Q3 2019 Earnings Call

October 24, 2019

Yes.

This call is being recorded.

Cause our actual results to differ materially. This presentation also include non-GAAP measures reconciliations of these measures. The most directly comparable GAAP measures are included in the appendix and posted on our website now I'll turn the call Repatha. Thank you sorry, and thank you everyone for joining us on our third quarter earnings call.

Through the first nine months of the year, we reported adjusted earnings of $1.81 per share. This keeps us on track to meet our year end guidance of $2.47 to $2.51 per share with a bias to the midpoint.

Well continue to manage the work and adapt to changing conditions in the final quarter. This year as we do every year to deliver the results do you expect.

We continue to reiterate our long term adjusted EPS and dividend growth of 6% to 8%.

We know there are more investment opportunities. We continue to plan conservatively based on customer affordability the level of workforce will need to complete the work and balance sheet constraints.

The plan depending on future rate case approvals are new 10 year capital plan will help us deliver safe and reliable energy to our customers for years to calm and it couldn't be done without the capital that you. All provide this plan supports our long term growth objectives and reflects our commitment to deliver for our customers and our investors.

29 team has been a productive and successful year on the regulatory front the gas rate order demonstrates a high level of alignment with our commission on the amount of investment required to keep our system safe and reliable we received over 98% of my request, which resulted in $6.4 billion a rate base.

We plan to file or next gas rate case by the end of this year and our electric rate case in the early part of next year, we'll expect an order in both cases 10 months. Following those filings as is required by the 2016 energy law.

And now my favorite slide the story of them on.

Our triple bottom line is being noticed by our customers than the communities. We serve there's nothing more gratifying than having our customers recognize our efforts by awarding us the number one JD power ranking for residential gap in the Midwest, our increased investment in the safety and reliability of our gas system the rollout.

Our automated gas meter reading to improve the accuracy of our bills and our application of the CE way to dramatically improve our first time quality in on time delivery of customer requested service.

It's also worth noting that we have managed to reduce our residential gas bills by over 30% in the last five years, while making these in significant investments.

When we make capital investments in our system, we fully demonstrate our triple bottom line, we serve people our planet and profit. It has the best long term business philosophy to fulfill our purpose world class performance delivering hometown service.

This triple bottom line has served our model well and allows us to performed consistently regardless of whether conditions the economy or other external factors our track record demonstrates our ability to deliver consistent premium result year after year after year and this year you can expect this thing with that I'll turn the call over time.

Reggie.

Thank you Pat and good morning, everyone.

Our results for the quarter compare favorably to the third quarter of 2018 by 14 cents and as Patti highlighted keep us on track to meet our financial objectives for the year.

On a year to date basis, we have delivered $514 million of adjusted net income were $1.81 cents per share. We're just 12 cents per share lower than our financial results over the same period in 2018.

As we've been highlighting all year, we plan for back end loaded 2019, given the timing of our gas rate case in last year's cost forehead. Among other factors will remain on track with our plan to achieve our full year EPS guide.

As always we'll continue to plan conservatively and manage the work to meet our operational and financial objectives. As we have done every year as several years.

Favorable sales mix and strong cost performance, which if they are ongoing and planned initiatives such as attrition management improved productivity via the CE way and supply up supply chain optimization to name a few.

A favorable barents versus the comparable period in 2018 during our second quarter call. This partially at 15 cents per share of negative Barents and that 17 cents swing as largely driven by the aforementioned factors, which exemplifies our strength in managing the business as we match unexpected and at times.

Controllable headwinds with positive off.

As we look to the fourth quarter much of the Tailwinds, we anticipate in the second half the year I've come to fruition, we remain confident in our ability to meet our EPS guidance for the year.

Our Q4 glide path assumes that the absence of favorable weather in 2018 with more than offset by this natural reinvestments or pull ahead. We made in Q4, 2018, which equates to 15 cents of net positive variance in 2019.

We also anticipate additional 13th.

That said, we will take none of this for granted will approach. These last two months of the year with the usual degree of paranoia by continuing to maintain our cost as well and flex additional opportunities as needed delivered a consistent financial results you've come to expect.

And the year such as this where are you seeing suboptimal weather and higher storm cost, we leaned on our ability to manage the work and identify and execute on risk mitigation opportunities entry year at times. These opportunities can be episodic like some of the savings we achieved the past on benefits in tax related items and this year is really no different.

We've been using this slide now for the past several years because of the pit them eyes is what we do here at CMS.

So you don't have to.

This is all made possible by our self funding strategy depicted on slide 12, our focus on cost control and proactive risk management to fund our capital investments and mitigate entry year volatility underpin our simple, but unique business model enables us to meet our financial objectives every year.

As such we're confident that we can continue to improve customer experience through capital investments, while meeting our affordability and environmental targets for many years to come.

But we don't limit our efforts to cost reduction initiatives economic development, which is another key element of our self funding strategy has proven to be quite fruitful in our service territory largely due to the active nature of our plan.

The plan over the past three years, we've seen substantial increases in new load commitments in our electric service territory.

Testing in 2018 with over 100 megawatts achieved as indicated in the bar chart on slide 14.

This year, we're targeting another 100 megawatts and are on track made this objective.

It's also worth noting that our electric service territory is supported by a diverse customer mix as shown on the right hand side of the slide.

You'll note that the auto industry represents about 2% or customer rate mix, which we use a proxy for margin.

Although the strike at GM is top of mind is worth reminding you that were not overly exposed to auto manufacturers or their suppliers.

Back unemployment in Grand Rapids, the heart of our electric service territory remains well below the national average and we continue to see robust new construction activity in Western Michigan.

We feel the diversity of our service territory is key to minimizing some of the earnings and operating cash flow often associated with weakening economic conditions slide 15 highlights the impact of such sensitivities among others on an annual basis, which mostly been mitigated in 2019, given our recent gas order the access.

Celebrated execution of our financing plan may aforementioned risk mitigation activities, which you reduce the probability of large variances in our plan.

Rest assured we will continue to monitor these net revenues as we come down the stretch in 2019 will manage the risks accordingly, as we do year and in Europe , and with that I'll pass it back the Patty for some concluding remarks work unite thanks, Reggie our investment thesis is compelling and will serve our customers our planet and our investors for years to come.

And with that Rocco. Please open the lines for Q any.

Thank you very much Friday the question answer session will be conducted electronically.

We would like to ask a question. Please do so we're pressing the star followed by the digital under Touchtone telephone.

Here is in the speaker function. Please make sure you pick up your handset.

If you do funds. Your question has been answered you might remember so for pressing the star followed whether those are two under Touchtone telephone.

We'll pause for just a second.

Okay.

Our first question today comes from Andrew Weisel.

Sure Howard Weil. Please go ahead.

Hey, good morning, everybody.

My first question as you talked about the future will future long term annual growth of 6% to 8%, obviously nothing new there, but is that meant to be.

Polska apples with the 10 year Capex plan in other words does that mean to go through 2028.

You know do that on an annual basis and give you a good window looking forward and that the nearer term, but the 10 year capital plan certainly supports directionally, 6% to 8% and so that's really part of what we're trying to share today that we've got to not just kind of a holding number but an actual plan for capital investments across assist.

That should lead to our continued performance.

Okay got it.

Next question.

List of potential sources of upside on page five you don't include renewables. There is that more a function of demand forecasts and not seeing a need or is it related to customer bills and affordability or is this some other factor there.

Well, it's in the base plan. So we know based on our IR P., what our 20 year renewable strategy is.

We know that will own half and purchased half of the new solar 6000 megawatts total in the 20 years 5000. The 10 years. So that's built into the base plan and Andrew. It's also worth reminding that as we've said in our IR piece filing you know, it's going to be about 60 gigawatts per our estimate of solar over the next sort of debt.

Plus and will own half of that and so that 4 billion, you're seeing attributable to renewables over the 10 year period as a combination of the wind investments, we're making the rps as well as the assumption of owning about half of that solar investment opportunity over the next several years.

Make sense, then one last one the seeking to be a little bit of Curveball question. I noticed you posted a slide that call retail outreach a few weeks ago can you. Please talk about what drove that and maybe what you're trying to accomplish and then round numbers what percent of your stock is currently held by retail investors.

Oh, yes, so that was part of an effort that we did with one of your competitors, Andrew and the interest to full disclosure about an essence.

Some time ago, we suspended our dividend as we were pulling back from sins of the past and so that really turned over our ownership to skew much more heavily towards the institutional side and so overtime as the fundamentals of the business have improved restarted increase our exposure to retail investors and we'll look to do that more going forward.

Hey, good thank you.

Thank you.

And our next question today comes from sharper Rosa of Guggenheim Securities. Please go ahead.

Hi, Good morning, guys, if actually Constantine here for a sharp.

You mean.

Hi, good morning.

Congratulations on right corner and beating all the assets.

So one quick question on the legislature and there was a set of below the powering Michigan forward and that was introduced.

And that's kind of looking at.

Are you doing I guess some of the.

Things that were outlined in 2016, just wanted to get your insight on kind of how does that impact youre.

Current IR PJM potentially kind of any future.

Planning processes.

Well so there's a couple of good things to know that number one our energy law that we did pass in 2016, well out was solid and it created the framework that led to the I RP. The ERP gives three year forward look for approvals. So we have a three year approval on the elements of the.

Integrated resource plan and our renewable plant in particular and it was so well received that we think some of these smaller.

Proposals that are part of that package.

Really aren't necessary because we've created this framework for competitive bidding for solar I think some of the that proposals that are on the table are trying to do an end around and they're not getting much traction. So the good news is the energy law was had wild our wide bipartisan support our integrated reach.

There's pretty good alignment with the committee leadership in the house in the Senate that we've got we've done our work on the legislation on.

Renewables and and the energy law that was completed in 2016.

Perfect Thats.

That definitely helps out.

One kind of small housekeeping item.

Started and presenting kind of the.

Side and capital case.

This presentation.

Just curious how does that contemplate the long term kind of equity needs for the business.

You mentioned, a $150 million per year the.

Some of these opportunities kind of.

Give a little bit of variability to 150 number.

So what I would suggest Constantine is that we always provide our estimate for equity needs on a rolling annual basis with the update of our five year plan in Q1 of every year and so we'll provide.

Next et cetera, and then customer bill affordability, and where that is relative to inflation and so all those variables will impact.

Our needs from an equity issuance perspective, but I can say directionally my senses will probably be up a little bit, but we'll see as we continue to flush out our operating plan our financial plan over the next several years.

Okay that makes sense. Thanks.

Back in Q.

Thanks things Constantine.

Two questions.

Lines of credit Suisse. Please go ahead.

Hi, guys.

Hey, Good morning show up on that last good morning. Good morning, just follow up in the last question just noticing on a cash flow slide 23. This year I know else increasing over the five year period cash flows.

Is that because.

And then well so those increasing or the credits increasing because of the.

I guess higher number for higher amount of renewables and the system is what's driving that.

Hey, Michael it's more the ladder. So we don't see a real increase nano wells and in fact, they were remit the Anna wells themselves or re measured upon tax reform going into effect. When the bill was enacted in late 17, although we do see some accretion in a credits that we have because of the renewable investments we've been making both for the Rps and overtime we may.

I see a little bit more increase in credits as well as we take on solar investments. So it has more to do with the renewable efforts than any accretion and then I'll wells.

And does that.

Crude to the benefit more of a customer or I mean is offset equity needs going forward just curious.

I would say based on what's on the page it's more the latter it offsets equities, but keep in mind just based on the way in which we've structured.

The cost we have to pay for the investments as well as the contracts will take on and that will directly benefit customers. So you'll see a benefit for both sort of cash flow.

Okay, great. Thank you.

Thank you.

Our next question comes from Greg Gordon of Evercore ISI. Please go ahead.

Hey, Thanks, good morning.

If my memory serves me correctly the integrated resource plan, then that the 25 billion and capital there is no capital in there for any additional fossil fuel generation correct.

Yes, a couple of things.

Our first I RP that we filed had 450 megawatts of storage in the latter part of the plan, but as we're preparing to file again.

Solar and when that will have on our system, it's going to be very beneficial to have cost effective solar both from a people talk about storage as a means of dispatching those renewables, but think about all those distributed solar panels, they're going to need voltage control and so we're going to need storage associated with those.

I was just specifically for grid stability and reliability not just for dispatch ability. So I do see that more and more still storage will be part of our plan, especially as prices drops and that's all captured that those additional storage dollars will be captured in the electric ops portion of the Capex plan.

Fantastic when you look at that the amount of money that you plan on spending in the gas utility.

When you think about the migration away from from fossil fuels I mean are we seeing.

In California start to move to actually try to.

Eliminate incremental use of natural gas for.

Any type of infrastructure. So as you look at your tenure plan and you talk to the policy makers in Michigan.

Well I would say this natural gas has been a big part of Michigan heating season, I think these a lot of the cities that you're seeing with moratoriums on natural gas don't have natural gas penetration for home heating and water heating like Michigan does and so given that when were looking at the cost coming.

Options about growth, we have more assumptions just about replacing like for like systems, making sure our systems are safe.

Making sure that aging infrastructure can deliver the volume of natural gas that we move today on the coldest winter day, So that's really.

Hey, good morning too.

Hi, Jim.

Hey, how do you. So perhaps you have to go back if I can rehash, a little bit of the five versus 10 year update here seems like the five year piece is pretty drift fair with the renewable piece of the three quarters is equal to the 600 million in the RFP and just not to be pedantic about it but seems like it's the same and then separately can you give us a little bit more about that.

25 to the 29 Delta that you talked about in the upside opportunity what what would drive those of you if that might be the best we'd ask that.

Yes. So first on your first question what are those.

Some people you could argue it's easy to throw a number on a 10 year capital plan I want you to understand our capital plan that we are presenting today is a real plan, we actually have.

10 year gas plan drawn up that shows the needs for the system and what year, we would do lot and and so the basis for this capital plan effect is affected by our ability to complete the work our balance sheet capacity and customer affordability that 20 tenure plan. The 25 billion as described.

Effects customers.

Does that help is that what you're asking.

Lower our unit costs are more volume of work can be done. We're also looking obviously at workforce constraints and making sure that we've got adequate.

People plans to do all this work so there's a variety of factors that that mitigate adding in the additional capital, but trust me the needs of the system demand those dollars and so we're constantly working for ways to get those included in the plan.

Yes, indeed already good luck seaspan.

Most of my questions have been addressed I just wanted to go back to the upside opportunities that you've laid out on on slide five.

The result of many of the improvements man this that and we try and make it easy for the commission to say, yes, but they really are they are an important Jack imbalance in the process to make sure that the dollars that we are investing in the system, our invested prudently and that they are in the best interests of customers and I think in our most recent gas case, we got a good indicator from the commission that.

I agree with our plan they agree with the amount of infrastructure that were.

Putting on the system and they agree the importance of keeping certainly our gas system safe and reliable in our electric system to be modernize Dan reducing our carbon emissions and.

Increasing reliability for customers every day. So it is a partnership with the commission can make sure that we're doing everything we can do and these capital investments and so that takes annual rate proceedings as as we file and and we get routine feedback from the commission about our plans. So Steven the only thing I would add as a needless.

That all makes sense and then just shifting over to renewables.

We discuss ERP and just generally your plan I wanted to just drill in a little bit more on regulatory approval to to rate base half of the investments could you just remind us sort of where we stand from a regulatory approval process in terms of just solidifying that capability over over many years to come.

Yes, so again, we the the ERP has a three year forward looking formal approval, but the settlement.

I would suggest that the construct is in place. So we'll be reviewed obviously every time, we do a new ERP filing.

And our next question.

He comes from Travis Miller of Morningstar. Please go ahead.

Turning joining Travis.

I was wondering just real quick on the 2020 bps looks like you've got a lot of the regulatory uncertainty locked in or or at least not there anymore for the year.

What are some of those sensitivities there as it whether or not.

Yes, I would say, it's a fairly straight forward glide path for 2020 bps Travis I think you highlighted the key.

Driver, which will be rate relief net of investments and so if you're thinking about the gas rate order. We just received.

I'll say additional items that are unforeseen.

Okay, Great and then question on that Slide 20, where you have the five year Capex plan.

No. So that line item new renewables, that's a combination of the renewable spend to get to the 15% Rps by 2021, So you've got the wind investments in there and then it starts to take on in the latter portion of that five year period. Some of the solar related investments. The IR piece. So that is all the utility that is all that.

Renewable related spend at the utility in that line item there just over this five year pure 19 to 23.

Okay. Okay, and then just real quick on the solar that you guys are talking about.

Six eight gigawatts and potential for growth there.

What's your kind of split there between utility scale and distributed generation is that all utility scale or how do you see that potentially evolving between distributed generation, a rooftop solar and utility scale.

Residential program.

That are run by the utility there like community solar sorts of programs. So its utility scale that a customer can buy a plot. If you will there will be some residential distributed solar that customers want to invest themselves in private power generation and so we have a program within the state to allow that to happen but.

Okay, great. Thank you.

Thank you.

Good morning, Thanks for taking my question, so warning and good morning, I have only one bigger picture question. So.

Currently knee near term plans, what what to do with the bank and dig I mean.

Where do you mentioned that there could be some slight uptick in your equity needs. What would would you look at these assets of the other way to maybe fulfill those equity needs.

Theres no change for Enerbank. It plays a particular role in our.

Plan and continues to do.

Andrew I would just say for enterprises, because you asked about big we continue to view that businesses. It's heavily contracted not just dig but all the other assets, we have there and it's a fairly de risk business and so we continue to count on it in our five year plan to give us a pretty steady stream of earnings and cash flow contribution to export or five years. So we don't anticipate.

We.

Great. Thanks, Andy.

Next question today comes from David Roman of Goldman Sachs. Please go ahead.

Hi, good morning.

Morning, David.

Quick question on just the detail, maybe we'll be getting in the future on the 10 year plan I know back in 2017 at the Investor Day.

Something that we can expect maybe over the next 12 months or so or maybe following a little bit more.

Yes that makes sense, thanks, Greg and I think earlier you were asking a question for your answer a question and you mentioned upside from trackers as one of the potential outcomes. There I know, there's I'm talking about 2020 outcome, but longer term along with more detailed filings that you're putting out.

The expectation kind of file along with.

To put or the higher pay those opportunity there for incremental trackers.

Yeah, we'd like to think that in the event, we can get more traction on those types of mechanisms that would facilitate.

Demonstrated that we're going to make sure that we crawl before we walk in Michigan in that regard and so with each filing will look at whether it makes sense to apply those types of mechanisms to various programs and if we think it's applicable and can get good alignment with the commission staff will look to do more of that overtime, but I think it's going to be a measured pace.

Well and I'll, just echo Reggie his point here and say that our annual filing.

You know standard has worked pretty well for us it actually allows us to be more adaptive to changing conditions around where priorities around capital spend might vary from year to year. We do have forward looking test years. So we get good visibility and approval pre approval for the capital that we spend.

Methods, but certainly IRS comes in long term plans that the commission has requested in gas and electric and our IR P. does give all of us a better ability to plan have alignment have better visibility long term work and investment which is a basis for our tenure capital plan and then.

Allows for us to plan, obviously for the workforce that will complete all of that work. So what's really important is that we have good alignment with the commission on the work that needs to be done and then the regulatory mechanisms can work pretty well for us.

Hi, So maybe first storage actually very interesting you mentioned the storage costs. If you could just give us a little bit more color on how you've seen the storage cost come down and where it sits today and secondly, what is the storage installation coming along where there is it coming along with renewables on the utility scale side or.

Going to be a bigger driver to the cost curves on storage are really the automakers commitment to emission free vehicles and the amount of R&D that is occurring in the dollars. The billions of dollars being spent by the automakers and consortium's in suppliers to them to crack the code on an electric vehicle.

Or fuel cells, I think will bode well and provide benefits then to the electric industry to be able to utilize that storage technology in the R&D that's happening in that space. So.

You know those prices will continue to drop theyre not in the market right now, but we're doing our pilots and projects. So we can learn so that we can be ready when that technology cost curve really starts to materialize.

Yeah, mainly deed utility scale on the grid as balancing resource, but I would suggest that our next I RP is going to have a different combination and we're not done with the modeling yet but early indicators show that we'll have more distributed batteries as well as I used the utility scale.

I'll storage to make our renewal those more dispatchable.

Gotcha. Thanks, and then read you just from.

Moving a little bit what's the kind of driver on what timeframe when you're thinking about what that move.

Yes so.

If you look at the run rate capital investment we have now over a five year plan, we're doing about tuna quarter $1 billion.

And so that we think again can allow us to do that comfortably within our ATM program of about $150 million per year, starting in 2020 through this five year period now over time as you think about the quantum of this tenure plan or we could be at a run rate of two and a half billion and if we start to dip into those upside opportunities that could expand on an annual basis and so.

So it could go up.

Directionally, but it's difficult to get more precise and that profit because again there are number of factors a dictate your equity needs and so when we will be a federal to cash taxpayer and so at the moment, we think 2024, but that could change because we thought five years ago that would be a federal taxpayer down we're not and so thats a big variable regulatory outcomes is clearly a big variable and then come.

Furthermore, affordability in our trends there relative to inflation and so all those variables.

Impact the amount of equity we need to issue per year in so absent that visibility, it's tough to say how much more will go up but again, we'll obviously manage the balance sheet prudently as we have over time, and we'll see where the equity needs and up but I don't think materially you'll see a big rise in the sort of next couple of years, if that's what you're asking.

And our next question comes from Sophie Karp Keybanc. Please go ahead.

Hi, good morning.

Good morning boarded.

You had ever to be strong quarter and you maintained your guidance I guess is there anything specific that given you guys. Some caution maybe in Q4 as it evolves or is it just being conservative.

Yes, you know we feel good about our year end guidance has indicated.

On plan, we feel good about that plan and we ride that roller coaster and we enjoy it we enjoy riding a rollercoaster. So that you don't have to you know we want to deliver that nice Green line that read you mentioned in his prepared remarks that that is our promise and that's what we continue to to work to do everyday and that's what is.

So much on about running this business is that we get to to manage all those ups and downs and we feel good about the plan and where we are for the rest of the year.

Great and then.

Hey, you show and the on your slide set the customer bills decline in those stay in.

As you move in your fuel mix and the incremental generation is mostly renewable footwear, that's no longer going to be the case.

Im going to be a challenge to manage to manage of customer bill with this new and evolve and generation mix.

No in fact, it is definitely in line with creating the headroom necessary the replacement of fuel.

The elimination of fuel expense is a huge benefit and keep in mind, where particularly and uniquely position because of these large PPA base on which we do not earn.

We're going to be transitioning away from those PPA phase, which are out of the market. Today. So our customers are paying a high price for them, we're going to transition to renewable energies with no fuel costs and more competitive pricing on which we earn and so it's the best combination for our commitment to the triple bottom line, where.

Excited about where the future takes us on all of that it's directionally aligned with all of the savings we've achieved to date.

Thank you.

Yes. Thank you.

And ladies and gentlemen. This concludes our question answer session, Let's turn the conference back over to probably probably for any closing remarks.

Sharing more stories about.

All of the exciting things happening at CMS energy season.

Thank you Ma'am. This concludes today's conference we thank everyone for your participation you may now disconnect your lines.

Q3 2019 Earnings Call

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