CMS Energy Corporation (CMS) — Q4 2019 Earnings Call Transcript

Good morning, everyone, and thank you for joining us today. With me are Patti Poppe, President and Chief Executive Officer; and Rejji 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. 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 Patti.

Thanks, Sri. Thank you, everyone, for joining us on our year-end earnings call. This morning I’ll share our financial results for 2019 and our 2020 outlook. I'll discuss the roll forward of our five year capital plan and provide an update on key regulatory matters. Rejji will add more details on our financial results as well as the look ahead to 2020 and beyond. And of course, we look forward to the Q&A. For 2019 I'm excited to report adjusted earnings of $2.49 per share. We were able to achieve another year of adjusted 7% EPS growth despite record storms and a variety of headwinds throughout the year. Thanks to our unique operational capabilities that enabled us to adapt to changing conditions by managing the work and driving out costs through our lean operating system, the CE Way. With 2019 results in the books we're raising the lower end of our 2020 adjusted EPS guidance from $2.63 to $2.64, giving us a range of $2.64 to $2.68 with a bias to the midpoint, which is up 6% to 8% from the actual result we achieved in 2019. As we roll our plan forward one year, it reflects an additional $0.5 billion in our five year capital plan at the utility which supports our long term annual adjusted EPS and dividend growth of 6% to 8%. This is in line with our previously announced 10 year $25 billion customer investment plan. There's been a lot of recent discussion around ESV, but it's a topic that is not new to us. Our continued success at CMS is driven by our commitment to deliver on the triple bottom line of people, planet and profit. We don't trade one for the other. While 2019 marked our 17th year of industry-leading EPS growth, it was also a remarkable year for our commitment to people, our customers and coworkers, and our planet. Our customers awarded us our highest JD Power customer satisfaction scores ever and named us number one in the Midwest residential gas. Those satisfied customers were served by a highly engaged and diverse workforce. Our accomplishments on the planet include reaching a settlement in our integrated resource plan, the announcement of our net zero methane emissions goal by 2030 for our gas delivery system, and restoring over 1500 acres of land in our home state. Our ability to meet our triple bottom line is underpinned by world-class performance. We delivered our best ever customer on-time delivery metric, eliminated more than $20 million of waste through the implementation of the CE Way, settled our electric rate case for only the second time in our history, and received a gas rate case order that allows us to invest significantly in the safety and reliability of our large and aging gas system. Although 2019 has been another excellent year of solid performance and record achievements, we are still dissatisfied. We will continue to keep improving as we work to deliver our financial and operational commitments year after year. Now every year you'll see the ups and downs that come our way as illustrated on slide six. Every year, our unique capability of adapting to changing conditions enables us to deliver the results you expect year in and year out. In 2019, we were met with challenge after challenge as storm restoration costs surpassed our full year budget to six months into the year. But we don't make excuses for storms or other weather related impacts on revenue. This is what I love about our model, where we ride the roller coaster for you so you can enjoy smooth and predictable outcomes highlighted by the green line. This model has served our customers and you over the last decade plus, and we will continue to utilize it going forward. I feel compelled to give a shout out to the entire CMS Energy team for the tenacity and agility they demonstrated in 2019. Given the headwinds we faced and the challenges we overcame, I could not be more proud of the results and thankful for the efforts of my coworkers. Like we do every year, we're celebrating on the run and moving on to our next set of priorities and setting new goals. With 2019 behind us and as we prepare to deliver in 2020, we'll continue to make progress on ensuring the safety of our gas system, driving customer satisfaction and delivering on our clean energy plan. The goals we set for ourselves in 2020 are ambitious. As always, they're fueled by the continuing maturity of our lean operating system, the CE Way. Our ability to execute on our capital plan and make the investments our system needs will depend on our ability to see and eliminate waste wherever it is. As we continue to mature in the CE Way, we are creating a culture where all of our coworkers are both motivated and able to fulfill our purpose; world-class performance, delivering hometown service. These simple words mean a lot to us. Our system's capital demands that the utility continue to grow. To that end, we're rolling our capital plan free cash flow and additional year, which will increase the spend over the next five years to about $12.25 billion and supports rate base growth of 7% over that period. This increase reflects a continued ramp-up in annual capital investments in our electric and gas infrastructure to improve the safety and reliability of our systems, as well as increased investments in solar generation assets agreed to in our IRP, which was approved by the Commission last year. It's worth noting that only about 15% of these projects over the next five years are above $200 million, while about 75% of those projects are addressed in multi-year commission orders such as the IRP, which mitigates risk and provides more certainty around execution and regulatory outcomes. We will also remind you that our five-year customer investment plan is limited not by the needs of our system, as that stretches vast and wide across the great state of Michigan, but instead by balance sheet constraints, workforce capacity, and customer affordability. Looking now towards regulatory matters, with the 2016 energy law fully implemented, and with the benefits of tax reform addressed in recent Commission orders, our regulatory calendar for 2020 is much lighter than in recent years. Last year, we agreed to stay out of an electric rate case, and that strategy served us well as we were able to capitalize on some of the cost performance efforts by leveraging the CE Way. We now have the opportunity to funnel some of those cost savings back to our customers and offset some of the capital investment needs. Coupled with our efforts to ramp our energy efficiency savings to 2% by 2021, we will keep customers' bills affordable. We anticipate filing our next electric rate case by the end of this quarter. In December 2019, we filed a request in our gas rate case for $245 million of incremental revenue, including a 10.5% ROE and an equity ratio of 52.5% relative to debt, as we continue to focus on the safety and reliability of our gas delivery system. This case builds on the order in our last gas case where nearly all the capital investments were approved, as you would expect the needs of our system haven't changed that much in just one year. In conjunction with our gas case, we also filed our 10 year natural gas delivery plan, which provides a detailed look into the long-term needs of our gas delivery system and supports our 10 year capital plan. We're thankful for the constructive regulatory environment in Michigan that allows for timely rate orders and forward planning, and the Commission's commitment to working with us to continuously improve the safety and reliability of our system. I'll remind you, regardless of changing conditions around us, our triple bottom line and simple business model has served our customers and investors well and allows us to perform consistently year in and year out. As highlighted on slide 10, our track record demonstrates our ability to deliver the consistent premium results you've come to expect year after year after year. And this year, you can expect the same. With that, I'll turn the call over to Rejji.

Thank you, Patti, and good morning everyone. Before I get into the details, I'd like to share the wonderful news that Travis Uphaus from our IR team and his wife Marilyn welcomed their seventh child, Mark Christine Uphaus on Tuesday morning. So we are wishing the Uphaus family our very best from our headquarters in Jackson, Michigan. As Patti highlighted, we're pleased to report our 2019 adjusted net income of $708 million or $2.49 per share, which is up 7% year-over-year. Our adjusted EPS excludes select non-recurring items, including estimated severance and retention costs from our coworkers at our current coal facilities scheduled to be retired in 2023, as well as recognition of an expense related to the potential settlement of legacy legal matters. The 2019 results of the utility were largely driven by constructive outcomes in our electric rate case settlement in January 2019 and the gas rate order we received in September, which were partially offset by heavy storm activity, particularly in the first three quarters of the year. Our non-utility segment raised guidance by $0.02 in aggregate, largely due to low-cost financings at CMS Energy and solid performance from EnerBank. As we review our full suite of financial and customer portability targets for 2019 on slide 12, you'll note that in addition to achieving 7% annual adjusted EPS growth, we grew our dividend commensurately and generated approximately $1.8 billion of operating cash flow. Our steady cash flow generation and conservative financing strategy over the years continue to fortify our balance sheet, as evidenced by our strong FFO to debt ratio, which is approximately 17.5% at year-end and required no equity issuances in 2019. Lastly, in accordance with our self-funding model, we effectively met our customer affordability targets by keeping bills at or below inflation for both the gas and electric businesses, all while investing a record level of capital of approximately $2.3 billion at the utilities. Moving on to 2020, as Patti noted, we are raising our 2020 adjusted earnings guidance from $2.64 to $2.68 per share, which implies 6% to 8% annual growth off of our 2019 actuals. Unsurprisingly, we expect utility to drive the vast majority of our consolidated financial performance with the usual steady contribution from the non-utility business segments. One item to note is that enterprises EPS guidance is slightly down from their 2019 results given the absence of a gain on the sale of collect assets in the second quarter of 2019. All in, we will continue to target the midpoint of our consolidated EPS growth range at year-end. To elaborate on the glide path to achieve our 2020 EPS guidance range, as you'll note on the waterfall chart on slide 14, we plan for normal weather, which in this case amounts to an estimated $0.06, a negative year-over-year variance given the colder than normal weather experienced in 2019 and the benefit of our gas business. We anticipate that cost reduction initiatives, largely driven by the CE Way and other expected sources of year-over-year favorability, such as lower storm restoration expenses after an unprecedented level of storm activity last year, will fully offset the absence of favorable weather in 2019. It is also worth noting that we capitalized on an opportunity to fully fund our defined benefit pension plan earlier this month, which provides additional non-operating cost savings and EPS risk mitigation. Moving on to rate relief, we anticipate approximately $0.17 of EPS pickup in 2020. As mentioned during our Q3 call, about two-thirds of this pickup has already been approved by the Commission, and the gas rate order we received in September and the approval of our renewable energy plan in the first quarter of 2019. We expect a final order in our pending gas case in October of this year. While we plan to file an electric case in Q1 of this year, the test year for that case will start in 2021. Lastly, we apply our usual conservative assumptions around sales, financings, and other variables. As always, we will adapt to new conditions and circumstances throughout the year, to mitigate risk and increase the likelihood of meeting our financial and operational objectives to the benefit of customers and investors. As we work toward delivering our 2020 EPS target, we remain focused on cost reduction opportunities within our entire $5.5 billion cost structure, the core components of which are illustrated on slide 15. For well over a decade, we have managed to achieve planned and unplanned cost savings to mitigate interior risk and create long-term headroom in our electric and gas bills to support our substantial customer investments at the utility. As we look at 2020 and beyond, we continue to believe there are numerous cost reduction opportunities throughout our cost structure. These opportunities include, but are not limited to, the exploration of high-priced PPAs, the retirement of our coal fleet, capital-enabled savings as we modernize our electric and gas distribution systems, and the continued maturation of our lean operating system, the CE Way. These opportunities will provide sources of interior risk mitigation, as well as a sustainable funding strategy for our long-term customer investment plan, which will keep customers' bills low on an absolute basis, and relative to other household staples in Michigan. Moving on to weather normalized sales, as we've discussed in the past, economic conditions in Michigan remain positive, particularly in our electric service territory, which is anchored by Grand Rapids, one of the fastest growing cities in the country, as evidenced by the statistics on the upper left-hand corner of slide 16. When it comes to Michigan's economy, we are not passive participants. In fact, in addition to directly investing billions of dollars throughout the state annually, we collaborate with key stakeholders across the state to drive industrial activity through our economic development efforts. These efforts have attracted nearly 300 megawatts of new electric load in our service territory since 2016. In 2019 alone, the contracts we signed will support over 3600 jobs and bring in more than $1.5 billion of investment to Michigan. A prosperous Michigan, supported by our economic development efforts, offers multiple benefits to our business model. In the near term, it drives volumetric sales, which support our financial objectives, and longer-term it creates headroom in customer bills by reducing our rates. As mentioned in the past, we also continue to see a positive spillover effect of Fed industrial activity on our higher margin residential and commercial segments over time in the form of steady customer count growth and favorable load trends. As you'll note in the chart on the right-hand side of the slide, we've seen average residential load growth of 1% and 1.5% for the electric and gas businesses respectively, over the past five years when normalized for weather and our energy efficiency programs. To summarize our financial and customer affordability targets for 2020 and beyond, we expect another solid year of 6% to 8% adjusted EPS growth, solid operating cash flow growth, exclusive of the aforementioned discretionary pension contribution, and customer prices at or below inflation. From a balance sheet perspective, we continue to target solid investment-grade credit metrics. Our equity needs are approximately $250 million in 2022 due to the previously noted deferral of our equity issuance means in 2019. We expect our equity needs to be roughly $150 million per year in 2021 and beyond, which can be completed through our ATM equity issuance program, which will likely file along with our shelf during the first half of this year. Our model has served our stakeholders well in the past as customers received safe, reliable, and clean electric and gas at affordable prices, and our investors benefit from consistent industry-leading financial performance. On slide 18, we have refreshed our sensitivity analysis on key variables for your modeling assumptions. With reasonable planning assumptions and robust risk mitigation, the probability of large variances from our plan are minimized. There will always be sources of volatility in this business, be they weather, fuel cost, regulatory outcomes or otherwise. Every year, we view it as our mandate to warn you and mitigate the risk accordingly. With that, I'll hand it back to Patti for her concluding remarks before Q&A.

Thank you, Rejji. Our investment thesis is compelling and will serve our customers, our planet, and our investors for years to come. With that, Chad, would you please open the line for Q&A?

Hey, good morning Patti, Rejji.

Morning, Greg.

Good morning, Greg.

A couple of questions on the year. Rejji, did you mention that the small asset sale gain from enterprises was in the second quarter? Is that correct?

Yes. That's right.

Can you just give us a little more description of what asset it was and what you saw, the rationale for that?

Absolutely. The enterprise specifically sold some transmission-related assets, informally known as switchyard assets, to ITC transmission in the second quarter. We booked a gain of roughly $16 million or $0.04 in Q2. That was part of our plan throughout the year, which is why you'll see sort of an aberrant trend between our '19 actuals and what we anticipate for 2020.

Understood, it may be wrong, but I think you're breaking EnerBank out separately now for the first time. I'm happy to get the incremental disclosure. But can you just give us the rationale for that? And then I have one more question.

Yeah, happy to. EnerBank this year had a wonderful year. As Patti noted, they hit about $2.6 billion, a little over $2.6 billion in assets, which is in excess of 10% of our consolidated asset rationale. We chose to report this segment at this point.

My final question is about the decision to fund the pension. How much did you contribute to the pension? And can we consider the financial benefit of that as the difference between the financing costs and the expected pension return?

Yeah. So starting with your last question first, yes, we did take into account and you should assume that the EPS-related pickup is net of the funding costs. We anticipate about $0.05 earnings per share upside attributable to that. The amount, and you'll see this in the appendix, is a little over $530 million, which allowed us to fully fund our inactive defined benefit plan.

And that was funded from a parent infusion or from off of the actual operating company balance sheet?

The latter. We did a term loan in the interim at Consumers Energy. The term loan funding of that was about $300 million. We had a little bit of excess cash flow that allowed us to fund it with a bit of excess cash, which also helped the EPS accretion attributable to that.

Okay, thank you all very much. Have a great morning.

Thank you, Greg.

Thank you, Greg.

Hi, good morning team.

Good morning, Julien.

Good morning, Julien.

Perhaps just kicking off first, as usual, we're focused on the CapEx in the upward trend and nicely done on the upward of $0.5 billion increase here as you go forward. Can you talk a little bit about the upside trajectory? I suppose, if we take that $0.5 billion just kind of in the latest single year in isolation, going forward and you continue to do that, you end up somewhat in excess of your 10 year plan. So, obviously, we talked about the full, but perhaps this might be an opportunity to elaborate a little bit. And then probably the second question was a time, DE had some pushback on their latest process on procurement in their R&D. Any reasons with respect to your ongoing efforts on the renewable side specifically? What are specific quests on it?

I'll take the first part, and I'll let Rejji take the second part, Julien. The capital plan, the $25 billion capital plan, does have fluctuations year-to-year. You'll see that we've got a five-year look in the appendix of the deck, so you can see what the plan is by year. We do have some opportunities in that $25 billion, and we talked about that after the third quarter. There's certainly demand for additional spend on electric reliability and grid modernization and our gas business. As always, we're working to balance the competing demands for capital internally, having our internal capital battles, if you will, but also making sure that our bills remain affordable, that the capacity to do the work is possible. We have good credibility with our regulators that we do what we said we're going to do. The upside that you see in this first five-year forward adding an additional year is the natural fluctuation, but it all supports the $25 billion plan and that supports our 6% to 8% growth trajectory.

Julien, you inquired about what could enable us to explore those upside opportunities that Patti and I have previously discussed. The main limitations are customer affordability, which significantly affects our ability to access those potential opportunities of $3 billion to $4 billion in our ten-year plan, along with balance sheet constraints and possible workforce capacity issues. As these factors improve over time, we will consider adjusting our plans, but for now, this is our current direction. Regarding your second question about DTE's integrated resources, we won't comment on their regulatory filings. However, if you are asking if this affects our Integrated Resource Plan (IRP) and its implementation, the answer is no. We recently finished the Request for Proposals (RFP) and received approval for our IRP last year. In September, we completed the RFP for the first phase of 300 megawatts of solar, part of a broader initiative to develop solar generating assets totaling 6 gigawatts by 2040. The initial phase, which is about 1.1 gigawatts included in the settlement, comprises 300 megawatts this year, with another 300 megawatts planned for the RFP in September, and the remaining 500 megawatts in 2021, split between rate-based and Power Purchase Agreements. We are actively executing this plan and will submit a new IRP in June 2021 as part of the settlement. That summarizes our situation.

All right. Excellent. I'll leave it there. Thank you all. Best of luck.

Thank you.

Thanks, Julien.

Hi, good morning guys.

Good morning, Michael.

Hey. I just wanted to confirm that the extra $500 million of capital spending that's planned for the next five years is not part of the $3 billion to $4 billion of upside opportunities, right? Because the total 10 year plan didn't really change that much.

That's right, Michael, you've got that right. This is just the one-year roll forward. It shows the modification in the plan.

Got it. Is it an acceleration of spending that you would have done in the second five years of that 10-year plan?

No, it's right in line with our plan to add some additional, the IRP solar that was approved, as well as some additional electric reliability. You can plan on fluctuation between the gas, the electric, and the renewable parts of the spend as the years go forward, so that we can optimize that capital spend to the benefit of our customers. Again, mitigating the challenges that Rejji articulated around affordability and balance sheet. We're always just working the plan to have the highest value capital year after year.

I wanted to confirm that there are no additional equity requirements from this, and it does not appear to be a change in the plan regarding equity. This all seems to be related to ATM and internal programs, correct? There is no block equity involved?

Yeah, that's correct.

Okay. One thing I would maybe you could talk a little bit more about is you discussed a little bit about the attraction of new commercial or industrial customers in your territory. Can you discuss the potential impact on electric load and on your industrial customers as electric vehicles gain traction across the supply chain for the auto industry?

I would say that the industrial loads we are seeing added are largely unrelated to the automotive sector. Michigan is becoming increasingly diversified, with significant additions from the agricultural and pharmaceutical sectors. We are witnessing a diversification in Michigan’s industrial customer base. As the chair of the EEI electric transportation committee, I have had the opportunity to engage with national fleet operators. For example, Amazon participated in our National EEI Meeting in January, discussing their plans to electrify their fleet, which I see as a significant opportunity. While overall electric load growth per capita has not shown notable increases and often declines due to more efficient equipment and lighting, I believe the fleet potential could lead to actual load growth as these ambitions are realized. However, it won't happen overnight, as they will need access to electric transportation at a fleet scale, including the appropriate vehicles and trucks, and that development cycle is lengthy. We will also collaborate with them to site charging stations in a way that maximizes grid benefits and minimizes peak demand increases. I truly believe this represents a great opportunity for the industry, and Michigan will be an active participant in this transition.

Super, thanks very much.

Thanks so much. Hi guys, and congrats on a good quarter.

Thanks, Praful.

Thank you, Praful.

So maybe first, a more big picture step back question. Utilities clearly have been doing well in the current stock price environment, and CMS is clearly doing well as well given the execution. Do you think there is any use of that currency from your perspective, M&A or otherwise that you think you can look at, or is execution primarily the focus at this point?

Yeah, Praful. Our position on M&A versus organic growth has been consistent for some time. We're fully focused on executing on our capital plan. We've got enough to do within our walls. As I've said in the past, we're paying one times book to fund those capital investments. I'd rather do that and pay a premium for somebody else's CapEx backlog. So we're acutely focused on executing on our plan.

Fair enough. Makes sense. Then just quickly on the operating cash flow, then you're looking at the slide 17. You say up 100 from the 2020's $1.7 billion. Just can you walk through that what's the increase that you're seeing in the long-term plan? Connected to that, I saw increased NOL utilization on slide 23. Trying to understand a little bit of the drivers around operating cash flow.

Yeah, so Praful, as you may recall, prior to the enactment of tax reform at the end of 2017 we were on this very healthy trajectory of about $100 million year-over-year or at least year versus prior year budget OCF accretion per year. It has to do with just the fundamentals of this business. We're investing capital, growing rate base, getting solid customer receipts. Full credit goes to our team who manage working capital very well. It's a nice, healthy byproduct of all that good work. The only reason we paused slightly was just due to tax reform and the cash flow degradation effects of that. So we basically took a two-year pause on that level of growth. We guided in 2018 at $1.65 billion; we managed to exceed that. Again, we guided in 2019 at $1.65 billion and managed to exceed that again. We feel like we are back on that sort of $100 million per year increase starting this year in 2020. That’s what we have in the forecast, and we feel very good about that, particularly given the magnitude of the capital investment plan, our ability to manage our costs, and again, just execute well on the working capital front. We believe we have a very nice glide path to continue on that trajectory. Regarding NOLs and credits, we had a significant remeasurement in our NOLs due to tax reform. We still think we have a little bit of utilization left on what's remaining. We also have quite a few business credits that we've accumulated over time, and we expect modest accretion of that, just given some of our efforts in the renewable side. We don't expect to be a federal taxpayer until 2024. There’s a minimal amount we'll pay in 2023, based on our forecast — really not a partial taxpayer until 2024. Is that helpful?

Yeah, that's super helpful. Thanks for that. And then just finally, in terms of storm impacts and storm costs, is there any plan to change what gets recovered or what is allowed to be recovered in terms of storm costs in the current rate case filing?

Yeah, in our next electric rate case, we want to reflect the average service restoration expenses. What we've been recovering in rates is less than what we've actually experienced on the last five year average. We want that to be reflected. But we also want, and believe that with the age of the system, our increased spend on both the fundamental reliability of the system. We've been increasing both the actual spend and the requested spend. We think there's a lot of justification for that to keep up with the age of the system. We will continue to ramp the reliability spend. We also want an accurate reflection of the operating expenses associated with service restoration. And while, frankly, we're working to reduce the cost of every interruption by making our processes more efficient, using technology to respond faster and at a lower cost. We are doing both simultaneously.

Got it super powerful. Congrats again, guys.

Thank you.

Hey, good morning, guys.

Good morning, Shar.

Good morning, Shar.

Just a couple of questions. On your annual CapEx guide in your disclosures, that's closer to the back of the slide deck. There's obviously some shuffling spend between 2020 and 2021, can you just remind us what actually drove this? And can you maybe talk a little bit more about the new CapEx you're introducing towards the back end, specifically on the mix between gas and electric?

Sure, Shar, happy to take that. The shift you probably noticed in what's we're expecting in 2020 in our prior five year plan that we rolled out in Q1 of last year. Instead of this five year plan, it has everything to do with just the timing of the rate case in the forward test years. This current vintage now that we're a year smarter reflects the magnitude of spend we expect in 2021. That aligns nicely with the gas case that's pending, which we filed in December of last year, and with the electric case we’ll likely file in Q1 of this year. That's enabling the shift between 2020 and 2021. The absolute amount for the quantum of capital we anticipate spending on a five-year period one year period is always pretty consistent. But the composition does change over time. That's effectively what you're seeing. For the outer years, I think Patti did a nice job summarizing this — we're just basically losing 2019 from the prior vintage and rolling in another year, going from a '19 to '23 plan to a '20 to '24 plan. As part of that roll forward, you're seeing an expansion more of the solar generation attributable to the IRP, so taking on that final tranche of call it 250 megawatts that will be rate-based. Coupled with additional spend in our electric distribution, reliability related capital investments as well as gas infrastructure spend. That's where you’re seeing the pieces in the back end of that five-year period.

Got it. And then, Patti just trying to beat a dead horse on this, but I just had a follow-up on that incremental capital opportunities you guys have been highlighting. It seems like you're managing O&M well. You have built headroom that continues to improve, the economic backdrop remains strong in your service territory. You kind of highlight you do have balance sheet capacity. I'm curious about the drivers that we are missing as far as you look to pull forward some of that spend. Is there anything else outside of just managing towards that 7% growth target that you see as a function of trying to find the optimal capital projects internally? What’s causing those offsets on those drivers? Because it seems like the drivers lean toward accelerating spend versus not.

One thing I'll tell you about our 10-year capital plan, some people might argue that it's impossible to have a 10-year capital plan because conditions change so much or you don't know enough about the future. I can tell you our 10-year capital plan has a significant amount of meat on the bones. We intend to make sure that we are able to execute the work we have committed to. The ramp up of capital requires a significant operational capability to execute and prepare the workforce. Nationally, there are constraints on attracting talent and building a workforce. So we have to attract the workforce to deliver all that work. We want to ensure our plans are well-timed and well-planned so that we do precisely what we said we would do. We also want to make sure customer affordability is front of mind and that our customers value the investment we're making on their behalf. As an operator myself, I want to be sure my team is ready and prepared to execute the work we commit to. It's easy to write a number in a spreadsheet; it’s another thing to go dig the trench and lay the wire and roll the trucks. So we've got to ensure that we're ready all the way around.

Got it. So the human capital I expect is a bit of a constraint. Okay, great. All right, thanks so much guys. Congrats again.

Thank you, Shar.

Good morning guys.

Good morning, Jonathan.

Good morning, Jonathan.

Thanks for taking my question. So I was going to ask you about the shift in the CapEx from '20 to '21, and I think you've addressed that. So thank you for that. Just one other issue. Now you're giving this breakout of enterprises, bank and the parents, which it sounds like you'll continue to do that going forward, given the size. But should we think Rejji about the parent roughly consistent going forward with this number you're showing for 2020, or is that going to move around out in the five-year plan?

It should increase over time, Jonathan. This is largely at this point, interest expense at the parent. We have $12.2 billion of capital investments that we're going to be funding over this period. We do the best we can in terms of getting low interest rates realized in our debt financings, but conservatively, we'll assume that that segment does increase.

Okay. So you can just basically financing a portion of the underlying growth. I think that's it. I already want to talk on the CapEx, so thank you.

Thanks, Jonathan.

Good morning.

Good morning, Ali.

First question you, Patti, can you just remind us again, as you are looking at the sales data, roughly how much on an annual basis does energy efficiency sort of takeaway from the sales numbers?

So, and this has been part of our 2016 energy law. We have a 1.5% year-over-year reduction target we get economic incentives on. Take the prior year's load and reduce that by 1.5%. We do that through all the nice programs we have, rebates on LED light bulbs and things of that nature. We're facing a glide path to get to a 2% year-over-year reduction. That will be about 2% of our prior year's loads. We anticipate about $41 million in 2020 alone as we glide path up. That will translate to about a 1.5% increase in 2020.

Okay. And so just to be clear, if I look at the numbers for calendar '19, as reported weather normalized was negative 1.4. If we adjust that for your efficiency, then it should be done relatively flat. I know you're on an apples-to-apples basis looking at that being up 1%, I believe in '20 and perhaps beyond that. So can you talk a little bit more about that dynamic, you had growth going up to 1% and beyond?

Happy to. We actually tried to get in front of that question because it comes up quite a bit by offering this new slide 16 in the presentation. You're thinking about it the right way. If you look at that sort of blended, weather normalized electric load for 2019 versus 2018 of 1.4% down, think of that as flat. I’ll also note what's embedded in that 1.4% is a reduction in volume from a very large low margin customer. When you back out the effects of that large low margin customer, our weather normalized sales goes from 1.4% down to about 0.5% down. Take out the effects of energy efficiency and you're now up 1%. You can look across all of our channels for electric and see that trend, which we think is the right way to think about it. We feel quite good about that and think there’s healthy economic growth in our service territory, particularly within higher-margin parts of our supply chain.

Got you. One last question. I know you mentioned that the 2016 energy law is fully implemented, etc. Anything of note in this year's legislative session for us to keep an eye on that may be relevant to you folks or something that you guys are keeping an eye on as well?

No, Ali, I would suggest, particularly here in Michigan, there's nothing really being driven by the elections this fall. The presidential election is going to be a big distraction. Our whole state House has two-year terms and our congressional districts have two-year terms. There's reelection. Our governor did her state of the state last night and she doubled down on her commitment to fix the roads here in Michigan. That's her slogan, not mine. We're happy to support the investment in infrastructure. As we do more road repairs, it's a great opportunity for us to collaborate with our Department of Transportation and our construction work here in Michigan to do our investment infrastructure at a lower cost. Nothing new from a legislative agenda here in Michigan.

Got it. Thank you.

Thank you. Good morning.

Good morning, Travis.

On the gas case, I wonder if you could lay out some of the — I don’t use the word contentious, but some of the more debatable issues that you see coming up there, in particular, the ROE and the decision to go with the higher request.

A couple of things, Travis. First of all, as I mentioned, we have this 10 year natural gas delivery plan that we've filed with our case. That plan has been well vetted, actually collaborated with our staff at the commission in its development, aligning on our priorities. One thing I can firmly applaud our commission for is their commitment to long-term planning that enables better decisions in a one-year case. I feel good about this plan. You can look at our last case and see that over 90% of the capital we requested was approved, indicating that the work we committed to is aligned with what the commission wants us to do. We feel justified in our 10.5% ROE ask. We always ensure that we have adequate justification for that. It yields about a $25 million impact if you take the 10.5% to 9.9%. The commission has a job to do, and they've made it clear that a healthy ROE is important to the utility. A low cost of capital is essential for the benefit of customers and the utility. We look forward to final outcomes of that rate case. What's more important is the volume of capital and alignment with the staff and the Commission on the work we're doing.

Okay, great. You anticipated my question on ROE. So I want to ask that delta number. But broadly on enterprise and EnerBank and especially enterprise. What's your three-year strategy? Any updates to that here in the last quarter or two?

The plan at enterprises has been straightforward for some time. A dig drives the vast majority of the financial performance of enterprises. We have tried to derisk that business on its future earnings potential significantly through the energy contracts we amended and extended about a year ago. We've also locked in a good deal of our capacity open margins over the next few years. We feel this should be steady, predictable performance at enterprises. I'll also note we've done a few contracted renewable opportunities in the last year and a half. We'll look to be opportunistic if we find attractive returns with creditworthy counterparties. Very little terminal value is assigned to those projects. We're not limited against three or four looks at it.

Okay, great. Any of those contracted renewables and the CapEx plan right now?

Not in the 12 that we highlighted.

Thanks, Travis.

Good morning, everyone.

Good morning, Andrew.

I've got one near term and one long term. First on the near term, if you can elaborate. Rejji you gave a lot of good color on the demand trends by class. Are you able to estimate how much of the impact, particularly industrial, is related to tariffs and trade wars? And then what are your assumptions for load growth embedded in the 2020 guidance?

Yeah, we are fairly conservative in our position both in 2020 and also over the course of the five year plan. For electric, we’re assuming about flat to slightly declining. That is our working assumption for really 2020 and beyond. For gas, we’re thinking flat to maybe slightly up based on the trends we're seeing there. In terms of industrial activity, we've talked in the past about the diversified nature of our industrial customers and our electric service territory. About 2% of our gross margin comes from the auto sector. We do have exposure to companies that may have some level of exposure to export/import markets due to trade wars. At the end of the day, the margin we generate mainly comes from our residential and commercial customers. The industrial activity is important for Michigan, and we're very supportive of it through our economic development efforts. A 1% change in our industrial estimated growth probably drives about a half a penny of EPS. There isn't a significant impact when you see variation in the industrial class.

Right, makes sense. Okay, good. Next longer-term question. You continue to point to the midpoint of the 6% to 8% range. Obviously, you've been delivering 7% and that's probably not a surprise. My question is, you show rate-based growth of 7%, excluding the upside opportunities on CapEx. You have some incremental EPS growth from things like energy efficiency and demand response incentives as well as the EnerBank growth. What would prevent you from hitting the high end of the range going forward? Is that equity dilution or any other factors?

As we always balance the ability for our customers to afford the products, we have a sustainable plan. I would also offer that you can see from our track record on years when there had been favorability, we could have delivered more than the midpoint; we reinvested in the business. The consistent performance that you can set your watch to ensures consistency in delivering the expected results year after year. Even at this stage in the year, we're thinking two years out, not just next year. We are always looking for ways to pull ahead expenses. We reinvest favorability for the consistency in the long run.

Sounds good. I'll take my last one. Patti, no story of the month, any quick one you can throw at us?

Let's see. There are many of them. Here's one just off the top of my head. We had a team at one of our service centers, looking at their meter management process. When we went out to talk to them, Garrick Rochow, our Head of Operations observed that this team had a problem with their inventories of meters. Because they have these teams called fix it now teams, which are empowered work teams focused on driving the business, they identified a $2 million savings specifically that can be parlayed to other service centers and change their work process. This CE Way is becoming embedded in our organization and the ability to teach our coworkers to see and eliminate waste, improve their processes reduces what we call their own human struggle. When our coworkers see human struggle that they can reduce it often translates to dollars, makes their job easier, and reinforces that commitment to the ownership of the company. I couldn’t be more proud of the team. Thanks for asking. We had a big debate whether I should include that in the script and I'm very happy that you asked, Andrew.

You had one at your fingertips. Thank you very much.

Thanks.

Good morning, Greg.

Good morning. With the renewables CapEx that you've outlined on slide 22, can you maybe comment on how that contributes to a rate-based growth or as a portion of overall rate-based in the plan?

What that's comprised of is the combination of renewable spend and certainly in the near term portion of the five-year plan to get to the RPS, a renewable portfolio standard of 15% by 2021 as per the energy law. That's the components you'll see instead of the 2020-2021 timeframe. We have good projects in the pipeline that will allow us to get there. The latter portion, as we've discussed in the past, is part of the IRP-related renewable spend. As we start executing on this 1.1 gigawatts tranche, half of which will be owned, half of which will be PPA or contracted, that's what's making up the balance of that. In terms of the rate base component, of the $1.8 billion of capital we plan to spend in aggregate over the five-year period, it probably drives about or represents about 6% of rate base or thereabouts. Not all that significant at this moment, but over time, we expect that to grow some. The majority of the spend, as we've talked about in the past, is wires and pipes. Investing in the safety and reliability of our system, both in gas and electric infrastructure offers the biggest bang for the buck.

Okay, thank you. Congratulations.

Thank you.

Hi, good morning, and congrats on another consistent year.

Thank you, David. Good morning.

Good morning.

So, I apologize if this has already been asked. But with the natural gas distribution plan filed, given such a long-term look, effectively by program, when would you expect really if at all to file for another IRM or another multi-year mechanism? I mean, just given the detail by category in this filing along with the IRT, it seems like you are positioning consumers to work with the commission toward some mechanism in the 2020s?

I have mixed feelings about the long-term plans. The reality is the system is dynamic, the demands are dynamic. One of the great strengths of our plan, as I highlighted in my prepared remarks, is our flexibility. This large percent of our spend is under $200 million, which allows us to file every year. The ability to adjust when conditions change means we do not have a big bet strategy that we’ve employed for over a decade now that served us well. I personally like the flexibility of an annual filing that allows us to adjust as necessary. If our commission prefers to go that route, of course, we would work with them. But the idea of a dynamic plan has more relevance.

Okay, that makes sense. The other item just on the filing. I thought you guys did a good job of breaking out your expectation of cost reductions, starting in 2021 through the 2020s. We've heard a lot about on the electric side, the potential fuel cost savings and O&M. But I was wondering if you could kind of elaborate a little bit following extensive review what kind of big buckets or drivers and trajectory you're seeing at the natural gas side in the 2020s?

On the natural gas side, it's all about efficiency. With each dollar of capital, there are associated O&M costs. By making our capital more efficient, we can reduce O&M costs. We continue to work on driving down our unit costs to reduce waste associated with executing work, leak backlog, and leak response as large O&M expenses. Capital investments that reduce vintage services and service lines lead to reduced operating costs. We also completed a large capital project on automated meter reading for gas meters. That helps decrease O&M expenses by eliminating the need for daily walkthrough of someone's backyard and walking down to their basement to read their meter. We cannot do drive-by meter reads; it’s significantly more efficient and safer for our workforce. There are many opportunities for operating expense benefits associated with waste elimination in the gas business as well.

Great. Thank you. Those are my questions.

Thanks.

Hey, good morning. I guess.

Good morning.

Just on EnerBank. Obviously, Rejji, we've discussed it before. What are your thoughts as far as the pros of keeping it first, the pros of potentially not keeping it?

EnerBank is a valued part of the CMS family. They had a great year and that’s what we think about EnerBank. They were a great contribution here last year and in many years in the past.

Thanks, Chad. Thanks again, everyone for joining us this morning. We look forward to seeing you throughout the year. 2020 is going to be a great one. Thanks so much.