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spk09: Good morning everyone and welcome to the CMS Energy 2022 Year-End Results Call. The earnings news release issued earlier today and the presentation used in this webcast are available on CMS Energy's website in the Investor Relations section. This call is being recorded. After the presentation, we will conduct a question and answer session. 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 on your telephone keypad. Just a reminder, there will be a rebroadcast of this conference call today beginning at 12pm Eastern Time running through February 9th. This presentation is also being webcast and is available on CMS Energy's website in the Investor Relations section. At this time, I would like to turn the call over to Mr. Sri Madipati, Treasurer and Vice President of Investor Relations and Finance.
spk10: Thank you, Adam. 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 uncertainty. 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 Gary.
spk02: Thank you, Sri, and thank you, everyone, for joining us today. 2022, an outstanding year at CMS Energy, both operationally and financially. And even more than that, 2022 marks the 20th year CMS Energy has consistently delivered industry-leading financial performance. Many of you have been on this journey with us, and I appreciate you and I thank you. You've seen us put our words into action. Our performance is supported by our simple investment thesis, which delivers for our customers, and investors. We continue to lead the clean energy transformation. Our net zero commitments, backed up by the solid plans in our approved integrated resource plan, IRP, provide certainty for our investment in clean energy and highlight the supportive regulatory construct in Michigan. Across the company, we are disciplined about taking costs out and working every day to get better. We use the CE way from corporate functions to the front line to achieve our operational and financial objectives. This focus keeps customer bills affordable.
spk07: On the regulatory front, it's been an incredible year.
spk02: We settled not one, not two, but three major cases highlighting the top tier regulatory backdrop in Michigan. All of this leads to a premium total shareholder return you've come to expect from CMS Energy. I want to take a few minutes to share some of the big wins we had over the year. First, our commitment to people, our coworkers who show up every day with a heart of service, and our customers who count on us to be there in any weather with safe, reliable, affordable and clean energy. In 2022, we will recognize nationwide as the best employer for women in the utility sector, a top employer for diversity, and one of the best large employers by Forbes. It's this team of coworkers who continue to deliver results utilizing the CE way. In 2022, our coworkers' commitment to being best in class in the operation of our generating assets, saved our customers roughly $560 million. This is more than double what we delivered in 2021, meaning our team continues to drive more value by running our own generation more efficiently than the market. Just to make this real, in December, during Storm Elliott, when others were short power, This team and these generation assets were exporting energy out of Michigan into MISO. I'm also pleased with the growth in economic development we've seen and helped lead in the state. As I shared in the Q3 call, semi-conductors, polysilicon, and battery manufacturing are all calling Michigan home. 230 megawatt of new and expanding load with over $8 billion of investment in Michigan. A recent Department of Energy study ranks Michigan as a top three state for planned battery plant capacity, further differentiating our state and service territory. Our commitments across the state have delivered more load growth, more jobs, and more investment, all of which create an environment in our state that looks strong well into the future. We remain focused on getting ready for that future with our IRP. which delivers even more savings to our customers with roughly $600 million in savings over our prior plan and reduces our carbon footprint by over 60% as we exit coal in 2025 and add 8 gigawatt of solar and 550 megawatt of battery through 2040. We continued our long track record of managing costs and keeping prices affordable through the CE way. and delivering $58 million of savings in 2022. This level of discipline to continuously improve has been a contributor to the successful regulatory outcomes in our settled electric and gas rate cases, which is highlighted by the $47 million of regulatory mechanisms to support infrastructure investments and assist customers. This year, both our customers and investors will benefit from our $22 million volunteer refund mechanism, a $15 million bill credit, and $10 million of customer assistance. These regulatory mechanisms de-risk 2023 while providing needed customer benefit. It's this strong execution and these results that you and we expect. And it meets our commitment to the triple bottom line, positioning our business for sustainable long-term growth. 2022 marks another year of premium growth. The team continued to deliver regardless of conditions. In 2022, we delivered adjusted earnings per share of $2.89 at the high end of our guidance range. I'm also pleased to share that we are raising our 2023 adjusted four-year EPS guidance to $3.06 to $3.12 from $3.05 to $3.11 per share, compounding off of 2022 actuals like you would expect from a premium name like CMS Energy. We continue to expect to be toward the high end of this range, which points to the midpoint or higher, signaling our confidence as we start the year in a strong position. Furthermore, the CMS Energy Board of Directors recently approved a dividend increase to $1.95 per share for 2023. Longer term, we continue to have confidence toward the high end of our adjusted EPS growth range of 6% to 8%, And we continue to see long-term dividend growth of 6% to 8% with a targeted payout ratio of about 60% over time. And finally, I'm pleased to share that we have refreshed our five-year utility customer investment plan, increasing our prior plan by $1.2 billion to $15.5 billion through 2027. I have confidence in our plan for 2023 and beyond. Given our long standing ability to manage the work and consistently deliver industry leading growth. It's no coincidence that I started my prepared remarks with our investment thesis. We live by it. And it works. On slide six, we've highlighted our new five year $15.5 billion utility customer investment plan. This translates to greater than 7% annual rate-based growth and supports safety and reliability investments in our electric and gas systems and paves the way to a clean energy future with net zero carbon, methane, and greenhouse gas emissions. You will note that about 40% of our customer investments support renewable generation, grid modernization, and main and service replacements on our gas system, which are critical as we lead the clean energy transformation. Bottom line, we have a long and robust capital runway. Beyond our core investments, we have growth drivers outside of traditional rate base. This includes adders built into legislation for incentives on our energy efficiency and demand response programs, and the Financial Compensation Mechanism, FCM, we earn on PPAs. We also expect incremental earnings provided by our non-utility business, North Star Clean Energy, as they see continued growth in their contracted renewables, as well as better pricing from capacity and energy sold at our DIG facility. We continue to earn a 10.7% ROE in renewables to meet our renewable portfolio standard and are in the process of completing the Heartland Wind Project in 2023. These regulatory incentives are a core part of Michigan's energy law, which, with our strong regulatory construct, continues to support needed customer investments. In addition, the energy law provides certainty of recovery before looking 10-month rate cases and regular fuel tracking mechanisms that allow us to help smooth the impact of commodity prices for our customers. I used the word incredible to describe this earlier. We delivered across the board with settlements in our IRP and our gas and electric rate cases. providing more certainty for 2023 customer investment. This wasn't by accident. We have a supportive law, strong regulatory construct, and our improved regulatory approach enables us to work with multiple parties on complex cases and provide the best outcome for our customers and investors. And we plan to continue this strong performance in the next rate case cycle. We filed a gas case in December and we'll file our next electric rate case later this year, with those outcomes providing further certainty for 2024 customer investments. We know a robust customer investment plan in strong regulatory construct alone do not support sustainable growth. Our customers count on us to keep their bills affordable. Inflation has been top of mind for many throughout 2022. and remain so as we enter 2023 first i'll remind everyone that cms energy is well positioned as it relates to the key sources of inflation including labor materials and commodities in addition we've delivered roughly 150 million dollars in ce way savings over the last three years and estimate over 200 million dollars in large episodic savings as ppas expire and as we exit coal generation. We're also seeing significant new and expanding commercial and industrial load in our service territory. There is a broad spectrum of growth. Some customers have opened new facilities this year, and some are in early construction. These new sales opportunities, both in the short and long term, allow us to spread our cost across a growing customer base. ultimately reducing rates for all of our customers. It should be no surprise why I'm pleased with 2022 and confident in the 2023 outlook. This proven approach continues to deliver. Now, I'll pass the call over to Reggie, who will offer additional detail.
spk14: Thank you, Garrick, and good morning, everyone. As Garrick highlighted, we delivered strong financial performance in 2022 with adjusted net income of $838 million, which translates to $2.89 per share at the high end of our guidance range. The key drivers of our full year 2022 financial performance were higher sales driven by favorable weather and solid commercial and industrial load, the latter of which is indicative of the attractive economic conditions in our service territory, and rate relief net of investment. These positive drivers were partially offset by higher expenses attributable to discrete customer initiatives which reduce bills, support our most vulnerable customers, and improve the safety and reliability of our gas and electric systems. Our strong performance in 2022 provided significant financial flexibility at year-end, which, as Garrick highlighted, enabled us to de-risk our 2023 financial plan to the benefit of customers and investors, which I'll cover in more detail later. To elaborate on the strength of our financial performance in 2022, on slide 10, you'll note that we met or exceeded the vast majority of our key financial objectives for the year. From an EPS perspective, our consistent performance above plan over the course of 2022 enabled us to raise and narrow our 2022 adjusted EPS guidance on our third quarter call. From a financing perspective, we successfully settled $55 million of equity forward contracts as planned, and more notably, opportunistically priced approximately $440 million of equity forward contracts at a weighted average price of over $68 per share to address the parent company's financing needs for the pending acquisition of the Covert Natural Gas Generation Facility in support of our IRP. The only financial target missed in 2022 was related to our customer investment plan at the utility, which was budgeted for $2.6 billion. We ended the year just shy of that at $2.5 billion, primarily due to the timing of a wind project in support of Michigan's renewable portfolio standard, which was largely pushed into 2023 and is now under construction. Moving to our 2023 EPS guidance on slide 11, as Garrick noted, we are raising our 2023 adjusted earnings guidance to $3.06 to $3.12 per share from $3.05 to $3.11 per share with continued competence toward the high end of the range. As you can see in the segment details, our EPS growth will primarily be driven by the utility, as it has for the past several years, and we also assume modest growth for our non-utility business, North Star Clean Energy. Finally, we plan for limited activity at the parent given the lack of financing needs in 2023 beyond the settlement of the aforementioned equity forward contract for the covert acquisition while maintaining the usual conservative assumptions throughout the business. To elaborate on the glide path to achieve our 2023 adjusted EPS guidance range, As you'll note on the waterfall chart on slide 12, we'll plan for normal weather, which in this case amounts to 20 cents per share of negative year-over-year variance, given the absence of the favorable weather we saw in 2022. Additionally, we anticipate 14 cents of EPS pickup attributable to rate relief, largely driven by our recent electric and gas rate orders and the expectation of a constructive outcome in our pending gas rate case later this year. As always, our rate relief figures are stated net of investment-related costs, such as depreciation, property taxes, and utility interest expense. As we turn to our cost structure in 2023, you'll note $0.04 per share of positive variance attributable to continued productivity driven by the CE way and other cost reduction initiatives underway. Lastly, in the penultimate bar on the right-hand side, we're assuming the usual cost conservative estimates around weather normalized sales and non-utility performance, coupled with the benefits of the significant reinvestment activity deployed in the fourth quarter of 2022 through our regulatory filings and traditional operational pull ahead. These assumptions equate to 19 to 25 cents of positive variance versus 2022. As always, we'll adapt to changing conditions throughout the year to mitigate risks and deliver our operational and financial objectives to the benefit of customers and investors. On slide 13, we have a summary of our near and long-term financial objectives. To avoid being repetitive, I'll limit my remarks to the metrics we have not yet covered. From a balance sheet perspective, we continue to target solid investment grade credit ratings and we'll continue to manage our key credit metrics accordingly. To that end, we'll look to settle the equity forward contracts for the covert financing in the second quarter of 2023 and have no additional planned equity financing needs until 2025. In the other years of our plan, we intend to resume our at the market or ATM equity issuance program in the amount of up to $350 million per year in 2025 through 2027. given a substantial increase in our five-year utility customer investment plan. And as such, you can expect us to file a prospective supplement to reflect this revision to our ATM program later this year. Slide 14 offers more specificity on the balance of our funding needs in 2023, which are limited to debt issuances at the utility, a good portion of which has been priced and or funded over the past several weeks as noted on the page. In fact, the $825 million of utility bond financings addressed to date include the $400 million tranche of debt financing required to fund the acquisition of Covert in the second quarter. So we have fully de-risked our financing needs for that critical component of our IRP well in advance with attractive terms to the benefit of customers and investors. And as a reminder, the acquisition of the covert natural gas facility will enable us to exit coal generation in 2025, which makes us one of the first vertically integrated utilities in the country to do so. To conclude my remarks on slide 15, 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, we The probability of large variances from our plan is minimized. Our model has served and will continue to serve all stakeholders well. Our customers receive safe, reliable, and clean energy at affordable prices. Our diverse workforce remains engaged, well-trained, and empowered in our purpose-driven organization, and our investors benefit from consistent, industry-leading financial performance. And with that, I'll hand it back to Garrick for his final remarks before the Q&A session.
spk02: Thank you, Reggie. Our simple investment thesis is how we run our business and has withstood the test of time. It delivers in a very balanced way for all our stakeholders and enables us to consistently deliver our financial objectives. 2022 was an outstanding year. marking our 20th year of industry-leading financial performance. I'm confident in our refreshed $15.5 billion utility customer investment plan, the ability to execute on it, and in our regulatory construct to support it, as well as our solid track record of managing costs so we keep customer bills affordable. Finally, we deliver regardless of condition, not by luck, or accident, but by a great team that runs a proven model and stays disciplined in the work. This is what led to an outstanding 2022 and provides for a strong outlook in 2023 and beyond. With that, Adam, please open the lines for Q&A.
spk09: Thank you very much, Garrick. The question and answer session will be conducted electronically. If you'd like to ask a question today, please do so by pressing star followed by the digit one on your touch-tone telephone. If you are using a speaker function, please make sure you pick up your handset. We'll 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 star followed by two on your touch-tone telephone. Pause for just a second. Our first question comes from Shah Parezo from Guggenheim Partners. Shah, your line is open. Please go ahead.
spk11: Thanks. Good morning, guys. Good morning. Good morning. Good morning. Good morning. So just a couple quick questions here. The CapEx update now includes covert. Can you maybe comment on the impacts of IRA in the plan you presented today? The clean energy segment went from 2.8 to 3.1, so it was kind of a fairly modest increase. Were there sort of any assumptions
spk02: changes around tax equity utilization or do you anticipate another irp update would be needed for more fundamental changes to the clean energy outlook thanks thanks char this the 15.5 billion dollar plan as you indicated includes covert and a nice tranche of renewables and i'll also point out from a vgp perspective that's that large customer renewable program it includes the first tranche of that as well and so happy to dive in a little bit deeper here But remember this, that covert and a renewables bill is spelled out in our integrated resource plan. So that's the nature of this five-year plan, both from a renewables and the development of renewables, the covert acquisition, as well as storage and storage deployment. So that's set. And that IRP really serves as the prudency review, and then we go through the regulatory cases to recover on those. And so that plan reflects that. Now, your specific question on the IRA, that's additional benefit for our customers. As we've shared, that production tax credit offers savings that directly – on the execution of that plan. By 2026, that's about $60 million a year of savings for our customers. And so that IRP, when we originally filed it, was around $600 million, or settled it, I should say, was around $600 million of savings for our customers. That only grows as a result of the production tax credit and the IRA. And so that's the nature of how we're applying that. I would remind you as well, based on AMT, we don't anticipate being subject to AMT for really the remainder of the decade, the way that's framing up. And so, I don't know, Reggie, do you want to add any additional comment to Char's question?
spk14: No, I think you laid it out pretty well, Garrett. The only thing I would add, Char, is you did ask about tax equity. At the utility, we're not assuming tax equity for financing for any of these projects.
spk11: Got it. Okay, perfect. And then just lastly, just a question on your updated guidance and sort of the embedded assumptions. You're showing $0.04 of cost savings as a driver for 23, but also highlighted roughly $30 million or about $0.10 of cost savings related to Carn 1 and 2 coal retirements. What level, I guess, of cost inflation is embedded in the $0.04? Is there a headwind on labor materials? And then More importantly, how are you sort of thinking about that O&M flex beyond that $0.04? Is it closer to the $58 million you achieved in 2022? Thanks.
spk14: Yes, sure. I'll cover most of this, and if Garrick wants to add, he certainly can. To answer your last question first, we're assuming around $45 to $50 million of cost reductions attributable to the CE way, so that's what we have embedded in the plan. You know, we've been pleased to observe over the last several years now that we're at a run rate now of about 45, 50 million, which we hit really the pandemic, sometimes necessity is the mother of invention. And so prior to the pandemic, the run rate was about $10 million of O&M reduction. And then we had a really nice inflection point during the pandemic of about 40 to 45 million of CE way driven savings. And that's, we've held onto that for some time. And so that's the working assumption embedded in the plan. I would say CARN 1 and 2, we do anticipate those savings coming through. We'll see some of that in our power supply costs with just less coal procurement, but also obviously on the O&M side, you know, there's clearly less staffing attributable to gas plants versus coal. So you'll see some of the savings there. And so that's largely the inputs that we have flowing through that cost productivity line item or the four cents that you're seeing in the waterfall from 2022 to 2023. Is that helpful?
spk11: It is. That's helpful, Reggie. Thank you, guys. That's all I had. Congrats on the quarter. Appreciate it. Thanks, Char.
spk09: The next question comes from Jeremy Tonic from J.P. Morgan. Jeremy, please go ahead. Your line is open.
spk01: Hi. Good morning. Hey. Good morning, Jeremy. I just wanted to start off by digging into DIG a little bit, if possible. And if I look at slide 20 here, just wondering if you could walk us through, is this Is this in plan or is this upside plan? And just if you could elaborate a little bit, I guess, the future plan for DIG will flip to the market or do Michigan customers want the asset? Just trying to see what's happening there, what could happen there.
spk07: I like the way you teed that up. We're going to dig into DIG. It's kind of like my Ferrari comment when I talk about DIG, you know.
spk02: I mean, you may not know this, but the dig plant itself is right across from the River Rouge plant where they make the Ford Lightnings. And they just happened to get me a Ford Lightning about three weeks ago. So it performs well better than a Ferrari, I'll tell you that. So we're going to call it the Ford F-150 Lightning in the garage from now going forward. But bottom line, here's what we do at DIG, and it's been a historical practice which really serves us well, is we layer in capacity contracts, multi-year capacity contracts, and energy contracts over time. And as everyone knows, energy prices and capacity prices have been continuing to rise. There's that upward pressure in there. And so as we layer in these contracts, it's provided additional benefit, additional return from that facility. And so that's what we're reflecting, those contracts that have already been inked, you might say, for the improvement in performance. Now, we anticipate that to continue to improve as we layer in additional contracts, particularly in and we're about 50% contracted both for energy and capacity if you get out to the year 26, 27, in that time frame. And so there's potential for upside there. And I'll have Reggie walk through what that upside looks like here in just a moment. But why don't you do that, Reggie, and then I'll conclude.
spk14: Yeah, so just to go back to the page you referenced, Jeremy, page 20 in the deck, you know, you see these dark blue bars here at around $30 million. That's a pretty good run rate for a the economics we have locked in through capacity and energy contracts, as we're noting here in 2023. And then as you get to the outer years of the plan, you see these light blue sensitivities in the stacked bar chart, and that represents the opportunity if we start to see continued tightening and therefore improved economics in the bilateral market. And so in the event we see capacity prices go to about $4.50 per kilowatt month, you can see the incremental upside here from a pre-tax income basis. And then if it gets closer to cone, and I'll remind everyone that, you know, Zone 7 is priced pretty much at cone for two of the last three planning resource auctions. You know, you could see us at a higher level than that with about $25 million upside. And so, as Garrick noted, we wouldn't see those economics until the outer years of the plan, but clearly there's some opportunity as margin opens up in sort of the 25, 26, 27 timeframe.
spk02: And let me just conclude there. So that upside is not in the plan, just to be really clear about that. And to the degree there is upside, I want to make sure everyone's clear. There's no sugar highs, right? We deliver 6% to 8%, and we have confidence toward the high end. So I just want to be clear on expectations going forward.
spk01: That's very helpful there. Thanks. And just want to continue, I guess, with kind of later dated elements of the plan here. Looking at the back half of the plan growth drivers, outside of rate-based. Can you walk us through timeline for clarity on the pieces there? Just wondering if there's conservatism on those items as we look at kind of outside of rate-based growth later, David.
spk14: Yeah, and just thank you for the question, Jeremy. And just for everyone's reference, this is the content we have on slide six of the deck. And so We've always talked about the additional growth drivers beyond rate base as a result of the very constructive legislation we have in Michigan. And so there's the energy waste reduction opportunities that we have, and we earn economic incentives on that. There's a financial compensation mechanism that we get on PPAs that has been solidified now in two integrated resource plans. And then there's the 10.7% ROE that we get on renewable projects associated with the Renewable Portfolio Standard of Michigan, which we're still executing on. And then there's additional contribution from North Star. And so all of those offer growth to our earnings profile above and beyond what we get in rate base. And so that 7% or so you're seeing for rate base growth, these would be additive to that. And I would say you get steady contribution for the majority of these, Jeremy, to get to your question. And so with respect to energy waste reduction, we do expect that to increase gradually over the course of the plan. The PPAs, those will actually ramp up as we do more solar on the contracted side, attributable to the IRP. And then we'll see probably more front-end loaded, the wind opportunity, and then just steady growth at North Star. And so that's really how you should think about the economic opportunity for those non-rate-based opportunities over the course of the plan.
spk01: Got it. That's very helpful. I'll leave it there. Thanks.
spk14: Thank you. Thank you, Jeremy.
spk09: The next question comes from Julian DeMilleen-Smith from Bank of America. Julian, your line is open. Please go ahead.
spk00: Hi. Good morning. This is Heidi Haug on for Julian. Thank you for taking your question. My first question is, hi, how are you? My first question is just to elaborate on the DIG economics and the opportunity there. How do you see the move from a seasonal auction in MISO or to a seasonal auction in MISO from an annual auction kind of impacting that opportunity, if at all, and how should we think about that there?
spk14: Yeah, so we are assessing MISO's new rules around sort of the seasonal auction. I still think when you cut through it, whether it's a historical process or a new process, you know, you're still going to see a continued tightening of Zone 7. It's still a peninsula. You still have limited transmission importation access to the southern border, and you still have coal retirements. And so when you have that sort of construct, you're going to see just an imbalance between supply and demand, and we'll start to open up in those outer years. And so We anticipate, as I said before, that we'll potentially see more attractive economics as energy and capacity starts to free up in the outer years of the plan. The degree to which it's more attractive, we'll see. I think, you know, obviously it's early days. But we certainly think what we're showing on the page in that slide 20 offers at least a representative or is at least indicative as to where prices may go if we see continued tightening. And again, Those light blue bars, that upside opportunity, is not incorporated in our plan, to be very clear.
spk02: And just to add to that, that old seasonal construct is out there to address resource adequacy. And the capacity that has been applied over units has the potential to actually reduce some capacity of units. And so the need grows, certainly in the short to mid-term, across all of MISO, including Zone 7. So the value of a place like and a facility like DIG should only improve for Reggie's comments.
spk00: Great. Thank you. That's helpful. And switching gears a bit here. Can you quantify the aggregate voluntary regulatory mechanisms in 2022? And as we think about, you know, the updated 2023 guidance range, do you have any voluntary mechanisms embedded in the range at this time?
spk14: Yeah, so to answer your last question first, Heidi, we do not presuppose any VRM for the 2023 waterfall. or sorry, for our 2023 guidance, and none of that's incorporated in the waterfall, I should say. With respect to the components of the voluntary refund mechanism, you know, we just filed that earlier this year. To be clear, it's $22 million, and we're going to allocate a portion of that towards excess capital investments over the course of 2022 attributable to emerging capital work like asset relocations, demand failures in new business, And so that's a portion of it on the electric side. And then we allocated the balance of it towards our gas customers, particularly those who are most vulnerable. And we think that's a very prudent use of those resources during these challenging times for customers. And so that's really the spirit of it. Were you also getting at the electric rate case settlement commitments as well?
spk00: Yes, yes, correct. And the donations as well as, you know, how we should think about kind of what informs the guidance.
spk14: Yeah, and so there's none of that incorporated into the 2023 guide either. And just to round out the numbers here, so in the electric rate case settlement, we committed to a $15 million bill credit that will benefit customers in 2023. And again, we recognize the expense of that in 2022. And then there was $10 million, again, of low-income customer support, again, recognized in 2022, and customers will benefit from that over the course of this year. And so that's really how it works, and none of that is presupposed in our 2023 guide.
spk02: And so if I pull up and look at the big picture here, this is why the Michigan regulatory construct is so strong. You have these mechanisms, whether it's the settlement or whether it's the volunteer refund mechanisms that allow us to de-risk the future year and offer additional customer benefit. And that's exactly what this $47 million is. And so this gives us, you know, this is why I'm so confident, we're so confident in our ability and the outlook for 2023. Great.
spk00: Thank you so much. And congrats again on the results today.
spk07: Thank you, Heidi.
spk09: The next question is from Michael Sullivan of Wolf Research. Michael, please go ahead. Your line is open.
spk08: Hey, everyone. Good morning.
spk07: Hey, Michael. How are you today?
spk08: Good. Good. Thanks, Garrett. One thing I picked up on in your comments up front, Garrett, was I think you said an improved approach on the regulatory side is kind of being key to some of the settlements last year. Can you just give a little more color on what you meant by that and what that means going forward in terms of being able to consistently settle?
spk02: Well, you remember Q4 call last year. And I was in this spot and we were saying, hey, we need to improve. We didn't get the best order out of the commission. And we said a couple things on that call. One, we need to improve our testimony and our business cases. And we did that. We took two months. We delayed the case by two months. And that's exactly what we worked on We also adjusted our approach for the electric rate case and how we deliver that and interface with the staff on it. That was a learning that we took from our integrated resource plan filing. We extended that to our electric rate case. And then as we got to August and we saw the staff position, it was a very constructive staff position because of all the work that had been done, the testimony in business cases, the improvement that had been done. And that was the foundation. So once you have that constructive foundation, that constructive point where staff is, then it's really an opportunity to work through settlement. And that's exactly what we did. Working with a number of interveners, the Attorney General, the staff, business community, residential community, as well as a number of environmental interveners to really have a very constructive outcome with this electric ray case. And so as I look forward, we're going to continue to deploy those methods we're going to continue to improve the process going forward so that we can set ourselves up for settlement, or if we have to go to the final order, that we can get a constructive order.
spk08: Great. Thanks. That's really helpful. And then just shifting to the CapEx plan and the clean energy spend, can you guys just quantify how much –
spk02: megawatt basis of renewables um you're looking to add over over the plan and what that looks um in terms of split between solar storage wind let me i'll take a crack at it here and and reggie will jump in a little bit too so in our in our irp there's there's you know obviously we're replacing coal and so i'm just going to walk through the whole the whole piece of it so you can see every component of it so We're going to add about 1.2 gigawatts. That's the covert facility. We've got this RFP out there for 700 megawatts. 500 is dispatchable. 200 is renewables, which we'll have a PPA for. That will get a financial compensation mechanism on that portion of it. And then in addition to that, we've got about 1.2 gigawatts of renewable build-out in that plan. That's spelled out in our IRP. And again, 8 gigawatts over the longer piece, but 1.2 roughly in that five-year window. That's a mix of wind and solar. And then bottom line, we have also in here what I call energy efficiency and demand response. Those also play out in that window as well. And then if you're doing the math on this, we're also keeping Carn 3 and 4 around. That's part of it as well, but that's just more of a capacity look. And so we're in the process of constructing a wind farm right now. That's part of our renewable portfolio standard. That's the one Reggie mentioned in his comments. It's under construction. That's about a couple hundred megawatts of that plan. And the remainder out there is roughly solar and solar-built. I will add this, and Char asked this question earlier, and I didn't finish it, but we also have in this plan roughly 300 megawatts of voluntary green pricing. This is our large customer renewable program. We've talked about this over previous calls. It's about 1,000 megawatts we have ability to build, and we have to have subscriptions for that. And we've got our first, you might say, tranche of subscriptions. And then we're building the first, over the course of this plan, we're building the first 300 megawatts.
spk08: Is that helpful?
spk02: Very helpful.
spk08: I'm all set. Thanks a lot, Gary.
spk14: Michael, the only bit I'd add is that you asked about storage as well. I think Garrick enumerated every last bit, and I'll just add storage. We're assuming around 75 megawatts of storage in the plan. I mean, obviously, longer term for the IRP will do more than that, but over the course of this five-year plan, about 75 megawatts.
spk08: Okay. Thanks again. Take care.
spk09: The next question is from Andrew Weissel from Scotiabank. Andrew, please go ahead. Your line is open.
spk07: How's the new baby? Hi, good morning, everyone.
spk03: How's the new baby? Good. She's sleeping through the night this week. It's a miracle. I just want to elaborate on an earlier question about the non-rate-based drivers. I guess my question is, what are the offsets? If rate-based is growing faster than 7 plus these adders, you're clear that we shouldn't expect more than 8% growth, no sugar highs. So what's keeping the growth below 8%? Is it the equity in the outer years or something else?
spk14: Andrew, hi, it's Reggie. The only thing I would add is that to Garrick's comment is if you ever need help getting your baby to sleep, feel free to play back this call. We try to make these calls. But to get to your question, I would say, yes, you will see some equity dilution in the outer years of the plan. So As I mentioned, we'll be getting up to $350 million of equity from 2025 through 2027. So that's some of the offset to the non-rate-based opportunities. And then, you know, we will have some parent funding costs in the outer years of the plan beyond equity. So we'll start issuing a little bit of debt. And so that's the other bit as well. So I'd say it's largely on the funding side. Yeah.
spk02: If I could just add to it. It's also the mindset that we have that we're going to, we've got great mechanisms in the state in this construct with the VRM that allow us to offer benefit in the next year, both for our customers and for our investors. And that really helps to de-risk. And so that's another reason why we think about it towards really the long term versus, you know, one year and a sugar high.
spk03: Sounds good. Then on the equity, the number went up. It was up to $250 million. Now it's up to $350 million in 2025 and beyond. Just wondering what's the driver of that increase? And I know it's up to, but why the change?
spk14: Yeah, so it's a good question, Andrew, and just to be clear here. So obviously the capital investment plan has increased materially from the prior vintage, so we're at $14.3 billion. In the prior five-year plan, we're now $15.5 billion, and we're effectively addressing the covert needs, and that drives about $800 million of that increase. But the balance, you know, we still have incremental investment opportunities above and beyond covert, and so it's really to balance out the funding for that additional capex and obviously maintain our credit metrics kind of in that mid-teens area, which we've always targeted, per my prepared remarks. But I will also say, you know, our general rule of thumb, obviously, is we always want to avoid block equity, and You know, we still think even at that level of up to $350 million per year, even where the market cap is right now, that's sub 2%, and in a perfect world, the market cap will continue to grow, and it will be a much smaller relative to the market cap at that point. So we think we can dribble that out comfortably without any overhang or material pricing risk.
spk03: Agreed. It's definitely not a risk. Just trying to understand, though, does that mean it's going to be more than $250 million and less than $350 million the way you see it now?
spk14: I would say up to 350 per year.
spk03: Okay, fair enough. Thank you very much. Thank you.
spk09: The next question comes from David Alcara from Morgan Stanley. David, please go ahead. Your line is open.
spk04: Hey, good morning. Thanks so much for taking my question. Morning. I was wondering if you could just specify what you're assuming for low growth in the latest outlook. You had some good commentary, too, about industrial growth. activity in the state. Um, what are the, what are the recent trends you've been experiencing with resi and CNI activity as well?
spk14: Yeah, David, this is Reggie. I'll take that. So, um, let me start with what we saw last year and it was very consistent with our commentary over the course of each quarter, but we just continue to see a good, uh, load growth on a weather normalized basis, um, in Michigan. And so, you know, we were down about 1% for residential as we had been highlighting that was actually a little better than plan. But then on the commercial side, we were up over 1.5%. And then industrial, excluding one large low-margin customer, up over 2.5%. And so all in about a point or 1% on a blended basis. And our expectations are, I'd say, a little tempered going into 2023. And so we anticipate being a little south of that. And so we would say probably flat to slightly up all in. Resi continuing to come in as people continue to go back to work. But Still commercial, I'd say roughly half a point, and industrial between 1.5% to 2%. So we still anticipate decent load growth, and that does not include any of the robust economic development opportunities that we see in our pipeline at the moment as a result of the Chips and Science Act, the Inflation Reduction Act. We continue to see a lot of activity, whether it's semiconductor fabs, as Garrick noted in his prepared remarks, battery fabs, EV battery supply chain or other energy-intensive businesses, we do hope that we'll see some more lumpy load opportunity in the outer years of the plan. Some more to come on that.
spk02: Yeah, I just would add to that on Reggie's good comments there. The CHIPS Act and the IRA and even the IIJA, well, that's a soup of acronyms there, but Bottom line, they've helped our business and they've helped a number of other businesses here in the state from a growth perspective. In addition to that, we've been working closely with the legislature, with the governor's office. There's site incentives that really make our state as competitive as other states that are offering site incentives. That comes in terms of not only investment in the site from a state perspective, but also incentives to locate here, which has been very helpful. We introduced an economic development rate, which further encourages growth here in the state. And we're seeing some nice low growth over the last year in commitments to Michigan. And I expect more here in short order. And so I'm excited about that and what that means for our state, both from an investment perspective, growth perspective, and particularly jobs perspective.
spk04: Great. Thanks for all that color. Very helpful. And I was just wondering, just looking out to the equity needs later in the plan and the balance sheet and cash flow at that point, I was wondering, are there any cash flow impacts that come over time, potentially from IRA or as you start ramping up renewables and with tax credit dynamics, anything that could help operating cash flow, free up cash flow to further invest at that point that we should think about just as your investment profile shifts in that direction?
spk14: Yeah, it's a good question, David. So we currently are assuming about $12.5 billion of operating cash flow generation over the duration of this plan, so a healthy level. And that's kind of run rate $2.5 billion or so per year. So, you know, clearly we'll benefit, as Garrick noted earlier, from just lower costs as a result of the production tax credits will now apply to solar investments. Whether there's incremental upside opportunity for OCF, we'll see. But, you know, we try to plan conservatively, and we feel pretty good about the estimates for OCF and the financing plan going forward. And I think it's also worth noting that we don't anticipate being a material payer of federal taxes through the duration of this plan. We'll be a partial taxpayer as you start to get to 24 and 25, but federal tax cash payments are not a material source of outflow over the course of this plan. And that's kind of been sort of our norm for some time now. So the team continues to do a very effective tax planning to minimize that outflow.
spk04: Okay, gotcha. That makes sense. Thanks so much.
spk09: The next question comes from Douglas Chopra from Edipool. Douglas, your line is open. Please go ahead.
spk05: Hey, team. Good morning. Thank you for taking my question. Hey, good morning, Derek. Thank you for taking my question. Hey, just Reggie, I want to go back to the equity financing plan. So the capex in both 25 and 26 was raised by 100 million. And that seems to all to go to the equity from 250 to 350. Did the assumptions change in cash flow? Or did anything else change? Or you're just building some flexibility in the plan? So if you could just talk to that, please.
spk14: I would say it's more flexibility than anything else. I mean, I would say it's not as formulaic as $100 million increase in the given year equates to 400% equity financing. I think it's more, you see about $400 plus million of incremental capital investment above the prior plan and exclusive of covert. And so we're just trying to fund that as thoughtfully as possible. But it's not as formulaic as incremental $100 million and $25 million and therefore incremental $100 million. It's much more... is a little more ardent than that. So I would just say, you know, it just gives us some flexibility and, you know, hopefully we don't have to do as much of that. But for now, the guidance is up to $350 per year and we think that prudently funds the business and keeps those credit metrics in the mid-teens level to keep the credit ratings we have that we've worked very hard to achieve. Awesome.
spk05: That makes sense. And then maybe just on the slide 12 here, the $0.19 to $0.25 usage non-utility tax and other, Can you give a little bit of a more detailed breakdown of what's usage and some of the other items, if you can?
spk14: Yeah, so usage, you know, non-weather sales, I just provided that in the other question. But like I said, it's flat to slightly up, I would say about a quarter, 25 basis points up all in. We expect residential down over half percent as folks come back to pre-pandemic levels. And then you've got commercial up about a half a point, and then 1.5% to 2% for industrial, again, excluding one large low-margin customer. The other big bucket within that $19.25 is just, remember, we had a lot of discretionary activities in the fourth quarter. So, namely, you've got the VRM, which was $22 million, and then you've got another $25 million there. of electric rate case commitments. And so all in that $47 million of Q4 flex is about 12 cents that does not need to take place in the fourth quarter of this year. And so when you think about that comp of Q4 22 versus Q4 2023, you see a lot of that in there. So I'd say it's a combination of those sort of discretionary items that don't need to recur. And then you've got You know, I'd say, you know, relatively modest load assumptions. We got a little bit of uptick in Northstar as well. That's the other component of that. And as you can see, we delivered actuals of 12 cents per share at Northstar in 2022. And the guide for this year, 2023, is 13 to 16 cents. So that's a piece of it as well. It's really those pieces.
spk05: Does that help? Got it. The usage, yeah, absolutely. Usage and half of it looks like the Q4 package. Flex from 22 to 23, and then a couple of pennies at North Star. Bingo. Thanks so much. Appreciate the time, guys. Thank you. Thank you.
spk09: The next question comes from Anthony Crote from Mizuho. Anthony, your line is open. Please go ahead. Hey, good morning.
spk12: Thanks for squeezing me in here.
spk06: Anytime.
spk12: Just hopefully two quick ones. One was on Digg. Is there a desired amount of capacity you want to leave open in the plan? Do you look longer term and say we want to keep 50 percent open or 40 percent open, or are you guys more opportunistic on that?
spk02: Well, right now, if you look at 23, 24, 25, it's 100 percent, or pretty close to it. In the upcoming two to three years, we want to fully subscribe from a capacity and energy perspective. As you layer in contracts, by the time you get out to 20, 25, 26, it approaches 50%. So there's room there. And absolutely, we're going to take advantage of opportunities in the energy and capacity marks to layer that in. So some longer-term contracts to really take advantage of the opportunity out there is with energy and capacity prices. Does that help, Anthony?
spk12: Yep, absolutely. And then lastly, I want to maybe look a little longer here, your next IRP filing. I mean, the IRP, the guys finished, I guess, I don't know, the 22 or 21, very successful, transformational. What's the timing of the next IRP, and what's that going to look like?
spk07: It just feels like I got through that this year with the settlement. Like I'm celebrating. I'm still in my victory lap of that IRP. It was a landmark. And now you're asking about the next one?
spk12: Yeah, park the lightning in the garage before you do the victory lap.
spk07: Yeah. So we have to be in there within five years. It's usually a three- to five-year window.
spk02: We don't have a plan yet on when that will be. It usually helps to be in around three years just because of the timing of the cycles and recovery. But no set time yet at this point, Anthony. Sorry, I can't give you a date yet. But we'll work toward it here in the next few years. Great, thanks so much for taking my question. Thank you.
spk09: The next question is from Travis Miller from Morningstar. Travis, please go ahead. Your line is open.
spk13: Good morning, everyone. Thank you. Hey, Travis. Good morning. Actually, a couple of questions ago, you answered my question about unpacking that other 19 to 25 cents on next year's earnings. Just one quick follow-up to that. The usage, so that's $7,000. on the 1% change and the electric side especially, is that on the numbers that you talked about in terms of what's in the guidance or is that incremental to what's on that guidance? Do you understand that question?
spk14: I do follow you. The sensitivities that you see, Travis, on page 15, this just highlights what the EPS impact would be if we saw another point, good or bad, relative to plan. And so the sensitivity around on the electric side is about $0.07 for every percent. Now, it obviously depends on the mix. And so we're assuming, like I said, for the usage, about a quarter of a percent up on a blended basis with resi coming down a little over half a percent, commercial about a half percent up. and then industrial 1.5% to 2%. And so, you know, for modeling purposes, that's sort of the base case. And then if we saw any deviation, that's what the sensitivity provides visibility on. Does that address your question?
spk13: Yeah, yeah, absolutely. And that could be weather sensitivity, right? That's not necessarily just weather normalized. That could be weather benefit or detriment.
spk09: Yeah.
spk13: Okay. That's exactly right.
spk09: Very good.
spk13: That's all. Yeah, that's all I have. Appreciate it. Thank you.
spk09: We have no further questions at this time, so I'll hand the call back to Mr. Carrick. Rush out for concluding remarks.
spk02: Thanks, Adam. I'd like to thank everyone for joining us today for our year-end earnings call. We certainly hope to see you on the road over the next coming month. So take care and stay safe.
spk09: This concludes today's call. Thank you very much for your attendance. You may now disconnect your lines.
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