CMS Energy Q4 2021 Earnings Call Transcript

Quartr
Provided by Quartr
February 2, 2022

There are 14 speakers on the call.

Operator

Good morning, everyone, and welcome to the CMS17 2021 Year End Results. The earnings news release issued earlier today and the presentation used in this webcast are available on CMS Energy's website in the Investor Relations section. This call is being recorded. After the presentation, we will conduct a question and answer session. Instructions will be provided at that time.

Operator

Just a reminder, there will be a rebroadcast of this conference call beginning today at 12 pm Eastern Time and running through February 10. This presentation is also being webcast and is available on CMS Energy's website in the Investor Relations section. At this time, I'd like to turn the call over to Mr. Shri Mani Badi, Treasurer and Vice President of Finance and Investor Relations. Please go ahead, sir.

Speaker 1

Thank you, Rocco. Good morning, everyone, and thank you for joining us today. With me are Derek Rochow, 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 risks and uncertainties. Please refer to our SEC filings for more information regarding the risks and other factors that could cause our actual results to differ materially.

Speaker 1

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.

Speaker 2

Now I'll

Speaker 1

turn the call over to Eric.

Speaker 3

Thank you, Sri, and thank you everyone for joining us today. I'm pleased to report as the team continued to deliver strong performance in 2021, demonstrating consistent results across the triple bottom line for our coworkers, Customers, communities and you, our investors. Allow me to take a few minutes to share the big wins this team accomplish in 2021. It is a point of pride that CMS was named the number one utility in the U. S.

Speaker 3

By Forbes for women and for workplace diversity. It starts with our coworkers And we know that companies that value and practice diversity, equity and inclusion deliver stronger performance. Our commitment to people, our coworkers and customers was in high gear all year. For our coworkers, we delivered the 11th straight year of 1st quartile employee engagement. For our customers, we delivered 1st quartile customer experience and launched several programs which support our most vulnerable and prepare all for a cleaner future with EVs and Renewable Energy Generation.

Speaker 3

This year's highlights include the expansion of our voluntary green pricing program, which allows for an incremental 1,000 megawatts of owned renewables and our Power My Fleet EV program to meet the demand of Michigan businesses, governments and schools as they electrify their fleet. And just this week, We announced along with General Motors, a plan to power 3 existing auto plants with 100% clean energy through our voluntary green pricing program. And I know yes, yes, I

Speaker 4

know all of you want

Speaker 3

to hear about our IRP. Our clean energy plan also known as our IRP places us in a solid leadership position on the transformation to clean energy. It has us out of coal by 2025, which achieved a 60% carbon emissions reduction. I am pleased with the progress we are seeing in the regulatory process, I look forward to landing the IRP in 2022. I also want to share the progress we have made with our gas system.

Speaker 3

Our commitment to be net 0 methane by 2,030 is industry leading. We are making our gas systems safer and cleaner by replacing old mains and services with modern materials. This year, we reduced fugitive methane emissions by more than 445 metric tons and executed on our best year ever for main replacement. This stand to reduce methane extends beyond our system with exciting new programs, which will make a positive impact on the planet. We recently announced a plan to build and own our 1st renewable natural gas facility with a Michigan dairy farm, which is included in our pending gas rate case.

Speaker 3

This facility would be a regulated asset and the emissions reduction will remove the equivalent of 4,000 gasoline fueled vehicles from the road annually. Clearly, we are on our way to a safe and clean gas system. Finally, I want to talk a little bit about Michigan, our home state, our service territory. In both our gas and electric business, we are seeing new service connections up over 2020 in 2019 above pre pandemic levels. In fact, we have not seen this level of new electric service connections in the last 10 years.

Speaker 3

We also attracted 105 megawatts of new industrial load to our service territory, which brings with it 4,000 new jobs and more than $1,000,000,000 of investment. And we are expecting Even more new load growth in the state. The work we did at the end of the year on 2 important growth mechanisms further enhanced Michigan's competitive position. We filed an economic development rate in November, which was quickly approved by the Michigan Public Service Commission in December. We also worked closely with business groups and the Governor's office on a package of economic development incentive bills that passed with bipartisan support signed by our Governor in December.

Speaker 3

With these improvements, I expect further announcements this year on several new projects. For you, our investors, I'm pleased to share we delivered our financial targets with another year of 7% adjusted EPS growth. We continued our long track record of managing costs and keeping prices affordable through the CE way. $55,000,000 of cost savings were realized in 2021. When I step back and reflect on 2021.

Speaker 3

It is this strong execution and result that you and we expect and it meets our commitment to triple bottom line positioning our business for sustainable long term growth. Strong execution leads to strong results In 2021 marks another year of premium growth. We delivered adjusted earnings per share of 2 point from $0.65 in 2021, at the high end of our guidance range and up 7% from 2020. And in January, the Board approved an annual dividend increase to $1.84 per share. In addition to raising our annual dividend in 2022, I'm pleased to share that we are raising our 2022 adjusted full year guidance $2.85 to $2.89 from $2.85 $2.87 per share.

Speaker 3

I have confidence in our plan for 2022 and our long standing ability to manage the work and deliver industry leading growth. Longer term, we remain committed to growing adjusted EPS for the high end of our 6% to 8% growth range. Looking forward, we continue to see long term dividend growth of 6% to 8% with a targeted payout ratio of about percent over time. And finally, I'm pleased to share that we have rolled forward our 5 year utility customer investment plan, increasing our prior plan by over $1,000,000,000 to $14,300,000,000 through 2026. On Slide 5, we've highlighted our new 5 year $14,300,000,000 customer investment plan.

Speaker 3

This translates to 7% annual rate based growth and supports the 2 key focus areas of our strategy, making our electric and gas systems safer and more reliable and paving the way with clean energy future with net 0 carbon and methane You will know that about 40% of our investment mix is aimed at renewable generation, grid modernization and main and service replacements on our gas system to support a clean energy transformation. Furthermore, we continue to increase our investments in what our customers count on us for every single day, safe and reliable electric and natural gas systems. You will also see that we continue to plan conservatively have ample upside in projects not factored in this plan, such as our IRP and voluntary green pricing program. We remain focused on the regulatory process as we make investments on behalf of our customers. In December, we received an order in our electric rate case.

Speaker 3

It offered several opportunities for us to improve our case process and we are hard at work as we prepare our next case. This order did support our plan by maintaining our existing 9.9% ROE, Increasing our regulatory equity ratio by 34 basis points and approving $54,000,000 in revenue requirement, exclusive $27,000,000 of lower depreciation approved prior to the order. We expect to file our next electric rate case early this year and anticipate an initial order on our IRP in April and a final order in our gas rate base expected by October. With that, I'll turn the call over to Reggie.

Speaker 4

Thank you, Garik, and good morning, everyone. As Garik highlighted, we delivered strong financial performance in 2021 with adjusted net income of $767,000,000 were $2.65 per share, up 7% year over year off our 2020 results. I'll note that our adjusted EPS excludes select non recurring items, most notably the financial performance of EnerBank, the gain on the sale and related transaction costs, all of which are disclosed in the reconciliation schedule in the appendix of this presentation and posted on our website. The key drivers of our full year financial performance in 2021 were rate relief net of investment coupled with strong volumetric sales in our electric business. These sources a positive variance were partially offset by increased operating and maintenance expenses in support of key customer initiatives related to safety, reliability and decarbonization and higher service restoration costs from storm activity.

Speaker 4

To this last point on storms, we saw a record level of storms across Michigan in 2021, particularly in the final 5 months of the year, including December, and we still manage to deliver at the high end of our EPS guidance range. Our ability to withstand such headwinds quite literally in the case of 2021 and deliver the financial results you've come to expect highlights our track record of planning conservatively, managing the work and relying on the perennial will of our dedicated coworkers. We deliver on the triple bottom line irrespective of the condition. Moving beyond EPS, on Slide 8, you'll note that we met or exceeded the vast majority of our key financial objectives for the year. It is worth noting that even with the aforementioned headwinds, we still managed to deliver over $1,800,000,000 of operating cash flow, which exceeded our plan by over $80,000,000 due to strong working capital management.

Speaker 4

The only financial target missed in 2021 was related to our customer investment plan with the utility, which was budgeted for roughly $2,500,000,000 and we ended the year just shy of that at $2,300,000,000 primarily due to the timing of select renewable projects, which were largely pushed into 20222023. To close the books on 2021, we successfully completed our financing plan ahead of schedule as noted during our Q3 earnings call issuing no equity during the year given the EnerBank sales while maintaining solid investment grade credit metrics. Moving to our 2022 guidance. On slide 9, we are raising our 2022 adjusted earnings guidance to 2 point to $2.89 per share from $2.85 to $2.87 per share, which implies premium annual growth off our 2021 results as Derek highlighted. As you can see in the segment details, our EPS growth will primarily be driven by the utility as it has in the past several years and we also anticipate a return to normal operations at enterprises its financial performance in 2021 was largely impacted by an expanded outage at DIG late in Q4.

Speaker 4

To elaborate on the glide path to achieve our 2022 adjusted EPS guidance range, as you'll note on the waterfall chart on Slide 10, we'll plan for normal weather, which in this case amounts to a $0.01 per share of positive year over year variance. Additionally, we anticipate $0.05 of EPS pickup attributable to rate relief net of investment costs, largely driven by our recent electric rate order of a constructive outcome in our pending gas case later this year. As a reminder, we also continue to see the residual effects of tax benefits from our 2020 gas rate settlement. As we look at our cost structure in 2022, you'll note approximately $0.21 per share of positive variance attributable to continued cost savings and productivity driven by the CE Way and other cost reduction initiatives as well as a return to more normalized levels of service restoration expense. As noted earlier, we're also assuming a resumption of normalized operating conditions in enterprises in the penultimate bar on the right hand side of the chart coupled with usual conservative assumptions around weather normalized scales.

Speaker 4

As always, we'll adapt to changing conditions and circumstances throughout the year, mitigate risks, and increase the likelihood of meeting and financial objectives. Moving to Slide 11, which denotes our near and long term financial objectives. In addition to the adjusted earnings and dividend per share target that Derek noted earlier, from a balance sheet perspective, we continue to target solid investment grade credit ratings and we will continue to manage our key credit metrics accordingly. To that end, given the attractive valuation achieved in the Interbank sale and our successful closing of the transaction in the 4th quarter, we do not anticipate issuing any equity through 2024 despite the increased in our 5 year customer investment plan to $14,300,000,000 Beyond 'twenty four, we expect to issue up to $250,000,000 of equity per year in 20252026. As for 2022 financings, our needs are limited to debt issuances at the utility and the settlement of equity forward contract, the details of which you can find in the appendix of our presentation.

Speaker 4

Our model has served and will continue to serve all stakeholders well. Our customers receive safe, reliable and clean energy at affordable prices, while our coworkers remain engaged, well trained and empowered in our purpose driven organization. Now investors benefit from consistent industry leading financial performance. We're often asked whether we can sustain our consistent industry leading growth In the long term, given widespread concerns about inflation, supply chain and natural gas prices among other risks, and our answer remains the same. Irrespective of the circumstances, we view it as our job to do the worrying for you.

Speaker 4

Sustainable and agile Cost management has been one of the key pillars of our success over the past several years. And as you can see in the breakout of our cost structure on slide 12, there remain ample opportunities to reduce cost across the business. As you will note on the right hand side of the slide, we estimate over $200,000,000 of episodic cost savings opportunities through coal facility retirements and the expiration of high priced power purchase agreements or PPAs. In fact, our PPA with the Palisade MoveCare facility will expire in April of this year, which will provide approximately $90,000,000 and savings to our customers. These cost savings are above and beyond what we'll aim to achieve annually largely through the CE Way, our lean operating system, is worth in 2020.

Speaker 4

Given our track record of reducing costs, we are highly confident that we will be able to execute our capital plan delivering substantial value for customers and investors. To conclude my remarks, On slide 13, we have refreshed our sensitivity analysis on key variables for your modeling assumptions. As you will note, with reasonable planning assumptions and our track record of risk mitigation, the probability of large variances from our plan are minimized. And with that, I'll hand it back to Gerrick for his final remarks before Q and A.

Speaker 3

Thank you, Reggie. Our Simple investment thesis has withstood the test of time and continues to be our approach going forward. It is grounded in a balanced commitment to all our stakeholders and enables us to continue to deliver on our financial objectives. As we've highlighted today, We've achieved another year of strong performance in 2021, executing on our commitment to the triple bottom line and are pleased with our strong results. I'm confident we're in a great position to continue our momentum throughout 2022 and beyond.

Speaker 3

We look forward to updating you as we head into another exciting year. With that, Rocco, please open the lines for Q and A.

Operator

Thank you very much, Gary. The question and answer session will be conducted electronically. And we'll take as many questions as time Our first question today comes from Shahriar Pourreza with Guggenheim Partners. Please go ahead.

Speaker 5

Good morning. Good morning, guys. Good morning. Good stuff this morning. A couple of questions here, if I may.

Speaker 5

First, you're guiding to the top end of 6% to 8%, which was kind of a change in language post transformation and now you kind of break out in more details The upside potential for non IRP CapEx. Just to confirm, is this upside included in the updated language around the growth Great. Maybe another way to ask is, if you're already at the top end, you have $4,000,000,000 to $5,000,000,000 of incremental spending items within and sort of outside of the IRP. How do we think about this growth rate in the context of the upside spending opportunities you're highlighting this morning?

Speaker 3

Yes. Great question, Shar. And let me offer this Just real clarity and offer a little bit of context. And so we're pleased with 2021 and delivering the high end of guidance. And as I shared previously, We got a lot of momentum coming into 2022 and our raising guidance should offer much confidence to the investment community and Our strength here in 2022 and our confidence in the delivery in 2022.

Speaker 3

I'll remind you that our 6% to 8%, and again toward the high end of That range, that's off of 20 22 base. So that's our projection going forward. You know we plan conservatively. And so again, you see a lot of upside in that capital plan, the IRP, the VGP type work. And so again, we'll weave those in as those materialize.

Speaker 3

Don't want to presume success in those. That's why we plan conservatively. But again, we expect to be the high end of that 2022 base. And so that's the nature of our growth Pattern going forward. And I know, Reggie, you want to offer some additional comments there as well.

Speaker 4

Yes. Good morning. Sure. Thanks for the question. The only thing First comments just to be our guess for the avoidance of doubt is that the guidance toward the high end of that 6% to 8% off the 2022 base That just assumes the capital plan we rolled out today of $14,300,000,000 of that 5 year period and the assumption of no equity through 2024.

Speaker 4

And so these other opportunities on the outside looking in that Gerrick noted the VIRP, the voluntary agreement pricing program or VGP, those would give us Even more confidence in delivering on that plan. So again delivery toward the high end of 2022 is just based on the $14,300,000,000 of capital and the assumption of no equity through 2024. Those are the key drivers.

Speaker 5

Got it. And then just to follow-up, the rate base growth through 26 is now 7%. It's a little bit of a slight change from prior year's language of greater than 7. It's subtle. Is there sort of a large numbers taking effect here just as we're thinking about modeling?

Speaker 4

Yes, you certainly do have that because we're compounding off of a higher base. But it's a solid 7% Sure. So I wouldn't read too much into it.

Speaker 5

Perfect. And then just lastly for me, in terms of the disclosures for 'twenty five through 'twenty six on the equity side. Obviously, you're restoring back the historical $2.50 per year. I'm sure, Reggie, you're thinking about this, but do you see sort of any opportunities to maybe mitigate, find some optimization on the financing given that you're predominantly 100% regulated, maybe a way to flex the balance sheet and credit metrics. Is there a way you can offset this?

Speaker 4

We'll see. I mean, the current base case for modeling purposes should be $250,000,000 per year in 2025 2026.

Speaker 3

But what

Speaker 4

you'll see in the appendix, Shar, is we are assuming about over $10,500,000,000 of operating cash flow generation over the next 5 years. So If we see upside to that, well, that certainly gives us more financial flexibility. We've also really done a nice job executing Very attractive, I'll say, equity like securities that get an equity credit like the hybrids we've been doing from time to time. We had a perpetual 3rd last year they got nice equity credit. And so we'll see if there are opportunities there.

Speaker 4

But the current working assumption should be that $250,000,000 per year in those outer years, 25,000,000

Speaker 5

Okay, perfect guys. Congrats on the execution. This is really good. Thanks.

Speaker 4

Thank you.

Operator

And our next question today comes from Jeremy Tonet with JPMorgan. Please go ahead.

Speaker 6

Hi, good morning.

Speaker 3

Good morning. How are you, Jeremy?

Speaker 6

Good. Thanks. It seems very clear from the slides there's various CapEx upside that we could see. But just wondering if you could Dive in a little bit more for the timing on when these items could make their way into plan and what we should be watching for there?

Speaker 3

I assume you're talking about the incremental items, just to clarify your question.

Speaker 6

Yes, the incremental CapEx opportunity.

Speaker 3

Certainly. So as you know, we're in the midst of an integrated resource plan and we don't want to presume, although we're confident in that plan, we don't want to presume that the Covert facility and the DIG will move into the utility. There's certainly a lot of good indicators around that. But nonetheless, we want to make sure that that's where it lands. We'll see a final order in the IRP by June of this year.

Speaker 3

And so again, assuming success there, we would anticipate the Culvert facility in 2023 And then the DIG facility is out in 2025 from an incremental opportunity. Our VDP, again, that's subscription based, based on customers. We saw some we saw some positive traction in that that we announced this week with General Motors. But again, that construction would be as those fill out and as those are subscribed, That construction period would be in 'twenty four to 'twenty seven. And so that's the nature of as that materializes, it would show up in that range.

Speaker 6

Got it. That's helpful. And if these come to fruition, would this impact, I

Speaker 7

guess, the funding plan on the equity side?

Speaker 4

For in the event the IRP gets approved, we don't believe we'd need to materially change our equity issuance needs. Now the VGP plus the IRP, if have those high class problems. We would potentially have to recalibrate. But to be clear, that would only be outside of 2024. So you think about the timing of the capital investments, Covert would potentially be before 2024.

Speaker 4

And again, we feel good about not needing to issue equity even in that scenario before 2024 where we may need to recalibrate as if we get the IRP and good momentum on the BGP those outer years 2025 beyond we may Take a second look there. But for now, again, feel very good about the work assumptions in this plan.

Speaker 6

Got it. That's very helpful. And just a quick last one, if I could. With regards to the electric rate case here, the outcome might have been a bit lighter than expected. And just wondering if you could comment a bit more, I guess, on The go forward expectations in Michigan as far as the regulatory construct there, as well as drivers in 2022 that you're using to employ to kind of offset some of that softness?

Speaker 3

Reggie and I will tag team this. Let me be very clear, I feel good about the regulatory construct here in Michigan. And when I look at this rate case, There are two things to take away from it. 1, there's an investor read through on constructive ROE, 9.9. Has been constructive, especially when compared with other jurisdictions.

Speaker 3

It's good solid equity thickness. In fact, our regulatory equity ratio grew by 34 basis points. That just again speaks to the nature of this commission and this regulatory construct. And again, all based in legislation, so don't forget that piece of it as well. The other piece of opportunity is clear in the order.

Speaker 3

And as a utility, we need to improve our business cases, particularly in a forward looking test year and additional investments we want to make on behalf of our customer. We need to do a better job of showing the benefits as well as the cost when compared to historical. That's on us. We own that. You can expect to see it in our next electric rate case.

Speaker 3

So let me hand it over to Reggie to walk through a little bit of why we have such Confidence in 2022.

Speaker 4

Yes, Jeremy. So as you think about the offsets with the order or from the order, clearly, it really highlights the benefits of having a forward test year. And so where we had disallowances in forward test year, we obviously can revise our capital and O and M spend programs. And so that's a clear offset from some of the disallowances we And then a couple of things related to 2021 and then in this test year that give us great confidence. And so as you may recall, we had plans to issue equity in 2021.

Speaker 4

And obviously given the timing of the Interbank sale, we didn't have to issue any equity that year. And so we've Got some momentum from a share count perspective. That's helpful. I continue to feel quite good about weather normalized load, we saw a really nice recovery from commercial industrial sales over the course of 2021. And we anticipate seeing some of that in 2022 as well, particularly given the leading indicators that we've seen with respect to new service requests, which Gerrick offered in his prepared remarks and we continue to see upside from our residential customers given this sort of teleworking phenomenon that we think should stick to some extent.

Speaker 4

And then cost performance, every year I continue to be surprised to the upside by what the organization can deliver. So last year our plan was about $45,000,000 and we delivered $55,000,000 there. And then in 2020, I can assure you we didn't plan for $100,000,000 $100,000,000 of savings and the organization went and got it. And so those are all the drivers that we think will offset some of the downs that we saw in the electric rate order.

Speaker 6

Got it. That's very helpful. Thank you. Thank you.

Operator

And ladies and gentlemen, our next question comes from Insoo Hyal with Goldman Sachs. Please go ahead.

Speaker 8

Yes. Thank you. My first question, you guys was a lot of store spending capital opportunities versus just use the expensing to for restoration or whatnot. Did any Additional needs to be added to your go forward plans.

Speaker 3

Thanks, Jin Tzu, and good morning. I want to be real clear with everyone here. We're at the largest Electric reliability capital spend that we've had in our company's history and it's actually 40% over 2020. So we're at a good pace in terms of electric reliability. But clearly, as we demonstrated in this electric rate case, there is more to do across our VaaS system.

Speaker 3

And so we'll be making requests in this upcoming Rate case with, of course, better business here, there is room to for improvement And we're well aligned with this commission and this staff to do just that.

Speaker 7

Got it.

Speaker 8

The second question is just going back to the demand comments you guys made. For quarter. 2022, if I'm understanding correctly, you're thinking more of a modest flat to modest growth and year over year growth. Is that correct? And then to just You've talked about positive signals.

Speaker 8

Is there any particular segment or industries that you're seeing that out of?

Speaker 4

Yes, Anshu, this is Reggie. So, yes, I think your working assumption for blended Whether normalized load on the electric side is about right. So call it just slightly up, flat to about a half a point. But again, we continue to be So down about 2.5%, a little over that versus 2020. Our plan was much more bearish and so we saw surprise to the upside versus plan there.

Speaker 4

Commercial, we've already seen commercial over the case of 2021, up about 3.3%, so effectively back at this point about 2022. And so when you think about our working assumptions for 2020 We're still assuming a decline for residential versus 2021. On about somewhere between 1% to 2%, commercial basically flat to slightly up. And then industrial, we still expect to see pretty good growth there around 5%. So that's what on a blended basis gets you to around a point I'm sorry, excuse me, flat to slightly up about half a point all in.

Speaker 4

And then the positive signals from new service requests.

Speaker 5

To point

Speaker 4

to a specific sector, I think, would be challenging because We're pretty diversified in our service territory, but clearly we're seeing good news in auto. Now again, auto represents a couple of our gross margins, so not a great deal of exposure there, but across most sectors we expect to continue to see Michigan trend well. And as Gerrick noted in his we're seeing some very attractive economic development opportunities on the industrial side. We're not in a position right now to close those sectors, but we see a number of, I'll say, a combination of old and new economy sectors looking at Michigan as a place to land. And so we feel very good about the road and economically in Michigan.

Speaker 8

Thanks. That's good color. Thank you, guys.

Operator

And ladies and gentlemen, our next question today comes from Michael Sullivan at Wolfe Research. Please go ahead.

Speaker 9

Hey, everyone. Good morning.

Speaker 3

Good morning, Michael.

Speaker 9

Hey, Garrett. Just first wanted to ask on level of Conviction and inability to potentially settle the IRP in the next couple of weeks or months here?

Speaker 3

Yes. So I'm just going to break this down really, really clearly. I feel good about taking it a full distance. I want to make sure that's very clear on the table. There's a 60% reduction in carbon by 2025 over 2,005 baseline levels and there's an opportunity for more resilient supply system.

Speaker 3

Those are the factors of this. And so there's good there's a win I said this before, there's a winning here for everyone. And so we feel very strong about taking the full length and get what we need for our customers as well as for our investors. But bottom line, whether it's an electric case, gas case or an IRP, We're going to look at an opportunity to settle. And right now, we're in a sweet spot where there's an opportunity to do that.

Speaker 3

And when there's a win in there for everyone, there's an opportunity The year have a partial settlement or a full settlement. And so we'll look at that and we'll work with the parties to see if something can materialize there. But Just like there's an opportunity there, all those wins allow us to take it the full distance as well. So I feel confident either way that we'll get what we need for our customers, the planet and for our shareholders. That helpful, Michael?

Speaker 9

Yes, super helpful. Thank you. And my other question was, Reggie, I think you mentioned one of the Main drivers for the lower than planned CapEx last year was some slippage on renewables projects. Can you just give a little more detail on that?

Speaker 4

Yes, Michael. Good morning. Yes, so we had some renewable projects that we had to push out a little bit. I think the issues around supply chain pretty well Publicized across not just the country, but the planet. And so we saw some of that with respect to our projects.

Speaker 4

We still expect to get the projects over time, but we did have to push them out a little bit. So that was really the primary driver. And I'd say across some projects there were some really related to supply chain matters.

Speaker 3

Mike, can I just jump in on this one as well? I've been involved in large power plants and operations for 25 plus years. I don't think there's been a year in those 25 where I haven't seen projects move from year to year, major projects in terms of outages, in terms of construction timelines differed. And so it's pretty typical in our industry to have a little give and take. So this supply chain challenge that's in front of us will dissipate over time.

Speaker 3

I have no doubt about that. But remember this, we're retiring coal. And so you have to fill that capacity somehow. So these projects aren't going away. It's just a matter of when we plant them and what year.

Speaker 3

And so again, this is pretty typical for the work we do year after year, this give and take. And so, I'm not worried, not concerned and this too will pass.

Speaker 7

Great. Thanks a lot.

Operator

And our next question today comes from Andrew Weisel with Citibank. Please go ahead.

Speaker 7

Thank you. Good morning, everyone. My first question on the new CapEx plan, I see that the new customers you signed up, trying to see how the spending might be in kind of the later years of the plan, but should that number be a bigger run?

Speaker 3

So the $1,000,000,000 equates to 1,000 megawatts of renewables. And so the way this works is Customers subscribe to that and we have certain number of subscriptions, we build out that. And so the 1,000 megawatts Equates to $1,000,000,000 And so does that help? Andrew?

Speaker 7

And remind me, how many megawatts are you up to signed

Speaker 3

We've got one this program started at 120 megawatts. That is fully subscribed and we're now in 2nd phase of subscribing the 1,000 megawatts.

Speaker 7

Okay, got it. So you still got a little way to get to that $1,000,000,000 Okay, great. My next question is, if I compare the old CapEx plan to the new one, it seems I understand there's a roll forward, but it seems like your electric spending is down by about $500,000,000 and gas spending is up by about $1,000,000,000 Is that a conscious shift in strategy or is that just the output of a bottoms up Budget building project process?

Speaker 3

It's really a bottoms up piece. And just let me offer a little bit in the gas. Back in November of 2020, we got a large Pipeline project approved through an Act 9, which is the equivalent of a certificate of necessity. That is folded into this plan. And so as you might imagine, replacing 56 Miles of large transmission pipe, the project is around $5,000,000 I think it's $550,000,000 in that range.

Speaker 3

And so that's a big factor that As you build that bottoms up approach, it shows up in the gas and in this vintage of capital and capital 5 year plan.

Speaker 7

Okay, great. That's helpful. Then just one last one if I could squeeze it in. On the relative growth between the earnings and the dividend, you're targeting the high end of 6% to 8% for earnings. And I know your targeted dividend payout ratio is 60% versus about 64% in 2022.

Speaker 7

You just announced a 5.7 percent dividend increase. Is that a pace that we should expect for the next couple of years till you get to that 60% ratio?

Speaker 4

Andrew, yes, this is Reggie. So, yes, I think conceptually you're right in that you're going to see a decoupling at least in the short term between the earnings growth and the dividend per share growth. So that's what we're showing with this recent increase in the dividend, because we did mention on the heels of the interbank sale that we'll glide down we'll glide path down to a low 60s percent payout ratio. Right now, we're kind of mid-60s and we'll glide path down over time. So you'll see a little decoupling between the earnings growth, which will be a little stronger than the dividend per share growth, but We still think both are healthy and combined offer very attractive total shareholder return proposition.

Speaker 7

Definitely. Thank you very much.

Operator

And our next question today comes from Julien Dumoulin Smith with Bank of America. Please go ahead.

Speaker 2

Hey, good morning team.

Speaker 3

Hey, thanks

Operator

for the time.

Speaker 2

Good morning, Julian. Well done. So perhaps just coming back to a couple of things. The economic development tariffs, just to come to that first here, how do you think about that impacting 2022? Just you mentioned pretty strong industrial load.

Speaker 2

Obviously, Economic development tariffs kind of impact shift those impacts and load sensitivity to earnings sensitivity. Can you talk a little bit about what that could do? I imagine it's not too material, but Curious.

Speaker 3

Yes. So let me offer a little more color on these economic there's 2 pieces. We were very successful toward the end of the year in establishing economic development rate. We filed that in November and as I said, Almost record approval here with the commission and then public service commission and staff, which we see as a really good indicator here at Michigan encourage job growth and jobs here in Michigan. So it's an economic development rate, which is very competitive out there and it's Designed for energy intensive customers.

Speaker 3

The next piece is we worked to achieve economic set of bills that offered incentives To make Michigan competitive. That was offered through, again, bipartisan support through the legislature signed By the Governor, that was close to $1,000,000,000 $1,500,000,000 of incentives here in the state. And so GM, GM made their big announcements, Nearly $7,000,000,000 of investment in Michigan, 4,000 new jobs that is a direct result of that work. And so we feel good by the initial the initial volley here. But as Reggie said, there's and I shared in my prepared remarks, there are more that are considering Michigan and so we see a lot of upside from an industrial and jobs growth perspective and ultimately the spillover benefits.

Speaker 3

Reggie, I don't know if you want to add any additional context to that at all.

Speaker 4

No, I think you laid it out well, Gerd.

Speaker 2

All right. So we'll see what happens this year. Perhaps if I could pivot on Campbell, just super quick if I can. Campbell retirement, as you've alluded to several times already, retirement in the 'twenty five timeframe, that's come up a lot in the IRP and represents a substantive portion of the O and M savings. I think it's order of magnitude $60,000,000 Do you have offsets for this retirement?

Speaker 2

And again, as you think about it, if it's pushed back, for instance, in an IRP settlement? Or again how you would think about that fitting into your plan to the extent of which that moves out if you will?

Speaker 3

Well, in my earlier comments, just to be really clear, $650,000,000 of savings in total Requires the retirement of Campbell 1, 23. And I started my career at that plant. You can't do a partial There, it just doesn't work. And so you need the whole thing. 1, for the savings fees for our customers, but you can't do a partial retirement.

Speaker 3

So that's critically important in this equation and in this IRP. The second piece is when you retire a plant like that, you need the backfill in terms capacity in terms of energy and the lowest cost option of that we proved through modeling is through cohort and through the DIG facilities. And so again, this is why it all comes together quite nicely. And so it's very clear what's necessary to see this type of Savings for our customers to improve the supply side from a resiliency perspective and then also to have a 60% reduction in carbon. So that's how we're approaching Again, a lot of benefits, a lot of wins for everyone and we think we can achieve that.

Speaker 3

Not I think, we know we can achieve that during In 2022.

Speaker 2

Right. And just even further to clarify that, your core base plan, it doesn't reflect Campbell per se. The IRP, should we say, quote unquote, upside as we talked about from a capital perspective and making that affordable is predicated on Campbell, right, just to segment that apart?

Speaker 3

Yes. We need Campbell we need all of Campbell to retire. And again, that's not built into our plans. Not our 5 year plan at all, not the savings, not The capital upside is not in the plans. So just to be clear there.

Speaker 4

Excellent, guys. Well, I wish you the best

Speaker 2

of luck. Let's see what happens in Michigan this year. Cheers.

Speaker 3

Thanks, Julien.

Operator

And our next question today comes from Nick Campanella with Credit Suisse. Please go ahead.

Speaker 10

Hey, good morning everyone.

Speaker 3

Good morning.

Speaker 10

Hey, so most of my questions have been answered, but I just wanted to go back to the electric rate case Quick, absolutely acknowledge really healthy ROE and equity ratio. The commission did seem to push back on capital costs, Specifically with that 1 solar project, I guess at least for this order, can you confirm you're moving forward with that project still? How should we think about subsequent approvals in your clean energy generation capital plan? Understanding it's obviously imperative for the company's de carbonization goals, The commission does seem to be taking a slower approach to at least your initial set of projects here. Thanks.

Speaker 3

I don't agree. I don't agree with that conclusion that they're taking a slower approach. The language is really clear in the ex parte order and in electric rate case, Great case, their support for green energy. And in fact, that Washtenaw project, and it's clear that It's been supported and from a construction standpoint and a regulatory recovery standpoint. Now Reggie will walk through a little bit of the financial piece on how we'll progress with that project here over the course of 2022 2023.

Speaker 4

Yes. Next, again to Derek's point, we feel very confident that it was really a deferred decision by the commission because they did approve the contract in November before Electric rate order and the only reason it wasn't approved in the order is just given the timing in which it was introduced into the case. We do expect to get a constructive outcome in a subsequent filing. And so As a result of that, to Gerrick's point, we'll continue to execute on the project and because of the high probability of approval, we'll recognize AFUDC equity and debt accounting on this project. And so there'll be no P and L drag, if you will, and just a little bit of deferred cash Lower lag on the cash flow side.

Speaker 4

And so we fully expect to move forward on the project and again expect a constructive outcome in a subsequent case. Is that helpful?

Speaker 10

Yes, that's very clear. Appreciate the time today. Thank you.

Operator

Our next question today comes from Jonathan Arnold at Vertical Research. Please go ahead. Good morning, guys.

Speaker 3

Good morning, Jonathan.

Speaker 11

Just a quick question again on the 5 year plan. Thanks for the clarity on what's driving the step up in the gas Hi, that is cleaner. I'm just curious, though, on the electric distribution line, it seemed to take a pretty meaningful step down in 'twenty two. And I think that'll explain most of the delta. Can you square that, Garik, with your comments about customer growth and new connections and the like and maybe sort of maybe the rate case is partly the answer, but Just curious.

Speaker 3

Yes. Specifically for new growth, both electric connections and we have a deferral mechanism on And so we can allocate the appropriate amount of capital for growth and then see recovery in a subsequent case. And so That's been a practice we've had at least the last couple of rate cases that allow us to it's in 3 areas, both in new business, Asset relocations and demand capital. And so that's been very helpful in allowing us to expand our electric capital in year as a result of changes in the environment like great business growth. And so that's an important piece.

Speaker 3

The other piece that I would just again point back to, our electric reliability spend Is robust. It's the largest we've had here across our company, 40% over 2020. But I would offer this. There's better and more important work we need to do in this next electric rate case. We have more capital that we want to invest on behalf of our customers Reliability to offer benefits and improve our performance there and we'll work to engage that into the build that out in the next case.

Speaker 3

And I know Reggie would offer also offer some comments as well.

Speaker 4

Jonathan, the only thing I'd add, you noted that there was A slight dip in the front end of the 5 year plan on the distribution spend. So you can see the little off trend. We tend to and have historically been on about $1,000,000,000 per year spend rate all the reliability work that we know needs to get done in our service territory. The dip in 2022, that's attributable to just aligning The spend plan in 2022 with the rate order, we had about around $100,000,000 or so or thereabouts of this allowance and rate order. And so obviously with the forward test here, we can toggle our plans accordingly.

Speaker 4

And so that's really what's driving some of that decline in 2022, which is a little off trend.

Operator

And our next question today comes from Travis Miller at Morningstar. Please go ahead.

Speaker 12

Good morning. Thank you.

Speaker 2

Travis?

Speaker 12

Back to the IRP, just thinking about timing post IRP, would you get a decision soon enough or have Concrete plans soon enough to weave anything from the IRP into the presumed electric rate case filing this year.

Speaker 3

We're going to follow our electric rate case here in April timeframe. And so that's our plan right now. And so we don't anticipate no initial order could come out very earliest in April And then a final order in June. And so I don't anticipate that that will be woven into this electric rate case.

Speaker 12

Okay. What is your thought on timing of any specific projects or capital, at least generally From the IRP, a year out, 6 months out from the decision, what's your thought there?

Speaker 3

Our intent here is to so again, I don't want to presume approval. I think that would be I don't want to get in front of the commission on that, but again, confidence in a final order by June. And let's play this out, covert dig into the utility. We look to update our plans, our 5 year plans in the kind of the normal cycle to reflect those changes.

Speaker 12

Okay, perfect. And then real quick on the enterprises side, any update to the strategy there?

Speaker 3

Enterprises continues to be an important part of our business, although it was really small part of our business. And just as a reminder for everyone on the call, It's about 4% of our earnings mix. So again, small and then as dig and other facilities move into the utility, that enterprise Group grows even smaller. Right now, it's focused on renewables and Customer relationships and so let me offer a little bit more context around that. For example, a company like General Motors, one of the companies that Enterprise works with, They have long term commitment to sustainability across their global footprint.

Speaker 3

And so they provide Credit worthy party and we have a long contract period. We help them find renewable assets throughout the U. S. And so That's the role we play. We see utility like returns or better in that space.

Speaker 3

And again, we're not out in the auctions. We're not out Didn't squeeze from a margin perspective. It's specifically designed at customer relationships and helping them meet their sustainability targets. And so it's narrow, it's thoughtful, is a small part of our business but important for our strategic customers.

Speaker 12

Got it. Great. Thanks so much. That's all I had.

Speaker 3

Thank you.

Operator

And our next question comes from Anthony Chaudhaut with Mizuho. Please go ahead.

Speaker 8

Hey, good morning. Hopefully, just two quick ones. And I don't know if I'm reading too deep into this, but I think of the 'twenty one Actual at 265, the range you gave for 2022 of 185 to 189, the midpoint there is not Actually towards the high end of the 6th, it's actually above the high end. And this is before any of the additional capital, it seems that you're actually Not even trending towards the high end or above the high end. Was this just smaller numbers and moving a decimal place here or there?

Speaker 8

Or is there more to read through to this?

Speaker 3

Well, here's the good news, Anthony. You said 185 to 189. It's 285 to 2.85 to 2.80. Apologies.

Speaker 8

It's a long morning. Apologies.

Speaker 3

No problem. So again, we're happy with where we landed this year and we've got a lot of momentum coming into the year. And for some of the reasons that Reggie articulated earlier, but you may want to jump in again on this one. But bottom line, we've offered guidance there. We feel We've expanded and raised that guidance and feel good about really good and confident about landing there.

Speaker 3

And as I shared earlier, likely in the midpoint range, A lot of year left, but in the midpoint of that range we offer today. And so again, and then after this and really into 2022, that is the base year will grow at that 6% to 8% toward the high side. Anything else to offer on that, Reggie? No.

Speaker 4

I think you had the key point, Garrett, which is the 6% to 8% Guidance, Anthony, and that sort of confidence toward the high end that is off of the 2022 base. And so I think 'twenty three and beyond. 2022 is a fairly atypical year, again given the sale of the bank and that's why you see a little bit higher growth in the range of $285,000,000 to $289,000,000 off of the 2021 actuals 65, it implies like 7.5% to 9%, but we don't foresee ourselves growing at that clip going forward. So it's just an atypical year as we reduced the dilution from the Enerbank sale and redeployed the capital.

Speaker 8

What has happened for you guys to hit the 6? Like why even to 6 there? It seems that you guys are really fully loaded 7 to 8. I'm just curious what's the scenario where you come into the 6?

Speaker 4

Like Why not remove it,

Speaker 8

I guess is my question.

Speaker 4

Well, I mean even though the range may seem wide on a percentage basis, it's about 0.04 dollars to 0.05 sense on average, Anthony. And so we think that that's plenty of conservative to give us a little room to land the plane. So we feel good about guidance range, which again I think is one of the tightest in the sector.

Speaker 8

Great. And just last for me, I think you said DIGS, the plant was had an extended outage 2021. Just what was the issue and is that plant back in service?

Speaker 4

Yes, the quick answer is back in service. There was a supply line of gas that was feeding into the plant that needed some additional construction work. And having been in the gas business for a long time, we know once that type of work is done, it last about 70 years or so. So we feel good about the fact that that was non recurring and we'll be back at normal operations going forward for the foreseeable future. But just to be clear, it wasn't our gas line.

Speaker 4

It was from a third party, but that's now fixed and we're off and running.

Speaker 8

Great. Thanks for taking my questions.

Speaker 4

Thank you.

Operator

And our next question today comes from Paul Patterson at Glenrock Associates. Please go ahead. Hey, how's it going?

Speaker 3

It's going well, Paul. Thanks.

Speaker 13

Just and I apologize if I missed this, but the normalized storm impact for 2021 that you guys I guess the delta that you guys are thinking, I see that you're combining it with Customer initiatives, how much was the storm what are you thinking about in terms of how should we think storms this year I mean in 2021 versus in 2022?

Speaker 4

Yes, Paul. Thanks for the question. So we've seen at least over the last 4 or 5 years an increase in sort of the I'll say the volume and the intensity of storms. And so service restoration has Have been somewhat volatile. Last year, I'd say, was atypical even relative to the last few years.

Speaker 4

And so I think if you look back from say pre pandemic levels to 2020. We were on a spend rate of somewhere around $70,000,000 to $80,000,000 and then 2021 we were pull on top of that, I think almost 2x to 3x that not 3x, but closer to 2x. And so we just don't See a level of service restoration at those levels in 2022. So, we expect to be sort of we're I think we're having rates About $65,000,000 So we may be a little north of that when all is said and done this year, but we certainly don't think we'll see numbers in excess of $100,000,000 $150,000,000 which is where we were last year. So that's how we're thinking about it, sort of more towards where we are in rates and maybe slightly above that.

Speaker 4

Is that helpful?

Speaker 13

Very helpful. And then just with respect to COVID, I mean, it looks like you guys have done very well during it. And it looks you gave a lot of information on the usage and everything. But I'm just wondering, Is it kind of are we sort of is COVID kind of a non issue at this point should we think about in terms of 2022 and going forward? I mean, obviously, you can't predict the pandemic, but I mean, you're sort of saying, I mean, how do you think of COVID impacting stuff, I guess, in 2022?

Speaker 3

Well, I don't want to minimize COVID or the health effects to people. And so I'm going to be sensitive to my response here. But bottom line, what we've in Michigan here, we're seeing all the economic indicators are headed in the right direction and people have figured out a way Be able to work and live and even play in the midst of a pandemic. And as a company, we found Ways to work safely, with the appropriate precautions in place. And so again, we're not seeing what we saw at the beginning of the pandemic, which was Economic shutdowns and other factors influencing load, it's really on the upswing and all economic indicators are again headed in the right direction.

Speaker 3

And so I would put it in more of a perspective that we figured out how to work within the context of COVID.

Speaker 13

Okay, great. I really appreciate it. Thanks so much.

Operator

And ladies and gentlemen, this concludes our question and answer session. I'd like to turn the conference back over to Gary Gershow for any closing remarks.

Speaker 3

Thank you, Rocco. And I want to thank everyone for joining us today for our 4th quartile earnings call. Take care and stay safe.

Operator

Thank you, sir. This concludes today's conference call. We thank you all for attending today's presentation. You have a wonderful day. Thank you.

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CMS Energy Q4 2021
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