Q4 2024 CMS Energy Corp Earnings Call
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Speaker Change: Good morning, everyone and welcome to the CMS Energy 2024 year end results. The earnings news release issued earlier today and the presentation used in this webcast are available on CMS energy website in the Investor Relations section. This call is being recorded after the presentation. We will conduct a question and answer session instruction.
That will be provided at that time.
Speaker Change: It's anytime during the conference you need to reach an operator. Please press the star key followed by zero.
Speaker Change: Just to remind that that will be a rebroadcast of this conference call today, beginning at 12 P. M. Eastern time running through February 13th.
Speaker Change: <unk> is also being webcast and is available on CMS Energy's website in the Investor Relations section.
Speaker Change: At this time I would like to turn the call over to Mr. Jason Sure Treasurer, and Vice President of Investor Relations.
Speaker Change: Thank you Harry.
Speaker Change: Good morning, everyone and thank you for joining US today with me are Garrick Roche, our president and Chief Executive Officer, and Resi Hayes Executive Vice President and Chief Financial Officer.
Speaker Change: This presentation contains forward looking statements, which are subject to risks and uncertainties.
Speaker Change: Please refer to our SEC filings for more information regarding the risks and other factors that could cause our actual results to differ materially.
Speaker Change: This presentation also includes non-GAAP measures reconciliations of these measures to the most directly comparable GAAP measures are included in the appendix and posted on our website.
Gary: And now I'll turn the call over to Gary.
Gary: Thank you, Jason and thank you everyone for joining us today.
Speaker Change: In the words of James Brown.
Gary: Good.
Gary: CMS energy.
Gary: Two years of consistent industry, leading financial performance.
Gary: Every year for over two decades, you can count on us to deliver wood.
Gary: We do that through our simple, but powerful investment thesis couple.
Gary: Coupled with disciplined execution across our electric and gas businesses.
Gary: We take our legacy of service and excellent seriously at CMS energy.
Gary: <unk> to win every day.
Gary: We have a lot to celebrate about 2024 and today I will highlight a few key successes.
Gary: Many demonstrate how we deliver for all.
Gary: Of our stakeholders year in and year out.
Gary: First our work to improve customer reliability or.
Gary: Our five year reliability road map, which we filed in the 2023 set bold commitments to improve service to our customers to never have more than 100000 customers disrupted per event and have service restored within 24 hours.
Gary: And we are making progress.
Gary: In 2024, we restored power to over 93% of customers within 24 hours compared with 87% in 2023.
Gary: And the average customer experienced 21 fewer power outage minutes.
Gary: And although there is still more work to do.
Gary: It is clear the investments are making a meaningful difference.
Gary: I'm also pleased with the work on the electric supply side.
Gary: In November we filed our 20 year renewable energy plan. This critical long term filing highlights the thoughtful changes we will make to our generation portfolio as we transform our system for more renewables and a diversified mix that includes nine gigawatts of solar in 400 gig.
Gary: Lots of wind over the next two decades.
Gary: This filing details to the commission our commitment to leading the clean energy transformation and achieving the targets established in Michigan's 2023 energy law.
Gary: Most importantly, it demonstrates our commitment to diversify the energy portfolio and invest in supply infrastructure to serve our customers with reliable and clean energy in the most affordable manner.
Gary: And of course, our gas business continues to grow I'm extremely proud of our coworkers efforts to build and replace infrastructure that ensures a safe reliable and clean natural gas system. The.
Gary: The system has proven invaluable to customers throughout the year and even more recently in the extreme cold experienced in January.
Gary: I could give many more examples and some are listed on this slide which speak to the winning program at CMS energy and are further proof points of our investment thesis inaction.
Gary: Ensuring you can count on us to deliver value for all stakeholders every year.
Gary: On slide five we've highlighted our five year $20 billion utility customer investment plan.
Gary: $3 billion from our prior plan, a significant and needed increase designed to deliver better customer service through improved reliability both in distribution.
Gary: And supply.
Gary: Driven largely by our reliability, our roadmap as we bolster our electric distribution system and by investments in our supply portfolio as we expand our renewable pipeline to meet the energy law.
Gary: This plan supports eight 5% rate base growth through 2029.
Gary: In addition to the robust customer investment plan, we have growth drivers outside traditional rate base.
Gary: These are important in sometimes overlooked so.
Gary: Now, let me spend a moment here.
Gary: The financial compensation mechanism.
Gary: To them, which allows us to earn on Ppas grows during the five year period.
Gary: Approximately $20 million of incentives by the end of the decade and.
Gary: <unk> continues to grow thereafter, as we secure additional ppas.
Gary: There is more than $60 million per year of incentives through our energy efficiency programs enhanced.
Gary: Enhanced by the energy law.
Gary: We also expect incremental earnings from our non utility business Northstar clean energy as we continue to see attractive pricing from capacity.
Gary: And energy sold at Dearborn, industrial generation or big.
Gary: I wanted to take a moment to highlight the long runway of customer investments, which are incremental to our five year plan and give us confidence in our financial performance and continued growth of our company.
Gary: Slide six shows the detailed filings we expect over the next 10 years and beyond.
Gary: Which will be incorporated into future five year updates.
Gary: On the slide you can see key investments in the electric distribution system to improve reliability for our customers through rebuilds underground in hardening and technology.
Gary: <unk> billion dollars of opportunity not in the five year plan.
Gary: In the middle of the slide the renewable energy plant and ambitious and thoughtful plan to achieve 60% renewables by 2035 as required by the energy law and in response to significant load growth in our service area.
Gary: Providing for additional wind and solar resources.
Gary: $10 billion of opportunity not in the five year plan.
Gary: And finally, the 2026 integrated resource plan filing, which will shore up the intermittency of renewables Buildout battery storage.
And deploy clean energy required under the energy law.
Gary: The modeling for this filing is underway and we will provide additional customer investment opportunities.
Gary: Altogether, well over $20 billion that is not in the five year plan.
Gary: Now, let's talk about our formula to keep rates affordable for our customers to accommodate these needed investments.
Gary: You know our track record you've heard me share in the past about our deliberate and sharp focus on taking cost out.
Gary: Whether it is episodic cost savings through plant closures or renegotiating ppas.
Gary: Operating our plants better than the markets.
Gary: Leveraging the CE way for process improvement they use of digital technologies to improve efficiency or strong economic development.
Gary: Confident in our ability to keep bills affordable, while delivering on the needed customer investments.
Gary: Shrink every dollar is maximized and adds value.
Gary: Speaking of economic development I've said it before Michigan is in a Renaissance of growth.
Gary: Our five year plan now incorporates the significant economic development, we are seeing with upwards of 2% to 3% annual load growth.
We feel really good about the quality of growth, where we see materializing across our service area and the state both data centers and manufacturing load.
Gary: Well, we see a nice mix coming to the state the manufacturing growth brings with it jobs supply chains commercial activity housing starts and residential growth, which allows us to couple customer investments with affordability as we spread fixed costs over a large larger customer base.
Gary: We are committed to growing Michigan and we are pleased with what we've contracted.
Gary: And then now nine gigawatt pipeline of opportunities not yet in the plan.
Gary: We work hard every day to win our customers business and we are honored when businesses see the value and investing in our state.
Gary: And our service area.
Gary: Jumping to Michigan's regulatory environment, we continue to see a strong and supportive energy policy that insures timely recovery of investments and incentives above and beyond stated Roe.
Gary: As well as constructive regulatory planning mechanisms like renewable energy plants integrated resort.
Gary: And investment recovery mechanisms that streamline the rate case process.
Gary: In 2024, we delivered successful outcomes in our electric rate case settled our fourth consecutive gas rate case and saw support for our distribution investments through the Liberty audit.
Gary: For 2025, we expect a constructive outcome in our.
Gary: Electric rate case with an order by the end of March.
Gary: Our gas rate case in the early innings, but we expect good support for the needed investments to keep our systems safe.
Gary: And as I shared earlier.
Renewal energy plan with an expected outcome in late Q3 of 2025.
Gary: Something to look forward to you given the large amount of renewables needed to meet the energy law and the growing demand, we're seeing across our service area.
Gary: Now onto.
Gary: On to the financials we.
Gary: We delivered adjusted earnings per share of $3 and 34.
Gary: Toward the high end of our guidance range.
Gary: For 2025.
Gary: As you might expect we are raising our 2025 guidance off 2024 actuals from $3 52.
Gary: To $3 58 to $3 54 to $3 60.
Gary: Which represents 6% to 8% growth.
Gary: And we continue guide toward the high end.
Gary: We also continue our long standing tradition of compounding off actuals, providing our investors with a higher quality of earnings.
Gary: Longer term, we continue to guide toward the high end of our adjusted EPS growth range of 6% to 8%, which implies and includes seven up to 8%.
Gary: Our dividend policy remains unchanged, we continue to target a dividend payout ratio of about 60% over time.
Gary: With that.
Reggie: 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 2024, with adjusted net income of $998 million, which translates to $3 34 per share towards the high end of our guidance range.
Reggie: Key drivers of our 2024 financial performance.
Reggie: Included constructive regulatory outcomes.
Reggie: Solid beat at Northstar cost performance fueled by the CE way and a variety of non operational countermeasures, which more than offset the many challenges we saw throughout the year.
Reggie: For the second year in a row, we experienced significant weather related financial headwinds primarily in the form of mild winter temperatures in the first and fourth quarters in fact per our records in 2024, we had the warmest winter.
Reggie: And the last 25 years based on heating degree days yet. Despite these challenges we managed to offset the weather driven headwinds without compromising our commitments to our customers communities or coworkers.
Reggie: To elaborate on the strength of our financial performance in 2024 on Slide 11, you'll note that we met or exceeded all of our key financial objectives for the year.
Reggie: To avoid being repetitive I'll just note that we successfully invested $3 $3 billion as per our original guidance to make our electric and gas system safer more reliable and cleaner on behalf of our 3 million customers at the utility.
Reggie: We managed to do this while funding the business in a cost efficient manner, largely through operating cash flow well priced bonds at the utility and tax credit transfers.
Inaugural year of this new financing vehicle.
Reggie: This funding strategy enabled us to maintain.
Reggie: Our solid investment grade credit metrics and associated ratings as affirmed by each of the rating agencies over the course of the year. Most recently by S&P in December.
Reggie: Moving to our 2025 EPS guidance on slide 12, Youll note the re basing of our 2025.
Reggie: Adjusted EPS guidance off of actuals.
Reggie: For additional clarity our 2025 adjusted EPS guidance increased by <unk> <unk> per share on the low and high ends of the range commensurate with the amount by which our 2024 adjusted EPS of $3 34.
Reggie: We exceeded the midpoint of last year's EPS guidance range.
Reggie: Our increased 2025, EPS guidance implies 6% to 8% growth with continued confidence towards the high end of the range is Garik noted.
Reggie: As you can see in the segment details our EPS growth will primarily be driven by the utility providing $4.01 to $4 and five of adjusted earnings as we plan for normal weather.
Reggie: Constructive rate case outcomes and earned returns at or near authorized levels.
Reggie: At North Star, we're assuming an EPS contribution of.
Reggie: 18 to 22.
Which incorporates a planned maintenance maintenance outage at dig.
Reggie: Offset by ongoing contributions from northstar's clean energy business.
Reggie: Lastly, our financing assumptions remain conservative at the parent segment with the expectation of approximately $1 3 billion of new Holdco long long term debt and up to $500 million of equity to support the increased capital plan at the utility our 2025 guidance also assumes the app.
Reggie: Since of liability management transactions.
Reggie: To elaborate on the glide path to achieve our 2025 and adjusted EPS guidance range Youll see the usual waterfall chart on slide 13 for.
Reggie: For clarification purposes, all of the variance analysis herein are measured on a full year basis on a relative to 2024.
Reggie: From left to right, we will plan for normal weather, which in this case amounts of <unk> 39 per share of positive variance given the expected absence of the <unk> typically mild winter temperatures experienced in 2024.
Reggie: Additionally, we anticipate 21.
Reggie: EPS pickup attributable to rate relief by the residual benefits of last year's successful gas rate case settlement and the expectation of constructive outcomes in our pending electric and gas rate cases.
Reggie: Outside of the general rate cases, we also expect to see earnings contributions from our renewable investments as construction of these projects progress.
Reggie: As always our rate really figures are stated net of investment related costs such as depreciation.
Reggie: Property taxes and utility interest expense.
Reggie: As we turn to the cost structure in 2025 year old note <unk> per share of positive variance due to the anticipation of continued productivity driven by the CE way.
Reggie: We also expect a healthy reduction in operating expenses attributable to the closure of our remaining coal units mid year.
Reggie: Which will be largely offset by increases to vegetation management and other electric reliability reliability related cost categories, all of which align with our pending electric rate case.
Reggie: Lastly, in the penultimate bar on the right hand side, you'll note a significant negative variance, which largely consists of the reversal of select countermeasures in 2024 and expected capital costs associated with the aforementioned parent financings.
Reggie: Also including the usual conservative assumptions.
Reggie: Weather normalized sales and taxes among other items in aggregate these assumptions equate to 37 to <unk> 43 per share of negative variance.
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 14, we have a summary of our near.
Reggie: And long term financial objectives as Garrick noted from a dividend policy perspective, we're targeting a payout ratio of about 60% and anticipate remaining in that area over the course of our five year plan.
Reggie: Given the elevated cost of capital environment, and the breadth and depth of customer investment opportunities before us. We continue to believe that it is prudent to retain more earnings to fund growth.
Reggie: From a balance sheet perspective, we continue to target solid investment grade credit ratings, and we will continue to manage our key credit metrics accordingly, as we balanced the needs of the business.
Reggie: As such we intend to resume our at the money aftermarket or ATM equity issuance program and the amount of up to $500 million in 2025 as mentioned earlier.
Reggie: We expect this level of equity issuance to trend down in the outer years of our plan as we increase the size of our tax credit transfer program given the substantial renewable build out underway in accordance with Michigan's energy law.
Reggie: Lastly, we also expect select large multiyear economic development projects to begin coming online in 2025, yielding approximately 1% weather normalized load growth for the year with run rate assumptions of 2% to 3% in the outer years of our plan as other large projects come online.
Reggie: Slide 15 provides a look into the historical performance and estimated growth of northstar's big facility with upside potential beyond 2026 as capacity prices in zone seven continue to increase.
Reggie: Given the rising cost of new entry, we have updated the potential range of outcomes. Accordingly, as you can see in the bars on the far right hand side of the chart.
Reggie: We remain bullish on the opportunities in the bilateral market for dig and will continue our strategy of layering in contracts over time.
Reggie: Slide 16 offers more specificity.
Reggie: On the funding needs in 2025 at the utility and the parent.
Reggie: The only additional financings I've mentioned for the year are the planned debt issuances at the utility, which we anticipate being a little over $1 1 billion.
Reggie: It is also worth noting that we have not assumed the issuance of any junior subordinated notes also known as Highbridge in our 2025 financing plan or in our five year plan, which offers a potential opportunity if we see attractive price points and the market Needless to say we'll remain opportunistic.
Reggie: Throughout the year.
Reggie: On slide 17, we have 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 minimized. Our model has served and will continue to serve.
Reggie: All stakeholders, well, our customers receive safe reliable and clean energy at affordable prices are.
Reggie: Our diverse and battle tested workforce remains committed to our purpose driven organization and our investors benefit from consistent industry, leading financial performance and with that I'll hand, it back to Eric for his final remarks before the Q&A session.
Eric: Thank you Rajeev.
Eric: I'll finish where I started and with James Brown I feel good.
Eric: But I can't hold attune, so instead of it just like this.
Eric: 22 years.
Eric: <unk> 22 proof points of consistent industry, leading financial performance, providing you with predictability and strong growth.
Eric: Compounding off actuals, which very few due in our sector.
Eric: Providing you with a higher quality of earnings.
Eric: We had a great 2024.
Eric: <unk> confident in our strong outlook for 2025 and beyond.
Eric: We continue to execute on our simple investment thesis and make the necessary and important investments in our system will maintain customer affordability.
Speaker Change: With that Harry please open the lines for Q&A.
Harry: Thank you very much Garik a question answer session will be conducted electronically. If you would like to ask a question. Please do so by pressing the stocky followed by the digit one on your Touchtone telephone. If you are using a speaker function. Please make sure you pick up your headset will proceed in the order you signal us and we'll take as many questions as time permits.
Harry: If you do find that your question has been answered you may remove yourself from the queue by pressing the star key followed by the digit too on your Touchtone cellphone.
Harry: I will now pause for just a second.
Speaker Change: Our first question today will be from the line of Judy integrity on Smith with Jefferies. Please go ahead. Your line is open.
Speaker Change: Hey, good morning team nicely done thanks again for the time appreciate it.
Speaker Change: Good morning, Julien, let me kick it off here.
Julien: Good morning. Thank you look let me just kick it off on something with a little bit more timely here just with respect to the permanent you guys have a lot going on the renewable front I'd love to hear your thoughts about the ability to execute in this environment you guys specifically of wind in your outlook I'm just curious to get your thoughts here just given some of the backdrop here on the ability to execute and especially given the permitting regime.
Julien: Been something of a conversation in recent times and your geography, then I'll pivot back to some of the financials.
Julien: Well the team is doing some amazing work and from a pipeline perspective, both on wind and solar and I'll just give you some context of that before.
Julien: Jumping to kind of the administration kind of Federal administration piece. We just finished up a wind project in the late last year, which was very successful. We've got two large solar projects underway in Muskegon solar projects 250 megawatts, we just announced this last week another 360 megawatts for building himself.
Julien: Both West, Michigan, and so and this team has got a long pipeline. So this whole permitting thing.
Julien: Here's a secret to it and that's not much of a secret it's being on the ground right.
Julien: It's working with the locals and the local townships local communities to get acceptance for the projects and the tax dollars that come with those projects, it's working with landowners.
Julien: It's been our that's been our success in so when it comes to specifically wind and this administration, that's particularly aimed at federal lands and we're not doing anything offshore.
Julien: And we're not doing anything on federal land sell private and that's worth a point of successes and so we do see we do see an opportunity for future wind projects.
Julien: In many cases and Repowering, it's expansion with an existing parks and Theres a couple of new projects that are that are underway under consideration but.
Julien: I feel good about our ability to build out these renewables and then remember always that this renewable energy plan as it's an iteration. So if I've got to make an adjustment in the year, we will do that.
Julien: So that's what gives me a lot of confidence about our future and ability to continue to deliver on this important customer investment.
Julien: Agenda.
Julien: Awesome excellent. Thank you for that I know that a lot of folks are kind of curious to understand exactly how that gets implemented if you will but pivoting back to the financials. I mean, obviously very nicely done here. Thank you for the updates on the loan growth front I mean can you speak a little bit to what the legislation.
Julien: And especially you could do prospectively, you kind of alluded it and in broader terms can you speak a little bit more specifically in terms of what the contribution is in the 2% to 3% and what the big moving factors could be especially subsequent this legislation, which was fairly recent right in terms of what's reflected in that two to three.
Speaker Change: Are you assuming are you talking about state legislation and just to clarify your question Julien.
Speaker Change: Yeah, Yeah, Oh, yeah, I apologize, yeah, I'm thinking about sort of the datacenter Avenue and to what extent is that reflected in that two to three and again is it just a little bit to Nathan given how recently some of the stuff materialized.
Speaker Change: So I wonder if it really clear about our sales growth and this is exciting piece because it is evident in our renewable energy plan that we filed in November it's part of our five a.
Speaker Change: Our five year plan that we're that we're talking about today this 2% to 3% load growth.
Speaker Change: Our pipeline is not hypothetical this is stuff that's contracted we have a high confidence that we're building substations to support some of those loads starts to come on in 'twenty five and then continues out throughout 2019 as five year plan. So there's a lot of there's a high degree of confidence about this 2% to 3%. That's the important piece and then if you look forward.
Speaker Change: Nine gigawatt pipeline.
Speaker Change: And there are several quarters ago, I talked about that pipeline. It was smaller it's grown and it's shifted a little bit to more data centers. Its about 65 ish percent data centers now the rest of manufacturing and that's in part due to this legislation passing the sales and use tax so that passed at the end of the year. The Governor just signed at mid <unk>.
Speaker Change: <unk> and so we're starting to see a nice uplift there and you hear like you've heard Microsoft acquiring land Oracle other hyperscale ours as well and so.
Speaker Change: And you've also heard about the semiconductor project in Genesee County, there is a lot of energy here no pun intended a lot of excitement about the sales growth here, both what we've secured in that pipeline and so I'm excited about Michigan.
Speaker Change: Yeah, Julian I would add to Gary's comments as well.
Speaker Change: When you think about the 2% to 3% just to give you additional specificity, we've got multiple projects embedded in that I'd say.
Speaker Change: Six or seven larger ones and its well diversified. So datacenters are represented in that mix, but again theres a lot of non data center activity as we've talked about for some time.
Speaker Change: Just given.
Speaker Change: The attractiveness of Michigan remember, it's not just a competitive rates. We've also got obviously good fiber network. We've got really good access to fresh water, which is attractive for a lot of these manufacturing businesses because they do include water in their processes.
Speaker Change: And we've got a lot of energy ready sites, because we've been doing the hard work for many years now not just over the past couple of years. So we are well prepared to welcome these opportunities into Michigan and the opportunities embedded in that 2% to 3% and our five year plan. Those are either signed or imminently signed so again, there's not a whole lot of beta around those opportunities.
Speaker Change: One thing I would circle back to <unk> on your question about the permitting is that as Derek noted all of the projects that we're executing on are on private lands.
Speaker Change: I understand the private lands or also to some extent in the cross hairs a bit but I think that that's also centered on wetlands.
Speaker Change: Sated with private property again, none of our projects are situated in wetlands that could be subject to federal regulations. So again to <unk> comments, we feel very good about our fact pattern with respect to permitting and the associated build out of renewables overtime.
Speaker Change: Okay.
Speaker Change: Alright excellent guys I'll leave it there. So you guys said alright all of that.
Kerry Julien: Hey, Kerry Julien.
Speaker Change: The next question will be from the line of Jeremy Tonet with J P. Morgan. Please go ahead. Your line is open.
Jeremie: Okay, Jeremie hi, good morning.
Jeremie: Just wanted to dive in a little bit if I could with regards to I guess, how do you feel about the regulatory environment in Michigan.
Jeremie: Theres been some concern in the marketplace with recent orders and figured it would be good.
Jeremie: Just to hear from you guys. How you think about things at these days.
Jeremy Tonet: Jeremy like sausage.
Jeremy Tonet: Breakfast club, so I got to tell you. This I can tell you this.
Jeremy Tonet: Our breakfast burrito, and ex scramble I love season sausage.
Jeremy Tonet: But the reality is like I don't like how sausage is made no one wants to see how sausage is made.
Speaker Change: And I think that's it that's the challenge everybody is getting wrapped around the axle about the Michigan regulatory environment and that's just the nuances of the <unk> the <unk>.
Jeremy Tonet: Environment, you've got the pluses in deltas.
Jeremy Tonet: <unk> paying attention to it but the bottom line is the bottom line is we get constructive outcomes 2022 2023.
Jeremy Tonet: To remind you of 24.
Jeremy Tonet: Successful electric outcome.
Jeremy Tonet: Consistent.
Fourth consecutive.
Jeremy Tonet: Settlement.
Jeremy Tonet: We'll get a constructive outcome in this electric rate case.
Jeremy Tonet: So.
Speaker Change: Yeah, there's this push and pull that goes on within the regulatory environment, but I'm not here wringing my hands.
Speaker Change: We like our job is to swap the sweat the small stuff. That's all we do we sweat the small stuff. We worked with we worked with the commission process and we get constructive outcomes.
And so when we're out there talking about 6% to 8% toward the high end and this consistency and predictability that our investors can count on because we sweat it day in and day out so.
Jeremy Tonet: Bottomline, we worked through all that at the commission and we get the good outcomes and I think that's the bottom line Jeremy.
Jeremy Tonet: Got it sausage understood.
Jeremy Tonet:
Jeremy Tonet: I wanted to go if I could.
Jeremy Tonet: [laughter] pivot to.
Jeremy Tonet: Dig for a second here it seems like I think you mentioned an outage I was just wondering how much of a headwind that is for for EPS. This year, if you could quantify that.
Jeremy Tonet: Well first of all let me walk through the numbers on that but the teams did this where just like any major outage. We do that every seven to eight years teams prepared ready to execute materials are all there and so.
Jeremy Tonet: We've talked about this last year and this is part of the plan this year and it's.
Jeremy Tonet: There are some renewables that are part of the mix that helped with the EPS EPS numbers and contribution from Northstar.
Speaker Change: Yeah, I think Eric summarized it well Jeremy so yeah, we'll probably lose about a little less or rather a little more than 50% of <unk> contribution in prior years, but that'll be offset by contributions from existing operating assets remember, we do have a thermal generation fleet beyond dig we also have existing renewable projects.
Speaker Change: As the aviator project and others and then we also do have some multiyear projects that are underway that we expect to achieve commercial operation date or <unk> in the second half of this year and so it's a combination of additional contributions from new and existing operating assets and so that should offset digs contribution this year.
Speaker Change: Right I guess I was just thinking I mean guidance might have been even higher if not for this turnaround, but I understand your points there.
David: Thank you David.
David: The outages are a reality of the business. So unfortunately this year, we will have a modest dig David but in the subsequent years, we expect to see additional growth, which we highlighted on slide 15 in the materials.
David: Got it thanks.
David: The next question today will be from the line of Michael Sullivan with Wolfe Research. Please go ahead. Your line is open.
David: Yeah.
David: Hey, good morning.
David: Hey, Derik.
David: Didn't mean breakfast and that can be it can be wrong.
David: Sure.
David: I, usually prefer the week like that.
David: I can't treat myself, all the time I got to wait for their young.
David: Okay.
Speaker Change: I actually wanted to start with Rajiv just on the on the financing side. So do you mind, just maybe bridging us a little bit from the 3 billion Capex increase to what your increase on the equity side, because it seems like maybe a little bit less than what we would've otherwise expected in terms of equity need.
David: How much is maybe tied to tax credit transferability and any additional color there would be helpful.
Speaker Change: Yeah happy to provide some information on that Michael and I. Appreciate the question as always.
Speaker Change: So as you may recall in the past we've talked about this sensitivity between every dollar of capital investment funded by about 35 to 40 cents of common equity at the Holdco and that's about where we are if you just think about the glide path from this vintage we've just rolled out today of a five year plan versus the prior answer to give.
Speaker Change: Your specific numbers were up 3 billion vintage over vintage of aggregate capex.
Speaker Change: So that implies about another $120 million or so of equity. The prior plan had up to $350 million of equity starting this year and so you add 120 on top of that you start to get in that $500 million range and that's what we expect from an equity issuance perspective over the next two to three years and then as we get to the outer year outer years of this plan it does step down.
Speaker Change: Down and that's why I said on a long term basis. The average will be about $4 50, and what you see is we do have more expecting about $85 million or so roughly of tax credit monetization. This year, but that will step up over the course of this five year plan as we execute on more renewable projects to comply with the energy law and so we expect.
Speaker Change: Over $700 million of tax credit transfers in aggregate over the course of this five year plan and that compares favorably versus the expectations and the prior five year plan, which was closer to over a little over half a billion. So that tax credit ramp up of that tax credit transfer ramp up is really what's driving down the equity needs in the outer years of planning I would.
Speaker Change: Say on the front of the plan pretty directionally consistent with our historical sensitivity between Capex and equity needs.
Speaker Change: Okay.
Rajeev: Okay. That's really helpful and my second question I'm going to stick with you here Rajeev.
Speaker Change: In terms of.
Speaker Change: The liability management side, how do you think about.
Speaker Change: If theres more to potentially do if necessary and I know you didn't bake it into the plan, but if weather is mild to again for the second or third year in a row.
Speaker Change: Are there more levers to pull on that front and then maybe if I could also tie in like again, where you were conservative without.
Speaker Change: Baking in any hybrid issuance is like is that available to you. Currently you think and just wanted to be really.
Speaker Change: <unk>, Yeah, just trying to think about where you have to have some of the flex.
Speaker Change: Absolutely and so I would say with respect to liability management certainly that was a very helpful tool in the toolkit over the course of 24 and 2023 I'd remind you in so.
Speaker Change: We'd lean into those I think the benefits of several fold I mean, obviously, we want to peg them to weather and so we'd have to see what weather does over the course of the year. If we were going to go down that path, because we view opportunities like that as transitory like weather. So we would want to peg it take them to weather, but I would say given our utilization of those over the past couple of years I'd say there is certainly more opportunities there, but we'd have to see where interest.
Speaker Change: Rates go I mean, right now it certainly makes environment hospitable because rates have remained range bound in fairly high which creates the discounts on extinguishment that drive the games, but again, we'd have to see where weather trends and needless to say I'm going on.
Speaker Change: Here at CMS and as we've said before we.
Speaker Change: We don't discriminate when it comes to the cost structure and so we look broadly whether that's tax planning, whether that's operational O&M related flags, whether that's the CE way, we will continue to look throughout the cost structure and execute on levers.
Speaker Change: Wherever we find them and that's why we've been successful for so many years now just staying paranoid identifying risk quantifying risks and making sure we have opportunities that exceed the risk and so that's what we'll do going forward thats, the playbook and I don't see us deviating from that transitioning to the question around Highbridge certainly that's an opportunity as I think we may have.
Speaker Change: You talked about in the past.
Speaker Change: The real limitations. There is obviously, we'll see where market conditions are but it seems like there's pretty good depth and appetite for junior subordinated note paper in the market. We saw some issuances recently and at pretty interesting levels and there was quite a bit of activity last year, I think catalyzed by Moody's increasing the equity credit they ascribed to hybrid in Q.
Speaker Change: One of last year. So it's certainly an opportunity and we were doing those long before that was that became a thing and so.
Speaker Change: I'd say it represents less than 10%.
Speaker Change: Our book capitalization, there is a threshold by S&P at 15%. So that gives us about $3 billion of additional capacity to do hybrids and so again, it's a tool in the tool kit will be opportunistic if we see the right pricing and that can allow us to do both credit and EPS accretive deals from a financing perspective versus plan, we'll certainly look to do that.
Speaker Change: Really appreciate it very helpful. Thank you.
Speaker Change: Thank you.
Speaker Change: Yeah.
Speaker Change: The next question will be from the lineup Andrew Weisel with Scotiabank. Please go ahead. Your line is open.
Andrew Weisel: Good morning, Andrew Hey, good morning, everyone.
Andrew Weisel: You covered a lot of areas just one quick thing I wanted to clarify on the dividend the pace of increase has decelerated the past couple of years.
Speaker Change: Wanted to just understand the payout ratio for 2025 should be right around your target at 61% based on the midpoint of guidance you obviously tend to beat the guidance midpoint as we all know so my question is looking to 2006 and beyond how should we think about the dividend growth I understand it the board decision.
Speaker Change: <unk> I think you made a comment about wanting to retain more earnings to finance growth. How should we think about the pace of dividend growth relative to earnings going forward starting in next year.
Andrew Weisel: Yeah I appreciate the question Andrew.
Andrew Weisel: I'll take a walk down memory lane, because as you may recall, when we sold inter bank in 2021 and at the risk of sounding self serving boys that transaction aged well.
Andrew Weisel: We increased the growth rate at that time, and that's when we started going toward the high end of seven 8% and we just thought it was prudent.
Andrew Weisel: To decouple the dividend per share growth at that time from the EPS growth also we did have to right size. It because we went up to like 65% payout, which we thought was not comparable versus our growth your peers and so at that point that we've been on this sort of a glide path of Dps growth. It was initially sort of low <unk>.
Andrew Weisel: 6%, it's now sort of 5% to 7% toward the low end and that has made a lot of sense as we glide path down to a 60% payout ratio and just frankly again to your comment in my comment in my prepared remarks retain more earnings. So that we can redeploy those earnings into the utility growth in rate base growth and so that will be our MRO as they look.
Andrew Weisel: In the outer years again, we will probably have pretty consistent dividend per share increases and so youll see that growth kind of be in the low 5% year over year and I still think will be no I think I I anticipate us being sort of in that sort of low sixty's high fifty's range for some time and tier.
Andrew Weisel: Comment, we'll obviously have to confirm that our board is supportive of that year in and year out as we always do but it should be.
Andrew Weisel: Round, 60% again, it maybe instead of the high fifties or thereabout, but I think that again is the most prudent use of capital in the current environment, because we've got <unk>.
Andrew Weisel: <unk> and depths of Capex backlog that really warrants six insignificant.
Andrew Weisel: Support from a funding perspective, and we just don't think it makes sense to sort of recycle the capital through the external markets why not just retained more and redeploy it into the business. So that's going to be our ammo for some time is that helpful. Andrew.
Andrew: It is I certainly don't disagree I just wanted to make sure you're comfortable going into the <unk> and it sounds like you are thank you very much.
Andrew Weisel: Yep.
Speaker Change: The next question will be from the line of Nicholas Campanella with Barclays. Please go ahead. Your line is open.
Nicholas Campanella: Hey, good morning, and thanks for all the Internet.
Speaker Change: Good morning.
Hey, I just wanted to ask.
Speaker Change: Jeremy's question, a little bit further on like Northstar and the big opportunity is just <unk>.
Speaker Change: Outlined some of the potential upside there, but to the extent that you have.
Speaker Change: Better bilateral.
Speaker Change: Opportunities that come down the pipeline that are incremental to that is that still just the further extension of the six to eight or would you kind of reevaluate at that time.
Nick: Yeah. My name is three words, Nick with which I think youre well familiar and our bias is always to strengthen and lengthen the plan.
Nick: And so while there are certainly may be additional opportunity with the roughly 25% open margin.
Nick: That we highlighted in the outer years of our plan, which could be re contracted at really attractive rates just given the tightening we continue to see in zone seven.
It just gives us additional opportunity to strengthen the length of the plan and I think it's worth reminding folks in Garrick highlighted this in his prepared remarks, I mean remember we compound off of actuals year in and year out and so you really want to make sure that you've got enough support to do that because it gets harder every year by definition and so again, that's been our bias for.
Nick: Some time and that would be the intent as you can see on slide 15 to yes. There is open margin theres, a tightening market and there is additional opportunity, but it's also important to note. We did realize a good portion of that.
Nick: And this plan and so you can see.
Nick: In that bar that says 2026 through 2029, we've stepped up the earnings power of dig pretty handsomely by again contracting at really attractive rates and so there's still additional opportunity on the outside looking in but we didnt realize a good portion of that in this plan let.
Nick: Let me stop there and see if any further questions beyond that.
Nick: Okay.
Nick: No. That's helpful. And then I guess my only follow up is.
Nick: On the on the <unk> like I know, it's early but that's something that you expect to take the full distance or is there a settlement potential opportunity there too.
Nick: We will always look for settlement opportunities.
Nick: This renewable energy plan would be more similar to the integrated resource plan. We've had success in settling integrated resource plans and so again I would look for settlement opportunities in the in our renewable energy plan, but at the latest it'll go into Q3 of.
Nick: Q3 of the year and again, it's a good plan and get confidence in taking the whole way if need be.
Speaker Change: Alright, Thanks, a lot.
Nick: Thanks.
Nick: Yeah.
Speaker Change: Our next question will be from the line of <unk> Chopra with Evercore. Please go ahead. Your line is open.
Tim: Hey, Tim Good morning, Thanks for the discussion today, Hey, good morning, guys.
Tim: My other questions have been answered just one big picture question on tariffs.
Speaker Change: If you know trying to Harrison and in fact, now as you know and if they stay on for a prolonged period of time.
Speaker Change: Just thinking about how it impacts you, especially given you have a considerable amount of renewable investment of the plan. So let me talk to your supply chain, how you'd view, we're seeing that just any color you could share there would be great. Thank you.
Speaker Change: Really we the team has done great work, we've really done our homework here. So just let me talk through some numbers so when.
Speaker Change: When we look at direct spend across our supply chain and we looked at it both Canada, Mexico and China.
Speaker Change: It's a little over 5% drag that it's coming from one of those three locations in the world.
Speaker Change: When we look at indirect spend and so indirect youre going with a company that might be U S based but they have a spending either again, Mexico, Canada or China.
Speaker Change: Again, a little over 5%, so we're talking about 10% to 12% of the overall supply chain mix and so it's small in the context of that but to your point, we're actively working to mitigate that and that's one we've bumped up our supply stock a bit too we've looked at how to migrate to other vendors that are you.
Speaker Change: The space, that's a way to deal with it as well so that's the supply chain. So I've got great confidence in our ability to execute the capital plan and keep bills affordable for our customers now the other pieces in.
Speaker Change: Electric and natural gas. So let me talk about that homework, we've done as well because there is part of MISO. There are you know Canada is part of the MISO mix, but remember this.
Speaker Change: Given our natural gas plants, we're typically putting energy into the market got great heat rates get low cost of incoming natural gas. So that's a nice hedge saved our customers over a couple of hundred million dollars. This year and we'll continue to do that a hedge from a if there is if there is any volatility or an increase in electric prices in the market. So.
Really positioned well there and then gas we bought last year and this is a high for US we bought about 6% of our gas from Canada again and that was at a high.
Speaker Change: And so remember we have seven interconnects and so I've got six other interconnects that I can leverage for U S gas to be able to mitigate that so again I feel like I'm in a really good spot there or the company is in a really good spot from a from a tariff perspective for natural gas and then finally and I imagine we'll get those question over time.
Speaker Change: And we looked at it in some detail is that often you're starting to think about other industries and so often with Michigan with a rich heritage on automotive.
Speaker Change: The question comes up well tariffs, how do they impact the automotive industry in our mind.
Speaker Change: All of our investors that.
Speaker Change: A little over 2% of our gross margin is in the automotive space in tier one and tier two so we've got a very diversified service territory.
Speaker Change: Which helps mitigate some of that risk that might show up for the automotive industry and so.
Speaker Change: A lot of detail there are a lot of data you can tell we've done our homework, but feel like we can we can really manage and mitigate the impact to our customers I know Reggie wants to get them into this too.
Speaker Change: All I would add to Eric's dissertation as though for the avoidance of doubt, we actually do not directly source any material from China. As Derek noted, we may have second or third derivative exposure like I think most global and diversified businesses on the planet do but again, we do not directly source any material from China and the only other thing I.
Speaker Change: Mentioned is that we are obviously using.
Speaker Change: The place in the CE way when we work with our vendors and so we do have operating reviews with our vendors and we are working very actively with them to ask them. The same question you are asking us what are they doing to mitigate the risk of tariffs, we're making sure that our contracts with our vendors, particularly those who do have second or third derivative exposure to some of these.
Speaker Change: Locations that are in the crosshairs that there's the appropriate level of risk transfer or risk sharing and our contracts. So we are doing work with our vendors to make sure that we've got the right level of visibility of the manufacturing footprint and what and make sure we have clarity on what theyre doing to mitigate these risks.
Speaker Change: Right.
Speaker Change: Well, that's really a comprehensive I appreciate all the detail that actually just wanted a follow up question that I was just curious is there a way to think about.
Speaker Change: You're equipped planned in your supply chain, how much of that is domestic versus international because my thought process is this isn't just about China.
Speaker Change: Canada right. This is this might be.
Speaker Change: The European Union might be next year.
Speaker Change: So it's just all the thing about domestically versus internationally sourcing.
Speaker Change: Equipment and other things.
Speaker Change: Yeah.
Well they are gas hopefully what you heard from our earlier responses again, we sweat the details right. So our investors don't have to worry I mean, that's the that's the big message here, but I was just going back to those numbers like from a.
Speaker Change: Canada, Mexico, China, and certainly ready to clarify the China piece, we're talking about and indirectly about 10% to 12% where there might be materials that are coming.
Speaker Change: From those three countries and so again most of its U S based which gives us a great deal of confidence in our ability to execute the plan.
Speaker Change: I didn't catch it all I would add is that we do principally.
Speaker Change: Yes, we do principally source most of our materials domestically.
Speaker Change: Some of them are internationally sourced, but most of them are domestic and again I think the key really operationally as you know, it's really important to have a diversified vendor base and we've done that quite a bit on the solar side.
Speaker Change: We're sourcing domestically a lot of solar to Derisk and we've been doing that for many years now and that over the past couple of months last several years. We've also broadened our footprint to sourcing from southeast Asia with respect to solar modules and that's been really helpful. As well. So again, we've really taken and all of the above approach to make sure, we're well diversified and not subject to over.
Speaker Change: Indexing or over concentration in a particular area.
Speaker Change: Okay.
Speaker Change: Perfect. Thank you guys and congrats on the update here. Thanks.
Speaker Change: Thank you.
Speaker Change: Yeah.
Speaker Change: The next question will be from the line of David <unk> with Morgan Stanley. Please go ahead. Your line is open.
Speaker Change: Hey, Thanks, so much David.
Speaker Change: I was curious on maybe the broader kind of Michigan backdrop for for supporting data centers and I was curious is there excess transmission capacity as you see it in Michigan or in your own fleet of on the generation side, you have extra buffer to absorb.
Speaker Change: Data center projects and some of this load that you're saying.
Speaker Change: Well.
Speaker Change: First start with Michigan, Michigan has been very supportive.
Speaker Change: Both on a sales and use tax and as Rajeev mentioned in his earlier comments, we've worked closely with the.
Speaker Change: Regional and state economic development organizations to help locate data centers as well as manufacturing facilities.
Speaker Change: In Michigan.
Speaker Change: The biggest piece that we do in our economic development team does is help and the placement.
Speaker Change: And so theres not tons of excess transmission capacity out there, but there is there is advantages where you're located in the state and we helped along with the transmission provider locate and trying to position those across the state.
Speaker Change: And in some cases it does require transmission build out requires distribution build out, but we're trying to make that small so that we're able to keep the costs down but also so we can do it in the time frames that are expected from a supply perspective, we feel good about our supply mix, we're continuing that renewable energy plan.
Speaker Change: Incorporates that 2% to 3% growth we're building out those additional renewables to meet the energy law, but also for that sales growth when we do our integrated resource plan.
Speaker Change: Again look at.
Speaker Change: The needs there and so we have these violent to be able to build that out but remember out of the last IRB integrated resource plan, we were at a at.
Speaker Change: At a surplus until we've been able to leverage that as well to be able to attract these businesses, Michigan and so on.
Speaker Change: Again, I feel good about our ability to.
Speaker Change: To place them here.
Speaker Change: And to have the supply of resources to meet that.
Speaker Change: Final thing I'll add to it as well is remember these laws don't come on all at once and so theres timing piece of it and we worked with those companies we know those timing pieces.
Speaker Change: So for example, we've talked about this we know that switch the data center wants to be followed by 2026, well. We're building that we're constructing that now they they bring a little load on May 25, and we will have it on by 'twenty six and so we know all of those whether it's manufacturing or whether it's data centers and so we can stage those and make sure we have the.
Speaker Change: Both the physical distribution and transmission, but also the supply resource resources to be able to meet their needs.
Speaker Change: Got you. Thanks, that's helpful. And then maybe a quick question just going back to the rate case I know, it's late in the process, but are there opportunities here to still.
Speaker Change: Settle.
Speaker Change: Broadly your individual pieces before the finish line.
Speaker Change: I'm always open to settlement you know that but again the times. The clock is ticking on this one and we've had the P. F D and I would just offer this.
Speaker Change: Staff is.
Speaker Change: Staff is a really constructive starting position on this.
Speaker Change: Just as a reminder, like these are store.
Speaker Change: Staff professionals, they do their homework they have done a lot of due diligence in this case they put it in testimony.
Speaker Change: You know a nice constructive starting spot, which I have a lot of confidence in that and then you.
Speaker Change: Also add our experts who bring best practices and bring benchmarking to that and so there's a nice blend that should occur between SaaS positioning the company's position.
Speaker Change: But bottom line I have a lot of confidence we're going to get to.
Speaker Change: A constructive outcome.
Speaker Change: It would be settlement.
Speaker Change: Or probably more likely through a final order in March.
Speaker Change: We'll get to a constructive outcome that'll be good for all stakeholders.
Speaker Change: Okay, great. Thanks for all the updates.
Speaker Change: Yeah, you bet.
Yeah.
Speaker Change: As a reminder, if you would like to ask any further questions. Please dial star one now and the next question will be from the line of Travis Miller with Morningstar. Please go ahead. Your line is open.
Travis Miller: Good morning, everyone and thank you.
Speaker Change: Good morning.
Speaker Change: Hey, a quick clarification on the long term opportunity is when you put the numbers 10 billion on a reliability roadmap that $10 billion on the electric the RVP rather.
Speaker Change: Are those opportunities that are simply outside the plan.
Speaker Change: Year, six through 10 or are those opportunities that might come into the.
Speaker Change: The five year plan.
Speaker Change: Right now that $20 billion plus of opportunities is outside or incremental to the five year plan.
Speaker Change: Out of those filings progress it's.
Speaker Change: It's an opportunity to bring them into the five year plan or to your point add them in year six through 10.
Speaker Change: But as you can see it's a rich a rich opportunity for them, an investor standpoint, but they really needed customer investments needed from a reliability and resiliency of the system as we see higher wind speeds, because we see more frequent storms and higher customer expectations, we need to make those investments in the electric distribution system.
Speaker Change:
Speaker Change: For our customers and then the other one is just in terms of the energy law.
Speaker Change: We have to have renewables in place, 60% by 2035, and those are needed investments for cleaner air and compliance with us with the law as well as the supply growth that we're seeing across the state our.
Speaker Change: Our supply demand I should say that we were seeing across the state that we referenced and then finally important investments in our gas system to ensure the safety of our natural gas system now that's not on the slide but that's another important piece of the of the five year and then the 10 year.
Speaker Change: Okay great.
Speaker Change: And then the 2% to 3% electric growth. If you ended up realizing that type of growth is there a chance that you could get off of that kind of one year rate case cadence maybe extended the two years is that.
Speaker Change: Possibility as you've run the numbers, if you get that electric demand growth up.
Speaker Change: We're confident that we're going to see that so again I go back. So you use the word if and I just want to make sure. We're really clear about this these are contracts. These are things where were like if I take like Corning.
Speaker Change: $900 million investment 100 jobs.
Speaker Change: Bring it on the elect we're building a substation now bringing electric to serve them and so like these are being realized I just wanted to give that level of confidence.
Speaker Change: Again our approach.
Speaker Change: Theres occasion, where we stayed out for a year on a rate case, but our strategy is really to be in there annually to do smaller type increases to have an active dialogue with the commission, that's where we see the best outcomes and successful outcomes for our customers and so I would anticipate that annual rate case cadence continues going forward.
Speaker Change: Sure.
Speaker Change: Okay, Great. That's all very helpful. You answered most of my other questions I appreciate it.
Speaker Change: Yeah. Thank you.
Speaker Change: With no further questions queued I will now turn the call back to Mr. Garrett Rush out for some closing remarks.
Garrett Rush: Thanks Terry.
Speaker Change: I'd like to thank you for joining us today.
Speaker Change: I look forward to seeing you on the road this year take care and stay safe.
Speaker Change: Yeah.
Speaker Change: This concludes today's conference we thank everyone for your participation.
Speaker Change: [noise].