CMS Energy Corporation

Q3 2022 Earnings Conference Call

10/27/2022

spk00: Good morning everyone and welcome to the CMS Energy 2022 third quarter results. The earnings news released 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. Instructions will be provided at that time. If at any time during the conference you need to reach an operator, please press star followed by zero. Just a reminder that there will be a rebroadcast of this conference call today, beginning at 12 p.m. Eastern Time, running through November 3rd. This presentation is also being webcast and it's available on CMS Energy's website in the investor relations section. At this time, I would like to turn the call over to Mr. Sri Madipati, Treasurer and Vice President of Finance and Investor Relations.
spk06: Thank you, Maxine. Good morning, everyone, and thank you for joining us today. With me are Garrick Rochelle, President and Chief Executive Officer, and Reggie Hayes, Executive Vice President and Chief Financial Officer. This presentation contains forward-looking statements which are subject to risk and uncertainties. Please refer to our SEC filings for more information regarding the risk and other factors that could cause our actual results to differ materially. This presentation also includes non-GAAP measures. Reconciliations of these measures to the most directly comparable GAAP measures are included in the appendix and posted on our website. Now I'll turn the call over to Garrick.
spk10: Thanks Sri and thank you everyone for joining us today. I'm pleased with the results for the quarter and the path to year end. But before I get into specifics, I want to start with our simple investment thesis, which continues to stand the test of time. You've seen this in our calls and meetings, and you've seen the results. It works. This is where we put our words into action. We remain firmly committed to leading the clean energy transformation. As I mentioned on the Q2 call, the approval of our IRP was a proof point, evidence that we have a clear pathway supported by the regulatory construct to deliver on our leading clean energy commitment. Our investment thesis is fueled by our commitment to eliminate waste, driven by the CEA. I'd put us up against anyone in our ability to take cost out. This year, we are on track to take $50 million of O&M waste out of the business. The CE way is critical to delivering our operational and financial performance and keeping our service affordable for our customers. Another critical element is our top-tier regulatory backdrop in Michigan. In Q2, we not only delivered our IRP, but we settled our gas rate case. And in this quarter, we received constructive feedback on our pending electric rate case, further evidence of the health of the Michigan regulatory environment. A key part of our investment thesis, which we don't talk about enough, is our diverse and attractive service territory. I'm excited about both the pace and impact of new growth in Michigan. Just this month, our governor announced that Goshen, a global electric vehicle battery manufacturer, selected Michigan for its U.S. expansion over many other states, highlighting another example of onshoring manufacturing within the state. This project is expected to add over 2,000 jobs and provide $2.4 billion of investment. In August, President Biden joined Governor Whitmer at Hemlock Semiconductor, headquartered here in the heart of our service territory. Together, they announced an executive directive to guide the implementation of the CHIPS Act, which will boost domestic chip production and bolster Michigan's leadership in the semiconductor industry. Let me put that into perspective. Hemlock is one of the largest polysilicon manufacturers in the world. Nearly one-third of the world's chips are made from polysilicon produced at that facility right here in Michigan. In September, Hemlock announced plans to grow its operation. The project is expected to add 170 jobs and $375 million of investment in the state. Ground has already been broken on the expansion. Also the expansion of SK Siltron, now in operation, a semiconductor wafer manufacturer, bringing 150 jobs and over $300 million of investment to the state. These are highlights over the quarter. From the map on the slide, you can see we've secured over 80 agreements year to date, which translates to roughly 200 megawatts of new or expanding load in our service territory. This growth is bolstered by collaborative and innovative economic development efforts, supported by competitive rates for energy-intensive customers and robust policy, which are working and continue to drive growth. Our work with the Governor's Office, the Legislature, the Michigan Economic Development Corporation, and the Commission has made it possible for Michigan to not only compete, but win investment and new jobs. These economic tailwinds are just a few of many we've seen and continue to see across Michigan that will help attract more business, grow industrial, commercial, and residential load, and ultimately provide long-term bill relief for all our customers. Our strong commitment to decarbonize both our gas and electric systems is a key differentiator for CMS energy. The recently passed Inflation Reduction Act is another catalyst for our clean energy transformation, supporting deployment of renewables and lowering costs for our customers. We see a lot of benefit in this new legislation. The extension of tax credits for both wind and solar provides economic certainty and lowers costs for our robust renewable backlog within our IRP, which includes 8 gigawatts of solar, as well as the remaining 200 megawatts of wind we are constructing to meet Michigan's renewable portfolio standards. Production tax credits for solar projects will drive cost competitiveness for utility-owned projects versus PPAs. As we build scale, this cost competitiveness will enable us to own and rate-base a greater portion of future IRP solar investments. The investment tax credit for storage will lower costs and provide greater flexibility as we're able to site storage strategically across the grid. Our IRP includes storage 75 megawatts of battery storage beginning in 2024 and could accelerate or increase the 550 megawatts of battery storage through 2040. These tax advantages reduce the cost of new solar roughly 15%, providing annual cost savings of $60 million versus our plan. Also, with the use of tax deductions and credits, We do not expect a material impact in the alternative minimum tax for the remainder of the decade. All of this helps our customers with more savings. It supports our commitment to grow Michigan. It drives the transformation to clean energy and our growing voluntary green pricing program. Bottom line, this legislation is a great tailwind across the board. Now, let's get into the numbers. Year to date, we've delivered $2.29 of adjusted earnings per share and remain ahead of plan. With confidence in this year, we're raising the bottom end of our guidance to $2.87 to $2.89 per share from $2.85 to $2.89 per share. For 2023, we are initiating our full-year preliminary guidance of $3.05 to $3.11 per share, which reflects 6% to 8% growth off the midpoint of our revised 2022 guidance, and we expect to be toward the high end of that range. And remember, we always rebase our guidance off actuals, compounding our growth. This brings you a higher quality of earnings and differentiates us from others in the sector. Our long-term dividend growth remains at 6% to 8% with a targeted payout ratio of about 60% over time. We'll provide you with an update on our guidance as well as a refresh of our five-year capital plan on the Q4 call early next year. Lastly, we are confident in both our outlook and our ability to deliver our financial and operational targets for the remainder of the year. Which brings me to my last slide. In a few weeks, Michigan will have elections across the state. New people will join the legislature. We'll also see the results of the race for governor. Whatever the outcome, we will work effectively, as we have for decades, with whoever holds office. You've heard us say it before. We deliver, regardless of conditions. nearly two decades of industry-leading financial performance. You can count on CMS Energy for that. Now, I'll turn the call to Reggie to offer additional detail.
spk09: Thank you, Garrick, and good morning, everyone. As Garrick noted, our third quarter results are a continuation of the strong performance we have delivered throughout the year, keeping us ahead of plan and positioning us well to achieve our financial objectives in 2022. To elaborate, year to date, we have delivered adjusted net income of $662 million for $2.29 per share, up 11 cents per share versus a comparable period in 2021, largely driven by favorable weather, including more normalized storm activity in our service territory and healthy economic conditions in the state. The waterfall chart on slide eight provides more details on the key year to date drivers of our financial performance versus 2021. As Garrick mentioned, our solid year-to-date performance has driven our revised 2022 adjusted EPS guidance, which reflects an increase in the lower end of the range to $2.87 from $2.85. So our 2022 adjusted EPS guidance has now been raised and narrowed to $2.87 to $2.89. As noted, favorable sales continue to be the primary driver of our positive year-over-year variance. largely driven by weather, equating to 13 cents per share of positive variance. Our strong sales were partially offset by planned increases in operating and maintenance, or O&M expense, largely driven by customer initiatives, which are embedded in rates to improve safety, reliability, and our rate of decarbonization, to the tune of 3 cents per share of negative variance versus the first nine months of 2021. It is worth noting that the aforementioned year-over-year increase in O&M expense was partially offset by lower service restoration expense versus the comparable period in 2021 as anticipated. Lastly, the one cent per share of positive variance in the final year-to-date bucket reflects higher non-weather sales of the utility attributable to continued strong commercial and industrial load in our electric business, slightly offset by drag at the parent from our preferred stock dividends and select regulatory items. As we look to the fourth quarter, we feel quite good about the glide path to achieve our revised full-year EPS guidance range. As always, we plan for normal weather, which we estimate will have a positive impact of about $0.08 per share versus the comparable period in 2021. We are also assuming $0.11 per share of positive variance versus the fourth quarter of 2021 attributable to rate relief associated with the October 1st implementation of new rates from our constructive gas rate case settlement earlier this year. And these estimates are stated net of investment-related costs such as depreciation, property taxes, and interest expense. In addition to said costs, our plan assumes increased O&M expense in the fourth quarter versus 2021 for key customer programs such as vegetation management, one of the most effective measures to reduce system outages. And I'll note that we're on course for a record level of vegetation management spend in 2022, given our focus on improving the reliability of our grid. We also expect to continue to benefit from normalized storm activity, which nets to 11 cents per share of positive variance versus the comparable period in 2021. To close out our assumptions for the remainder of 2022, we assume the usual conservative assumptions for our non-utility business and weather normalized load at the utilities. We have also maintained a healthy level of contingency given our strong year-to-date performance, which when coupled with our non-utility and load assumptions equates to 17 to 19 cents per share of negative variance highlighted in the penultimate bar of the chart. As such, we have substantial financial flexibility heading into the final three months of the year, which increases our confidence in delivering for customers and investors in 2022 and beyond. Turning to our 2022 financing plan on slide nine, I'm pleased to report that we have successfully completed our planned financings for the year with $800 million of debt issuances at the utility priced at a weighted average coupon of 3.9%, which is well below indicative levels in the current environment. And while our plan did not call for any financings at the parent this year, we opportunistically priced approximately $440 million of Equity Forward contracts during the quarter at a weighted average price of $68 per share. Our timely execution of the Equity Forwards locks in attractive terms for the parent financing needs of the pending acquisition of the new covert natural gas generation facility. The settlement of the Equity Forwards will largely occur in the first half of 2023 concurrent with the acquisition timing and in accordance with our recently approved integrated resource plan. Staying on the balance sheet, as we move into the winter heating season, we have preserved a strong liquidity position, which supplements our use of commercial paper. And needless to say, we'll continue to monitor market conditions to try to lock in attractive terms for future financing opportunities at the utility. Lastly, it's important to highlight that we have no debt maturities or planned financings at the parent in 2023, and virtually no floating rate exposure outside of the utility. which largely insulates our income statement from future interest rate volatility. Our opportunistic yet prudent financing strategy reduces costs while limiting uncertainty in our cost structure, enabling us to fund our capital plan in a cost efficient manner to the benefit of customers and investors. And with that, I'll turn the call back over to Maxine to open the lines for Q&A.
spk00: Thank you very much, Reggie. 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 touch tone telephone. If you're using a speaker function, please make sure you pick up your headset. We will proceed in the order you signal us and we'll take as many questions as time permits. If you do find that your question has been answered, you may remove yourself by pressing the star key, followed by the digit two on your touch tone telephone. We'll pause for just a second. Our first question comes from Insoo Kim from Goldman Sachs. Please go ahead. Your line is now open.
spk03: Yeah, thank you. Thanks for the updates. Just first question, I think there's just been a lot of conversation about the recent opening of the docket for the Michigan storm audit process. Could you just give us an indication of the conversations you've had with the commission, kind of where their head's at, and what the potential range of outcomes could be here?
spk10: Yeah, thanks for your question. There are a couple things on this and I think it's important to understand we particularly in August here had some storm. We performed well during the storm, but again it's catching a little media attention and I think one of the things that's really important to recognize here in Michigan is the impacts of the Great Lakes and what Lake Lake Michigan does to the weather and storms and then also just a longer term trend we see as increasing wind speeds across Michigan in part due to climate change and. So the bottom line is we see a real investment opportunity in resiliency. The commission has been supportive of many of the reliability and resiliency efforts in our electric grade case, but there's more to do. There's more to do in this space. And so I really view this as a collaboration where we can work to, again, I think both the commission and the company are well aligned here in what we need to do in terms of reliability and resiliency. So I really view it as an opportunity where those opportunities are and create the path to improve that for our customers.
spk03: Is there a set timeline on when we should have more clarity on the outcome from all of this?
spk10: There's a first effort that's due here on November 4th. I would imagine the audit takes place over much of the fiscal year of 2023. And again, I see it as a collaborative effort. We want the same thing. We have the same goal. And it's really aligned to make sure we have all the right measures and investments in place to achieve that goal and they're at the right speed and pacing.
spk03: Got it. My last question, just thank you for the preliminary guidance on 23 and pointing to that upper end. Should we think of if the covert acquisition and the financing all embedded in that upper end and I guess what potential items could, you know, deviate from, from that range, even if it could be a potential upside from there. Thanks.
spk10: Yeah. The short answer is yes on covert and the financing is in that, that piece, but I'm going to just step back and think of the bigger picture here. And so how I think about this and how we think about this as a company. So this guidance here is six to 8% and we expect it toward the high end. We really think that offers the premium across this sector. And we've been doing this for, 20 years of industry-leading financial performance. And then I think what's unique about us, and again, differentiates us, and there's a strength, and frankly, a premium, is that we rebase off actuals. So we do this time and time again. And so we're not into sugar highs. This is a long-term play where we're going to continue to deliver six to eight toward the high end. So I feel good, we feel good about the guidance we've offered here today at 305 to 311. And One more thing on this. I want to make sure everyone understands, too, that this is an important balance, a balance of our customers, other stakeholders like regulators and legislators, as well as you, our investors.
spk04: Got it. Thank you so much.
spk00: Our next question comes from Shah Porreza from Guggenheim Partners. Please go ahead. Your line is now open.
spk07: Hey, guys. Good morning. Hey, good morning, Shah. Good morning, Shah. Morning, morning. So just a question on IRA and I guess how that impacted your thoughts around the IRP. I mean, clearly you guys highlighted the customer benefits and lower costs of solar, but does it or can it trigger, I guess, any sort of revision to the plan as it currently stands? You know, Garrick, I think you may have alluded to a little bit of that in the prepared. And in particular, do you have any sort of tax equity embedded in in renewable spending? And do you have any opportunity to avoid tax equity where we could see a potential increase in rate base?
spk10: I'll tag team this with Reggie here. This IRA is really beneficial for our industry and beneficial for our customers. And so, as you know, we've laid out our IRP, the 8 gigawatts, the storage bill. It's a nice plan. And we go in every three to five years to revise that. And so, in the short term, I really see the the benefit of the IRA and this production tax credit flowing right to our customers. That's the $60 million per year versus plan. And so that, again, keeps our customers' costs low, frankly. And remember, this IRP had $600 million of savings already baked in over that, and this is incremental to that. So, again, feel good about that. In respect to my other comments, we'll file, refile our IRP in three to five years, and with the IRA, there's upside opportunities in terms of, or tailwind opportunities in terms of pulling renewables forward, potentially pulling storage forward. We'll have to take a look at that. Again, I see this as a real advantage to utility-owned solar and storage versus PPAs. I know, Reggie, you may have additional comments today.
spk09: Yeah, sure. I would only add a couple of comments here. The other benefit, too, is just with the continuation of the tax credit for electric vehicles, well, that certainly could be a catalyst in accelerating the tipping point of electric vehicle proliferation in Michigan. And obviously, that would bring rate benefits as well, because you're growing the denominator in that rate calculation and bringing kilowatt hours into Michigan, which we would welcome. So there's a benefit there that should be at some point incorporated into our financials longer term. With respect to your question around financing, we are not presupposing any tax equity in our funding strategy. So the IRA, there's been a lot of talk about the transferability of credits. I still think there's more guidance required from the IRS. And we'll see what type of market develops as a result of transferability of credits. We certainly do have credits that we can monetize at some point. But at the moment, we're not presupposing any tax equity in our financing assumptions.
spk07: Okay, sorry, Garrett, just a quick follow-up. It's just, I guess, you know, you guys have never had a shortage of capital growth opportunities, right? It's always been a function of bills and rates being kind of that governor, customer rates. I guess the $60 million incremental in customer savings, does that allow a pull forward of some of that spend because you have that incremental headroom, or do we have to wait for the additional IRP filings? I guess I'm just trying to figure out how that plays in.
spk10: Yeah, I don't think you have to wait to the IRP filing for that. It's really a function of how we build out our capital plan. And as we've shared historically, we look at what the customer can afford. We look at how can we execute work. We look at the business cases. We look at the mix, where we put in dollars strategically. So there's a bottom-up buildup for that capital plan. And so as we're able to create more headroom or as We have, in the case of affordable bills, we'll look at how do we put those important capital investments into the system that ultimately provide value for our customers. And so that's the balance we'll strike. And you'll see it as it plays out here in our Q4 call in the five-year capital.
spk07: Okay, perfect. And then maybe just a quick one for Reggie. Just, I guess, beyond the covert purchase, as you guys are looking at your five-year plan and rolling in more IRP spending into plan, including renewables. Do you anticipate any associated financing need or the issuance last quarter took care of those needs as we're thinking about the current plan and slightly beyond the current plan, I guess?
spk09: Yeah, so appreciate the question, Char. And just for semantics, we haven't issued the equity yet. We just put in place forward contracts. And so we've locked in the price we'll issue, obviously, over the course of 2023 in the first half of the year. But You know, the forwards we've put in place really provide for the funding for the parent financing needs at covert. We have yet to roll out, obviously, a new five-year plan, but the current plan of $14.3 billion that we're executing on, as you may recall, we've been very consistent in our comments about the equity funding needs being limited to 2025 and 2026, so about $250 million per year. in those outer years. And because of the sale of the bank last year, there's no equity needs prior to that. And so we'll see what happens when we start to update the capital plan. And in addition to the comments Garrick offered on how we think about the capital plan, affordability is a constraint we're mindful of. The other one is financing, and we don't want to lever or over-equitize the balance sheet. So we'll be mindful of that. And then obviously, just execution feasibility of the capital plan, of executing on a capital plan is the other thing we'll think through.
spk07: Okay, perfect. The last point was I was trying to get it. Thank you so much, guys. Appreciate it. See you soon.
spk10: Thanks, Shar. Thank you, Shar. See you at EI.
spk00: Thank you. Our next question comes from Jeremy Tornett from J.P. Morgan. Please go ahead. Your line is now open.
spk01: Hi. Good morning. Hey, good morning, Jeremy. How are you? Good, good. Thanks. Just wanted to talk a bit more on 2023 EPS guide here, if we could, the driver's. And just wondering if you could flesh out for us the contribution you see from Covert in 23. And when you're thinking about sales trends, what do you anticipate for sales trends for 23? How does that compare to kind of current trends? Just kind of trying to get a feel for upside versus downside drivers within the guidance range.
spk10: Sure, I'll start. And I know Reggie will offer some context around it as well. So, again, I want to remind everybody, as I stated earlier here, that It's 6% to 8% toward the high end, and we're pleased with that. And that includes covert. As we've said, the covert strengthens and lengthens our plan here. And so when I think about this, this is, again, we're playing a long-term game here where we have this consistency and repeatability of delivering industry-leading financial performance. And so that's how we're thinking about it as we move in 2023 and then even in the outer years. But, Reg, you walk through some of the specifics, please.
spk09: Yeah, sure, sir. Jeremy, again, appreciate the question. The covert acquisition, you know, as we discussed, I think in Q2 of this year, we anticipate that being about three to four cents of EPS upside versus plan. And then the financing for the equity should offer a penny or two on top of that. And so that's all incorporated into the guide, as Garrick mentioned. And so know we could spend more time on the details of that but that's what's embedded in that 305 to 311 guide with respect to sales as you know we plan conservatively and so we're assuming as it pertains to weather that clearly this year so far has been quite good and so we would anticipate a little bit of a headwind just planning for normal weather versus what is a strong 2022 comp on the non-weather side we've been surprised to the upside really starting with the pandemic and so we've just seen a nice bit of upside in terms of favorable mix with residential load, outperforming expectations the last couple of years. We'll plan conservatively and still assume that you see that pre-pandemic level of residential load. And again, I think we're seeing very good momentum on the commercial and industrial side, and we would expect that to carry on into 2023. And so those are the puts and takes with respect to covert and sales. The only thing I would add just to finish out on the drivers for 2023 is that clearly we had a constructive gas rate case settlement earlier this year. And so we should expect to see the benefit of that increase in rates, which went effective October 1st of this year, start to flow into the heating season in Q1 of next year. So for the first three or four months of 2023. And then we've got a pending electric rate case and anticipate a constructive outcome there as well. So those are kind of the primary drivers. You've got covert, you've got conservatism on sales. You've got then the rate relief that we anticipate from constructive outcomes. Is that helpful?
spk01: Yes. No, that's very helpful. And just wanted to pivot a little bit to battery storage, if I could, and just wondering if you could provide some more thoughts on how you think the system need could potentially change over this decade, especially if renewable penetration ticks higher than planned from IRA benefits. And is there anything else you're watching out for on this front?
spk10: Thanks, Jeremy. That's a great question. So in our IRP, we have 75 megawatts, and that has to take place in 24 to 2027. And we've already issued the RFP for that work. And so that's well underway. And so you'll see inclusion of that in our five-year capital plan. But clearly what is nice about this ITC and the flexibility that's offered within the IRA is you can have standalone solar. So typically it's been coupled. with solar and so the ability to move storage around and have it be not just a supply asset, but to have it be a grid asset provides a greater amount of flexibility in how we use. And so you can see like the value stacking of a storage of lithium-ion and other storage technologies. So we look forward to that. We're going to continue to look in our five-year plan, but also in the longer-term strategy. and how we might accelerate or how we might think about differently the deployment of lithium-ion and other storage technologies. And I know Reggie has some comments on this as well.
spk09: Jeremy, the only thing I would add is it's important to remember that the IRP is iterative in nature, and so we'll be filing one per the statute at a minimum every five years, but our bias will likely be to file sooner than that. And so the importance of that and the benefit of it is that As we see a potential descent in the cost curve, whether to Garrick's point it's lithium ion or any other storage technology, we could incorporate new assumptions in upcoming IRPs. And so we're assuming in the full plan over the next 15 to 20 years about 550 megawatts. Garrick noted the 75 megawatts in the short term, but it's a larger portfolio longer term. And, you know, again, if the cost curve permits it, you know, we'll look to pull some of that forward and potentially expand it, particularly with the optionality provided with the ITC using it for standalone storage as well as opting out of normalization, which is helpful, too.
spk01: Got it. That's helpful. And just a real quick last one, if I could. Just wondering what the potential impacts for ratepayers could be. Should Palisades successfully reopen, and does this change how you think about future customer savings should this transpire?
spk10: Well, let me offer a couple comments on Palisades. So if we get into the technical questions, like we don't own the plant, we don't operate the plant anymore, and we no longer have a purchase power agreement, which was a significant savings for our customers and power supply costs over the course of the year. So technical questions and related questions that should be really directed to Hold Tech or maybe the Department of Energy and the like. But bottom line, here's what we've shared with the governor's office and with the Michigan Public Service Commission. We'll be open to a purchase power agreement. It has to be much more competitive and much more market-based than it has been historically. And we would expect a financial compensation mechanism on that PPA as a new purchase power agreement. So that's really what I'd offer on Palisades at this point.
spk01: Got it. Makes sense. I'll leave it there. Thank you. Thanks, Jeremy. See you at the EI.
spk00: Our next question comes from Julian Denvin Smith from Bank of America. Please go ahead. Your line is now open.
spk11: Hey, good morning, team. Thanks for the time. Appreciate it. Hey, listen, just maybe just starting. Hey, thank you. Just starting with preliminary, right? I want to focus on that word. Can you emphasize or can you piece apart why you used the word preliminary at the outset? What are the moving pieces in your mind, if we can go back to that quickly, in terms of when you pivot to a more finalized guidance? and what you're watching here in the next few months.
spk10: Just want to clarify that. Yeah, preliminary because we rebase off of actuals, and that's the short of it. And so as we wrap up Q4, which, again, year-end I feel good about, we'll deliver within that guidance range we've provided, and then we'll rebase off of actuals. And so when I think about this year and this guidance, of course, we've tightened the guidance, raised the bottom end, which should be an indicator of competence. I'm really thinking about the midpoint of that guidance and again, managing the work. So imagine storms and other things that come our way that we typically deal with. And then we'll look for reinvestment opportunities, uh, also as we go through the remainder of the year and those reinvestment opportunities, de-risk 2023 and ensure a path of success for 2023. And so that's how it'll play out through the remainder of the year. I don't know if Reggie, you want to add to that, um,
spk09: Julian, the only thing I would add, in addition to just, you know, it's Q3 and, you know, we'll rebase off of actuals in Q4 and take into account any contingency deployment over the next couple of months. But the other variables is obviously we have a pending electric rate case. And so we'll have a little bit, a couple months more of visibility into how that's trending. We're certainly in the process of evaluating potential settlement. And so we'll see how things go there. And then at that point, we will have filed a gas rate case. And so we're still thinking through the size and implications of that and we'll assume a constructive outcome there but still some variables in place so that's the other bit of information we'd look for as we establish our 2023 final guidance and on our q4 call early next year got it okay all right fair enough thank you and then if i can just go back to the last question a little bit um can you talk about how um any revisit of a contract with with uh with holtec and their palisades
spk11: could actually feasibly play itself out vis-a-vis your IRP and or RFP processes. Obviously, it's a little bit less than traditional. I get that DOE's involvement is also less than traditional, but I just want to rehash a little bit how that would fit into your ongoing processes that are continually in flight and admittedly of late have somewhat been crystallized, at least in the near term.
spk10: The RF, so just for context, and I know you know this, Julian, but for context for others on the call, there's 700 megawatts within this IRP that's 500 megawatts is dispatchable, 200 megawatts of clean energy. That RFP has been issued. It was issued at the end of September. That's going to play out. It's done through a third party because of the potential for an affiliate transaction with the DIG. So that plays out. We anticipate those proposals to be submitted in the December timeframe. Those will be evaluated again by the third party. That will take to February. And then we anticipate we'll have some direction in that in the May timeframe. I'll likely share it at the May earnings call timeline. So that's how it's going to play out. I do not know who will participate in that. Again, it's by a third party. Should Holtec choose to participate with the Palisades plant? And if it comes in at a competitive price, It may be an option out there. And again, because it's not an affiliate, we would earn a financial compensation mechanism or a return on that. So that's the approach that we play out here over the course of the next eight months.
spk11: Got it. All right. I know I can't comment too much on it, but I appreciate it. Thank you guys very much. Good luck. Speak to you soon.
spk09: Thanks.
spk11: Thanks, Julian.
spk00: Our next question comes from David Akaro from Morgan Stanley. Please go ahead. Your line is now open.
spk12: Good morning. Thanks for taking my question. You alluded to it, but just any latest thinking on the electric rate case and potential for settlement? And then was just curious what timing you would be contemplating for the next electric rate case filing at this point in terms of the gap between the rate cases here?
spk10: Well, just a little background too. And so I was really pleased with the team. And we did a lot of work on this electric rate case to improve the quality of the case. And I believe and see it's evident in the staff's position on that. It's a constructive starting point that they provided in August. And so as Reggie shared, we're looking at the potential for electric rate case settlement. And so that'll continue until the case is final. We anticipate PFD in December, and then a final order in February. So that's, that's the current status. And then just the longer we have the opportunity, you know, we're on 10 months, 10 month cycle. And so it'd be in really in 20, 2023, would we consider another filing another electric grade case? And that's a little far out for us in terms of, we've got to want to see how this one plays out and make sure we're making the right investments for our customers.
spk12: yep that makes sense thanks um and was just wondering if you could give the latest in terms of what you're seeing in terms of cost pressures from inflation whether it be labor materials components and just how that's impacting the odm outlook here that's a that's a great question and i appreciate you started with our customers because that's like that's a key piece and so just let me give you a little facts here to this and so
spk10: In 2021, we had $75 million of state, federal, and some company funds that went to our customers. In 2022, that number was $79 million. And again, just for context, October to October is the fiscal year for state. And so I'm really pleased that we've been able to get money in the hands of our customers. And you'll see from a quarter, you know, our customers have a lower debt balance or bad debt balance on their bills. They're not carrying a big balance. And in fact, from an uncollectibles perspective, we're in a quartile one position. So I feel good because our customers are starting out in a better position. Now, I'm certainly empathetic and sympathetic to their needs. And so what we know about our customers, when we look at their bill, about 80% of a gas bill is consumption. It's about 90% on an electric bill. We can influence that. We can influence that through our energy waste reduction, energy efficiency programs, and we are doing that. And that's great for our customers. In addition, we're about 30,000 thermostats, three thermostats for those that are most in need, vulnerable customers, to help them, again, control the use. We're pushing, again, with nonprofits and other state and federal funds. And so our focus is clearly on our most vulnerable customers here in this time. And then broadly as a company, and you asked the question, really, have we seen material prices increase? Absolutely, 7% year over year. But there's a lot of things we're doing to – to mitigate that, particularly in the CE way, $50 million of O&M waste reduction, approaching $90 million on a capital perspective. Our plants ran just, again, they ran phenomenally over the summer months. They got a low heat rate, gas and coal. MISO was bouncing all around in the volatility of the market. Ours were steady state. We saved our customers $500 million year to date. Looks like $700 million by year end. Again, we used our gas assets, all these storage fields, to help manage gas cost impact. So those are the here and now. And then we have a whole host of episodic cost savings, $200 million. Palisades for PPA. Palisades PPA fell off. Karn retires. Karn 1 and 2 retires. $30 million of O&M there. So IRA in that PTC. Again, I can go on and on. But you can see we're squarely focused on cost reduction for our customers, creating the necessary headroom so we make the right investments to improve the system, again, for our customers to manage that. And I know Reggie has even more to offer.
spk09: Yeah, Derek, I think you covered all the key points on the cost side. The only thing I'll remind you, David, is that we're still looking at load opportunities as well. The announcement of Goshen, you know, from an economic development perspective, the global market, electric vehicle battery manufacturer out of China. That, as we see it, is the beginning of what is going to be likely a fruitful period of good economic development opportunities as a result of the good legislation passed over the past several months. The CHIPS Act and the IRA have really created a once-in-a-generation opportunity to bring really good load opportunities to Michigan. And that helps the equation as well. And I mentioned earlier some of the benefits of the IRA. If it accelerates the tipping point for EV proliferation in Michigan, that helps the load equation as well. And so we're looking at all the cost opportunities as Garrick enumerated, but we're also looking at top line as well to reduce rates.
spk12: Okay, great. A lot of helpful points there.
spk10: Thanks so much and see you soon. Thanks, David.
spk00: Our next question comes from Travis Miller from Morningstar. Please go ahead. Your line is now open.
spk08: Good morning. Thank you.
spk10: Morning, Travis.
spk08: I was wondering, you highlighted, obviously, the business load that you see coming in, the industrial load. What does that mean in terms of mix of capital investment need or any kind of other need when we're thinking about distribution versus revenue?
spk10: generation is that type of load something where it'll get more distribution investment to serve it or more generation type investment to serve it it's a little bit of both but the immediate the immediate piece is really in the space of distribution so these companies are located here like if you take hsc as an example or hemlock semiconductor they're building out that load right now. And so we're looking at the existing substation and how do we offer additional redundancy and build out. In the case of Goshen, again, they're constructing their facility. So a little further behind from a start point, but again, you're going to be running electric line and build a substation dedicated to that facility. And so the first steps really show up in the distribution space for investments. And you'll see those as part of our five-year capital plan to be able to again, build and construct those. And then really, there's a beautiful part of the integrated resource plan. We continue to look out 20 years and balance the demand needs and the supply needs. And right now, we look long on capacity, really through 2031. So we have room to grow and add these investments. But as Michigan continues to grow, we continue to add low, we'll make adjustments as we move forward in our subsequent IRPs from a supply side. Is that helpful, Travis?
spk08: Yeah, yeah, that helps. That's exactly what I was asking. You answered everything else that I had to ask, so appreciate it, and see you in a couple weeks.
spk10: Yep, take care.
spk00: Our next question comes from Anthony Crowdell from Missouri. Your line is now open. Please go ahead.
spk02: Hey, good morning, Gary. Good morning, Reggie. Congratulations on a great quarter. Thank you. And I apologize, this is real semantics. I understand if you just want to ignore the question. But if I think about, you talk about the IRP maybe strengthened and lengthened the CMS plan. And then when I fold over to earnings guidance of 6% to 8% towards the high end, if I look at 23 where it's kind of preliminary, it's right now at 7% more than midpoint. I guess I'm trying to reconcile 6% to 8% towards the high end. Is that just take 6% out of our planning assumptions, or is 6% to 8% towards the high end?
spk10: I love your question, and I'm not going to ignore it. So let's answer it. Let's just go back in history a little bit, even pre-Enterbank. We got it at 6 to 8, and we always said we had a bias toward the midpoint. That's how we approached it. And now our language is definitely different. It's 6 to 8, and we expect to be toward the high end. And so that's the approach going forward. And we, again, we look for repeatability into that. And so as you saw in our 2023 preliminary guidance, it's off that midpoint of 2022. But, again, we're saying 6 to 8, expect to be toward the high end. We'll rebase off actuals, as we always do. But you can expect year after year that we're going to be that consistency of industry-leading financial performance, that we're going to continue to guide in that 6% to 8% range, again, from the high end. That's what I'd offer. Is that helpful?
spk02: Okay. Last shot at it, and then I'm finished. If I look back in the last 18 years, the guys delivered Very consistent 7%. Do you view the performance, when I look back 18, that you hit the high end of that 6% to 8% range?
spk10: I don't know what data you have in front of you, but I can only talk about what we have, what we're in the context of the call here in our 2023 guidance. So we've said 305 to 311, and I would expect that we would be to the high end of that range. Does that clear it up? Perfect. I wouldn't anticipate the midpoint. I would expect the upper half of that range. Perfect. Thanks so much, and looking forward to seeing you in Hollywood. See you there.
spk00: Thank you. Our final question today comes from Michael Sullivan from Wolf Research. Please go ahead. Your line is now open.
spk05: Hey, everyone. Good morning. Morning, Michael. Hey, just wanted to ask on just with, you know, your own renewables becoming more competitive post IRA. I think the current plan has 50% ownership in there. What is the CapEx associated with that? And if you were to be cost competitive across the board and go to 100%, what would that look like theoretically?
spk09: Yeah. Michael, I assume you're asking about the full portfolio of 8 gigawatts. Is that fair?
spk05: In the current, yeah, either way, whatever is easiest for you. The current five-year plan, the IRP, that just got approved.
spk09: Yeah, so for the 8 gigawatts, we've roughly quantified in the past that 50% ownership of that could be around $4 billion. But again, with cost curves reducing the way they are, and that was a pre IRA assumption. So presumably, it could be a lower amount of capex. But we would expect to own, as Garrick highlighted, greater than 50% over time if we continue to see the cost of owning continue to be more and more competitive with the cost of contracting. And so You know, we'll revise those estimates over time. In the five-year plan currently, we've got about a billion dollars of solar in the plan. And obviously, we'll refresh the capital plan in the first quarter as we have our fourth quarter earnings call next year. So we'll give an update then. But the current plan had about roughly a billion in it.
spk05: Okay. That's super helpful. And just kind of following along that, again, this is kind of theoretical, but if you start finding that you are more cost competitive more regularly here. Do you limit that at all if that introduces more equity needs into the plan?
spk09: So the current construct per the settlement agreement has a natural cap of 60%. And so it's effectively a collar from 50% to 60% for ownership. And so we wouldn't be able to contractually to go above that now. But in subsequent IRPs, you know, we could potentially earn more than that. And so we'll revisit it. And particularly if we're cost competitive with contracted solutions, we'd like to think, you know, that ceiling could potentially come off. But I would say, you know, Garrick highlighted this earlier. I emphasize it as well. You know, when we think through the capital plan, the constraining factors are three things. It's affordability, so making sure that the rate increases are relatively modest as we execute on the capital plan. We also think about the feasibility of executing. We do not want to significantly grow our workforce to execute on the capital plan because that has structural cost implications. And so there's an operational feasibility aspect we take into it. And then there's balance sheet. And we would rather not over-equitize or over-lever the balance sheet in order to fund a capital plan. And so that's generally how we think about building out the capital plan. And we'll take that into account as we construct this latest capital plan that we'll provide in the first quarter of next year, and obviously subsequent capital plans after that.
spk05: Thanks, Reggie. Super helpful.
spk00: That concludes our Q&A session for today. I will now turn the call over to Mr. Garrick Rochelle for closing remarks.
spk10: Thanks, Maxine. And thank you, everyone, for joining us today. Look forward to seeing you at EEI in a few weeks. Take care and stay safe.
spk00: This concludes today's conference. We thank you for your participation.
Disclaimer

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