Q4 2023 CMS Energy Corporation Earnings Call
Okay.
Good morning, everyone and welcome to the CMS energy 2023 at year end results. The earnings news release issued earlier today and the presentation used in this webcast are available on CMS Energy's website in the Investor Relations section. This call is being recorded after the presentation. We will conduct a question and answer session.
And instructions will be provided at that time.
If at any time during the conference you need to reach operator. Please press the star flip is it right just to remind that that will be a brief broadcast of this conference call today, beginning at 12 P. M. Eastern time running through February eight.
The presentation is also being webcast and is available on CMS Energy's website in the Investor Relations section.
At this time I would like to turn the call over to Mr. Ron <unk>, Treasurer, and Vice President of Finance and Investor Relations.
Ron: Thank you Emily and good morning, everyone and thank you for joining US today with me are Garik Rochelle, President and Chief Executive Officer, Richard Heyse, Executive Vice President and Chief financial.
Ron: This presentation contains forward looking statements, which are subject to risks and uncertainties.
Ron: Please refer to our filings for more information regarding the risks and other factors that could cause our actual results to differ materially.
Ron: This presentation also includes non-GAAP reconciliations.
Ron: Reconciliations of these measures the most directly comparable GAAP measures are independent and closer to the IR website.
Speaker Change: Some of you May know this will be my last earnings call as I transition to a new role in the company responsible for our supply and the implementation of the new energy law.
Speaker Change: While I'm excited for my new role and responsibility I will Miss working with all of you in the investment community. So closely I want to thank you for the support you've all given me in this company.
Jason: Jason So a 25 year veteran of few minutes has been named Treasurer, and VP of Investor Relations. The hand over the Baton I'm confident and Jason and I are very experienced and now I'll turn the call over to Gary.
Gary: Thank you Sri and thank you everyone for joining us today.
Gary: Before I get started I wanted to thank <unk> for his leadership in the finance area and I look forward to his continued growth and impact as he takes on this important role electric supply.
Gary: He'll lead critical filings like our renewable energy plan.
Gary: An integrated resource plan, which I will discuss later in this call.
Gary: We have a deep bench of talent at CMS energy.
Gary: It is critically important that we develop our leaders in key areas of the business continuing to strengthen the bench.
Gary: Dexterity and provide challenging growth opportunities.
Gary: I know both street, and Jason will make a big impact in their new roles.
Gary: I've shared before on these calls.
Gary: Isn't our first rodeo.
Gary: S team delivers now 21 years of exceptional performance I am proud to share with you the highlights of the year and I am proud of this team you will see in the numbers and our operational highlights 2023, what incredible year.
Gary: We met and faced challenges that tested our team and we rose to the occasion.
Gary: First let's talk about the weather.
Gary: The 2022 2023 winter was in the top 10 warmest on record.
Gary: And then there was summer.
Gary: Well much of the world saw temperatures warmer temperatures are summer influenced by El Nino conditions was cooler than normal.
Gary: And then December 2023, the second warmest December.
Gary: On record.
Gary: Add to that record storm activity within our service territory. The say the least it was a challenging year.
Gary: Despite severe storms and unfavorable weather, we delivered an offset nearly $300 million.
Gary: A weather related financial headwinds.
Gary: Serving our customers with heat and light and keeping our financial commitments for our investors.
This world Class team comes together and we do what we say, we will do year in and year out no excuses just results.
Gary: As I said earlier I am proud of the team at CMS energy. There are number of great things, we delivered in the year, even more and are represented on slide four.
Gary: In the interest of time I want to hit on just a few.
Gary: To highlight the Freedom Award and the Secretary of Defense and why this is so special.
Gary: This is the highest recognition a company can receive for supporting their employees, who serve the guard and reserve.
Gary: The nomination was submitted by one of our employees and demonstrates the commitment of our entire company.
This is an important part of our culture to support and care for our people and to honor, our coworkers, who serve our customers and our country.
Gary: We continue our focus on leading the clean energy transformation.
Gary: In 2023, we retired over 500 megawatts of coal further reducing our carbon footprint.
Gary: Alongside these retirements, we ensured resource adequacy the acquisition of the one two gigawatt cohort natural gas generating station and brought online our 201 megawatt <unk> wind farm.
Gary: This thoughtful transition insurance customer reliability as we move our portfolio from coal to <unk>.
Gary: Clean.
Gary: I also want to give a shout out to our small.
Gary: The important Northstar clean energy team, we performed well in 2023.
Gary: Exceeding our expectations for the year, completing the Newport Solar project and demonstrating strong operational performance at Dearborn industrial generation.
Gary: Dig.
Gary: Another solid year of execution at CMS energy across the Triple bottom line.
Gary: <unk> industry, leading sustainable premium growth.
Gary: In 2023, Michigan also passed new energy legislation.
Gary: And of course, we're cleaner energy in Michigan, while maintaining resource adequacy customer affordability and strengthening our financial plan.
Gary: This legislation speaks to the constructive nature of Michigan.
Gary: It provides more incentives grow our clean energy portfolio.
Gary: Further investment opportunities with increased certainty of recovery.
Gary: Now it's still early days, we're evaluating all aspects of the new law, including the strategic advantage of owning versus contract and supply.
Increased incentives on Ppas and what makes sense.
Gary: It makes more sense for us and for our customers.
Gary: The law provides a lot of flexibility and options which is important.
Gary: You'll see this play out in a couple upcoming filings.
I want to draw your attention to the renewable energy plan.
Gary: This is not a new filing.
Gary: Comes a more important input in.
Gary: In the integrated resource plan.
Gary: The renewable energy plan will detail our path to meet the 60% renewable portfolio standard by 2035.
Gary: As you might imagine this work is underway we plan to file in the second half of the year.
Gary: Following our renewable energy plan filing our next one year integrated resource plan is due in 2027.
Gary: Together, our renewable energy plan and integrated resource plan will align our supply resources to deliver cost competitive cleaner and reliable energy as we target net zero.
Gary: They also provide important transparency and certainty as we advanced the business forward with investments in renewables and clean energy.
Gary: Michigan Energy law continues to support its strong regulatory environment and needed customer investment.
Gary: While the recent legislation provides opportunities while our update of renewable energy plan regulatory calendar is fairly routine in 2024.
Gary: Our electric case.
Gary: Rate case, excuse me continues toward a constructive outcome.
Gary: We've seen positive indicators with key stakeholder support for recovery of customer investments.
Gary: An important investment mechanisms such as <unk>.
Gary: And our underground pilot.
Gary: We expect an order from the commission on or before March one.
Gary: We filed our gas rate case in mid December then ask of $136 million with a 10, 5% Roe.
Gary: <unk> 51, 5% equity ratio.
Gary: The request lines with needed investments outlined in our 10 year natural gas delivery delivery plan.
Gary: We expect an order for the end of the year.
Gary: Yeah.
Gary: On slide seven we've highlighted our new five year $17 billion utility customer investment plan, which supports approximately seven 5% rate base growth through 2028.
Gary: You will note that about 40% of our customer investment opportunities support renewable generation grid modernization and maintenance service replacements on our gas system, which are critical.
Gary: <unk> as we lead the clean energy transformation.
Gary: The plan also includes an increased investment in the electric distribution system to improve reliability and resiliency for our customers.
Gary: We also have growth drivers outside of traditional rate base.
Gary: Include adders youll into legislation, where incentives are energy efficiency programs.
Gary: And the financial compensation mechanism, we earn a PPA that.
Gary: And earlier.
Gary: We also expect incremental earnings provided by our non utility business north of our clean energy as they see attractive pricing from capacity and energy sold at dig.
Gary: It's important to note that we have a long and robust runway of additional investment opportunities both within and beyond the five year window.
Gary: As an example.
Gary: We've incorporated a little less than half of the incremental $3 billion in customer investment associated with our electric reliability Road map.
Gary: We have also not yet include the customer investments associated with the new energy law.
Gary: These will be included in our renewable energy plan filing and will provide more opportunities for investment.
Gary: I feel good about our five year utility investment plan.
Gary: <unk> focused on our customers it positions business for continued success and delivers for all stakeholders.
Gary: With that I'll conclude the 'twenty two 'twenty three results and long term outlook before passing it over to Rajiv who will cover the financials in more detail.
Rajiv: 2023 no excuses.
Gary: Weather.
Speaker Change: The orange.
Rajiv: Just result, we delivered adjusted earnings per share of $3 11.
Rajiv: For the high end of our guidance range I'm also pleased to share that we are raising our 2024 adjusted full year EPS guidance.
Rajiv: To $3 29 to three.
Rajiv: $3 35.
Rajiv: <unk> $3 and 27 three.
Rajiv: $3 33 per share compounding off of <unk>.
Rajiv: 123 actual result.
Rajiv: Let me repeat compounding off of <unk> that is a differentiator in this sector.
Rajiv: We continue to expect to be toward the high end of our 2024 guidance range, which point to our confidence as we start the year.
Rajiv: Furthermore, the CMS energy Board of Directors recently approved a dividend increase to $2 <unk> per share for 2024.
Rajiv: Longer term, we continue to guide for the high end of our adjusted EPS growth range of 6% to 8%, which implies and include seven up to 8%.
Rajiv: Our dividend policy remains unchanged, we continue to grow the dividend Youll see that we are targeting a dividend payout ratio of about 60% over time.
Rajiv: Finally, we remain confident in our plan for 2024 and beyond given.
Rajiv: Given our longstanding ability to manage the work.
Rajiv: Currently deliver industry leading growth.
Rajiv: With that.
Rajiv: I'll hand, the call over to Reggie.
Reggie: Thank you Derek and good morning, everyone.
Reggie: As Garrett highlighted we delivered strong financial performance in 2023, with adjusted net income of $911 million, which translates to $3 11 per share towards the high end of our guidance range. The key drivers of our 2023 financial performance included strong cost performance throughout the organization.
Reggie: <unk>.
Reggie: Fueled by the CE way.
Reggie: A solid beat at North Star and a variety of non operational countermeasures, such as liability management and tax planning, which more than offset the significant weather related headwinds experienced throughout the year and.
Reggie: And to further underscore the magnitude of cost performance delivered by our workforce, our fourth quarter operational operating and maintenance or O&M expense exclusive of service restoration and vegetation management was approximately 25% below the comparable period in 2022 and over 20%.
Reggie: Our five year average for this cost category, a truly impressive achievement, all and we managed to offset nearly $300 million of weather related financial headwinds without compromising our operational commitments to our customers and the communities. We serve at CMS. We've had plenty of years of adversity, followed by <unk>.
Reggie: <unk> operational and financial fleet, but I cant recall, one quite like 2023, a year in which our workforce personified grip and displayed the perennial will to deliver for all stakeholders.
Reggie: To elaborate on the strength of our financial performance in 2023 on Slide 10, you'll note that we met or exceeded the vast majority of our key financial objectives for the year.
Reggie: From a financing perspective, we successfully settled $178 million of equity forward contracts in November and settled the remaining roughly $265 million in forwards in January as a reminder, these forwards are priced at levels favorable to our planning assumptions.
Reggie: The only financial targets matched in 2023 was related to our customer investment plan at the utility which was budgeted for $3 7 billion.
Reggie: We ended the year below that at $3 3 billion, primarily due to siting and permitting delays at select solar projects as mentioned in the past, we fully intend to build out all of the solar projects approved and I are Pete and voluntary green pricing.
Reggie: And with the Michigan with Michigan renewable energy, citing reform Bill passed last fall.
Reggie: Should see better progress here going forward.
Reggie: Moving to our 2024 EPS guidance on slide 11, we are raising our 2024 adjusted earnings guidance range to $3 in 2009.
Reggie: The $3 35 per share from $3 27 to $3 33.
Reggie: Sure as Derek noted with continued confidence towards the high end of the range.
Reggie: As you can see in the segment details our EPS growth will primarily be driven by the utility providing $3 74 to $3 80 of adjusted earnings the details of which I'll cover on the next slide at.
Reggie: At North Star Wars, any EPS contribution of.
Reggie: Of 16 to 18.
Reggie: Which reflects strong underlying performance, primarily big and ongoing contributions from our renewables business.
Reggie: Lastly, our financing financing assumptions remain conservative at the parent segment and our 2024 guidance range assumes the absence of liability management transactions as.
Reggie: As always we'll remain opportunistic in this regard and we'll look to capitalize on attractive market conditions should they arise.
Reggie: To elaborate on the glide path to achieve our 2024 adjusted EPS guidance range Youll see the usual waterfall chart on slide 12 for clarification purposes. All of the variance analysis herein are measured on a full year basis.
Reggie: Relative to 2023.
Reggie: From left to right, we will plan for normal weather, which in this case <unk> 43 per share a positive year over year variance given the absence of the typically mild temperatures experienced throughout 2023.
Reggie: Additionally, we anticipate 23 of EPS pickup attributable to rate relief driven by the residual benefit of last year's constructive gas rate case settlement and assumed supportive outcomes of our pending electric and gas rate cases as always our rate relief figures are stated net of investment related costs such as depreciation.
Reggie: Pretty taxes and utility interest expense.
Reggie: As we turn to our cost structure in 2024, Youll note six loss per share of positive variance due to continued productivity driven by the CE way.
Reggie: The ongoing benefits of cost reduction measures implemented in 2023, which is our voluntary separation plan.
Reggie: Which reduced our salaried workforce by roughly 10% and initiatives already underway. It is also worth noting that our cost assumptions exclude the impact of the catastrophic high storm, we experienced in the first quarter of 2023.
Reggie: Lastly.
And the penultimate bar on the right hand side, you'll note a significant negative variance, which largely consists of the reversal of select onetime cost reduction measures. These are partially offset by the ongoing benefit of our well executed financing plan in 2023, and we're assuming the usual conservative assumptions around weather no.
Reggie: <unk> sales taxes, and non utility performance among other items in aggregate. These assumptions equate to 58 to 64 per share of negative <unk> <unk>.
Reggie: As always we will adapt to changing conditions throughout the year to mitigate risks and deliver our operational and financial objectives to the benefit of customers and investors.
Reggie: On slide 13, we have a summary of our near and long term financial objectives to avoid being repetitive I'll focus my remarks on those metrics were not yet covered.
Reggie: From a balance sheet perspective, we continue to target solid investment grade credit ratings and will continue to manage our key credit metrics accordingly, as we balance the needs of the business.
Reggie: As previously mentioned, we have already settled the remaining equity forwards and have no additional equity needs in 2024.
Reggie: Longer term, we intend to resume our at the market or ATM equity issuance program and the amount of up to $350 million per year, beginning in 2025 and extending through 2028, which is essentially the same assumption in our previous five year plan, but for the extension of an additional year.
Reggie: We're able to maintain our preexisting equity needs. Despite an increased utility capital plan given the expectation of strong operating cash flow generation and the ability to monetize tax credits courtesy of the inflation reduction that.
Reggie: It is also worth noting that this morning's decision by Moodys to increase the equity credit ascribed to junior subordinated notes, which represents about 40% of our debt at the parent company is not embedded in our plan thus providing further cushion in these metrics slip.
Reggie: Slide 14 offers more specificity on the balance of our funding needs in 2024, which are limited to debt issuances at the utility over half of which has been opportunistically issued as noted on the page and the coupon rate on this newly issued debt as favorable to plan, thus, providing a helpful tailwind as we start the year.
Reggie: Over the coming year, we have no planned long term financings at the parent and already redeemed at full maturity in January.
Reggie: At par.
Longer term, we have relatively modest near term maturities at the parent.
Reggie: With $250 million due in 2025 and $300 million due in 2026.
Reggie: On slide 15, we've refreshed our sensitivity analysis on key variables for your modeling assumptions as you'll note with reasonable planning assumptions and our track record of risk mitigation. The probability of large variances from our plan is minimum.
Reggie: Our model has occurred and will continue to serve all stakeholders well our customers can.
Reggie: Reliable and clean energy at affordable prices are diverse and battle tested workforce remains committed to our purpose driven organization and our investors benefit from consistent industry, leading financial performance.
Speaker Change: Before I hand, it back to Gary I would be remiss, if I didn't take a moment to echo Gary's creative suite.
Speaker Change: Worked closely with over the past seven years <unk> contributions to the finance team and the company have been immeasurable since he joined CMS.
Gary: So thank you Sri leaving it better than you found it.
Gary: Look forward to working with you and Jason in your new roles and with that I'll pass it on to Gary for his final remarks before the Q&A session.
Gary: Thank you Reggie.
Gary: You all know this this last slide very well by now.
Gary: Over two decades, regardless of conditions no excuses.
Gary: <unk> results given.
Gary: Given the challenges of 2023 I'm extremely proud the team effort.
Gary: Simple investment thesis.
Gary: Run our business. It has withstood the test of time and provides us confidence.
Gary: For a strong outlook in 2024.
Gary: And beyond.
Gary: With that Emily Please open the lines for Q&A.
Emily: Thank you very much Garrett the question and answer session will be conducted electronically. If you would like to ask a question. Please do so by pressing the star key followed by the digit one on your Touchtone telephone.
Emily: We're using a speaker phone please make sure you pick up your headset.
Emily: Proceed in the order you sticking with us and we will take as many questions as time Tonight.
Emily: If you do find that your question has been answered you.
Emily: You may remove yourself by pressing the star followed by the <unk> on your Touchtone telephone.
Emily: So just a second.
Emily: Our first question comes from the line of Nick Campanella with Barclays. Please go ahead.
Nick Campanella: Hey, good morning, and thanks for all the info today and.
Nick Campanella: Three great great working with you all these years best of luck in the new role.
Nick Campanella: So yes, just to just to get started could you maybe just help us understand the dig uplift in kind of context of the current six to eight CAGR you have some open capacity there. The current run rates are clearly higher just what's the timeline to lock that in and how should we kind of think about the <unk>.
Nick Campanella: Lift to the six to eight or perhaps just adding higher visibility and extending the six to eight for even longer.
Yes. Thank you Nick good to hear from you and I appreciate the shout out for Sri.
Speaker Change: In your comment there and in your question.
Speaker Change: Those traditional what I would call outside of rate base growth. So those growth drivers outside of traditional rate base energy efficiency financial compensation mechanism dig those are those are powerful in the plan and you asked specifically about Dearborn industrial generation, we are seeing both energy and capacity prices elevated, particularly in the out years of the plan we have.
Speaker Change: <unk>.
Speaker Change: Variable capacity beyond 2026 out through the plant, we're layering in contracts really as we speak.
Speaker Change: Which with attractive attractive numbers, and which give us confidence in our plan.
Particularly the out years.
Speaker Change: Through <unk> that helpful.
Speaker Change: Yes, thanks I appreciate that.
Speaker Change: Thank you and then.
Speaker Change: On the on the RVP plan I guess, if you file a second half of 'twenty. Four can you just help us understand regulatory process when would that when would there be a decision there or what does that kind of look like and then how does that kind of flow through to your Capex plan would it be like this time next year, we kind of get an update on how that flows through our I'll leave it there. Thanks.
Speaker Change: Well thank you Nick.
Speaker Change: First of all this is not a new filing.
Speaker Change: As a more important filing it is a bigger filing as you might imagine if youre going to achieve 60% renewables by 2035 or 50% by 2030. It has to grow from a size perspective. So it takes an increase importance. It's also important to remember is based on energy versus the integrated resource plan, which is based on capacity.
Speaker Change: So that work is underway and it's really a spectrum.
Speaker Change: To meet that standard do you do all Ppas. That's one that's one bookend or do you do all ownership.
Speaker Change: My view is somewhere in the middle but what's the strength of its energy law is theres a lot of flexibility to be able to chart that path to those clean energy ambition, we got to think about what the customer impact as well. We've got I think we're still we're still required and load serving entity to meet.
Speaker Change: <unk> resource capacity constraints and the ERP. So that's a consideration when we got to look at the balance sheet and here's a really capital light option, where we can get in STM at 9%, that's a really attractive.
Speaker Change: Attractive part of this energy law, so theres a lot of dynamics that have to play out and that work is underway right. Now we will file that renewable energy plan in the second half of the year.
Speaker Change: We havent till 'twenty five to get it done, but we want to pull that forward into 'twenty into 2024, given the work that has to be done in these milestones that are out there. So we'll file at the commission has staff have 10 months.
Speaker Change: To get to a final order and then that information there will certainly aid our capital plan.
Speaker Change: And the upside from the FCA mechanism, but also flows into our integrated resource plan and that integrated resource plan should become less complex because of this renewable energy plant work. Ultimately that then flows into rate cases, as we move forward over time on that annual annual frequency.
Speaker Change: I know you have some more comments on this as well as how fast the Reggie.
Speaker Change: Yes. Good morning, So all I would add to <unk> comments as you think about that trajectory and sequencing that Eric laid out. It is important to note that the plan that we laid out today that takes you from 2024 to 2028 does not incorporate any capital investment opportunities associated with the new legislation and so.
Speaker Change: As we file the RFP in the second half of this year and then get feedback presumably in the second half of 2025, we won't start incorporating capital opportunities most likely for a couple of vintages of five year plans now we have started to layer in the energy waste reduction of our energy efficiency opportunities as well as modest portion of the Fcs.
Speaker Change: Opportunities, but I think in subsequent five year plans youll start to see more SCM related opportunities and certainly more capital opportunities, but it's going to take a couple of vintages before we have real clarity on that is that helpful.
Speaker Change: That is helpful and that was a lot of information I. Appreciate it looking forward to seeing you next week, having good day.
Speaker Change: Thanks, Nick.
Speaker Change: Our next question comes from Jeremy Tonet with JP Morgan. Please go ahead Jeremy.
Jeremy Bryan Tonet: Good morning, Jeremie Hi, good morning.
Jeremy Bryan Tonet: Hi.
Just wanted to touch base, I guess, a little bit more on the Moody's changed. This morning, if you could just walk us through that a bit and quantify how much equity credit that is just trying to get a sense for what that means.
Jeremy Bryan Tonet: Jeremy This is rajeev. Thanks for the question. So Moody's this morning.
Jeremy Bryan Tonet: Increased the equity credit that they ascribe the junior subordinated notes, which your board formerly referred to as hybrids. It was previously of 25% equity credit and they're essentially now at parity with S&P at 50%.
Rajeev: And so the reason why that's impactful for US is that we've issued those securities quite a bit over the last five to six years and so currently represents about 40% of our debt portfolio at the Holdco and so by them increasing the equity credit ascribed to this it really increases I would say the <unk> debt metrics episode of debt metrics at Moody's by about 50 to 60.
Rajeev: At this point so.
Rajeev: Fairly accretive from a credit perspective to plan.
Rajeev: Okay.
Speaker Change: Got it that's really helpful. There and as we.
Speaker Change: Approach finalizing the electric rate case. So just wondering if you can provide any more incremental thoughts I guess on.
Speaker Change: How you feel about how things are progressing there just any color would be appreciated.
Speaker Change: Yes.
Jeremy things are progressing nicely I feel I feel good about a constructive outcome.
Speaker Change: Staff had a great starting spot.
Jeremy Bryan Tonet: It can be a constructive outcome and feel confident that we can get there. There's a lot of positive indicators support for the important work on reliability I would say there is a great alignment between staff and frankly, the commissioners on where we want to go improve reliability in this day, that's a big part of this electric rate case.
Jeremy Bryan Tonet: And also positive indicators on the mechanisms that we have talked about in the past this infrastructure recovery mechanism, we think that's really important.
Jeremy Bryan Tonet: From a go forward reliability perspective, it's also lines up with what your scripts shared about ring fencing and providing opportunity to capital to see the inside of where where those investments are and how they make a difference.
Jeremy Bryan Tonet: And then and then finally, our underground pilot that seems have seen support as well that's an important first step in this resiliency play in are our larger ambitions that are the revenue and our reliability roadmap.
Jeremy Bryan Tonet: Again, I feel really good about where the where the cases headed and we expect a final order on or before March 1st.
Speaker Change: Got it.
Speaker Change: Very helpful. Thanks, I'll leave it there.
Speaker Change: Our next question comes from Sean <unk> with Guggenheim Partners. Please go ahead.
Sean: Hey, guys good morning.
Sean: Hey, good morning sure sure.
Sean: Just a real quick clean up question on the Capex and rate base.
Sean: As part of the rate base CAGR increase to that firm seven 5% and the higher Capex run rate is that driven by some of the spending in solar delays in 'twenty three so slightly off maybe a lower base and timing differences or is it driven by new capex the tail of a plan or maybe a combination of both especially since you guys.
Sean: Don't really include a lot of Capex until we get through the approval process right.
Sean: Yes sure. This is Roger I. Appreciate the question I would say, it's largely due to the ladder and that's incremental capex. So remember we have the electric reliability road map that we've provided that we filed with the commission in late September of last year, and so that had $3 billion of incremental capex opportunity versus the.
Sean: Prior vintage we haven't incorporated all of that but about half is as per Gary's prepared remarks, so call. It roughly a good portion of that 1 billion and a half step up in our new plan versus our old plan. We also do have increased our renewable investments, but I wouldn't say that that's sort of the deferrals that are coming into 2024 from <unk>.
Sean: 23, yes, there is a little bit of that but it's largely additional ERP execution on the renewable side as well as our voluntary green pricing programs. So I would say the vast majority of that uplift from our five year Capex plan. The current one versus the prior is driven by electric reliability related investments and then you've got a portion attributable to clean energy investments largely renewables.
Sean: Let me just reinforce that perfect you can think about them at add onto good revenue. Good comments, there is that clean energy piece in the supply. It's what's approved in R 22, IRB and the upside will be to the tail end because we haven't built in any of those new energy law is Reggie stated in some earlier comments, so as that renewable energy plan its file and.
Sean: The approved then youll see that.
Sean: Likely at the tail, but even beyond the five years you can see a nice path of 10 years of investment opportunity as a result of this energy law.
Speaker Change: Got it okay, yeah. It sounds like it's more it's more incremental versus shifting from 'twenty three 'twenty four okay. And then just on the balance sheet $3 50, and equity. After 25, I guess does that contemplate sort of an increases beyond the current Capex plan as you look to ramp up reliability and renewable spending.
Sean: <unk>.
Speaker Change: Sure. This just incorporates the current five year plan of $17 billion of utility Capex.
Speaker Change: And.
Speaker Change: It's enough work to prepare these five year plan. So we're not thinking about year six through 10, just yet.
Speaker Change: So I would say that it's again, just the $17 billion utility Capex plan and the funding associated therewith, but that's part of my prepared remarks, we're quite pleased that even with that upward pressure on equity needs. As a result of that growing capital plan. We didn't have to change the annual amount. So we're still up to $3 50, as we were in our prior plan and it has a lot to do with just good cash.
Speaker Change: Cash flow generation and the plan to monetize tax credits.
Comments that that is true here in Michigan.
And so that's the work that's underway.
So we'll continue to follow the process and I'm sure here just given the constructive nature of Michigan, we can get to a place a good landing spot for PBR.
And any sense of just timing on when it could all.
Kind of come to a conclusion.
Okay.
So we're still in process right now like I said comments are due here February 2nd.
Ideally here there are some milestones around may timeframe as well, but we haven't got a clear picture on when ending perspective.
Alright, thanks, everyone Great case.
I'm sorry, just likely plays out in the next next electric rate case, well beyond this one.
Sounds good thanks again.
Yep.
The next question comes from Julien Dumoulin Smith with Bank of America Merrill Lynch. Please go ahead Julien.
Hey, good morning team. Thanks again for the time I appreciate it very much.
Just following up maybe zeroing back to where we've been talking about the balance sheet here for a little bit I just wanted to clarify Watson to reflect the updated.
So the cash flow number that you projected.
Zoom that doesn't include any kind of expectations for uplift on dig.
Among other factors also maybe we could talk at the same time about how much additional latitude youre getting from Moody's given the tweak with that with the juniors there and then ultimately on the dividend. It seems like dividend growth may be slowing a little bit should that be the new norm here just given me.
Are you trying to target a lower payout given the accelerated growth.
Sorry, Im staring at all at the same time here, if you want to address.
Yeah Julian I appreciate the question, that's quite a bit to unpack there. So let me start with dig and the ocs implications and so so.
So everything that we've highlighted them.
In our five year plan to think about the rate base growth up to seven 5%. We also talked about additional opportunities attributable to energy efficiency. These are the non rate base growth drivers at the utility F. C. M. And then we talked about non utility opportunities with degree contracting all of that is based on our all of that is incorporated into.
Earnings as well as our cash flow generation and so we have a page in the appendix that she was about a little over 13 billion in aggregate cash flow generation.
Over the course of this five year plan and that incorporates.
Some re contracting that we've seen at dig on both the energy and capacity side, but it does not take into account that open margin that we have on slide 21 in the appendix and the potential opportunities. If you see a higher capacity price over time and so there's there is some upside both from an earnings and cash flow perspective, so not all of that is baked into the cashless or there's additional <unk>.
Opportunity there.
Just transitioning over to Moody's.
Note that the decision to increase the equity credit from 25% to 50% for junior subordinated notes that's worth about 50 to 60 basis points of episode of that accretion and then with respect to dividend policy, we've really been.
Very consistent in dividend policy since we sold interbank and started to accelerate the earnings growth of the business.
And really the idea has been to trend down to a low 60% payout ratio as Garrett highlighted in his prepared remarks, and so what that equates to is really decoupled growth between our dps growth or dividend per share growth and our earnings per share growth. We've said six to eight towards the high end for earnings per share will probably be closer to the low end is.
The 11th increase today implies and that'll be the plan going forward because we do believe that that's a very efficient use of capital.
Have the dividend policy in that level. So that we can efficiently fund the growth of the business and so really that show.
We're thinking about it going forward was that helpful.
Speaker Change: Yes, absolutely maybe just to tie that together here.
Speaker Change: As you look at your ethical metrics altogether.
Speaker Change: You raised the rate base growth seven up to seven and a half now through the five year period, I guess, it's not exactly apples to apples across the years, but it doesn't seem like there's incremental equity versus the original plan per se. So how do you think about your metrics.
Ron: Through this outlook or are you actually intact net net.
Ron: Given the various factors, we just elaborated on or are you seeing a slight uptick priority, reflecting some of these other pieces. If you will just how do you think about where you land.
Ron: Yes, so we feel very good about the credit metrics staying in that mid teens area, which we have targeted for some time now to preserve the solid investment grade credit metrics and credit rating excuse me. We've had for many years now and that's with a long start longstanding dialogue with the rating agencies, the ocs generation coupled with.
Speaker Change: The equity needs up to $3 50, as well as the monetization of tax credits and again, just a very disciplined dividend policy all of that allows us to maintain our credit metrics in that mid teens area and again, yes, we've increased the utility Capex plan, we've held on to the the equity needs and supporting factors allow us to stay in that level so that.
Gary: And certainly there may be opportunity longer term, but we feel very good about the metrics, where they are today and don't intend to deviate from our current credit ratings I don't think thats. The implication of your question, but just wanted to say that for the avoidance of doubt.
Gary: Yeah.
Speaker Change: Awesome excellent and then just through the plan outlook here I mean, just given all the focus on legislation can you just clarify what is the sort of expect that bill impact or commitment here, rather given all to come on what that means for customers. As best you guys are going to try to target. This.
Yes, Julian to be clear. This is respect to the with respect to the new energy legislation.
Julian: Yeah as you think about what is on the come I mean is there any kind of commitment you guys are making on trying to level that out for customers at any in any specific pace.
Speaker Change: Yes, Needless to say as we've always talked about when we prepare not just this five year plan or prior plans with future plan. The key governors will be affordability.
Gary: Balance sheet and can we get the work down and as it pertains to new energy legislation, yes. It does create additional opportunities whether that's on the capital investment side or on contract with the financial compensation mechanism, But trust me will not turn a blind eye to affordability and what makes US really excited about the opportunity going forward is when you think about our current.
Gary: Energy mix and how were sourcing energy, we have about 1 billion and a half that we spend each year on a combination of ppas as well as open market repurchases that were paying a pretty high level is cost of energy on a weighted average basis and so with the new energy law.
Gary: Going into effect and the opportunities associated there with we think theres a lot of headroom to get economics on energy going forward without increasing customer bills now theres a lot more process left as Garik noted, but we do think there's a lot of headroom already in bills for us to potentially deliver.
Gary: To deliver on that Triple bottom line, where theres nice economic opportunity for investors, but again, not giving that to the detriment of customers.
Speaker Change: Excellent. Thank you again sort of luxury Jason talk soon.
Speaker Change: Thanks Julien.
Speaker Change: Yeah.
Speaker Change: The next question comes from Andrew Weisel with Scotiabank. Please go ahead.
Andrew Weisel: Hi, Andrew Hey, good morning, everybody. Thank you.
Andrew Weisel: Two questions. One just elaborate on your earlier comments. So first 'twenty three capex fell short of your target $3 3 billion or $3 7 billion planned can you just talk about what happened there I think some of that might have been the solar delays and then what happened to that 400 million. It sounds like that was not part of the $1 $5 billion increase so do.
Gary: Just help explain what happened there.
Gary: Okay. It's expected in the context of a year that you're going to have projects.
Gary: Andrew of 25 years in this business in the half.
Gary: No project goes exactly as you planned and sometimes they shift and move and particularly with the solar piece.
As Rajeev mentioned in his prepared remarks, it's really not the supply chain at this point, we've got to lock in on panels and the like it is really about local entities and siting and permitting that we worked through that it just means we might move to a different community or there might be different setbacks that we have to work through all of that is doable, but it does create some shift.
Gary: And in the context of the year.
Gary: The key pieces, it's not move and we still have to deliver.
Gary: 2030, 50% renewables will you have to be at 60% by 2035 that doesn't change and so if it's not in this year. It just moves to a different year and we'll continue that project. So there's a bit of shifting that ends up moving on the capital plan.
Gary: Hopefully that helps.
<unk> already has got a comment as well, yes, Andrew what I would add and I think you're sort of reflecting on <unk> question and my response to that to be clear, we do have some of that spend.
Andrew Weisel: That we did not achieve in 2023 some of that is certainly pushed into this new five year plan is just the vast majority of the increase in this five year plan versus the prior is driven by reliability related investments. So there's certainly is a portion of those deferrals being pushed into 'twenty four and beyond but again the biggest driver of this new five year plan is reliability.
Gary: Yeah.
Speaker Change: Okay that makes a lot of sense.
Speaker Change: And a quick follow up on that in the 'twenty four you give spending by year. The number for 2028 at $3 1 billion is actually the lowest of the next five years Directionally I would've expected the opposite.
Gary: Personally assume you'll be increasing that as you go through these regulatory processes, but maybe you can just talk about why the trend is dipping down rather than going up every year.
Gary: Hey, Andrew this is rajeev I'll take that yeah, so what you're seeing here in the 'twenty four 'twenty five timeframe is just we do anticipate.
Rajeev: A pretty big increase in reliability related investments and so that's what's driving a lot of that obviously, that's going to be subject to regulatory outcomes and so we will toggle the plan as needed and I think Gary.
Gary: Earlier point is well taken that these plans you see capital projects come in and out.
Gary: Some get pushed in some get pushed out and so we do anticipate that smoothing out over time.
Gary: So the composition over this five year timeframe may change, but we feel very good about the quantum overall, a $17 billion and so you may see some of that Lumpiness go in and out or starting to smooth out over time.
Gary: Yes.
Speaker Change: Okay. Thank you very much and congrats again to screen, Jason sure Youre going to have your hands full and Jason you've got very big shoes to fill so best of luck to both of you.
Speaker Change: [laughter].
Speaker Change: Thanks, Andrew.
Gary: The next question comes from Doug <unk> with Evercore ISI. Please go ahead.
Gary: Yeah.
Doug: Hey, good morning can you might over close to the hour. So thank you for letting my question in here.
Doug: Randy can you quantify for us of that $13 billion in.
Gary: Operating cash flow how much of that is tax credits monetization.
Randy: Yes, sure happy to offer that color, it's about a half a billion of tax credit monetization, that's incorporated a little over half a billion dollars and that really drives a good portion of the vintage over vintage difference in the prior vintage I think we're seeing call. It almost $12 5 billion of Agri.
Gary: We get cash flow operating cash flow generation in this one we're kind of 13 and change. So a good portion of that is driven by the tax credit monetization, which again is over <unk> 5 billion.
Gary: Yes.
So that's like over the five year period to $100 million a year roughly speaking.
Speaker Change: I wouldn't say, it's as linear as that.
Speaker Change: Or is flat is that I would say it actually it's going to be a little lower in the front end and then it's going to grow over time.
Speaker Change: Understood. Thank you so much I appreciate that and then a quick follow up any update on the storm.
Gary: Review process, what's going on there I know were expecting a report out I think in September this year, just any anything you can share there.
Gary: As I've shared in previous calls the geis, we're working on improving reliability you can see that in the capital investment plan you can see that in the reliability Road map, we're focused on at the Commission's focus at the audits underway the process on it and I look forward to the results.
Gary: I would anticipate we're going to incorporate into future rate cases from a process perspective still looks like we're on track for September timeframe.
Gary: Okay.
Speaker Change: Thanks, So much guys I appreciate the time and congrats my congrats also to three and Jason both.
Gary: Yes.
Gary: The next question comes from Travis Miller with Morningstar. Please go ahead tavis.
Travis Miller: Thank you.
Travis Miller: Again echo congrats to assure integrations for you appreciate all the help over the years spring break.
Gary: A quick question on slide 12, the 16th sense of the cost savings how much of that is just the reversal of higher costs and how much is incremental cost savings you're expecting this year.
Gary: Travis It's rajeev appreciate the question yeah. So on the waterfall charges for others reference for 2024.
Travis Miller: Yeah, the 16th of pickup that we're seeing.
Speaker Change: Or that we're anticipating year over year, you do see a portion of reversal related to storm activity. Obviously I mentioned in my prepared remarks that we had a significant ice storm.
Gary: In the first quarter of 2023, and so we do not anticipate storms of that magnitude year in year out, but we also have a good portion of CE way related savings and I'd say, it's about $60 million or call. It 15.
Rajiv: You have to think about the puts and takes here. So you've got the reversal of storms you definitely have cost savings embedded in this current plan, but we also have inflation and other cost categories like salaries.
Rajiv: As well as other costs, a non labor related costs, and so theres a mix of inflation as well as cost savings to offset or fund that inflation and then that coupled with the reversal of the storms would drive that <unk> 16 per share.
Speaker Change: Okay, great that makes sense and then a broader question.
Rajiv: Ill touch on a little bit in the call here, but when you think about those clean energy standard buckets in terms of the nuclear natural gas with carbon capture in the renewables Whats your thought long term in general I know you don't have the specifics yet, but how those three buckets work for you.
Speaker Change: Like previous earlier comments nuclear is not really on the table right now.
Rajiv: How much does.
Rajiv: Nuclear and natural gas.
Rajiv: <unk>.
Rajiv: Mix.
Rajiv: Go into that mix, when youre thinking about 2035 or 2040.
Speaker Change: Yes, great question Travis.
Travis Miller: And I do love it.
Rajiv: About this energy law is there is a lot of flexibility. It's just a ton of flexibility in there and that's the strength and that served us well in previous energy law is going to go back to 2016, the integrated resource plan.
Rajiv: You build a plan that works for your customers works for your investors and allows you to deliver the energy supply that you need across your service area. Our focus right. Now is really on this first step which is the renewable energy plan and that is when it's so.
Reggie: It's it's hydro's, we have to hit a milestone by.
Reggie: By 2030 or 50%.
Reggie: By 2035% to 60% those are important milestones first so thats our focus right now now we're not taking our eye off the ball by 2040, we have to have 100% clean energy.
Reggie: A milestone along that journey as well that will get into the carbon capture that will get into other considerations on how we meet that so that's a broader definition, where nuclear as part of it.
Reggie: Gas with carbon capture and so I anticipate that once we get this renewable energy plan finalized we're gonna start looking out there at those other future sources right now we would see it given our natural gas fleet as consideration for carbon capture is one of the options, but we're not taking anything off the table.
Reggie: Wide open landscape, whether it be the right math to kind of make sure. We have the right plan for our customers and for our investors. So we're not saying no to anything so hopefully that helps.
Speaker Change: Yes, no that makes sense, that's all I had thanks a lot.
Speaker Change: Thank you Travis.
Speaker Change: The next question comes from safety caught with Keybanc. Please go ahead.
Speaker Change: Hi.
Safety: And thank you for taking my question.
Safety: It was the main at the end of the hour I appreciate it so I wanted to ask you about.
Reggie: Your.
Reggie: Perspective growth in renewable energy investments, obviously as outlined by the new law.
Reggie: The filing you intend to make I guess, what we've seen and what we've seen in other states and other jurisdictions right now is somewhat of a pushback maybe on those types of investments.
Reggie: And the Genesis of that might be different in different jurisdictions, but it seems that the cost is often.
Reggie: Barrier.
Speaker Change: So my question is how do you.
Reggie: Plan to avoid that.
Barrier: What are the steps you've taken to socialize this plan.
Barrier: Still not shocked that regulators the intervenors.
Reggie: Consumers like once that becomes a reality.
Reggie: It's a great question Theres a lot of dynamics that play out in any type of construction, whether you're putting in a gas pipeline or whether you're building renewables and we've really really at a ground level from a community perspective is where we see.
Reggie: The opportunity to be able to best influence this and so for example, we completed the 201 megawatt Heartland wind farm up in the rash of county, Red Rash of county in surrounding counties had been very welcoming to renewables and so we know that because we are on the ground making that happen.
Reggie: And that's the way we intend to approach. These at a very local level. Now there is there has been siting reform in the state that was signed in November timeframe by our governor that has to be implemented by the commission and so theres. Some work there but that could also help from a siding perspective as we move forward.
I would remind you too within this new energy law, we have the opportunity to be outside of Michigan as well in MISO and so we're going to look for a lot of Theres Windier states or some of your states, we're going to look for those areas where projects are underway or theirs.
Reggie: Good sighting opportunities.
Reggie: And be able to.
Reggie: Connect and be able to achieve the clean energy standard as well as I shared also when I think forward about this new energy standard it's a mix right not all ownership, it's not all ppas, so probably a blend that makes the most sense and that's what we're figuring out right now and so that gives us a lot of options again thats a strength of this to be able to find all those.
Reggie: Important resources get them all cited in and get them constructed I would also remind you last comment I'm a little long winded here, but there is flexibility in this law is youre not there exactly in 2030 or 2035, you can get an exception through the public service Commission. So that also offers flexibility.
Reggie: To be able to achieve these ambitious clean energy goals.
Thank you I appreciate it that's all for me.
Speaker Change: Thank you.
Our final question comes from Anthony <unk> with Mizuho.
Anthony: Please go ahead Anthony.
Anthony: Hey, Thanks for squeezing me in and Sri Fest 2024.
Anthony: Just quickly I wanted to take the other side to Julians question.
Anthony: I think you finished the year slightly under 15% <unk> to debt potentially gets 60 basis point adder for the change at Moody's I mean, any thought I think.
Reggie: Upgrade trigger for you guys at Moody's is 17%.
Any thought of maybe achieving that to get an upgraded <unk> credit rating.
Anthony It's Reggie I appreciate the question and we're also enjoying our time in the 2020 for Sri fast. So thank you for acknowledging that.
Speaker Change: I would just say.
It's a pretty big lift I would think to get mathematically to that 17 or high teens area that Moody's and S&P have guided us toward if we wanted to get an upgrade and so that would require.
Reggie: The absence of additional equity pretty substantial cash flow generation and or monetization of tax credits and so I don't foresee that.
Reggie: In the near term or in this vintage of our five year plan.
Speaker Change: And I'd also just observing markets now for it seems like with the last 15 to 20 years, it really hasnt been worth the cost.
Reggie: Getting to those higher credit rating levels.
Reggie: If you think about the juice being worth the squeeze just the amount of coupon that you can save by having a higher credit rating.
Reggie: Not been worth the cost of all of the equity issuances and so on and so we like we are right now we think that's the most efficient.
Reggie: Area from a credit rating perspective to issue debt.
Reggie: And really there is no appetite.
Reggie: <unk> the balance sheet in a manner that would allow us to get an upgrade so we feel good where we are along with way of saying that.
Speaker Change: Thanks, so much for taking my questions.
Speaker Change: I appreciate it.
Reggie: We have no further questions I'll turn the call back to Gary for closing remarks.
Speaker Change: Thank you Emily.
Speaker Change: And I'd like to thank all of you for joining us today for our yearend earnings call.
Speaker Change: I look forward to seeing you on the road here in the near future take care and stay safe.
Speaker Change: Yes.
Speaker Change: This concludes today's conference we thank everyone for your participation you may now disconnect your line.