Q4 2019 Earnings Call
Good morning, everyone and welcome to the CMS energy 2019 fourth-quarter results. Their earnings news release issued earlier today and the presentation used in this webcast wage are available on CMS energies 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. If any time during the conference, you need to reach an operator, please press star followed by zero just reminder. There will be a rebroadcast of this conference call today beginning at 12 p.m. Eastern time running through February 6th. This presentation is also being webcast and is available on CMS energies website in the investor relations section off at this time. I would like to turn the call over to mister Surrey madapati vice president of Treasury and investor relations, please go ahead ma'am.
Thank everyone and thank you for joining us today.
With me or Patti poppe 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 risk and other factors that could cause our actual results to differ materially this presentation also includes non-GAAP measures reconciliations of these marriage the most directly comparable gaap measures are included in the appendix and post on our website now, I'll turn the call over to Patty SRI. Thank you everyone for joining us on our year-end earnings call this morning. I'll share a financial results for 2019 and our 2020 Outlook. I'll discuss the roll-forward of our five-year Capital plan and provide an update on key regulatory matters. Reggie will add more details on how long the results as well as a look ahead to 2020 and Beyond and of course, we look forward to the Q&A for twenty. Nineteen. I'm excited to report adjusted earnings of $2.49 per share wage.
We were able to achieve another year of adjust.
To 7% EPS growth despite record storms and a variety of headwinds throughout the year. Thanks to our unique operational capabilities that enable us to adapt to changing conditions by managing to work and driving out costs to Arlene operating system to see way with 2019 results in the books were raising the lower end of our 2020 adjusted EPS guidance from $2.53 to $2.64 giving us a range of $2.64 to $2.68 with a bias to the midpoint, which is up 68% from the actual package which Eve in 2019 as we roll our plan forward one year. It reflects an additional half billion dollars in our five-year Capital plan at the utility which supports our long-term wage adjusted EPs and dividend growth of 68% and is in line with our previously announced 10-year $25 billion dollar customer investment plan.
Well, there's been a lot of recent discussion around EST. It's a topic that is not new to us. Our continued success at CMS is driven by our commitment to deliver on the triple bottom line of people planet and profit. We don't trade one for the other. So while 2019 marked our 17th year of industry-leading eps growth. It was also a remarkable year for a commitment to people our customers and co-workers and our planet. Our customers awarded us our highest JD Power customer satisfaction scores ever and named Us number one in the Midwest for residential gas those satisfied customers were served by a highly engaged and diverse Workforce our accomplishments on the planet include reaching a settlement in our integrated resource plan the announcement of our Net Zero methane emissions goal by $23 for our gas delivery system and restoring over fifteen hundred acres of land in our home state our ability to meet our triple bottom line is dead.
underpinned by world-class
Foreman and we delivered our best ever customer on time delivery metrics eliminated more than twenty million dollars of waste to the implementation of the Seaway settled our electric great case for only the second time in history and receive a gas rate case order that allows us to invest significantly in the safety and reliability of our large and aging gas systems. Although 2019 has been another excellent a solid performance and record achievements. We are still dissatisfied will continue to keep improving as we work to deliver our financial and operational commitments year after year.
Now every year you'll see the ups and downs that come our way as Illustrated on slide sticks and every year our unique capability of adapting to changing conditions enables us to deliver the results. You expect you're in and you're out
In 2019. We were met with challenge after challenge a Storm Restoration costs or past our full-year budget to six months into the year, but we don't make excuses for storms or other weather-related impact on Revenue. This is what I love about our model where we ride the roller coaster for you. So you can enjoy the smooth and predictable outcome highlighted by the green line is she has served our customers and use over the last decade-plus and will continue to utilize it going forward. I feel compelled to give a shout out to the entire CMS energy team to the tenacity that the agility they demonstrated in 2019 given the head winds we face and challenges we overcame. I could not be more proud of the results and thankful for the efforts of my coworkers.
Like we do every year.
We're celebrating on the run and moving on to our next set of priorities and setting new goals with 2019 behind us. And as we prepare to deliver in 2020 will continue to make progress on ensuring the safety of our guests system driving customer satisfaction and delivering on our clean energy plan the goals we've set for ourselves in 2020 are ambitious. And as always they're fueled by the continuing maturity of Arlene operating system to see way our ability to execute on our Capital plan and make the Investments. Our system needs will depend on our ability to see and eliminate wastes wherever it is as we continue to mature in the CUA. We are creating a culture where all of our co-workers are both motivated and able to fulfill our purpose world-class performance delivering Hometown service these same words mean a lot to us.
Our systems Capital demands at the utility continue to grow and to that end. We're rolling our Capital plan forward and additional year which will increase the spend over the next five years to about five and a quarter billion dollars and supports rate based growth of 7% over that. This increase reflects the continued ramp up in annual Capital investments in our electric and gas infrastructure to improve the safety and reliability of our systems as well as increased Investments and solar generation assets agreed to in our IRP, which was approved by the commission last year. It's worth noting that own know about 15% of these projects over the next five years are above two hundred million dollars in about 75% of those projects are addressed in multi-year commission orders such as the IRP mitigates risk and provides more certainty around execution and Regulatory outcomes.
We'll also remind.
You that are 5 year customer investment plan is limited not by the needs of our system as that stretches vast and wide across the great state of Michigan, but instead by balance sheet constraints Workforce capacity and customer affordability.
Looking now toward regulatory matters with the 2016 energy loss fully implemented and with the benefits of tax reform address in recent commission orders or regulatory calendar for 2020 is month later than in recent years last year. We agreed to stay out of an electric great case in the strategy served as well as we were able to capitalize on some of the cost performance efforts by leveraging the Seaway. Now, I have the opportunity to funnel some of those cost savings back to our customers and all set some of the capital investment needs coupled with our efforts to ramp our Energy Efficiency savings to 2% by 2020 one month will keep customers bills affordable. We anticipate filing our next electric rate Case by the end of this quarter in December 2019. We filed a request in our gas rate case for $245,000 of incremental Revenue, including a 10.5% r o e and an equity ratio of 52.5% relative to debt as we continue to focus on the safety and reliability of our dead.
delivery system this case
Built on the order in our last guest case. We're nearly all of the capital Investments were approved because you would expect the needs of our system haven't changed that much in just one year in conjunction with our guests case. We also filed our 10-year natural gas delivery plan which provides a detailed look into the long-term needs of our gas delivery system and supports our ten-year Capital plan. We're thankful for the constructive office environment in Michigan that allows for timely rate orders and forward planning and the commission's commitment to working with us to continuously improve the safety and reliability of our system.
I'll remind you regardless of changing conditions around us are triple bottom line and simple business model have served our customers and investors. Well and allows us to perform consistently year-end off Euro as highlighted on slide ten. Our track record demonstrates our ability to deliver the consistent premium results. You've come to expect year after year after year and this year you can expect the same with that. I'll turn the call over to Reggie. Thank you Patty and good morning everyone before I get into the details. I'd like to share the wonderful news that Travis up house from our team and his wife Marilyn. Welcome their seventh child Mara Christine up house on Tuesday morning. So we're wishing the up house family are very best for our headquarters in Jackson, Michigan.
as Petty highlighted were
Please report our 2019 adjusted net income of 708 million dollars or $2.49 per share up 7% Year-over-year are adjusted EPS excludes select items including estimated Severance and retention costs for our co-workers at our current facilities. We're just scheduled to be retired in 2023 as well as the recognition of an expense report to the potential settlement of Legacy legal matters, 2019 results of the utility were largely driven by constructive outcomes in our electric rate case settlement in January 2019 wage rate order we received in September which are partially offset by heavy storm activity particularly in the first three quarters of the Year. Our non-utility segments be guidance by two cents in aggregate large low-cost financing just CMS energy and solid performance from interbank.
As we review our full Suite of Financial and customer affordability targets for 2019. It's like 12, you'll note that in addition to achieving 7% annual adjusted EPS growth. We grew our dividend commensurate wage generated approximately one point eight billion dollars operating cash flow are steady cash flow generation and conservative financing strategy over the years continue to fortify our balance sheet as evidenced by our strong fo to debt ratio, which is approximately 17 and a half percent at year-end and required. No equity issuance has and 2019.
last name
Accordance with our self funding model we effectively met our customer affordability targets by keeping bills at or below inflation for both the gas and electric businesses all while investing a record level of capital of approximately 2.3 billion dollars at the utility moving on to 20/20 is Patty noted. We are raising our 2020 adjusted earnings guidance from $2.64 to $2.68 per share which implies six to eight percent annual growth off of our 2019 actual unsurprisingly. We expect utility to drive the vast majority of our Consolidated financial performance package usual steady contribution from the non-utility business segments one item to note is that Enterprise is EPS guidance is slightly down from their 2019 results given the absence of a gain on the sale of selected with the second quarter 2019.
All in will continue to Target the midpoint of our Consolidated EPS growth range at your end to elaborate on the Glide path to achieve our 2020 EPS guidance range as you'll note on the Water Club waterfalls start on slide 14 we planted for normal weather which in this case the amounts to an estimated $0.06 of negative variance negative year-over-year variance given the colder than normal weather experienced 2019 to the benefit of our gas business. We anticipate the cost reduction initiatives largely driven by the way and other expected sources of year-over-year favorability, which is lower Storm Restoration senses after an unprecedented level of storm activity last year will fully offset the absence of favorable weather in 2019. It is also worth noting that we capitalize on an opportunity to fully fund are defined benefit Pension Plan earlier this month which provides additional non-operating cost savings and EPS risk mitigation moving on to rate relief. We anticipate approximately $0.17 a month.
just pick up in 2020 as
Mentioned during our Q3 call about two-thirds of this pickup has already been approved by the commission and the gas rate order. We received in September and the approval of our renewable energy plan and a first-quarter 29th will expect the final order in our pending gas case in October of this year, which effectively makes up the balance of our expected rate relief driven EPS contribution in 2020 what we plan to file a electric case and q1 of this year the test year for that case, we'll start in 20 21 lastly. We apply our usual conservative assumptions around sales financing and other variables as always will adapt when you conditions and circumstances throughout the year to mitigate risk and increase the likelihood of meeting our financial and operational objectives to the benefit of customers and investors.
As we as we work toward delivering our 2020 EPS Target. We remained focused on cost reduction opportunities within our entire five and half billion dollar cost structure the core components of which are Thursday 5:15 for well over a decade. We have managed to achieve planned and unplanned cost savings to mitigate entry or risk and create long-term Headroom in our electric and gas bills to support our summer schedule customer Investments after utility as we looked at twenty twenty and Beyond we continue believe there are numerous cost reduction opportunities throughout our cost structure these opportunities include but are not limited to the expiration of high-priced ppas the retirement of our call Fleet capital capital enabled savings as we modernize our Electric and Gas Distribution Systems and the continued maturation of Arlene odd system to see way.
These opportunities will provide.
Sources of Entry or risk mitigation as well as a sustainable funding strategy for a long-term customer investment plan, which will keep customers customers bills low on an absolute basis and relative to other household Staples in Michigan has depicted in the chart on the right hand side of the page moving on to weather normalized sales as we as we have discussed in the past economic conditions in Michigan remain possible particularly in our electric service territory, which is anchored by Grand Rapids on the fastest growing cities in the country as evidenced by the statistics and the upper left-hand corner of slide 16.
And when it comes to Michigan's economy, we are not passive participants. In fact, in addition to directly investing billions of dollars throughout the state. Annually, we collaborate with key stakeholders across the stage to drive industrial activity through our Economic Development efforts. These efforts have attracted nearly 300 megawatts of new electric load and our service territory since 2016. And in 2019 alone the contracts be signed will support / 3600 jobs and bring in more than one point five billion dollars of investment to Michigan a prosperous Michigan reported by our Economic Development efforts offers multiple benefits to our business model in the near-term. It drives volumetric sales, which support our financial objectives and longer-term it creates Headroom and customer bills by reducing our rates off as mentioned in the past. We also continue to see the positive spillover effects of said industrial activity on our higher-margin residential and Commercial segments over time in the form of steady customer account number.
unfavorable loads friends
As you'll note in the charts in the right hand side of the slide. We've seen average residential load growth of 1% and 1 and a half percent for the electric and gas businesses respectively over the past five years normalized for weather and our Energy Efficiency programs.
To summarize our financial and customer affordability targets for 2020 and Beyond we expect another solid year of six to eight percent adjusted EPS growth solid operating cash flow growth choice of the aforementioned discretionary pension contribution and customer prices that are below inflation from a balance sheet perspective. We continue to Target solid investment-grade credit metrics and as you'll note home equity needs are approximately two hundred and fifty million dollars in twenty-twenty do the previously noted deferral of our Equity issuance needs in 2019. We are we expect our Equity needs to be roughly a hundred million dollars per year in 2021 and Beyond which can be completed your ratm Equity issuance programmed, which will likely file along with our shelves during the first half of this year.
our model has served our
Cold as well in the past has customers received safe reliable and clean electric and gas and affordable prices and our investors benefit from consistent industry-leading financial performance on slide eighteen. We refreshed our sensitivity analysis on key variables for your modeling assumptions as you'll note would reasonable planning assumptions and robust risk mitigation the probability of large variance. Our plan are minimized there will always be sources of volatility in this business eBay whether fuel costs regulatory outcomes, or otherwise and every year we view it as our mandate to do the worrying for you down the receive quarterly. And with that. I'll hand it back to Patty for her concluding remarks before Q&A. Thank you Reggie our investment. Thesis is compelling and we'll serve our customers our planet Earth are investors for years to come and with that Chad. Would you please open the line for Q&A? Certainly? Thank you very much Patty. The question answer session will be conducted electronically dead.
If you would like to ask a question, please do so by pressing the star key followed by the digit one on your touch-tone telephone if you're using a speaker function.
Please make sure you pick up your headset will proceed in the order you signal us and we'll take as many questions as time permits. If you do find that your question has been answered. You may remove your thoughts by pressing the star key followed by the digit to on your touch-tone telephone will pause for just a second.
The first question will come from Greg Gordon with evercore is I please go ahead.
Hey, good morning. Patty Reggie Reg. Couple questions on the on the year. So did you did you did you say that that small asset-sale gain from Enterprises was in the summer quarter? Is that correct? That's that's right. Can you can you just give us a little more description of what asset it was and and what you saw in the rationale for Enterprises specific big had some transmission related assets. The informal parlance is switchyard assets which they sold to ITC Transmission in the second quarter. And so we booked a gain of roughly $60,000 or $0.04 and cute to that was part of our plan throughout the year, which is why you'll see sort of an aberrant Trend between r19 actuals and what we anticipate for 2020.
understood
I may be wrong, but I think you're breaking under Bank out separately. Now for for the first time I I'm happy to get the incremental disclosure wage. You just give us the rationale for that and then I have one more question. Yeah happy to so enter Bank this year and they had a wonderful year as Patty noted. They hit about 2.6 little over two point six billion in assets, which is in excess of 10% of our Consolidated asset threshold. And so we chose to report out this segment at this point.
Great. My final question is the decision to fund the pension. How much did how much sort of a dollars did you top off the pension and can we think about the financial benefit of that being sort of the edge between the financing costs and the expected pension return? Yeah. So starting with your last question first. Yes, we did take into account and you should assume that the EPS related pickup is net of the funding costs. And so we anticipate about $0.05 of earnings per share upside attributable to that the amount and you'll see this in the appendix is a little over $530 million dollars. And so that allowed us to fully fund are inactive defined benefit plan.
And that was funded.
From a parent infusion or from off of the actual operating company balance sheet the ladder. So we did a Term Loan in the interim that Consumers Energy. It's interesting. It's the the term loan funding of that was about three hundred million dollars. We actually had a little bit of excess cash flow that we allowed that allowed us to put to fund it with the Xbox cash, which also helped EPS accretion attributable to that. Okay. Thank you all very much. Have a great morning. Thank you for the next question comes from Julian dumoulin-smith Bank of America, please go ahead.
Make a warranty morning.
Hey, I'm just taking off first as usual focus on the capex in the upward Trend and nicely done on the upwards and half billion dollar increase here as you vote for how long can you talk a little bit about the upside trajectory? It says if you take that half billion dollars and just kind of related single year and isolation go forward and you continue to do that. Um someone excess of your kind of ten year plan, so obviously talked about this little bit but perhaps this might be an opportunity to allow me a little bit and then I'll probably second question at the same time. She had some pushback on their latest process on procurement and they're IRP. Any any reasons respect to your ongoing efforts on the renewable specifically want to I just want to clarify now.
Well, I'll take the first part and will read you take the second part Julian the the capital plan the $25 billion dollar capital.
And does have fluctuations year-to-year some and and you'll see we've got a five-year look in the appendix of the deck so you can see the the what the plan is by year off and we do have some opportunities in that 25 billion and we talked about that after the third quarter, you know, there's certainly demand for additional spend on electric reliability and grid modernization and and our gas business and as always we're working to balance the competing demands for Capital internally having our internal Capital battles if you will, but also making sure that our Bills remain affordable making sure that the capacity to do the work is possible so that we have good credibility with our Regulators that we do what we said we're going to do and so the the upside down that you see in this First Five-Year for adding additional year is the natural fluctuation, but it also supports the $25 plan and that supports our 68% growth trajectory.
Yeah, Julian, you also just asked about you know, what could allow us to I think if I heard you correctly just dip into those upside opportunities in this Patty and I have talked about in the past, you know, the parents are primarily, you know, customer affordability. And so that is the primary constraint on what it will be able to dip into those upside opportunities at three to four billion in that ten year plan as well balance sheet constraints and potentially, you know Workforce capacity and so over time is all of those potentially move favorably will consider recalibrating. But for now, that's where the plaque it's now getting to your second question related to if I heard you correctly again, the the feed wasn't all that good but it sounded like a potential reaction to I think the alj's decision wage is integrated resource plan. Needless to say, you know, we're not going to speak for DTE on their regulatory filings, but if you're asking whether that has an impact on our dog
he and the execution of RRP the answer to that is no we obviously just concluded the
The RFP. Well first we got approval for RRP and mid last year and we just concluded in September or deep into queue for the request for proposal for the First Choice launch of 300 megawatts of solar. This is part of a longer-term effort to really build out solar generating assets to the tune of 6 gigawatts by 2040 and this first tranche of call it a 1.1 gigawatts that were approving the settlement. We just did about three hundred megawatts this year. We'll do another three hundred megawatts in RFP and September this year in the balance of 500 megawatts and 21 half of what you'll be rate base half of which will be PPA and so we're in execution mode and obviously we'll look to file a new IRP in June of 21 for the settlement. So we're that's that's where we stand on that wage.
All righty. Excellent. I'll look at there and thank you all have two black. Thank you. Next question will be for Michael Weinstein with credit Swiss. Please go ahead with hi. Good morning guys morning Michael. I just wanted to confirm that the extra five hundred million of capital spending that's planned for the next five years is not a part of the three to four billion of upside opportunities, right? Cuz the total ten year plan didn't really change that much. That's right, Michael. You've got that right. This is just the one year roll-forward. So it's just a modification in the plan.
Got it. This is
Is it an acceleration of spending that you would have done in the second five years of that ten year plan basically know it's right in line with our planet adds some additional the IRP so long that was approved as well as some additional electric reliability and uh, really the the you can plan on fluctuation between the gas the electric the renewable parts of the spend as the years go forward so that we can optimize that Capital spend to the benefit of customers and uh, again is mitigating the the challenges that Reggie articulated around affordability balance sheet. We're always I'm just working the plan to have the highest value Capital year after year, right? And also I wanted to confirm that there's no incremental Equity need from any of that either, you know, obviously, it doesn't look like the plan change and that this is all it's all ATM and internal programs, right? There's no block Equity. That's correct.
Okay, and you know one thing I would maybe you could talk a little bit more about is you know, you discuss a little bit about new.
The attraction of new commercial and Industrial customers in in your territory and can you discuss the potential impacts on on electric load and on your industrial customers as electric vehicles gain traction across the supply chain for the Auto industry. Yeah, you know the I would say the industrial load that we're seeing being added actual up being very unrelated to Automotive. Michigan is more and more Diversified. We've had some big ad customer additions and some Pharma additions and so I would say if anything were missing some diversification in Michigan in our makeup of our industrial rate base, but I would also say or our industrial customer base, but I would also offer on the TV front that part of the electric transportation as the co-chair of that committee. I've had an opportunity to really get exposed to some of the national Fleet operators. We had Amazon for example
Our national meeting in January talking about their Ambitions to Electrify their Fleet. I see that as a big opportunity, you know load growth for electric per capita certainly has not had significant increases. In fact, it goes down in many cases as equipment gets more efficient lighting gets more efficient and I see this Fleet potential to be actual Logan potential in the future as their Ambitions materialized now, I will tell you it's not going to sneak up on it because with their first of all they need to have electric transportation at a complete scale available. The actual Vehicles the trucks the cetera and that development cycle is you know, not fast but then we'll be working with them to site there charging stations and make sure we maximize the benefit to the grid and minimize the addition to Peak demand. So I think it's a great opportunity frankly for the industry and Michigan will certainly be participants in Georgia.
Thank you very much.
Thank you. Next question will be from meta with Citigroup, please go ahead. Thanks so much. Hi guys and congrats on a good quarter month. So maybe first a more a big picture a step back question utilities clearly have been doing well in the in the current stock price environment and CMS clearly doing well too given the execution. Do you think there is any use of that currency from your perspective m&a or otherwise that you think you can look at or execution is primarily the focus at this point. Yeah proper our position on m&a versus organic growth has been consistent for some time. And you know, we are fully focused on executing on our Capital plan. We've got enough to do within our walls and as I've said in the past, you know, we're paying one times book to fund those Capital Investments. I'd rather do that than pay a premium for somebody else's capex backlog. So we are acutely focus on execution.
our plan
Fair enough makes sense then just quickly on the operating cash flow. Then you're looking at the slide 17 and you say up 100 from the 2023 one point seven billion. Just can you walk through that? What's the increase that you're kind of seeing in the long-term plan and I guess connected to that. I also saw increased utilization a slight twenty-three. So just try to understand a little bit of the drivers around the operating cash flow. Yes, as you may recall prior to the enactment of tax reform at the end of 2015. We were on this very healthy trajectory of about a hundred million dollars of year over a year or at least year versus prior year budget ocf accretion per year and it has to do with just the the very nice fundamentals of this business. I mean, we're investing Capital growing rate base getting solid customer receipts and I'll give full credit to our folks who manage working capital very well in our team as well.
So it's just a nice healthy.
The byproduct of all of that good work there. And so the only reason that we paused slightly was just due to tax reform in the cash flow degradation effects of that. So we basically took a two-year pause on that wage growth. And so we guided in 2018 at 1.65 billion. We managed to exceed that and again we guided in 2019 and 1.65 billion and managed to his exceed that again and so now we feel like again relative to what we budgeted the prior. We will be back on that sort of hundred million dollar per year increase starting this year in 2020. And so that's what we have in the forecast and we feel very good about that particularly given the magnitude of the capital investment plan our ability to manage our costs. And again just execute well in the working capital front and say we feel like we have a very nice Glide path to continue that on that trajectory now. Pertains to end and credits, you know, we obviously at a significant remeasurement going back to tax reform on our end. We still think we've got a little bit of utilization left of what's remaining, but then also we took
have quite a few business credits that we
I've accumulated over time and we expect modest accretion of that just give it to some of our efforts and the removable side. And so that's where you see still decent amount of I'll say a combination of LOLs and tax credits. And so at this point we did not expect to be, you know, a federal taxpayer until call it a 2024. There's a modest amount that will pay in 2023 based on our forecasts but really not a partial taxpayer money. Is that helpful? Yeah, that's super helpful. Thanks for that. And and you just finally in terms of storm impact Sandstorm costs. Is there any in the current rate case filing? Is there any plan to change what gets recovered or what is allowed to be recovered from terms of storm costs Yeah in our next electric great case certainly. We want to reflect the average service restoration expenses. And what we've been recovering in rates is less than what we've actually experienced on the last five year average. And so we want that to be reflected. But we also want and believe that with God.
um the age of the system
Some that are increased spend in both the fundamental reliability of the system. We've been increasing, uh, both the actual spend as well as the dog quested spend. We think there's a lot of justification for that to keep up with the age of the system. And so we'll continue to ramp the the reliability spend but we also want accurate reflection of the operating expense associated with service restoration. Well, frankly at the same time, we're working to reduce the cost of every Interruption by making our processes more efficient by making are utilizing technology to respond faster and at a lower cost and so we're doing both simultaneously got it's super helpful. Congrats again guys.
And our next question comes from sharper Elsa with Guggenheim Partners, please go ahead.
Hey, good morning, guys.
It just on on a couple of questions on your annual capex Garden your disclosures that's closer to the back of the the slide deck. There's some obviously some shuffling to spend between 26 and 21. Can you just remind us what actually drove this and can you maybe talk a little bit more about the new capex? You're introducing towards the back end really more specifically on the mix between Gas and Electric.
Yeah, sure. Sure.
Sure, happy to take that. So a little bit of the shift that you probably have noticed between what's were expecting or what we were expecting in 20 20 in our prior Five-Year Plan rolled out in q1 of last year and sort of this Five-Year Plan. It has everything to do with just the timing of the rate case and the Ford test years. And so this current vintage now that we're you're smarter reflects the magnitude of them spend we expected twenty Twenty-One and that aligns nicely with the gas case that's pending that we filed in December of last year. And with the electric case will likely file and q1 of this year. And so that's really what you see the that shifting between 20 and 21 and what we've always said and this remains true to form is that you know the absolute amount for the Quantum of capital we anticipate spending on a 5 year. R. Is you know always pretty consistent but the composition does change over time and you know, sometimes you get shifts into your yard, so that's effectively what you're seeing and then for the outer years.
I think Patty did a nice job.
Summarizing this is just uh, we're just basically losing 2019 from the prior vintage enrolling in another year or so going from a 19 to 23 plan to a 20 2/24 plan in as part of that role. You're seeing an expansion more of the solar generation will do attributable to the IR piece or taking on that sort of final tranche of call a 250 megawatts that will rate base wage. Then you couple that with additional spend and both our electric distribution reliability related Capital Investments as well as gas infrastructure set. And so those are kind of the pieces you're seeing in the back end of that month.
Got it, and sorry and then Patti just started be the dead horse on this but I just haven't fall up on that incremental Capital opportunities. You guys have been highlighting. It seems like you're managing On Em. Well, you have Bill Headroom that continues to improve the economic backdrop remain strong in your service stories. You kind of highlight you do have sort of balance sheet capacity some I'm kind of curious is what are the drivers that we are missing as far as as you look to pull forward some of that spend. Is there anything else outside of just managing towards at 7% growth Target? That midpoint wage is is it a function of trying to find the optimal capital projects internally. So what sort of the the the offsets those drivers cuz it seems like the drivers seem to fit towards you accelerating spend versus yeah, you know one thing I'll tell you about our ten-year Capital plan, you know, I think some people might argue that it's impossible to have a ten year Capital plan cuz conditions changed so much money.
Don't know enough about the future I can tell you.
Ten year Capital plan has a significant amount of meat on the bone. And what we intend to do is make sure that we are able to execute the work that we have committed to and so I'll tell you the ramp-up of capital requires a significant operational and ability to execute and prepare the workforce. And when we hear nationally about constraints on ability to attract talent and not to build out a Workforce we have to attract the workforce to deliver all that work. And so that we want to make sure is well-timed and well-planned so that we do precisely what we said we're going to do and it's also important that from the affordability standpoint that our customers are able to pay and would value for Value the Investments That would be making on their behalf. So really customer affordability continues to be front of mind and and as an operator myself, I want to make sure my team is ready and prepared to execute the work that we commit to, Georgia.
It's easy to write a number in a spreadsheet. It's another thing to go dig the the trench and lay The Wire.
And roll the trucks. So we've got to make sure that we're ready all the way around.
Got it to the human capital aspect. It's a bit of a concern. Okay, great. All right. Thanks so much guys congrats again. Next question will be from Jonathan Arnold. Go ahead. Oh, good morning guys morning Jonathan Jonathan. Thanks for taking my question. I was going to ask you about the shift in the Carfax from twenty to Twenty-One. And I think you've addressed Thursday to thank you for that. Just one other issue. Now, you're giving this breakout of Enterprises and a bank and the parent which it sounds like you'll continue to do that going forward given the size but should we think about the parent roughly consistent going forward with this number you're showing for twenty twenty or Thirty to move around out in The Five-Year Plan. Well, it should increase over time Jonathan. Just keep in mind, you know, that's largely at this point interest expense at the parent and you know, we have 12.2
Billion dollars of capital Investments that were going to be funding over this. And so, you know, obviously we do the best we can in terms.
Of getting low interest rates realizing our debt financing is but we just assume that the new money will be raising that that interest expense should come up over time or increase over time. And so we do expect that that off that segment to increase every now and then we overachieve of course keshiri and his team have been very good at getting financing is at lower rates than anticipated but it conservatively will assume that that that segment doesn't okay, so you can just basically announcing of a portion of the of the underlying growth. I think that's it. I really wanted to ask on the Carfax. Thank you.
Thanks, Jonathan. And the next question will be from Ali Agha with Str. H. Please go ahead. Good morning.
Morning early morning first question. Can you just remind us again as you're looking at the sales that are roughly how much on an annual basis energy-efficiency sort of take away from the sales numbers?
Yeah, so and this is a has been basically come out of the new what I can't call do so much anymore. But the the 2016 energy law and so we may have a 1 and a half percent year-over-year reduction Target that we get economic incentives on and so you take the prior Year's load and then you reduce that by 1 and 1/2 wage and we do that through all the nice programs. We have and rebates on LED light bulbs and things of that nature. And so that's where historically we've been the last few years our current Five-Year Plan and we've been very public about this is part of RRP is to expand those energy waste reduction programs. And so we're on a Glide path to get to a 2% year-over-year reduction. And so you should be about 2% of our prior years load and so I just want to re-emphasize that we do get economic incentives on those programs. And so historically that's been uh run rate of birth.
34 million dollars pre-tax
Combined electric and gas and so as we Glide path so that 2% you know that amount of pre tax income Wilcrest it about $47 million toward the latter years of this plan and we anticipate about 41 million and 20 twenty alone as we Glide path up and so we anticipate again 1 and 1/2 to 2% reduction and load as part of that. And remember it also gets screwed up and rates as we filed cases and so that is also something worth noting. Okay, and so just to be clear if I look at the numbers for calendar nineteen as reported weather normalized -1.4 if we adjust that for Energy Efficiency, then it should be relatively flat and I know you're sort of on an apples-to-apples basis looking at that wage up 1% I believe in 20 and perhaps beyond that. So, can you just talk a little bit more about that Dynamic, you know? Yeah going up to 1% and be happy to page.
You know, we actually tried.
To get in front of that question cuz it comes up quite a bit by offering this new slide sixteen and the presentation but you're thinking about it. I'll leave the right way. And so if you look at that sort of Blended weather normalized electric load for 2019 vs 2018 1.4% down think of that as flat. I'll also note what's embedded in that 1.4% is offered a reduction in volume from a very large low-margin customer. And so when you back out the effects of that low large that large low-margin customer our weather normalized sales tax from 1.4% down to about half a percent down and then if you take out the effects energy-efficiency will now you're up 1% and you can look across all of our channels for electric and see that Trend which we think is the right way to think about it. So residential flat so you again you normalize for energy-efficiency, you're up one and half percent commercial down 1.1% You normalize you're up half a percentage.
And we have seen those organic.
Ends in our customer accounts just to make sure that we're not being too scientific here. And so we feel quite good about that and think there is very healthy economic growth in our service territory participate with the high-margin part of our supply chain or sorry our customer segments. Got you and one last question I know is you mentioned that you know, the 2018 energy lies fully implemented Etc, you know anything of note, you know in this year's legislative session for us to keep an eye on that may be relevant to you folks or something that you would keep an eye on as well. No, I would suggest particularly here in Michigan. The there's nothing really being driven by the election this fall certainly the presidential election is going to be a big distraction. We do have our whole house State House, of course has two year terms and our congressional districts. Have two year terms. Yep.
There's elections.
Our governor did her State of the State last night and uh, she doubled down on her commitment to fix the damn roads here in Michigan. That's her slogan not mine. And so we're happy to support the investment in infrastructure and frankly as we do more Road repairs. It's a great opportunity for us to collaborate with our department of transportation and our construction work here in Michigan to do our investment in infrastructure at a lower cost for all citizens. So, um, I would say nothing though knew from a legislative agenda here in Michigan. Thank you. Yep. The next question comes from Travis Miller with Morningstar, please go ahead. Thank you. Good morning service on the gas case was wondering if you could lay out some of the used contentious but some of the more debatable issues that you see coming up there and in particular the r o e and the decision to go with the higher request.
Yeah, well a couple of things Travis first of all as I mentioned.
We have this 10-year gas natural gas delivery plan that we filed with our case and that plan has been well vetted with and actually collaborated with our staff at the commission and its development and aligning on our priorities. Uh, one thing I can firmly applaud. Our commission for is their commitment to being able to see long-term plans so I can make better decisions in a one-year case. And so this 10-year gas plan we filed has a lot of meat on the bones and I feel very good about it. You can look at our last case and see the package over ninety percent approval of the capital that we requested is a good indicator that that work that we have committed to doing is the work that the commission would want us to do as well. So we feel good about that now on the page are we of course, we feel justified in 10.5% Are we ask and so we always make sure that we have adequate justification for that job.
Yields about a $25 million dollar impact if you take the $10.99 and so we recognize that the commission has a job to do they've made it clear that they recognize them healthy r o e is important to the utility low cost of capital is important for the benefit of customers and the utility and so we look forward to seeing what the final outcome of that rate case may be. But what's more important I think is we really take an eye on on it is the volume of capital and the alignment with the staff and the commission on the work that we're doing.
Okay, great.
New you anticipated my question on the so I won't ask that Delta number but broadly on the Enterprise and enter bank and especially Enterprise. What's your three year strategy any updates to that here in the last quarter or two? Yeah. So the planet Enterprises has been pretty straight forward for some time. And so I you know, obviously a dig drives the vast majority of the financial performance of Enterprises, and we really have tried to be risk that business and its future earnings potential quite a bit off through the energy contracts that we amended in extended about a year or so ago and then we've also locked in a good deal of our Capacity open margin over the next few years as well. We feel like they should be pretty steady predictable performance at Enterprises. I'll also note, you know, we've done a few of these contract of renewable opportunities of the last sort of year and half and so dead.
no, we will look to the opportunistic if those if we find nice, uh
Opportunities with third parties where we can get attractive returns credit-worthy counterparties, um, and basically have to describe very little terminal value to projects like that and so long to do those from time to time. But again, we expect three or four would look to be pretty pretty straightforward. Okay, great any of those contracted Renewables in the capex playing right now?
No. Not in the 12 to we highlighted. Okay, great. Thank you very much.
My next question is from Andrew weisel with Scotiabank. Good morning. Everyone morning Andrew if I could I've got one thousand one long-term first and the near-term if you could elaborate read you gave a lot of good color on the demand Friend by class. Are you able to estimate like how much of the impact particularly industrial is related Palm Terrace in trade Wars and then what are your assumptions for low growth embedded in the 2020 guidance?
Yes.
So we have I'll say for twenty twenty guidance. We are a fairly conservative in our position both in 2020 and also over the course of The Five-Year Plan and so for electric and again, if you got to keep take into account that we have the Energy Efficiency programs embedded in that we're assuming about call it flat to slightly declining for electric. And so that is our working assumption, um for a really 20 20 and Beyond and I'd say gas, you know flat that may be slightly up based on the trends we're seeing there and so that's our current position in terms of industrial activity in a clearly. We've talked in the past about the Diversified nature of our industrial customers in our electric service territory, and I'll just remind that folks that about 2% of our gross margin equivalent comes from the auto sector and so yes, of course, we do have exposure to companies that you know may have some level of exposure to export import market wage.
or whatever you want to call it, but
You know at the end of the day a lot of the margin we generate comes from our residential and Commercial customers and we continue to see very nice Trends there. And so the industrial activity were obviously a very supportive of it through our Economic Development efforts. We do think it's important to Michigan and our efforts on the residential commercial side. But really the vast majority of our sales are driven by residential commercial at least the margin them we've seen good Trends. The only other data point I'll leave you with is that you know, 1% change in our industrial estimated growth probably drives about a half a penny of took us and so there really isn't a significant impact when you see variation in the industrial class cuz it's much lower margin.
Right makes sense. Okay, good next longer-term question. You continue to point to the midpoint of the 68% range and obviously you've been delivering 7% So that's probably not a surprise. My question is you show rate based growth of 7% excluding the upside opportunities on capex. You have some incremental EPS growth from things like the Energy Efficiency and demand respect incentives as well as enter Bank growth. My question is what would prevent you from hitting the high end of the range going forward is that Equity dilution or any other factors? Well, I'd say number one were always balancing the ability for our customers to afford the product so that we have a sustainable plan and I'll also offer and you can see from our track record on years when there has been some phone number ability on a year when we could have delivered more than the mid-point. We reinvested in the business. And so one of the key components of our success here is our consistent performance.
actually can set your watch to
That you can rest at night. That's our goal. And so the idea that we would start to fluctuate in pursuit of a a higher Target really, uh is not consistent with our commitment to delivering as you would expect year after year after year, and actually so even at this stage of the Year, we're thinking two years out not just next year and so we're always looking for ways to pull ahead fences reinvest favorability for the benefit of the consistency in the long run.
Sounds good. I'll speaking the last one patty no story of the month. Any any quick one. You can throw at us.
Let's see. Yeah layers many of them. Here's one just off the top of my head. We had a team at one of our service center were really looking at their meter management process and when we went out to to talk to him Gary gross our head of operations are observed that this team had had this problem of meter inventory and how they were managing that inventory. And because they have we have these teams called Fix It Now teams which are empowered work teams right on the ground level focus on driving the business. They had identified this issue with their inventories of meters and identified a two million dollar savings specifically that benefits that can be actually parlayed to our service centers that change their work process. This way is becoming embedded in our organization and the ability to teach our co-workers to see yep.
Eliminate waste and improve their process it reduces what we call their own humans.
Struggle when our our co-workers see human struggle that they can reduce it off and parlays into Dollars makes their job easier to do makes them more committed to the ownership of the company and not it's another good example of a real savings that get driven by real people who do the real work, and I could not be more proud of the team. Thanks for asking. We have a big debate whether I should include that in the script, and I am very happy that name is Andrew. I stand I need to have one at your fingertips. Thank you very much.
And our next question comes from Greg Oriole with UBS, please go ahead.
Thanks. Good morning, Greg. Good morning with the Renewables cat facts that you've outlined on 522. Can you maybe comment on how that how that contributes to rate based growth or is the portion of overall rate based on the plan?
Yeah, so great what that's comprised of it's the combination of renewable stand and certainly in the near-term portion of this Five-Year Plan to get Erp s s i renewable portfolio standard of 15% by 2020 one is per the energy law. So that's the component you'll see instead of the 20 20 21 years and we have good projects in the pipeline that we think will allow us to get there. And then the latter portion as we've talked about in the past is part of the IRP related renewable staff. So again as we start to execute on this one point one gigawatt launched half of which will be owned half of which you'll be TP eight or contracted, you know, that's what's making up off balance of that in terms of the rate base component, you know, we have of the billion eight of capital we plan to spend an angry over the five-year period it probably drives about or off.
represents about 6% of rape
Or thereabouts so not all that stuff significant at this moment. But over time we'll expect that to grow some but the vast majority of the spend is we've talked on the past is wires and pipes. We think that's where if you really want to get the biggest bang for the buck. It's really in the investment in the safety and reliability of our system both and gas infrastructure electric infrastructure. And so that's where you see the vast majority of the rate base spend in the rate base wage accordingly.
Okay. Thank you graduation. Thank you.
And our next question is from David Fishman with Goldman Sachs.
Hi, good morning and grats on another consistent year. Thank you, David. Good morning morning morning. So I apologize. This is already been asked but the the natural gas Natural Gas Distribution plan filed, you know given such a long-term look effectively by program. When would you expect really if at all to file for another irm or another about your mechanism, I mean just give him the detail by category in this filing along with the p and the Egypt it certainly seems like you are potentially positioning that consumers to work with the commission toward mechanism of some kind and the 26th, you know, I would offer this David I I have mixed feelings about the long-term plans because the reality is the system is dynamic. The demands are Dynamic. One of the great strengths of our plan is I highlighted in my prepared remarks is that we've got a lot of flexibility, you know this large percent of our specials.
And under $200 the ability to file every year simple concrete.
Filings that are part of a long-term plan allow us to adjust when conditions change and there's no big bet strategy that we have employed for over a decade now has served us well in our ability to be flexible. And so when you lock in a three-year filing on a system like the gas system where you can have dynamism, maybe you've got new regulations, maybe there's a ninja somewhere else in the country that reprioritize has our our system and our investment strategy. I personally like the flexibility of an annual filing that allows us to go ahead and and adjust as necessary. Now the Simplicity of a filing if you've got multi-year plans certainly can be appealing and if our commission was leaning that way and they really preferred that then of course we would work with them on that but I think the idea of that we're Dynamic and so as our plan has more. Uh, yep.
Men's to our ability to deliver consistently.
Okay, that makes sense. And then the other item just on the filing. I thought you guys did a good job of breaking out your expectation for a kind of cost reductions starting at twenty Twenty-One kind of through the twenties. We've heard a lot about on the electric side the potential fuel cost savings and o&m but I was wondering if you could kind of elaborate a little bit of Fallen kind of the extensive review what kind of big buckets or drivers and trajectory you're seeing a natural gas side and the 2020s. Yeah, I'd say the natural gas site. It's all about the efficiency of getting the work done and with every dollar of capital. There's still Associated o&m that comes with that. So when we can make our Capital more efficient, we can make our own em more efficient. So we continue to work on our unit cost on driving our unit costs on reducing ways from our the ability to execute them are leak backlog and leak response is a large o&m expense. And so when we make the capital Investments That reduce vintage services and service lines and vintage, May, New Jersey.
for example, we're able to
To reduce operating costs and we just completed also large capital projects on our automated meter reading for our gas meters and that helps reduce income expense as well that obviously reduces, um, the the daily walk through of someone's backyard and and walking down into their basement to read their meter. We cannot do drive-by meter reading change significantly more efficient and safer for our Workforce. So there's lots of operating expense benefits to waste elimination the gas business as well.
Great. Thank you. So my questions. Thanks.
The next question will come from Andrew Levy with exoduspoint, please go ahead. Hey, good morning. I guess just on the interbank off, you know, obviously Reggie, you know, we've discussed kind of the company before just what are your thoughts as far as the pros of keeping it first the pros of potentially not keeping it.
You know.
Through EverBank is really a valued part of the CMS family. They had a great year and that's really what we think about interbank. They they were a great contribution here last year off and in many years in the past.
Okay. Thank you.
Ladies and gentlemen, this concludes our question-and-answer session. I would like to return the conference back to Patty potty puppy for any closing remarks.
Well, thanks Chad, and thanks again everyone for joining us this morning. We certainly look forward to seeing you throughout the year. Twenty-twenty is going to be a great one. Thanks so much, and thank you. This concludes today's conference. Thank you everyone for joining in our call today. Take care.
Thursday