Q1 2022 CMS Energy Corp Earnings Call
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So we have announced.
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Brian .
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Cute 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.
If at any time during the conference you need to reach an operator. Please press the star followed by zero.
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. Three multi party treasurer.
And vice President of Finance and Investor Relations.
Thank you Austin and good morning, everyone and thank you for joining US today with me are Derek Rochelle, President and Chief Executive Officer, and <unk> Hayes Executive Vice President and Chief Financial Officer. This presentation contain 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 actual results to differ materially.
<unk> also includes non-GAAP .
Reconciliations of these measures.
The comparable GAAP measures are independent and posted on our website now I'll turn the call over to Gary.
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 IRB.
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. These aren't just words there are evident in our actions and our results.
Our <unk> settlement paves the way to be out of coal by 2025, one of the first utilities in the nation to achieve such a milestone.
Our recently announced net zero goal for our gas system, not just a dream with evidence and proof points and our net zero methane target and a 20% reduction in customer emissions by 2030.
Excellent.
<unk>.
Can't think of a more important time, given inflation and supply chain constraints for our industry, leading cost management level.
Play out <unk>.
<unk> will walk through specifics in his prepared remarks.
Continue to be confident in our ability to offset inflationary pressure.
Alleviate supply chain concerns.
This means keeping customer bills affordable.
<unk> unique operating system.
Top tier regulatory jurisdiction.
The ERP settlement once again demonstrates the constructive regulatory environment in Michigan.
Liberty important industry, leading outcomes for all.
I'd be remiss, if I didn't think the Michigan Public Service Commission staff.
The Michigan Attorney General customer groups environmental organizations energy trade Representatives and consumers energy work team for the constructive dialogue led to settlement and a 28 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 our.
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 ERP and.
And our quarter.
I'm thrilled with this settlement that.
It provides a 20 year blueprint to meet Michigan's energy, while protecting the future.
The environment for future generations, and ensuring financial certainty.
<unk> 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 and ambitions to Decarbonize and lead the way to protect our planet.
And accelerating 75%.
Megawatts of battery storage between now.
Our investors.
Well see capital upside along with the purchase of the Colbert plant and demand side programs as.
As well as the continuation of our financial compensation mechanism.
STM on purchase power agreement.
Ppas.
We also received regulatory asset treatment at an ROE of 9%.
Closely aligned with our original filings.
After the purchase of CMS enterprises.
Asset <unk>.
Ted will pursue.
Long term ppas with 700 megawatts of Michigan based capacity starting in 2025.
Yeah.
While we believe the purchase of the CNS enterprise assets was a good value for customers. Our primary concern with ensuring we secured sufficient capacity to meet our customers' needs.
The proposed RFP.
With the purchase of the Colbert plant and a delayed retirement of our karn three and four peaking units will address this concern.
Dig in the <unk> that enterprises will have an opportunity to participate in this RFP.
But we'll otherwise continue to sell capacity as they've done in the past and the attractive bilateral market.
Is a win for <unk>.
Everyone.
In March we announced plans to achieve net zero carbon emissions for our natural gas system by 2050, which includes both our customers and our suppliers emissions.
This adds to our long term plan, both electric and natural gas.
To further drive the carbonization and provide meaningful proof points, along the clean energy transformation.
Net zero emissions across our natural gas system is certainly an ambitious target.
We've modeled this extensively we believe it is through existing infrastructure and a clean fuel network.
It also will now.
But there are thoughtful ways to reduce and mitigate greenhouse gas emissions across important home heating and thermal electric generation resources.
<unk> are important in ensuring long term affordability and reliability for our customers.
As we've demonstrated across our electric system with this IRB. These aren't just words that are evident in our actions and our results.
Proof points of our both our net zero methane target and 20% reduction in gas customer emission by 2030.
And we're delivering on those plans.
An investment opportunity.
This includes accelerating vintage main and service replacement and adding renewable natural gas to our system.
All included in our five year capital investment plan.
It also means greater energy efficiency.
Carbon offsets and potential the hydrogen blending.
Which provide growth opportunities above our plan strengthening and lengthening our investment is good for our customers our plans.
And our investors.
This is an important road ahead, we look forward to us.
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 first quarter, we delivered adjusted earnings per share of $1 20.
This is up 11 <unk>.
Per share from last year.
Head of our plan and positions us well as we start the year, giving us confidence as we navigate the nine months ahead.
We are reaffirming our 2022 adjusted full year guidance of $2 85, $2 89 per share.
But we continue to guide to the high end of our long term adjusted EPS growth range of 6% to 8%.
The IRB strengthen and lengthen 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 2014 3 billion five year customer investment plan.
As we've noted the ERP does provide upside to our current plan.
We remain disciplined in our approach you can expect with that update as we report fourth quarter results.
Early next year.
As I, often say strong execution leads a strong result in this quarter was another impressive example, we're confident in the full year guidance, we are focused on delivering for our customers the planet.
Our investors.
Now.
I will turn the call over to Rajiv.
Thank you Derek and good morning, everyone as.
As Garrett highlighted we're pleased to report our first quarter results for 2022.
We delivered adjusted net income of $346 million.
$1 20 per share.
We're up 10% off our 2021 first quarter results larger.
Largely driven by favorable weather and economic conditions in this year.
From a weather perspective, a relatively high volume of degree days in the first quarter.
Coupled with the absence of unfavorable weather during the same period in 2021 provided <unk> per share of positive variance as noted on slide seven.
And from an economic standpoint, we continue to see.
In the first quarter contributed <unk> <unk> per share positive variance.
The comparable period in 2021.
Either at or above pre pandemic levels across each of our customer segments, particularly when excluding the impact.
Of our energy efficiency programs, which reduced customer load by about 2% per year.
Another noteworthy driver of our financial performance for the quarter was rate relief net of investment related expenses, which contributed <unk> <unk> per share of uptime.
As we continue to realize the residual effects and tax benefits from our 2020 last week.
These sources of positive variance were partially offset by increased operating and maintenance or O&M expenses have utility in support of key customer initiatives related to safety reliability, and deep carbonization, which equated to six <unk> per share of negative variance.
We also realized <unk> <unk> per share of negative variance for the quarter largely related to unrealized loss and cost and timing of tax expenses.
At the parent company.
Looking ahead, we feel quite good about the remaining nine months of the year as always we plan for normal weather, which we estimate will have a negative impact of about <unk> 90 per share versus the comparable period in 2021, we.
We expect the impact of weather will be offset by rate relief net of investments, which we estimate to be roughly 20.
There.
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.
Closing out the glide path for the remainder of the year as noted during our Q4 call. We anticipate lower overall O&M expenses of the utility drew.
Driven by the usual cost performance fueled by the CE way 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&M cost performance will drive 29.
Per share of positive variance.
Lastly, we're assuming normalized operating conditions the enterprises, given the extended outage 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 irrespective of the circumstances for the benefit of our customers and investors.
Our ability to deliver the results you expect year on year out is supported by Michigan strong regulatory environment as Garrett highlighted earlier, the multiparty settlement of our ERP provides more evidence of that.
As noted the ERP settlement that we recently filed includes a substantial near term capital investment opportunity and the acquisition of the Colbert gas plant, which strengthens and lengthens our financial glidepath to the tune of about three to four <unk> per share with the assumption of reasonable parent funding costs and a 9%.
Are we on the retired coal assets as.
As we look ahead, we remain acutely focused on obtaining approval.
<unk> of our ERP settlement agreement and making progress on our pending rate cases, which are highlighted in our regulatory calendar on slide eight.
As for the latter just last week, we filed an electric rate case requesting a $272 million revenue increase.
With a 51, 5% equity ratio.
10, 25% ROE and I will note that even with this request.
The typical way.
First quarter of 2023.
We also continue to work towards.
Work through our pending gas rate case, and recently filed rebuttal tests.
We anticipate an order for the gas rate case by October of this year.
The question, we often get when we discuss capital investment opportunities and regulatory construct is minimized 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 <unk>.
<unk> environment in which we live.
Turning to slide nine you will see that several counter measures have been implemented over the past several quarters to offset inflationary pressures.
On the left hand side of the slide you'll note that the table highlights the cost categories that have had well publicized atypical levels.
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 renovate we renegotiated all three of our collective bargaining agreements with five year terms, which provides cost and labor stability over the next few years, where we had 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 towards include leveraging market.
Analysis to optimize terms.
And conditions with new and existing vendors, where possible while broadening our vendor base. We're also deploying the CE way and our distribution centers to eliminate waste and we're 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 were capitalized which reduces the income statement impact in the short term as those costs are incurred over time.
Lastly, given the well publicized tightening of solar equipment supply will remind you that our solar build out is modular in nature and allows us to flex projects over the plan period.
On the commodity side, we continue to run our electric generation fleet in a cost efficient manner.
Insulate our customers from market volatility when they are dispatched in fact heat rates of our natural gas plants for 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 as.
As we manage inflation risks in the current environment Youll note on the right hand side of the slide that we still have substantial episodic cost reduction opportunities longer term, which we estimate will generate over $200 million through coal plant retirements and the expiration of high priced power purchase agreements.
These cost savings are above and beyond what will aim to achieve annually through the CE way, which I'll remind you was a key driver in our achievement of over $150 million of cost savings in aggregate over the past few years.
Sustainable and agile cost management has been one of the key pillars of our success and enabled us to deliver on our financial objectives, and there remains ample opportunities to reduce costs across the business going forward.
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 our customers and investors as we always have.
And with that <unk>.
<unk>. Please open the lines for Q&A.
Thank you.
As a reminder.
Like to ask a question. It is star followed by one on your telephone keypad.
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Again to ask a question press star one.
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First we will pause here briefly ask questions <unk>.
Our first question is from Michael Sullivan from Wolfe Research.
Michael Your line is open.
Hey, good morning, everyone.
Good morning.
Yes.
More.
Clarity on what you mean by strength in the <unk>.
6% to 8%.
Of that is putting your above.
To eight 8%.
Sure.
Great.
Okay. Here this is a great settlement.
So there is an important regulatory process that we're still in the midst of.
And.
Just like back in 2018 in 2019, there is a few parties that have contest the settlement, that's pretty pretty difficult, we anticipate that to occur over the next months and the regulatory per month month of May.
And then the commissioners will issue an order, which we anticipate in late June it could drift into at this point.
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 ability because of the number of parties are on and to be able to navigate that process.
So what it means from a plan perspective, as we've shared that strengthen our ability to achieve the 6% to 8%.
Towards the towards the high end and as we shared this is again upside upside to the plan the IOP as upside of the plan.
Here's how I'd think about it.
We know and we've certainly made it.
It comes in in the plan and the mate.
But from a planning perspective.
But remember it is important piece in the 6% to 8% we deliver each and every year and then we rebase off of actuals.
So that's an important piece of that compounding that quarterly.
Our compounding images into quality of earnings, which you've come to know and expect and frankly that allows us to do the strengthening and lengthening across the broader plan.
Okay, sorry, if I could just try a little more on that I mean are you trying to imply that.
There may just be one outsized growth year, and then Thats, where you would re based off of that.
No I.
We don't do sugar high.
We've got nearly 20 years of consistent financial performance.
And we're going to deliver our plan here is to deliver a year 'twenty and so.
Again, I think there is strengthening and lengthening of that plan comes from the ability to get six to eight toward the high end and we've got great confidence in that but also this rebase in each and every year you know our history, we deliver and then we.
We rebased off actuals and that provides a nice opportunity to strengthen the length of the plan.
Okay got it 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.
The ask.
At this time, given the order late last year and maybe some.
Differences this time time around our lessons learned.
I feel really good about this rate case that we're filing in.
Again confident in this regulatory construct that has 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 rate case that was a positive.
For a small dollars, but a positive.
Our gas rate case, we had staffs position. The initial volley was constructive and a great starting spot MSRP settlement with staff with the Attorney General provides another data point that speaks to the constructive nature of this we.
We took feedback after that electric last electric rate case, I shared that in last earnings call and we wrote a lot of our testimony specifically in the area of electric reliability and I'll just share that we have more work that we're working on to continuously improve that rate case process, but I feel good about our filing is primarily made up of.
Electric reliability resiliency work important work to deliver for our customers. There is also the Colbert facility is in there for a little bit of work on economic development. We've seen a lot of growth here in the state to support that that work in this broader clean energy transformation and so I feel good about the case and the strength of the case and <unk>.
Getting a good outcome.
Okay. Thanks, Thanks, a lot Eric appreciate it.
Our next question is from Jeremy Jeremy Tonet from Jpmorgan.
Jeremie Your line is open.
Hi, good morning.
Alright. Thanks.
Just wanted to go with the IOP a little bit more on you talked about some of the earnings.
I'll flip there 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.
An alternative to the dig acquisition and just wondering there's been a lot of focus on the state and potentially extending Palisades do you think this could be an option here.
Roger will start with the financing piece and then we can bounce back and forth on your other questions.
Yes, Jeremy so thanks for the question I would say with respect to the financing needs coming out of this IRS settlement agreement will.
It will be obviously focused on the sooner we get approval the acquisition of the cohort facility and so that would take place around mid 2023 call. It the may timeframe.
And so we would plan to fund that with debt at the utility given our ratemaking capital structure, you consume about half of its funded that way so call it roughly $400 million or so based on the $815 million 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 the past either hybrids or preferred which we have really executed at optimal levels over the last several years, so that would be the finance.
<unk> plan as we sit here today, and we will keep an eye on how market conditions evolve over that timeframe.
Garik I'll hand, it to you for the RFP in palisade.
Yes from an RFP perspective, what we agreed to in the settlement is 700 equivalent 700 megawatts.
<unk>.
A portion of it some of our megawatts of <unk>.
Load out their capacity out there for 500 megawatts of dispatch of <unk> and that's the nature of that and available.
Reliable generation in the state and then 200 megawatts is whereas within the category of renewables.
Again purchase power agreements for those purchase power agreements that are not associated with the affiliate there is the opportunity to earn our financial compensation mechanism on those.
And enterprise has the opportunity to bid into that to that 700 megawatts.
Primarily in the 500 megawatts that are dispatch will in nature and so that's the nature of the RFP.
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 are specific questions. In this call on Palisades I'd really direct them to entergy specific to the plant now our governor.
It came back and 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 dispatch will in clean energy across our nation and in Michigan.
Our PPA.
On that facility expires here at the end of May.
It is a it is an expensive.
Purchase power agreement.
As we've shared in the course of this call we're laser focused on reducing cost for our customers.
And so that is front and center for us we'd certainly entertain.
Along a long term purchase power agreement, a new purchase power agreement with the facility entertain discussions and conversation about that but it does have to be at a competitive price.
It'll be important factor and then also <unk>.
Expect a receiver STM on that new PPA as well.
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 de carbonization for the gas system.
And maybe thinking about R&D a bit more how much regulated capex do you think this could translate into.
Within our five year plan. There is a there's a hefty amount is about $5 billion little more thats aimed at de carbonization of our natural gas system again.
Get multiple benefits youre out there replacing old.
Old pipe vintage pipe as we call it and services. It makes the system safer improves reliability of natural gas system also eliminates methane emissions one of the leading causes of climate change and so we've got a target of net zero by 2030. So those investments are being made right now over the course of the five years and will extend into the 10 year.
<unk> as well.
We see our renewable natural gas is also part of that solution as part of this gas rate case, that's underway right now if you get into the details of SaaS position.
They were not supportive of that renewable natural gas. However, they left an opening in there, which we think we can mitigate in the course of rebuttal and move that into into the utility, but some work to be done there in our in our gas case.
Got it that's helpful I'll leave it there thanks.
Thanks, Jeremy.
Our next question is from Andrew Weisel from Scotiabank, Andrew Your line is open.
Good morning, Andrew.
Thank you and good morning.
First question I wanted to ask a little bit more about the inflationary pressures I. Appreciate all the details you gave in the past I think you've talked about limiting bill increase it just take two or 3%. If I remember correctly. My question is how confident are you about your ability to stick to that in 2022, and maybe 'twenty three I assume.
Inflation won't be as big of a concern after that but in the near term do you still feel comfortable with those targets.
Everyone in this sector and even outside the sector.
It's been inflation to me. The bigger question is how do you think is best at managing that and I would put us up towards the top of the list.
Our ability to leverage the CE way and.
Provide cost savings for our customers.
And certainly again, we talk about it as flexing our muscle here, we've got great. Examples of that in 2020, we saw sales drop we found $100 million of savings in the organization we've got.
2021 in August we had <unk> 16 impact is 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 and so Reggie went through a number of examples of the way, we manage that across the system and so long term.
We look at our five year plan, even in the short term there is 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.
Yes.
Okay great.
Question is enterprises, you mentioned that big in the <unk> will likely due to the upcoming RFP I don't expect anything too specific for obvious competitive reasons, but can you qualitatively talk about how you think of the tradeoffs between taking price certainty and stability that would come with a long term contract versus the potential for lower revenues.
Given the competitive nature of bidding.
I think Regina I'll tag team. This one bottom line is it something that enterprises is going to consider.
Again im not certain we'll participate in that we have the potential to participate in that RFP.
And we'll we'll make that evaluation the capacity market is certainly as we've seen across MISO.
<unk> as well for.
For upside.
With our enterprise assets and so there is an evaluation will participate in and take a look at the impact of how big participate either in the in the bilateral market or our business or is this longer term.
PPA with the utility.
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 likely utility and.
And as lower beta fashion as possible.
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 to dig for some time now and when we owned the bank Thats, how we ran the bank as well as just trying to lock in as much revenue as possible and run it on a lowest basis and so we'll see I think it's a function of where the market is at.
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 it looks like and we'll run the business accordingly.
Okay that makes sense and just lastly, what's the timing of.
The RFP.
Then youll communicated if dig is in fact participating or not dig into pickers.
I wouldn't anticipate.
Initially here that our RFP will be issued within the fiscal year 2022.
Okay.
Okay.
Our next question is from <unk> Kim from Goldman Sachs.
Your line is open.
Okay. Thank you.
First question, Hey, Derik.
The solar you've talked about just the modular nature of it and kind of shifts the timing and whatnot.
Let's take all I guess, whether it's the megawatts that's kind of a build on transfer or saw the ppas that are expected to.
Come on line over the next couple of years dipole R&D.
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.
I'll start with I'll start with the punch line or the bottom line no material impact to the five year plan continued confidence in our 2022 guidance.
And then continued confidence in the longer term plan for five years, and the 6% to 8% and being toward the high end.
Punch lineup, let me tell you why.
With IOP is eight gigawatts, it's not eight gigawatts tomorrow or even in the five year plan. We had 15 to 20 years to build this out. So there is there is considerable flexibility to be able to construct that in select everyone else in the industry.
Apartment of Commerce in this investigation slowed things up and some of our projects.
Neither these or megawatts that are going to get built. These are renewable projects that are going to get built because they are part of our broader.
Broader IRB.
In nature, but again, let me try to offer some context from a size perspective.
We're building out of owned owned generation here about 150 megawatts per year. So we're talking about two projects in 2024, we go up to 250 megawatts per year.
So this annual capital spend is around $200 million to $250 million. This is manageable easily manageable and in fact this has.
I've been in operations for 20 years. This is this is work that happens every year, there's stuff that goes in and out of the plant based on a lot of different variables and so easily manageable from a from a capital perspective. In fact is just as a reminder, that $3 to $4 billion of capital backlog and things like electric reliability investments in our gas system.
80% of those projects are less than $200 million. So there is the ability to put them into the plan and offer real value for our customers.
Another important part of this clean energy journey as well as <unk>.
Minder here, although solar has been impacted we're still progressing with wind and the state of Michigan, and we're and we're investing a lot in the space of our hydro facilities, we have 15 hydro facilities.
Art thoughtful investments occurring there as well and those are on progress are on target.
And so I feel good about that from where we are headed from a clean energy perspective. The last piece that I'll also point to you and I think thats an important from a capacity perspective, and I noted in my prepared remarks.
Current three and four.
Continues to operate the 2031.
Current three in full we originally proposed retiring in 2023 and so this settlement offer some additional flexibility from a capacity build perspective, and so again, we've got some flexibility to weather.
Other things and be able to meet that meet all our customers' needs. So again feel good about the capital plan and confident in our earnings guidance both in the in the year and in the long term.
Understood.
Second question on those enterprise assets stay in the nonregulated ones like <unk>.
Kevin.
Go into rate base here with the IRS settlement.
And depending on what you decide on the RFP, whether youll participate or not how do you just think about strategically these assets now going forward as part of the portfolio.
The enterprise assets are important part of our portfolio a 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 a tesla in the garage is probably the new electric corvette in the garage and I don't know, how you want to say it but with capacity prices theres. Some theres some certainties of upside here and some of our.
And some of our Dart dig in some of the features but buying.
By and large this business is about renewables and customer focus renewables.
And it's small in nature, and we deliver strategic solutions for our customers Hasnt changed but it continues to be a consistent performer for our business.
And I understand it's been a while since we've heard that Scott referenced.
Yes, Thanks, I Wonder Brian line to bring that back.
It's a great it's a great asset for us.
Our next question is from Shar <unk> of Guggenheim partners.
Your line is open.
Hey, good morning, guys.
Shar how are you.
Great.
So just just one follow up on Palisades Garik, just can you remind us how many megawatts could be potentially re PPA under the assumption of the plant can remain viable here and obviously the government highlighted that there is a potential owner that's interested in.
In acquiring the asset.
Having sort of any discussions right now on re contracting assuming.
Can you keep the asset viable, which timing seems a little bit tight, but just curious on if there is any dialogue.
It's roughly 800 megawatts, a little shy of 800 megawatts I think around seven 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.
Just to understand the complexities of the situation to understand what's going on but nothing nothing that's really got too.
Any any level of seriousness on.
Long term purchase power agreement.
Okay got it and then just real quick revenues are 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 potentially accretive capex update chemo near term.
Thanks for the question Charles.
We have been targeting that sort of mid teens episode of debt.
For the rating agencies for some time now and certainly the sale of inter bank gave us a nice uplift at least in the case of S&P and so while we do have.
Some cushion to maybe be a little more aggressive on the funding strategy. We worked very hard to get to the level that we're at today. We've worked very hard to get the ratings, we have today and so our intent is not to stress those metrics and so we like the fact that we've got a little cushion on those metrics in it that allows us to.
To continue to not to issue equity through 2025, we will look to do that and if we can extend beyond 2025, we will look to do that but not to the detriment of our metrics are ratings. 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 perfect. That's all the questions I had thanks guys.
Thanks Shar.
Our next question is from Jonathan Arnold Vesica Research Johns.
Jonathan Your line is open good morning.
Morning, guys.
Quick one.
The Palisades.
To be extended.
Extended I guess, whether or not that was where the PPA. How would you think about that in the context of you all.
Overall <unk> pad.
This cat capacity needs.
Two pieces, there that's really really important and it does have to be a competitive purchase power agreement so ill reemphasize.
That component of it as well.
And if we were to consider that.
And have those and have those conversations.
Again, we would expect financial compensation mechanism mechanism on those as well.
Again, it just provides additional flexibility for us and.
And clean energy and so that will be a little bit long from a capacity perspective, but theres opportunities to think about different investments.
And give us a little more flexibility or even further flexibility in our solar or solar build out.
Okay, and then and then just.
I will get back a bit I think it was early last year that ULA gave the slide deck on the Pecos, yes, showing potential.
Potential.
Pre tax earnings.
Step up opportunities.
My question really is is that prior disclosure is still <unk>.
One that we can think about or should we be looking for you to tell us something out at some point in the future or is that still a decent guide.
Yes.
Jonathan we still feel good about the revenue opportunities that big.
Particularly now that we don't foresee it being part of the AARP and so I'm going to go from memory, but we were somewhere around $35 million of revenue pretax 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 attract.
Accurately noted as attractiveness prepared remarks, because we do continue to see a tightened 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 million area, but there's certainly upside opportunities in the coming years, if we continue to participate in a bilateral.
<unk> a market I guess I was asking more about the $90 million that you had that 75 stepping up from nine element.
So thats, yes, so that working assumption was.
The bilateral market went to cone, which was at the time around $7 50.
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 to 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 seven tightened.
Great.
Thank you for that.
Yes, I think that's it thank you.
Yes.
Our next question is from Travis Miller of Morningstar.
Travis Your line is open.
Good morning, everyone and thank you.
I'm wondering as you did your long term reliability modeling as part of the vet IRT.
When did reliability get to be an issue is that 60 plus percent.
Range in 2040 with renewables, there's a number of other variables we look at it.
From a system reliability perspective, and so it's an important mix of renewables and batteries, particularly.
And part of the plan, but also.
Dispatch of generation, so you get into things like gas gas at least in our case natural gas and part of the plan and so all of those come together in this plan that we submitted was more reliable than our previous IRB in terms of the in terms of the build out and then our extension of Karn three and four.
And again it was planned to be retired in 2023 and extending that to 2031 continues to provide additional reliability over the course of this decade.
Okay got it and then kind of similar on that could we expect some of that upside in the distribution and transmission bucket as opposed to.
More on the generation side.
The upside Capex that youre talking about.
We'll broader broader we have again I look at that are 10, or 15 years 20 years, Theres ample theres ample capital upside and we have about $3 to $4 billion of.
Capital is not in the plan that are specific projects identified that improve our gas system more replacement of mains that looks at reliability and resiliency, we got a large $5 5 billion focused on that.
Much of that is in this electric rate case to improve reliability for our customers. Those are the things that fit into that to that plan and continue to have a long horizon.
Capital investment opportunities.