CMS Energy Q1 2022 Earnings Call Transcript

Quartr
Provided by Quartr
May 3, 2022

There are 12 speakers on the call.

Operator

Good morning, everyone, and welcome to the CMS Energy 2022 First Quarter Results. The earnings news release issued earlier today and the presentation used in this webcast are available on CMS Energy's website in the Investor Relations section. This call is being recorded. After the presentation, we will conduct a question and answer session. Instructions will be provided at that time.

Operator

Just a reminder, there will be a rebroadcast of this conference call today beginning at 12 p. M. Eastern Time running through May 10. This presentation is also being webcast and is available on CMS Energy's website in the Investor Relations section. At this time, I would now like to turn the call over to Mr.

Operator

Sri Madhipati, Treasurer and Vice President of Finance and Investor Relations.

Speaker 1

Thank you, Austin. Good morning, everyone, and thank you for joining us today. With me are Derek Rochow, President and Chief Executive Officer and Reggie Hayes, Executive Vice President and Chief Financial Officer. This presentation contains forward looking statements, which are subject to risks and uncertainties. Please refer to our SEC filings for more information regarding the risks and other factors that could cause our actual results to differ materially.

Speaker 1

This presentation also includes non GAAP measures. Reconciliations of these measures to the most directly comparable GAAP measures are included in the appendix and posted on our website. Now, I'll turn the call over to Gary.

Speaker 2

Thanks, Sri, and thank you everyone for joining our call today. I'm pleased to share the great progress we have made over the quarter and with our IRP. You've heard me speak about our simple investment thesis on many of these calls. It has withstood The test of time and this quarter was no different. The industry leading net zero commitments.

Speaker 2

These aren't just words. They're evident in our actions and our results. Our IRP settlement paves the way to be out of coal by 2025, is one of the first utilities in the nation to achieve such a milestone. Our recently announced net zero goal for our gas system is not just a dream, but evident in proof point in our net 0 methane target and 20% reduction in customer missions by 2,030. Excellent.

Speaker 2

This is the EUA. I can't think of a more important time given inflation and I continue to be confident in our ability to offset inflationary pressure and alleviate supply chain concerns. This means keeping customer bills affordable through our CEUA, lean operating system. Top tier regulatory jurisdiction. The IRP settlement once again demonstrates a constructive regulatory environment in Michigan, delivering important industry leading outcomes for all.

Speaker 2

I'd be remiss if I didn't thank the Michigan Public Service Commission staff, the Michigan Attorney General, customer groups, Environmental Organizations, Energy Trade Representatives and the Consumers Energy Work Team for the constructive dialogue that led to settlement in a 20 year blueprint to meet Michigan's energy needs while protecting the environment for future generations. All of this, along with the fundamentals of our simple but impactful investment thesis leads to a consistent premium total shareholder return for you, for our investors. At CMS Energy, we deliver for all our stakeholders. This is why you own us and what you can count on. Now let me get on with sharing the great news of the IRP and our quarter.

Speaker 2

I'm thrilled With this settlement, it provides a 20 year blueprint to meet Michigan's energy needs while protecting the future the environment for the future generations and ensuring financial certainty. You've heard me say before, our IRP is a win for everyone. And let me share with you why. Our customers will see significant savings in addition to cleaner and more reliable energy. We're accelerating our ESG ambitions to decarbonize and lead the way to protect our planet, Exiting coal operations and achieving a 60% carbon emission reduction by 2025, growing our solar to 8 gigawatts and accelerating 75 megawatts of battery storage between now and 2027.

Speaker 2

Our investors will see capital upside along with the purchase of the Colbert plant and economic incentives on demand side programs as well as the continuation of a financial compensation mechanism, FCM, on purchase power agreement, PPAs. We also received regulatory asset treatment at an ROE of 9% on our retired coal assets through the remaining design lives. The settlement agreement is closely aligned with our original filing. But most notably, we've dropped the purchase of CMS Enterprise assets Instead, we'll pursue long term PPAs for 700 megawatts of Michigan based capacity starting in 2025. While we believe the purchase of CMS Enterprise assets was a good value for customers.

Speaker 2

Our primary concern was ensuring we secured sufficient capacity to meet our Customers' needs. The proposed RFP, coupled with the purchase of the Covert plant and a delayed retirement for the Karn 3 and 4 peaking unit will address this concern. DIG and the peakers and enterprises will have an opportunity This is a win for everyone. In March, we announced plans to achieve net zero carbon emissions for our natural gas system by 2,050, which includes both our customers and our suppliers' emissions. This adds to our long term plan, both electric and natural gas, further drive decarbonization and provides meaningful proof points along the clean energy transformation.

Speaker 2

Net 0 emissions across our natural gas system is certainly an ambitious target. However, we've modeled this extensively. We believe it's achievable. It also acknowledges that there are thoughtful ways to reduce and mitigate greenhouse gas emissions across for home heating and thermal electric generation resources, both are important in ensuring long term affordability And reliability for our customers. As we've demonstrated across our electric system with this IRP, These aren't just words.

Speaker 2

They are evident in our actions and our results. The proof points are in both our net 0 methane target and 20% reduction in gas customer emissions by 2,030. And we're delivering on those plans and investment opportunities. This includes accelerating vintage main and service replacement and adding renewable natural gas to our system, all included in our 5 year capital investment also means greater energy efficiency, carbon offsets and potential hydrogen blending, which provide growth opportunities above our plan, strengthening and lengthening our investment horizon. Our decarbonization plan is good for our customers, Our planet and our investors.

Speaker 2

This is an important road ahead. We look forward to updating you on our progress. Like I shared at the beginning of my remarks, we've had a great quarter. We're off to a strong start of the year on all fronts. In the Q1, we delivered adjusted earnings per share of $1.20 This is up $0.11 per share from last is ahead of our plan and positions us well as we start the year, giving us confidence as we navigate the 9 months ahead.

Speaker 2

We are reaffirming our 2022 adjusted full year guidance of $2.85 to $2.89 per share, And we continue to guide to the high end of our long term adjusted EPS growth range of 6% to 8%. The IRP strengthens And lengthened our ability to deliver on our earnings glide path going forward. Looking forward, we continue to see long term dividend growth of 6% to 8% The target payout ratio of about 60% over time. Today, we are reaffirming our $14,300,000,000 5 year customer investment plan. As we've noted, the IRP does provide upside to our current plan.

Speaker 2

We will remain disciplined in our approach. You can expect to see that update as we report 4th quarter results early next year. As I often say, strong execution leads to strong results. And this quarter was another impressive example. We are confident and the full year guidance, and we are focused on delivering for our customers, the planet and you, our investors.

Speaker 2

Now I'll turn the call over to Reggie.

Speaker 3

Thank you, Garik, and good morning, everyone. As Garik highlighted, we're pleased to report our Q1 results for 2022. We delivered adjusted net income of $346,000,000 were $1.20 per share, up 10% off our 2021 Q1 results, largely driven by favorable weather and economic conditions in Michigan. From a weather perspective, a relatively high volume of heating degree days in the Q1, coupled with the absence of unfavorable weather during the same period in 2021 provided $0.16 per share of positive variance as noted on Slide 7. And from an economic standpoint, we continue to see strong commercial and industrial load in our electric business, while weather normalized residential load continues to exceed All in, weather normalized load in the Q1 contributed $0.04 per share of positive variance versus the comparable period in 2021 is either at or above pre pandemic levels across each of our customer segments, particularly when excluding the of our energy efficiency programs, which reduced customer load by about 2% per year.

Speaker 3

Another noteworthy driver of our financial performance for the quarter was rate relief net of investment related expenses, which contributed $0.03 per share of upside as we continue to realize the residual effects of tax benefits from our 2020 gas rate settlement. These sources of positive variance were partially offset by increased operating and maintenance or O and M expenses at the utility in support of key customer initiatives related to safety, reliability and decarbonization is equated to $0.06 per share of negative variance. We also realized $0.02 per share of negative variance for the quarter largely related to annualized financing costs and the timing of tax expenses at the parent company. Looking ahead, we feel quite good about the remaining 9 months of the year. As always, we plan for normal weather, which we estimate will have a negative which we estimate to be roughly $0.10 per share versus the comparable period in 2021 and is largely driven by our expectation of a constructive outcome in our pending gas rate case later this year.

Speaker 3

Closing out the glide path for the remainder of the year, as noted during our Q4 call, we anticipate lower overall O and M expenses at the utility, driven by the usual cost performance deal by the CDLA and other cost reduction initiatives and a more normalized level of service restoration expense on the heels of record storm activity in 2021. Collectively, we assume O and M cost performance will drive $0.29 per share of positive variance. Lastly, we're assuming normalized operating conditions at enterprises given the extended outage at mid last year coupled with the usual conservative assumptions around weather normalized. As we've said before, we'll continue to plan conservatively like we do every year to ensure we deliver on our operational and financial objectives to deliver the results you expect year in and year out is supported by Michigan's strong regulatory environment. And as Garrick highlighted earlier, the multiparty settlement of our IRP provides more evidence of that.

Speaker 3

As noted, the IRP settlement that we recently filed includes a near term capital investment opportunity in the acquisition of the Kuglberg gas plant, which strengthens and lengthens our financial glide path to the tune of about $0.03 to $0.04 per share with the assumption of reasonable parent funding costs and a 9% ROE on the retired coal assets. As we look ahead, we remain acutely focused on obtaining approval of our IRP settlement agreement and making progress on our pending rate cases, which are highlighted in the regulatory calendar on Slide 8. As for the latter, just last week, we filed an electric rate case requesting a $272,000,000 revenue increase with a 51.5 percent equity ratio and a 10.25 percent ROE. And I'll note that even with this request, the typical electric bill for We also continue to work through our pending gas rate case and recently filed rebuttal anticipate an order for the gas rate case by October of this year. The question we often get when we discussed our capital investment opportunities and regulatory construct is whether we can manage our costs to minimize the rate impact for our customers and I'm pleased to report that we remain hard at work on all aspects of our cost structure to preserve headroom for needed customer investments in the long term and to mitigate the challenging and inflationary environment in which we live.

Speaker 3

Turning to Slide 9, you'll see that several countermeasures have been implemented over the past several quarters to offset inflationary pressures. On the left hand side of the slide, you'll note that highlights the cost categories that have had well publicized atypical levels of inflation, specifically costs related to labor, materials and commodities and the corresponding risk mitigation efforts that we have employed. Starting with labor, our workforce is roughly 40% unionized and in 2020 we renegotiated all three of our collective bargaining agreements with 5 year terms, which provides cost and labor stability over the next few years with a substantial portion of our employee base. On the nonunion side, we have benefited from a strong retention rate, which is in excess of 95% and allows us to minimize hiring in a tight labor market. From a materials perspective, we are actively managing our supply chain to reduce rising input costs.

Speaker 3

Part of these efforts include leveraging market analysis to optimize terms and conditions with new and existing vendors where possible while broadening our vendor base. We are also deploying the CE Way in our distribution centers to eliminate waste and we are exploring those best practices with our suppliers to reduce their costs and maintain availability of key materials. It is also worth noting that approximately 90% of our material costs which reduces the income statement impact in short term as those costs are incurred over time. Lastly, given the well publicized tightening of or equipment supply will remind you that our solar build out is modular in nature and allows us to flex projects over the planned period. On the commodities side, we continue to run our electric generation fleet in a cost efficient manner to insulate our customers from market volatility when they are dispatched, in fact, the state rates of our natural gas plants were some of the lowest in the region, which means we can offer power at a cost lower than market and that provides substantial value for our customers.

Speaker 3

As we manage inflation risk in the current environment, you'll note on the right hand side We still have substantial episodic cost reduction opportunities longer term, which we estimate will generate over $200,000,000 through coal plant retirements and the expiration of high priced power purchase agreements. These cost savings are above and beyond what we'll aim to achieve annually through the CE Way, which I'll remind you was a key driver in our achievement of over $150,000,000 of cost savings in aggregate over the past few years. Sustainable and agile cost management has been one of the key pillars enabled us to deliver on our financial objectives and there remain ample opportunities to reduce costs across the business going forward. Given our track record of reducing costs, we're highly confident that we'll be able to mitigate risk in the current environment and in the long run, execute our capital plan delivering substantial value for customers and investors as we always have. And with that, Austin, please open the lines for Q and

Operator

Thank you. Our first question is from Michael Sullivan from Wolfe Research. Michael, your line is open.

Speaker 4

Hey, good morning, everyone.

Speaker 2

Good morning.

Speaker 4

Hey, Garik. Can you maybe just give

Speaker 3

a little

Speaker 4

more clarity on what you mean by Strengthen the 6% to 8% as it relates to the IRP upside. Is there any reason that we shouldn't think of that as putting you above the 8%?

Speaker 2

Great question, Mike. Let's start here. This is a great settlement. There's an important regulatory process that we're still in the midst of. And just like back in 2018, in 2019, there's a few parties that have contested someone.

Speaker 2

That's pretty difficult. We anticipate that to occur over the next month in the regulatory proceeding. There's a schedule for that, a calendar for that that occurs over the month of May. And then the commissioners will issue an order, which we anticipate in late June. It could drift into July, but we anticipate late June at this point.

Speaker 2

So I do not want to be out in front of the commissioners on this and put the cart in front of the horse per se, but here's what I'll tell you on this. We feel good about the settlement and the and lengthen our plan. It gives us great confidence in our ability to achieve the 6% to 8% toward the high end. And as we've shared, this is again upside to the plan. The IRP is upside to the plan.

Speaker 2

And here's how I'd think about it. We know and we've made it clear that in 2023, cohort comes into the plan in the May timeframe. That's good from a planning perspective. But remember this important piece in the 6% to 8%. We deliver each and every year and then we rebase off of actuals.

Speaker 2

So that's an important piece. It's that compounding, that quarterly compounding image, it's quality of earnings, which you've come And frankly that allows us to do the strengthening and lengthening across the broader plan.

Speaker 4

Okay. Sorry, if I could just pry a little more on that. I mean, are you trying to imply that there may just be one outsized growth year and then that's where you would rebase on Off of to see 6% to 8% continued off of that. Is that a fair way of reading that?

Speaker 2

No, I don't do we don't do sugar highs. There's we've got nearly 20 years of consistent financial performance. I mean, we're going to deliver Our plan here is to deliver year 2020. And so again, I think there's strengthening, lengthening of that plan comes from the ability to be at toward the high end and we've got great confidence in that, but also this rebasing. Each and every year, you know our history, we deliver And then we rebase off actuals and that provides a nice opportunity to strengthen the length of the plan.

Speaker 4

Okay, got it. And then maybe going in a different direction, the electric rate case you just filed, maybe if you could just walk us through conviction level and getting a bigger portion of the ask this time given the orderly last year and maybe some differences this time around or lessons learned?

Speaker 2

I feel really good about This rate case that we're filing and I'm again confident in this regulatory construct. There's been a number of signals here over the last quarter that gives me confidence in the regulatory construct. Let me start there. We had a rehearing on our electric aid case. That was a positive for a small dollars but a positive, our gas rate case, we had staff's position.

Speaker 2

The initial rally was constructive And a great starting spot in this IRP settlement with staff, with the attorney general provides another data point that speaks to specifically in the area of electric reliability, enhanced and bolstered our business cases. And so this is going to be a step change and is a step change And our filing and I would just share we have more work that we're working on to continuously improve that rate case process, but I feel good about our filing. It's primarily made up of of electric reliability and resiliency work, important work to deliver for our customers. There's also the Covert facility is in there. There's a little bit of work on economic development.

Speaker 2

We've seen a lot of growth here in the state to support that work in this broader clean energy transformation. And so I feel good about the case and the strength of the case and getting a good outcome.

Speaker 4

Okay. Thanks a lot, Gary. Appreciate it.

Operator

Our next question is from Jeremy Tonet from JPMorgan. Jeremy, your line is open.

Speaker 5

Hi, Jeremy. Hi, good morning. Hi, thanks. Just wanted to go with the IRP a little bit more. And you talked about some of the earnings uplift there.

Speaker 5

And just wondering If you might be able to share, I guess, financing needs that might be possible on the back of that. And then separately, could you walk us through the RFP that was agreed to as an alternative to the DIG acquisition. And just wondering, there's been a lot of focus on the same potentially extending Palisades. You think this could be an option here?

Speaker 2

Reg, you will start with the financing piece and then we could bounce back and forth on your other questions.

Speaker 3

Jeremy, so thanks for the question. I'd say with respect to the financing needs coming out of this IRP settlement agreement, will be obviously focused on assuming we get approval the acquisition of the Covert facility and so that would take place around mid-twenty 23, call it the May timeframe. And so we would plan to fund that with debt at the utility Given our rate making capital structure, you could assume about half of it's funded that way. So call it roughly $400,000,000 or so based on a $815,000,000 purchase price and then we fund the balance at the parent and we still feel quite good about the commitment to avoid issuing equity prior to 2025 and so we would assume that the parent financing would likely include the sort of equity credit like securities that we've done in asset or hybrids are preferred, which we have really executed at optimal levels over the last several years. So that would be the financing plan as we sit here today and we'll keep an eye on how market conditions evolve over that timeframe.

Speaker 3

Derek, I'll hand it to you for the RFP and Palisade.

Speaker 2

Yes. From an RFP perspective, What we agreed to in the settlement is 700 equivalent of 700 megawatts of a portion Some of our megawatts of load out there, capacity out there, 500 megawatts is dispatchable and That's the nature of that and available reliable generation to state and then 200 megawatts is right within the category of renewable and again purchase power agreements. For those purchase power agreements that are not associated with the affiliate, there's the opportunity to earn the financial compensation mechanism on those. And Enterprise has the opportunity to bid into that 700 megawatts, primarily in the 500 megawatts that are in nature. And so that's the nature of the RFP.

Speaker 2

In terms of Palisades, it's important to remember we're not the owner or Operator of Palisades, we've not been involved in any conversations with the Department of Energy. And if there's specific questions in this Call on Palisades, I'd really direct them to Entergy, specific to the plant. Now our governor has came back it came out in support of keeping Palisades operational. We're certainly supportive of our governor and the administration and even a broader context, we believe in nuclear energy as part of the solution here for reliable dispatchable and clean energy across Our nation and in Michigan, our PPA on that facility expires here at the end of May. It is an expensive purchase power agreement.

Speaker 2

And as we've shared in the course of this call, we're laser focused on reducing costs for our customers. And so that is front and center for us. We'd certainly entertain a long term Purchase power agreement, new purchase power agreement with the facility, entertain discussions and conversation about that, but it does have to be at a competitive That'll be important factor and then also we expect to receive a FDM on that new PPA as well.

Speaker 5

Got it. That's very helpful there. Thank you. And maybe pivoting a bit here towards decarbonization, what investment opportunities are you seeing in support of decarbonization for the gas system? And maybe thinking about RNG a bit more, how much regulated CapEx do you think this could translate into?

Speaker 2

Well, in our 5 year plan, there's a hefty amount. There's about $5,000,000,000 a little more that's aimed at decarbonization of our natural gas system. Again, it's multiple benefits. You're out there replacing old pipe, vintage pipe as we call it in services and makes the system safer, improves reliability in natural gas system, also eliminates methane emissions, one of the leading causes of climate change. And so We've got a target of net 0 by 2,030.

Speaker 2

So those investments are being made right now over the course of the 5 years and will extend into the 10 year plan as well. We see our renewable natural gas is also part of that solution. It is part of this gas rate case that's underway right now. If you get into the details of staff's position, they were not supportive of that renewable natural gas. However, they left opening in there, which we think we can mitigate in the course of rebuttal and move that into the utility.

Speaker 2

There's some work to be done there in our gas case.

Speaker 5

Got it. That's helpful. I'll leave it there. Thanks.

Speaker 2

Thanks, Jeremy.

Operator

Our next question is from Andrew Weisel from Scotiabank. Andrew, your line is open.

Speaker 2

Good morning, Andrew.

Speaker 6

Thank you. Good morning. First question, I want to ask

Speaker 3

a little bit more about the

Speaker 6

inflationary pressures. I appreciate all the details you gave. In the past, I think you've talked about limiting bill increases to say 2% or 3% if I remember correctly. My question is how confident are you about your ability Stick to that in, say, 2022 and maybe 'twenty three. I assume widespread inflation won't be as big of a concern after that.

Speaker 6

But in the near term, Do you still feel comfortable with those past targets?

Speaker 2

Everyone in this sector and even outside the sector has seen inflation. I guess, me, the bigger question is, who do you think is best at managing that? And I would put us up toward the top of the list. Our ability to leverage the CEWAY and to provide cost savings for our customers is certainly, again, we talk about is flexing our muscle here. We've got great examples of that in 2020.

Speaker 2

We saw sales drop. We found $100,000,000 of savings in the organization. We've got In 2021, in August, we had $0.16 of impact as to storms. We offset that. We have an amazing ability to be able To leverage the tools of the CE Way and then plus automation, I would add, to be able to mitigate costs.

Speaker 2

And so, Reggie went through a number of examples of the way we We'll manage that across the system. And so long term, when we look at our 5 year plan and even in the short term, there's a nice ability to manage rates and keep them affordable for our customers, in line with kind of traditional inflation, you might say, but I feel confident in our plan to be able to mitigate much of the impact of inflation going forward.

Speaker 6

Okay, great. Next question is at enterprises. You mentioned that DIG and the peakers will likely bid into the upcoming RFP. I don't expect anything too specific for obvious competitive reasons, but can you qualitatively talk About how do you think of the trade off between, say, price certainty and stability that would come with a long term contract versus the potential for lower revenues given

Speaker 2

I think, Reggie and I will tag team this one. Bottom line is it's Something that Enterprises is going to consider. Again, I'm not certain we'll participate in that. We have the potential to participate in that RFP And we'll make that evaluation. The capacity market is certainly, as we've seen across MISO, an opportunity as well and for upside with our enterprise assets.

Speaker 2

And so there's an evaluation we'll participate in and take a look at the impact of How DIG participates either in the bilateral market or our bids into this longer term PPA with the utility.

Speaker 3

Yes, Andrew. The only thing I would add to that is philosophically, we've always had the mindset that we try to run our non utility businesses Like a utility and as lower beta fashion as possible. And so if we have an opportunity to get attractive levels for energy and capacity, and we can do that over the long term. That's generally been our bias, and we've done that on the energy and capacity side of DIG for some time now and when we own the bank that's how we ran the bank as well. It's just trying to lock in as much revenue as possible and run it on a low risk basis.

Speaker 3

And so we'll see. I think it's a function of where the market is at the time and how long the PPAs are in the bilateral market versus what might be offered in this RFP. So we'll see what the fact pattern looks like and we'll run the business accordingly.

Speaker 6

Okay. That makes sense. And just lastly, what's the timing of the RFP and when you'll communicate if Dig is in fact

Speaker 2

I would anticipate, at least initially here, that our RFP would

Speaker 6

Okay.

Operator

Our next question is from Insoo Kim from Goldman Sachs. Anshu, your line is open.

Speaker 5

Hey, thank you.

Speaker 7

First question Hey, Derek. On the solar, you've talked about just the modular nature of it and kind of shift the timing and whatnot, but just holistically, I guess, whether it's The megawatts that's kind of a build on transfer or some of the PPAs that are expected to come online, I guess, over the next couple of years that will earn the financial compensation mechanism, just your broad level of confidence, I guess, in terms of being able to mitigate any impact from what's going on in the solar space?

Speaker 2

I'll start with the punch line or the bottom line. No material impact to the 5 year plan, continued confidence in our 20 point to guidance and then continued confidence in the longer term plan, the 5 years and the 6% to 8% and being toward the high end. So that's the punch line. Now Let me tell you why. This IRP is 8 gigawatts.

Speaker 2

It's not 8 gigawatts tomorrow or even in the 5 year plan. We have 15 to 20 years to build this out. So there's considerable flexibility to be able to construct that. And just like everyone else in the industry, The Department of Commerce in this investigation slowed things up in some of our projects. These are Megawatts that are going to get built.

Speaker 2

These are renewable projects that are going to get built because they're part of our broader IRP in nature. But Again, let me try to offer some context from a size perspective. We're building out of owned generation here about 150 megawatts per year. So we're talking about 2 projects. In 2024, we go up to 2 50 megawatts per year.

Speaker 2

And so This annual capital spend is around $200,000,000 to $250,000,000 This is manageable, easily manageable. And in fact, this is I've been in operations for 20 years. This is work that happens every year. There's stuff that goes in and out of the plan based on a lot of Variables and so easily manageable from a capital perspective. In fact, just as a reminder, we've got $3,000,000,000 to $4,000,000,000 of capital backlog And things like electric reliability, investments in our gas system, 80% of those projects are less than $200,000,000 So there's ability to put them into the plan And offer real value for our customers.

Speaker 2

The other important part of this clean energy journey as well as A reminder here that although solar has been impacted, we're still progressing with wind in the state of Michigan, and And we're investing a lot in the space of our hydro facilities. We have 15 hydro facilities, there are smart and thoughtful investments occurring there as well. And those are on progress, are on target. So I feel good about that from where we're headed from a clean energy perspective. And the last piece that I'll also point to and I think this is important from a capacity perspective, and I noted in my prepared remarks is Karn III and IV continues to operate to 2,031.

Speaker 2

Kern 3 and 4, we originally proposed retiring in 2023. And so this settlement offers some additional flexibility from a capacity build perspective. And so Again, we've got some flexibility to weather things and be able to meet all our customers' needs. So again, Feel good about the capital plan, confident in our earnings guidance both in the year and in the long term.

Speaker 7

Understood. My second question on those enterprise assets, the non regulated ones like DIG, given won't be going to rate base here with the settlement. And depending on what you decide on the RFP, whether you'll participate or not, How do you just think about strategically these assets now going forward as part of your portfolio?

Speaker 2

Enterprise assets are important part of our portfolio. It's small, but important. It makes about 4% of our earnings mix. And again, this goes back a little bit. We used to talk about the Ferrari in the garage and then it was the Tesla in the garage.

Speaker 2

It's probably the new electric Corvette in the garage. I don't know how you want to say it, but with capacity prices, there's some certainty, some upside here in some of our dig in some of the peakers, but by and large, this business is about renewables and customer focused renewables. And it's small in nature, and we deliver strategic solutions for our customers hasn't changed, but it continues to be a consistent performer for our business.

Speaker 7

Understood. It's been a while since we've heard that reference, but I think it's good to hear again. Thanks.

Speaker 2

I wanted to bring that back. It's a great asset for us.

Operator

Our next question is from Shar Pourreza of Guggenheim Partners. Shar, your line is open.

Speaker 3

Hey, good morning, guys.

Speaker 2

Shar, how are you?

Speaker 3

Great. So just one follow-up on Palisades, Garrett. Just can you remind us how many megawatts could be potentially re PPA under the assumption the And obviously, the government highlighted that there is a potential owner that's interested in acquiring the asset, are you having sort of any discussions right now Assuming, can you keep the asset viable, which timing seems a little bit tight, but just curious on if there's any dialogue?

Speaker 2

It's roughly 800 megawatts, a little shy of 800 megawatts. I think it's around 780 megawatts for Palisades. In line with the Governor's letter, we're certainly open to conversations and discussions. We've had some conversations more Just to understand the complexities of the situation, understand what's going on, but nothing that's really got to Any level of seriousness on a long term purchase power agreement.

Speaker 3

Okay, got it. And then just real quick, Reggie, as you're sort of thinking about financing needs, can you just remind us on the preferred options? And do you see a potential to lean more on credit metrics just given nearly a fully regulated business mix and potentially accretive CapEx updates in the near term? Thanks for the question, Shar. So we have been targeting that sort of mid teens FFO to debt for the rating agencies for some time now and certainly the sale of EnerBank gave us a nice uplift at least in the case of S and P.

Speaker 3

And so while we do have has some cushion to maybe be a little more aggressive in the funding strategy. We worked very hard to get to the level that we're at today. We've worked Hard to get the ratings we have today and so our intent is not to stress those metrics some. And so we like the fact that we've got a little cushion on those metrics and if that allows us To continue to not to issue equity through 2025, we'll look to do that. And if we can extend beyond 2025, we'll look to do that, but not to the detriment of our metrics or ratings.

Speaker 3

So So we still like that mid teens area. That's where we are. We have a little cushion there and we'll continue to plan the business that way. Okay, terrific. That's all the questions I had.

Speaker 3

Thanks guys.

Speaker 8

Thank you.

Operator

Our next question is from Jonathan Arnold of Vesterco Research. Jonathan, your line is open.

Speaker 2

Good morning.

Speaker 9

Good morning, guys. Quick one on Palisades, were it to be extended, I guess whether or not that was with the PPA, how would you think about that in the context of your overall IRP plan and

Speaker 2

2 pieces there. It's really, really important and it does have to be a competitive Our purchase card agreement, so I'll reemphasize that component of it as well. And if we were to consider that And have those conversations. Again, we would expect financial compensation mechanism on those as well. Again, it just provides additional flexibility for us in clean energy.

Speaker 2

And so it will be a little bit long from a capacity perspective, but there's opportunities to think about different investments And give us a little more flexibility in our even further flexibility in our solar build out.

Speaker 9

Okay. And then just going I have to go back a bit. I think it was early last year that you last gave the slide on DIG and the Peakers Showing potential pre tax earnings step up opportunities. My question really is, is that Prior disclosure still a valid one that we can think about? Or should we be looking for you to tell us something else At some point in the future or is that still a decent guide?

Speaker 3

Yes. So, We still feel good about the revenue opportunities at DIG, particularly now that we don't foresee it being part of the IRP. And so I'm going to go Memory, but we were somewhere around $35,000,000 of revenue or pre tax earnings associated with DIG and we still think That's a pretty good base case to run and what we're also seeing probably unsurprisingly is a tightening of the bilateral capacity market, which I think Garrick accurately noted as attractive in his prepared remarks because we do continue to see it tighten and we do expect to see even more attractive capacity and energy opportunities on the contracted side at DIG. So I'd say base case, it's good to be around that $35,000,000 area, but there's certainly upside opportunities in the coming years if continue to participate in a bilateral market.

Speaker 9

I guess I was asking more about the $90,000,000 that you had that $35,000,000 Stepping up from, I wasn't sure if

Speaker 3

you wanted to Yes, so that working assumption was if the bilateral market went to cone, which was at the time around $7.50 per kilowatt month. And so in the event the bilateral market continues to tighten and gets to those levels that certainly could be within the realm of possibility to see upside at that level, but we're certainly not planning for that given our nature, but yes, it could be an opportunity over time if we continue to see zone 7 tighten.

Speaker 9

Great. Thank you for that. And I Yes, I think that's it. Thank you.

Operator

Our next question is from Travis Miller of Morningstar. Travis, your line is open.

Speaker 2

Good morning, everyone. Thank you. Wondering as you did your long term reliability modeling as part of that IRP, When did reliability get to be an issue? Is that 60 plus percent range in 2,040 with renewables? Is About where you start to max out on renewable ability

Speaker 3

to put into the mix.

Speaker 2

I wouldn't put it that way. Here's the process of an integrated resource plan. We do The loss of load expectation study, there's a number of other variables we look at it from a system reliability perspective. So it's an important mix of renewables and batteries particularly in part of the plan, but also dispatch Generation, so you're getting things like gas, at least in our case natural gas and part of the plan. And so all those come together.

Speaker 2

This plan that we submitted was more reliable than our previous IRP in terms of the build out. And then our extension of Karn III and IV, again, was planned to be retired in 2023 and extending that to 2,031 continues to on additional reliability over the course of this decade.

Speaker 3

Okay. Got it. And then

Speaker 2

kind of similar on that, Could we expect some of that upside in the distribution and transmission bucket as opposed to maybe more on the generation side? The upside CapEx that you're talking about? Well, broader, we have again, I look at Our 10 year, 15, 20 years, there's ample capital upside. And we have about $3,000,000,000 to $4,000,000,000 of Capital is not in the plan that are specific projects identified that improve our gas system, more replacement of mains Looks at reliability and resiliency. We've got a large $5,500,000,000 focus on that.

Speaker 2

I mean, Much of that's in this electric rate case to improve reliability for our customers. Those are the things that fit into that plan and continue to Have a long horizon of capital investment opportunities. Okay. And then one just real quick. Would the IRP change your general kind of every year type of cadence on the regulatory filings either electric or gas?

Speaker 2

The IRP won't have any impact on our rate case proceedings. So we'll continue to stay. The main plan is to go with annual rate cases, but on occasion, we do stay out for a year and we have. Our gas case is a great example of that. We've been out for 2 years and are in for a case right now.

Speaker 2

Okay, Great. Thanks so much. Yes. Thank you, Travis.

Operator

Our next question is from Durgesh Chopra of Evercore. Durgesh, your line is open.

Speaker 10

Hey, good morning. Thank you for taking my question. Good morning, guys. Just one for me. Maybe can you just at a high level elaborate how the financial compensation mechanisms work?

Speaker 10

And then as you're thinking about our models, how should we be modeling upside in terms of timing? Is this sort of Gradual pickup in earnings as you sort of go through the RFPs or how does that work? Any color is appreciated. Thank you.

Speaker 3

Yes, Durgesh, this is Reggie. So the financial compensation mechanism is applied to PPAs and we can have the team go Through the math with you offline, but in essence you're applying what is the equivalent of our after tax WACC as it stood in the 2018 IRP at just over 5 point 6% and you're going to apply that to the megawatts of PPAs you're taking on as part of the IRP. And then the first IRP in 2018 was 550 Megawatts or thereabouts and so you would apply to that, you also obviously take into account the hours per year, the energy cost as well as just capacity factor of the resource. And so you put all that through the vegomatic and for that first tranche of the IRP, we assume that was about $4,000,000 of pre tax earnings. And so per that math, you would apply that to what we will PPA in this next IRP and so we've said it's about a 700 megawatt RFP that we'll roll out assuming we had approval in the latter portion this year as Garik noted and there will be 2 tranches 500 megawatts dispatchable, 200 megawatts of other and we'll have and FCM applied to those PPAs once those are resolved.

Speaker 3

Is that helpful?

Speaker 10

Very helpful. Thank you. And then in terms of timing, you mentioned later this year. So these are basically these are earnings uplifts Next year, is that the right way to think about it?

Speaker 3

Yes, let me be clear. The RFP for that 700 megawatt tranche of PPA and again it's going to be 2 tranches, 1500 megawatts of dispatchable local and 200 megawatts of other. The RFP would commence this year, but we would not effectuate the PPAs until the 2025 timeframe. And so you wouldn't see any of the earnings associated with those financial compensation mechanism until that timeframe. I also want to be very clear that in the event Enterprises participates in that 500 Megawatt tranche, then they would not be eligible for the FCM or we would not be eligible

Speaker 10

for the FCM. Thank you, Reggie. That is very helpful. I'll follow-up with the IR team With some more details, but this is extremely helpful. Thank you.

Speaker 10

Thank you.

Operator

Our next question is from Greg Orrill of UBS. Greg, your line is open.

Speaker 3

Yes, thank you. Good morning. Maybe a clarification. This might bring up an old discussion, but what is the Design Life on Campbell units where you earn the you would earned the 9% ROE under the IRP settlement. Yeah, Greg.

Speaker 3

So of the 3 units, 2 of the units design life runs till 2,031, that's for Campbell 1 and 2 and then for Campbell 3 it's through 2,039 and so that's where we'd earn that 9

Speaker 10

Thanks. Thank you.

Operator

Next question is from Julien Dumoulin Smith from Bank of America. Julien, your line is open.

Speaker 2

Good morning, Julien.

Speaker 8

Hey, good morning team. Hi. Thanks for the time. So just coming back to the earlier conversation on the $0.03 to $0.04 of upside here from the IRP, we go back to that math and just rehash it to start from the gross number and net that down? And specifically, what I was trying to reconcile is, So how do we think about the acquisition here, sort of the gross $800,000,000 and then reconcile that down to $0.03 to $0.04 ultimately.

Speaker 8

Seems just a little conservative, shall we say, relative to what I would otherwise expect. And maybe we can be a little bit more explicit again, understanding some of the nuances on financing I have to try to reconcile that.

Speaker 3

Yes, Julian. So this is Reggie. For the $0.03 to 0 point 4 We're assuming it's an $815,000,000 purchase price is codified in the settlement agreement. And so given our rate construct, you can assume again with Our rate making capital structure, you're going to get 40% of that as equity. And you have to net out obviously your parent Funding costs and we've made the usual conservative assumptions around that.

Speaker 3

And so that's where you get a good portion of the accretion I noted. But then you also have to net out, I'd say the downward revision in the ROE on the regulatory assets. And so remember, the IRP was not incorporated into our 5 year plan. And we were assuming we're going to earn 9.9% on those coal facilities through their design license. So with the settlement agreement is structured, that's going to up down to 9%.

Speaker 3

You get a little bit of dilution there plus dilution from the parent financing. And so that's what gets you to sort of that $0.03 to $0.04 It's also worth noting again, clearly we are not presupposing any outcome on the PPA, that 700 megawatt tranche, that's not included in the math. And so we're applying the usual conservatism, but that's where the math takes us about $0.03 to $0.04 In 2023, if all comes to fruition, obviously, you have partial year, so you wouldn't get you'd only get about 6, 7 months of that if we close the transaction in May as anticipated and then you get annualized about 0.03 Jon. Is that helpful?

Speaker 8

Yes, absolutely. I appreciate it. Yes, I very much appreciate that. In fact, actually, Since you bring it up here, just to keep going along that logical thought process, how do you think about that 700 megawatt PPA? I mean, in terms of ownership opportunities, you seem to be In part downplaying the dig element of this in terms of committing to bid that into that procurement process.

Speaker 8

I mean, what other avenues or shots on goal, if you want to call it, do you have for an ownership opportunity there as you think about the array of different approaches you could take?

Speaker 3

Well, yes, to be very clear, it's certainly an opportunity for DIG, particularly or specifically for that 500 Megawatt tranche, which is essentially going to be earmarked for local dispatchable Research and so certainly DIG would qualify for that. And so that is certainly an opportunity. And as we think about the alternatives as fiduciaries, they could certainly participate in that or DIG participated in that and 10 year PPA if dig prevails, that's not an attract that's a pretty attractive alternative depending on where the economics end up. But as I mentioned earlier, We're also seeing a very attractive bilateral market shaping up here in Zone 7 just with continued tightening. And so we are seeing levels that are in excess from our existing capacity contracts and energy contracts.

Speaker 3

And so we'll weigh the alternatives once the RFP comes around and see what we'll do there. On the 200 megawatts, obviously, DIG wouldn't be eligible for that, but we'll see what else But it certainly creates an opportunity for DIG without a doubt.

Speaker 8

Yes, indeed. All right, guys. Thank you. Best of luck. Thank you.

Operator

Our next question is from Nicholas Campanella of Credit Suisse. Nicholas, your line is open.

Speaker 7

Hey, good morning. Thanks everyone for taking the questions. Congrats on the IRP and thanks for all the details I just wanted to sorry to belabor the point on the renewable supply chain stuff. I just the bottom line takeaway is that you have, I think roughly $700,000,000 of clean generation spend in 2022 and then $600,000,000 in 2023,

Operator

that's all

Speaker 7

unchanged. Is that correct?

Speaker 2

I think the important part of that clean energy spend in those 2 years you referenced is it's not Solar. There's a good portion of hydro and wind in there. And so again, we're talking about 200 to 250 that would be On an annual basis, that would be in the solar area. So that's the difference. That helpful.

Speaker 7

Great. Thanks for the clarification. Yes, that's very helpful. Thank you for that. And then just I know in the Q4, we talked a lot about COBRA, so I figured we can talk about some other upside opportunities.

Speaker 7

In the Q4, we talked about the VGP, potential gas and electric capital upside. I know they weren't in the deck today, but maybe can you just kind of talk about where you are in potentially bringing those opportunities into the 5 year plan? Is that more of a EEI 4th quarter item and I know we're focused on the IRP in the near term, but just what about all the other upside opportunities that are outside the plan

Speaker 2

today. That's great. Again, we'll take a look at this 5 year plan. We're building it out right now and we'll share it here in Q4. Obviously, Colbert is a big piece of it.

Speaker 2

Those other elements within the IRP as well. We accelerated 75 megawatts of battery storage into the years of 2024 or 2027. So that has to be incorporated in as new capital upside in that 5 year plan. Extension of carton 34 has some impact as well. So those are all additions and things that need to be worked through from a capital plan.

Speaker 2

In terms of the voluntary green pricing, that also continues to progress nicely with our customers as they subscribe. We build out that plan. We've issued an RFP for that work. I haven't seen the results of that yet. It's still out there, but that would be potentially solar, could be other renewables is materializing.

Speaker 2

And so we're not ready to announce that yet, but directionally, it looks is good.

Speaker 8

Is that helpful?

Speaker 6

Great. Thanks. Yeah.

Speaker 2

Thank

Speaker 7

you for the time today and congrats again on the IRP.

Speaker 2

Thank you.

Speaker 7

Our next question

Operator

is from Paul Patterson of Glenrock Associates. Paul, your line is open. Hey, good morning.

Speaker 2

Hi. Good morning, Paul.

Speaker 11

Congratulations on the IRP settlement. And Most of my questions have been answered here, but just with respect to sales and what have you, Is COVID over, do you think? I mean, are we now at sort

Speaker 2

of a normal level of what

Speaker 11

you think will be normal going forward? Or I don't know. I'm just hoping maybe it is.

Speaker 2

We're all hoping it is over too. Let's Reggie walk through A sales piece a little bit and then I'll talk more on some macro factors. So maybe just touch on sales, Reggie.

Speaker 3

Yes. So Paul, to be clear, I won't give you a medical assessment because clearly the pandemic is still with us. I know that's not the spirit of the question, but figured I'd be remiss if I didn't say that. But from I'd say a retail sales perspective, we continue to be encouraged with what we're seeing virtually across all the customer classes as I noted in my prepared remarks and so whether it's commercial, we're up 3% above pre pandemic levels. So looking at sort of Q1 2022 versus Q1 2019 residential is up versus the 2019 pre pandemic level.

Speaker 3

So we're still seeing that nice mix that we've enjoyed for the last couple of years. And so residential start to come back a good deal, but still hanging in there and again in excess of the pre pandemic levels. And then on a total retail sales basis, we are about 1% above the pre pandemic levels and industrial is about flat excluding one large low margin customer. So I would say again, per my prepared remarks, I think at this point we are effectively at or better than pre pandemic levels indicators and I think it's also worth noting that of the percentages I just shared with you that does not take into count the energy waste reduction programs we have that reduce our load year over year by 1.5% to 2%. So when you exclude that performance looks even better.

Speaker 3

So we feel very good on the retail sales side. But again, obviously, the pandemic is still with us. But Derek, I don't know if you have any other comments.

Speaker 2

Yes. So just some quick macro factors. So Bloomberg recognized Michigan as the number one economy, state economy coming out The post pandemic, and so that's certainly a highlight. We've been recognized as the top state foreign direct investment over 14, really approaching 15,000 different firms that have located here in Michigan, 5,000 different locations. The big announcement with General Motors, but it's not just General Motors, it's a whole The economic trends that we're seeing here in Michigan as well.

Speaker 2

Thanks for your question, Paul.

Speaker 11

Okay, great. And just the other final thing is that there was some legislation that was Recently introduced regarding outages and reliability. It seemed to me that maybe it was more of a Detroit thing or That might be driving I wasn't really completely clear. I was just wondering, do you have any color about you don't see this very often about What might be driving that legislative? I mean, it seems like it's some Democrat representatives or whatever there that are proposing it.

Speaker 11

And I was

Speaker 2

Our electric rate case and our plan underway Certainly to improve in electric liability across the state to improve value for our customers. And so that's well underway. This legislation that was introduced, we don't anticipate getting any traction out of committee. That's the short of it.

Speaker 11

Okay, great. Thanks so much.

Speaker 2

Thanks, Paul.

Operator

Our final question is from Anthony Crowdell of Mizuho. Anthony, your line is open.

Speaker 7

Hey, good morning, Garrett. Good morning, Reggie. Thanks for fitting me in here.

Speaker 2

Thanks, Rich. Hey. You bet.

Speaker 7

Hopefully, an easy one. Where's Rocco? It's the first call I've been on without Rocco. Just hopefully, 2 easy ones. I guess following up on Mike's earlier question, I think the question is going around maybe moving above the 6% to 8% EPS growth rate.

Speaker 7

I think, Gary, you responded with CMS doesn't do sugar If I think about it, is there any desire of the company maybe to get back to that previous earnings trajectory that you had before the EnerBank sale?

Speaker 2

Well, let me state that the first question is Rocco is great, Austin is really performing well during this call As well, shout out to Austin. But bottom line from the earnings glide path we had with And so I feel good about where we're heading and confident here in that growth rate in the future.

Speaker 7

Great. And then last question and then I'll let you guys get back doing some work there. I guess since the IRP filing, it appears we've moved from an energy transition seemed to be an energy security theme. Have the state regulators given any messaging on energy security that would benefit your CapEx plan?

Speaker 2

I would argue that we're focused on both. Again, we can't sacrifice one for the other. And so this IRP that's settled here, does both. It allows us for that clean energy transformation as well as Reliability and security of the state. And so again, there's always some policymakers and legislators that are looking at that And we're going to continue to look at opportunities from a capital investment perspective.

Speaker 2

But again, we feel really good about our 5 year plan to balance both Liability, security of the grid as well as planet and I would add to it, our customers and ensuring that it's affordable. And Rejji, why don't you add Anthony,

Speaker 4

the only thing I would

Speaker 3

add just to get into some of the specifics of the IRP from a capacity perspective and to Gerrick's comment, this is why we feel again assuming the settlement agreement is approved. We're also going to RFP shortly after approval if all goes according to plan, the 700 megawatt tranche of PPA opportunity by 2025 and so that offers additional Capacity and again 500 megawatts of that will be local dispatchable capacity. We're also extending the retirement or delaying the retirement of Karn 3 and 4 which also provides over a gigawatt of capacity. And so again, we're taking obviously affordability into account, we're taking reliability into We're taking, obviously the clean aspects of our plan into account and that's why we feel good about not just the economics for all stakeholders, but most importantly reliability.

Speaker 7

Great. Thanks for taking my questions and looking forward to seeing you guys in Miami.

Speaker 2

Same.

Operator

That concludes the question and answer session. So I would now like to turn the conference back over to Mr. Garik Rochow for any closing remarks.

Speaker 2

Melissa, thank you, Austin. Nice job for our first time with Austin. And I'd like to thank all our callers and investors for joining us today. Take care and stay safe.

Operator

That concludes the conference call. Thank you for your participation. You may now disconnect

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Earnings Conference Call
CMS Energy Q1 2022
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