Earnings Call Transcript - CMS Q3 2022

Operator, Operator

Good morning, everyone, and welcome to the CMS Energy 2022 Third Quarter 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. Just a reminder that there will be a rebroadcast of this conference call today, beginning at 12:00 p.m. Eastern Time, running through November 3rd. This presentation is also being webcast and is available on CMS Energy's website in the Investor Relations section. At this time, I would like to turn the call over to Mr. Sri Maddipati, Treasurer and Vice President of Finance and Investor Relations.

Sri Maddipati, Treasurer and VP of Finance and Investor Relations

Thank you, Maxine. Good morning, everyone, and thank you for joining us today. With me are Garrick Rochow, 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 Garrick.

Garrick Rochow, President and CEO

Thanks, Sri, and thank you, everyone, for joining us today. I'm pleased with the results for the quarter and the path to year-end. But before I get into specifics, I want to start with our simple investment thesis, which continues to stand the test of time. You've seen this in our calls and meetings and you've seen the results. It works. This is where we put our words into action. We remain firmly committed to leading the clean energy transformation. As I mentioned on the Q2 call, the approval of our IRP was a proof point, evident that we have a clear pathway supported by the regulatory construct to deliver on our leading clean energy commitment. Our investment thesis is fueled by our commitment to eliminate waste, driven by the CE Way. I put us up against anyone in our ability to take cost out. This year, we are on track to take $50 million of O&M waste out of the business. The CE Way is critical to delivering our operational and financial performance and keeping our service affordable for our customers. Another critical element is our top-tier regulatory backdrop in Michigan. In Q2, we not only delivered our IRP, but we settled our gas rate case. And in this quarter, we received constructive feedback on our pending electric rate case, further evidence of the health of the Michigan regulatory environment. A key part of our investment thesis, which we don't talk about enough, is our diverse and attractive service territory. I'm excited about both the pace and impact of new growth in Michigan. Just this month, our governor announced that Goshen, a global electric vehicle battery manufacturer, selected Michigan for its U.S. expansion over many other states, highlighting another example of onshoring manufacturing within the state. This project is expected to add over 2,000 jobs and provide $2.4 billion of investment. In August, President Biden joined Governor Whitmer at Hemlock Semiconductor headquartered here in the heart of our service territory. Together, they announced an executive directive to guide the implementation of the CHIPS Act, which will boost domestic chip production and bolster Michigan's leadership in the semiconductor industry. Let me put that into perspective. Hemlock is one of the largest polysilicon manufacturers in the world. Nearly one third of the world's chips are made from polysilicon produced at that facility right here in Michigan. In September, Hemlock announced plans to grow its operation. The project is expected to add 170 jobs and $375 million of investment in the state. Ground has already been broken on the expansion. Also, the expansion of SK Siltron, now in operation, a semiconductor wafer manufacturer bringing 150 jobs and over $300 million of investment to the state. These are highlights over the quarter. From the map on the slide, you can see we secured over 80 agreements year-to-date, which translates to roughly 200 megawatts of new or expanding load in our service territory. This growth is bolstered by collaborative and innovative economic development efforts, supported by competitive rates for energy-intensive customers and robust policy, which are working and continue to drive growth. Our work with the Governor's office, the legislature, Michigan Economic Development Corporation, and the commission have made it possible for Michigan to not only compete, but win investment and new jobs. These economic tailwinds are just a few of many we've seen and continue to see across Michigan that will help attract more business, grow industrial, commercial, and residential load and ultimately provide long-term bill relief for all our customers. Our strong commitment to decarbonize both our gas and electric systems is a key differentiator for CMS Energy. The recently passed Inflation Reduction Act is another catalyst for our clean energy transformation, supporting deployment of renewables and lowering costs for our customers. We see a lot of benefit in this new legislation. The extension of tax credits for both wind and solar provides economic certainty and lowers costs for our robust renewal backlog within our IRP which includes 8 gigawatts of solar, as well as the remaining 200 megawatts of wind, we are constructing to meet Michigan's renewable portfolio standard. Production tax credits for solar projects will drive cost competitiveness for utility-owned projects versus PPAs. As we build scale, this cost competitiveness has enabled us to own in rate base a greater portion of future IRP solar investment. The investment tax credit for storage will lower costs and provide greater flexibility as we're able to site storage strategically across the grid. Our IRP includes 75 megawatts of battery storage beginning in 2024 and could accelerate or increase the 550 megawatts of battery storage through 2040. These tax advantages reduce the cost of new solar by roughly 15%, providing annual cost savings of $60 million versus our plan. Also, with the use of tax deductions and credit, we do not expect a material impact in the alternative minimum tax through the remainder of the decade. All of this helps our customers with more savings. It supports our commitment to grow Michigan. It drives the transformation to clean energy and our growing voluntary green pricing program. Bottom line, this legislation is a great tailwind across the board. Now let's get into the numbers. Year-to-date, we've delivered $2.29 of adjusted earnings per share and remain ahead of plan. With confidence in this year, we're raising the bottom end of our guidance to $2.87 to $2.89 per share from $2.85 to $2.89 per share. For 2023, we are initiating our full-year preliminary guidance of $3.05 to $3.11 per share, which reflects 6% to 8% growth off the midpoint of our revised 2022 guidance, and we expect to be toward the high end of that range. And remember, we've always rebased our guidance off actual compounding our growth. This brings you a higher quality of earnings and differentiates us from others in the sector. Our long-term dividend growth remains at 6% to 8% with a targeted payout ratio of about 60% over time. We'll provide you with an update on our guidance, as well as a refresh of our 5-year capital plan on the Q4 call early next year. Lastly, we are confident in both our outlook and our ability to deliver our financial and operational targets for the remainder of the year, which brings me to my last slide. In a few weeks, Michigan will have elections across the state. New people will join the legislature. We'll also see the results of the race for governor. Whatever the outcome, we will work effectively as we have for a decade with whoever holds office. You've heard us say it before. We deliver regardless of conditions, nearly two decades of industry-leading financial performance. You can count on CMS Energy for that. Now I'll turn the call over to Rejji to offer additional detail.

Rejji Hayes, Executive Vice President and CFO

Thank you, Garrick. And good morning, everyone. As Garrick noted, our third quarter results are a continuation of the strong performance we have delivered throughout the year, keeping us ahead of plan and positioning us well to achieve our financial objectives in 2022. To elaborate, year-to-date, we have delivered adjusted net income of $662 million or $2.29 per share, up $0.11 per share versus the comparable period in 2021, largely driven by favorable weather, including more normalized storm activity in our service territory and healthy economic conditions in the state. The waterfall chart on Slide 8 provides more details on the key year-to-date drivers of our financial performance versus 2021. As Garrick mentioned, our solid year-to-date performance has driven our revised 2022 adjusted EPS guidance, which reflects an increase in the lower end of the range to $2.87 from $2.85. So our 2022 adjusted EPS guidance has now been raised and narrowed to $2.87 to $2.89. As noted, favorable sales continue to be the primary driver of our positive year-over-year variance, largely driven by weather, equating to $0.13 per share of positive variance. Our strong sales were partially offset by planned increases in operating and maintenance or O&M expense, largely driven by customer initiatives, which are embedded in rates to improve safety, reliability, and our rate of decarbonization, to the tune of $0.03 per share of negative variance versus the first 9 months of 2021. It is worth noting that the aforementioned year-over-year increase in O&M expense was partially offset by lower service restoration expense versus the comparable period in 2021 as anticipated. Lastly, the $0.01 per share of positive variance in the final year-to-date bucket reflects higher non-weather sales of the utility attributable to continued strong commercial and industrial load in our electric business, slightly offset by a drag from our preferred stock dividend and select regulatory items. As we look to the fourth quarter, we feel quite good about the glide path to achieve our revised full-year EPS guidance range. As always, we plan for normal weather, which we estimate will have a positive impact of about $0.08 per share versus the comparable period in 2021. We're also assuming $0.11 per share of positive variance versus the fourth quarter of 2021 attributable to rate relief associated with the October 1 implementation of new rates from our constructive gas rate case settlement earlier this year. And these estimates are stated net of investment-related costs such as depreciation, property taxes, and interest expense. In addition to said cost, our plan assumes increased O&M expense in the fourth quarter versus 2021 for key customer programs such as vegetation management, one of the most effective measures to reduce system outages. And I'll note that we're on course for a record level of vegetation management spend in 2022, given our focus on improving the reliability of our grid. We also expect to continue to benefit from normalized storm activity, which nets to $0.11 per share of positive variance versus the comparable period in 2021. To close out our assumptions for the remainder of 2022, we assume the usual conservative assumptions for our non-utility business and weather normalized load at the utility. We have also maintained a healthy level of contingency given our strong year-to-date performance which when coupled with our non-utility and load assumptions equates to $0.17 to $0.19 per share, a negative variance highlighted in the chart. As such, we have substantial financial flexibility heading into the final three months of the year, which increases our confidence in delivering for customers and investors in 2022 and beyond. Turning to our 2022 financing plan, I'm pleased to report that we have successfully completed our planned financings for the year with $800 million of debt issuances at the utility priced at a weighted average coupon of 3.9%, which is well below indicative levels in the current environment. While our plan did not call for any financing at the parent this year, we opportunistically priced approximately $440 million of equity forward contracts during the quarter at a weighted average price of $68 per share. Our timely execution of the equity forward locks in attractive terms for the parent financing needs of the pending acquisition of the new Covert natural gas generation facility. The settlement of the equity forward will largely occur in the first half of 2023 concurrent with the acquisition timing and in accordance with our recently approved integrated resource plan. Staying on the balance sheet, as we move into the winter heating season, we have preserved a strong liquidity position, which supplements our use of commercial paper. And needless to say, we'll continue to monitor market conditions to try to lock in attractive terms for future financing opportunities at the utility. Lastly, it's important to highlight that we have no debt maturities or planned financings at the parent in 2023 and virtually no floating rate exposure outside of the utility, which largely insulates our income statement from future interest rate volatility. Our opportunistic and prudent financing strategy reduces costs while limiting uncertainty in our cost structure, enabling us to fund our capital plan in a cost-efficient manner for the benefit of customers and investors. And with that, I'll turn the call back over to Maxine to open the lines for Q&A.

Insoo Kim, Analyst

Yeah, thank you. Thanks for the update. Just first question, I think there's just been a lot of conversation about the recent opening of the docket for the Michigan storm mode process. Could you just give us an indication of the conversations you've had with the commission, kind of where their head's at and what the potential range of outcomes could be here?

Garrick Rochow, President and CEO

Yes. Thanks, Insoo, for your question. A couple of things on this. I think it's important to understand, particularly in August here we had some storm. We performed well during the storm. But again, it's catching a little media attention. And I think one of the things that's really important to recognize here in Michigan is the impacts of the Great Lakes and what Lake Michigan does to the weather and storms. And then also just a longer-term trend we see is increasing wind speeds across Michigan in part due to climate change. The bottom line is we see a real investment opportunity in resiliency. The commission has been supportive of many of the reliability and resiliency efforts in our electric rate case, but there's more to do. There's more to do in this space. I really view this as a collaboration where we can work to improve reliability and resiliency for our customers.

Insoo Kim, Analyst

Is there a set timeline on when we should have more clarity on the outcome from all of this?

Garrick Rochow, President and CEO

There is a first effort that's due here on November 4th. I would imagine the audit takes place over much of the fiscal year of 2023. And again, I see that as a collaborative effort. We want the same thing. We have the same goal, and it's really aligned to ensure we have all the right measures and investments in place to achieve that goal and they're happening at the right speed and pacing.

Insoo Kim, Analyst

Got it. My last question, just thank you for the preliminary guidance on '23 and pointing to that upper end. Should we think of the Covert acquisition and the financing all embedded in that upper end? And I guess, what potential items could deviate from that range even if it could be a potential upside from there? Thanks.

Garrick Rochow, President and CEO

Yeah. The short answer is yes, on Covert and the financing is included in that piece. But I'm going to just step back and think of the bigger picture here. So this guidance here is 6% to 8%, and we expect toward the high end. We really think that offers a premium across the sector. We've been doing this for 20 years of industry-leading financial performance. What’s unique about us, and sets us apart, is that we rebase off of actuals. So we're not interested in sugar highs. It's a long-term play where we're going to continue to deliver toward the high end. I feel good about the guidance we've offered here today at $3.05 to $3.11, and one more thing to note is that this balance matters. We consider our customers, other stakeholders like regulators and legislators, as well as you, our investors.

Shar Pourreza, Analyst

Hey, guys. Good morning.

Garrick Rochow, President and CEO

Hey, good morning, Shar.

Shar Pourreza, Analyst

Morning, morning. So just a question on IRA, I guess, how impacted your thoughts around the IRP. I mean clearly, you guys highlighted the customer benefits and lower costs of solar, but does it or can it trigger, I guess, any sort of revision to the plan as it currently stands? Garrick, I think you may have alluded to a little bit of that in the prepared. And in particular, do you have any sort of tax equity embedded in renewable spending? And do you have any opportunity to avoid tax equity where we could see a potential increase in rate base?

Garrick Rochow, President and CEO

I'll tag team this with Rejji here. This IRA is really beneficial for our industry and beneficial for our customers. As you know, we've laid out our IRP to 8 gigawatts, and the storage build is a good plan. We go in every three to five years to revise that. In the short term, I really see the benefits of the IRA in the production tax credit flowing right to our customers. That's the $60 million per year versus plan. So that, again, keeps our customers' costs low. And remember, this IRP had $600 million of savings already baked in over that, and this is incremental to that. Again, I feel good about that. In respect to my other comments, we'll file and refile our IRP in three to five years. With the IRA, there are upside opportunities in terms of our tailwind opportunities in pulling renewables forward, potentially even storage forward. We’ll have to take a look at that. Again, I see this as a real advantage to utility-owned solar and storage versus PPAs. I know Rejji may have additional comments.

Rejji Hayes, Executive Vice President and CFO

Yeah, sure. I would only add a couple of comments here. The other benefit, too, is just with the continuation of the tax credit for electric vehicles well, that certainly could be a catalyst in accelerating the tipping point of electric vehicle proliferation in Michigan, and obviously, that would bring rate benefits as well because you're growing the denominator in that rate calculation bringing kilowatt hours into Michigan, which we would welcome. So there's a benefit there that should be incorporated into our financials longer-term. With respect to your question around financing, we are not presupposing any tax equity in our funding strategy. So the IRA, there's been a lot of talk about the transferability of credits. I still think there's more guidance required from the IRS and we'll see what type of market develops as a result of the transferability of credits. We certainly do have credits so we can monetize at some point. But at the moment, we're not presupposing any tax equity in our financing assumptions.

Shar Pourreza, Analyst

Okay. Got you. Sorry, just a quick follow-up. It's just I guess you guys have never had a shortage of capital growth opportunities, right? It's always been a function of bills and rates being kind of at the governor's customer rates. I guess, the $60 million incremental in customer savings, does that allow a pull forward of some of that spend because you have that incremental headroom? Or do we have to wait for the additional IRP filing? I guess I'm just trying to figure out how that plays in.

Garrick Rochow, President and CEO

Yeah. I don't think you have to wait until the IRP filing for that. It's really a function of how we build out our capital plan. And as we've shared historically, we look at what the customer can afford. We establish what projects we can execute on, we assess business cases, and we consider the investment mix. So there's a bottom-up buildup for that capital plan. So as we're able to create more headroom or based on affordability of the bills, we’ll look at how we can make those important capital investments into the system that ultimately provide value for our customers. And so that’s the balance we will strike. You'll see it as it plays out here in our Q4 call in the 5-year capital plan.

Shar Pourreza, Analyst

Okay. Perfect. And then maybe just a quick one for Rejji. Just I guess beyond the Covert purchase as you guys are looking at your 5-year plan rolling in more IRP spending into the plan, including renewables, do you anticipate any associated financing need or the issuance last quarter took care of those needs as we're thinking about the current plan and slightly beyond the current plan, I guess?

Rejji Hayes, Executive Vice President and CFO

Yeah. So I appreciate the question, Shar. And just for semantics, we haven't issued the equity yet. We just put in place forward contracts. And so we've locked in the price, we'll issue, obviously, over the course of 2023 and the first half of the year. But the forwards we've put in place really provide for the funding for the parent financing needs at Covert. We have yet to roll out obviously a new 5-year plan, but the current plan of $14.3 billion that we're executing on. As you may recall, we’ve been very consistent in our comments about the equity funding needs being limited to 2025 and 2026, so about $250 million per year in those outer years. Because of the sale of the bank last year, there's no equity needs prior to that. We’ll see what happens when we start to update the capital plan. In addition to the comments Garrick offered on how we think about the capital plan, affordability is a constraint we remain aware of. The other one is financing, and we don’t want to over-lever or over-equitize the balance sheet. So we’ll be mindful of that. And obviously, just the execution and feasibility of the capital plan of executing on the capital plan is the other thing we will think through.

Jeremy Tonet, Analyst

Hi, good morning.

Garrick Rochow, President and CEO

Hey, good morning, Jeremy. How are you?

Jeremy Tonet, Analyst

Good, good. Thanks. Just want to talk a bit more on 2023 EPS guide here, if you could, the drivers. I'm just wondering if you could flesh out for us the contribution you can cover in '23. And when you're thinking about sales trends; what do you anticipate for sales trends for '23? How does that compare to kind of current trends? Just trying to get a feel for upside versus downside drivers within the guidance range?

Garrick Rochow, President and CEO

Sure. I'll start, and I know Rejji will offer some context around it as well. So again, I want to remind everybody, as I stated earlier here, it's 6% to 8% toward the high end, and we're pleased with that. And that includes Covert. As we've said, Covert strengthens and lengthens our plan here. So when I think about this, we're playing a long-term game where we have this consistency and repeatability of delivering industry-leading financial performance. That’s how we’re thinking about it as we move into 2023 and even in the outer years. But Rejji, if you could walk through some of the specifics, please.

Rejji Hayes, Executive Vice President and CFO

Yeah, sure. So Jeremy, again, I appreciate the question. The Covert acquisition, as we discussed in Q2 of this year, we anticipate that being about $0.03 to $0.04 of EPS upside versus plan. The equity financing for that should offer $0.01 or $0.02 on top of that. And so that's all incorporated into the guidance, as Garrick mentioned. We plan conservatively, so we are assuming as it pertains to weather that clearly this year so far has been quite good. We would anticipate a little bit of a headwind just planning for normal weather versus what is a strong 2022 comp. On the non-weather side, we've been surprised to the upside really starting with the pandemic. We've seen a nice uptick in favorable mix with residential load outpacing expectations over the last couple of years. We'll plan conservatively and still assume you see that pre-pandemic level of residential load. I think we are seeing solid momentum on the commercial and industrial side, and we would expect that to carry on into 2023. Those are the puts and takes concerning Covert and sales. The only thing I would add to the drivers for 2023 is clearly, we had a constructive gas rate case settlement earlier this year. We should expect to see the benefits of that increase in rates, which went effective October 1 of this year, start to flow into the heating season in Q1 of next year. So for the first three or four months of 2023. We anticipate a constructive outcome from our pending electric rate case. Those are kind of the primary drivers. You got Covert, conservatism on sales and anticipated rate relief from constructive outcomes. Is that helpful?

Jeremy Tonet, Analyst

Yes. No, that's very helpful. And I just wanted to pivot a little bit to battery storage if I could, just wondering if you could provide some more thoughts on how you think the system could potentially change over this decade, especially if renewable penetration ticks higher than planned from IRA benefits? Is there anything else you're watching out for on this front?

Garrick Rochow, President and CEO

Thanks, Jeremy. That's a great question. In our IRP, we have 75 megawatts, and that has to take place from 2024 to 2027. We've already issued the RFP for that work, and that's well underway. You will see inclusion of that in our 5-year capital plan. What is nice about this ITC and the flexibility offered within the IRA is you can have standalone solar. Typically, it's been coupled with solar. The ability to move storage around and have it be not just a supply asset but also a grid asset provides a greater amount of flexibility for usage. You can see like the value stacking of a storage of lithium-ion and other storage technologies. We look forward to that. We’re going to continue to look at our 5-year plan, but also develop our longer-term strategy and how we might accelerate or think differently about the deployment of lithium-ion and other storage technologies. I know Rejji has some comments on this as well.

Rejji Hayes, Executive Vice President and CFO

And Jeremy, the only thing I would add is it's important to remember that the IRP is iterative in nature, so we will be filing one for the statute at a minimum every 5 years, but our bias will likely be to file sooner than that. The importance of that and the benefit of it is that as we see a potential decrease in the cost curve, whether it’s lithium-ion or any other storage technology, we can incorporate new assumptions in upcoming IRPs. We’re assuming in the full plan over the next 15 to 20 years about 550 megawatts that Garrick noted, the 75 megawatts in the short term but it’s a larger portfolio longer-term. If the cost curve permits it, we will look to pull some of that forward and potentially expand it, particularly with the optionality provided with the ITC using it for standalone storage as well as opting out of normalization.

Jeremy Tonet, Analyst

Got it. That's helpful. And just a real quick last one if I could. Just wondering what the potential impacts for rate payers could be should Palisade successfully reopen? And does this change how you think about future customer savings should this transpire?

Garrick Rochow, President and CEO

Well, I would offer a couple of comments on Palisades. If we get into technical questions, we don't own or operate the plant anymore, and we no longer have a purchase power agreement, which was a significant savings for our customers and power supply costs over the course of the year. Technical questions and related queries should really be directed to Holtec or the Department of Energy and the like. The bottom line is, here's what we've shared with the Governor's office and the Michigan Public Service Commission; we will be open to a purchase power agreement. However, it has to be much more competitive and market-based than it has been historically. We would also expect a financial compensation mechanism on that PPA as a new purchase power agreement. So that’s what I'd offer on Palisades at this point.

Jeremy Tonet, Analyst

Got it. Makes sense. I'll leave it there. Thank you.

Garrick Rochow, President and CEO

Thanks, Jeremy.

Julien Dumoulin-Smith, Analyst

Good morning, team. Thanks for the time. Appreciate it.

Garrick Rochow, President and CEO

Good morning.

Julien Dumoulin-Smith, Analyst

Just starting with preliminary, right? I want to focus on that word. Can you emphasize or piece apart why you used the word preliminary at the outset? What are the moving pieces in your mind, if we can go back to that quickly in terms of when you pivot to a more finalized guidance and what you're watching here in the next few months? I just want to clarify that.

Garrick Rochow, President and CEO

Yeah, preliminary because we rebase off actuals, and that's the short of it. As we wrap up Q4, I feel confident we will deliver within that guidance range we provided, and then we’ll rebase off actuals. When I think about this year in this guidance, we've tightened the guidance and raised the bottom end, which should be an indicator of confidence. I'm really thinking about the midpoint of that guidance. We’ll manage the work, so imagine storms and other things that come our way that we typically deal with. We’ll look for reinvestment opportunities as we go through the remainder of the year. Those reinvestment opportunities derisk 2023 and ensure a path of success for 2023. That’s how it will play out through the remainder of the year. I don’t know if Rejji would like to add to that.

Rejji Hayes, Executive Vice President and CFO

The only thing I would add in addition to it being Q3 and we’ll rebase off actuals in Q4, consider the contingency deployment over the next couple of months. Another variable is obviously we have a pending electric rate case, and we'll have a couple of months more visibility into how that's trending. We’re evaluating potential settlement so let’s see how it goes there. At that point, we’ll have filed the gas rate case, so we’ll assume a constructive outcome but still some variables in place. That’s the other bit of information we’ll look for as we establish our 2023 final guidance on our Q4 call early next year.

Julien Dumoulin-Smith, Analyst

Got it. Okay. All right. Fair enough. Thank you. And then if I can just go back to the last question a little bit. Can you talk about how any revisit of a contract with Holtec and their Palisades could actually feasibly play to that vis-à-vis your IRP and/or RFP processes? Obviously, it's a little less traditional, I get the DOE's involvement is also less traditional. I just want to rehash a bit how that would fit into your ongoing processes that have been crystallized in the near term.

Garrick Rochow, President and CEO

So just for context, I know you know this, Julien, but for context for others on the call, there's 700 megawatts within this IRP; 500 megawatts is dispatchable and 200 megawatts of clean energy. That RFP has been issued; it was issued at the end of September. That’s going to play out. It's been executed by a third party because of the potential for an affiliate transaction with the DIG, so that plays out. We anticipate proposals to be submitted in December. Those will be evaluated again by the third party. That will take until February, and then we anticipate we'll have some direction in that in the May timeframe. I'll likely share it during the May earnings call. That's how it's going to play out. I do not know who will participate in that. Again, it's by a third party. Should Holtec choose to participate with the Palisades plant, and if it comes in at a competitive price, it may be an option out there. Because it's not an affiliate, we would earn a financial compensation mechanism or a return on that. That’s the approach that would play out here over the next several months.

Julien Dumoulin-Smith, Analyst

Got it. All right. I know I can't comment too much on it, but I appreciate it. Thank you very much. Good luck.

Garrick Rochow, President and CEO

Thanks.

Rejji Hayes, Executive Vice President and CFO

Thanks, Julien.

David Arcaro, Analyst

Hi, good morning. Thanks for taking my question. You alluded to it, but just any latest thinking on the electric rate case and potential for settlement? I was just curious what timing you would be contemplating for the next electric rate case filing at this point in terms of the gap between the rate cases?

Garrick Rochow, President and CEO

Well, just a little background, too. I was really pleased with the team. We did a lot of work on this electric rate case to improve the quality of the case. I believe and see it's evident in the fast position on that. It's a constructive starting point that they provided in August. As Rejji shared, we're looking at the potential for electric rate case settlement. That will continue until the case is final. We anticipate PFD in December and then a final order in February. So that's the current status. The longer we have the opportunity in a 10-month cycle. So it will be early in 2023 when we would consider another filing for another electric rate case. That’s a little far out for us; we need to see how this one plays out and ensure we are making the right investments for our customers.

David Arcaro, Analyst

Yeah, that makes sense. Thanks. I was just wondering if you could give the latest in terms of what you're seeing in terms of cost pressures from inflation, whether it be labor, materials, and components, and just how that's impacting the O&M outlook here.

Garrick Rochow, President and CEO

That's a great question. I appreciate you starting with our customers because that's a key piece. Let me give you a fact here. In 2021, we had $75 million of state, federal, and company funds that went to our customers. In 2022, that number was $79 million for context as October to October being the fiscal year for the state. I'm really pleased that we've been able to get money into the hands of our customers. You’ll see from a quarter that our customers have a lower bad debt balance on their bills. They're not carrying a big balance. From an uncollectibles perspective, we're in a quartile 1 position. I feel good because our customers are starting out in a better position. I’m empathetic and sympathetic to their needs. When we look at their bill, about 80% of the gas bill is consumption. It's about 90% on an electric bill; we can influence that through energy waste reduction and energy efficiency programs, and we are doing that. That’s great for them. We’re focusing again with nonprofits and other state and federal funds. Our focus clearly is on our most vulnerable customers here in this time. Broadly, as a company, have we seen material price increases? Absolutely, 17% year-over-year. But we are doing a lot to mitigate that, particularly in the CE Way, $50 million of O&M waste reduction, approaching $90 million on a capital perspective. Our plants performed phenomenally over the summer months. They achieved low heat rates; gas and coal. MISO was bouncing all around the volatility of the market. We saved our customers $500 million year-to-date, looking like $700 million by year-end. We’ve used our gas assets, all these storage fields, to help manage gas cost impacts. You can see we're squarely focused on cost reduction for our customers while creating the necessary headroom so we can make the right investments to improve the system for our customers to manage that. I know Rejji has even more to offer.

Rejji Hayes, Executive Vice President and CFO

Yes, Derek, I think you covered all the key points on the cost side. The only thing I would remind you, David, is that we are still exploring load opportunities as well. The announcement of Goshen from an economic development perspective, a global electric vehicle battery manufacturer out of China, is just the beginning of a likely fruitful period of good economic development opportunities as a result of the good legislation passed over the past several months. The CHIPS Act creates a once-in-a-generation opportunity to bring good load opportunities to Michigan and that positively impacts the equation. I mentioned earlier some of the benefits of the IRA; if it accelerates the tipping point for EV proliferation in Michigan, that aids the load as well. We’re looking at all cost opportunities as Garrick noted, but we’re also looking at top-line growth.

Travis Miller, Analyst

Good morning. Thank you.

Garrick Rochow, President and CEO

Good morning, Travis.

Travis Miller, Analyst

I was wondering; you highlighted the business load, the GC coming in, the industrial load. What does that mean in terms of the mix of capital investment need or any kind of other need when you're thinking about distribution versus generation? Is that type of load something you’ll get more distribution investment to serve it or more generation-type investments to serve it?

Garrick Rochow, President and CEO

It’s a little bit of both, but the immediate emphasis is in the distribution space. These companies are already located here, like Hemlock Semiconductor, building out their load. We’re assessing the existing substations, offering additional redundancy, and building out. In the case of Goshen, they are constructing their facilities and are further behind from a starting point. Again, you will see us run electric lines and build a dedicated substation for that facility. The first steps really show up in the distribution space for these investments. You’ll see those as part of our 5-year capital plan to build and construct those necessary for expanding capacity as Michigan continues to grow. We’ll adjust as we move forward in subsequent IRPs from a supply perspective. Is that helpful, Travis?

Travis Miller, Analyst

Yeah. That helps. It's exactly what I was asking. You answered everything else that I had to ask, so I appreciate it and see you in a couple of weeks.

Garrick Rochow, President and CEO

Yeah, take care.

Anthony Crowdell, Analyst

Good morning, Garrick. Good morning, Rejji. Congratulations on a great quarter.

Garrick Rochow, President and CEO

Thank you.

Anthony Crowdell, Analyst

I apologize, this is real semantics, but I understand if you want to ignore the question. But I think about you talked about the IRP maybe strengthening and lengthening the CMS plan. When I look at the earnings guidance of 6% to 8% towards the high end - if I look at '23 where it's kind of preliminary, it's right now at 7% more than the midpoint. I guess I'm trying to reconcile 6% to 8% toward the high end. Is that just taking 6% out of our planning assumptions? Or is it 6% to 8% towards the high end?

Garrick Rochow, President and CEO

I love your question and I’m not going to ignore it. Going back in history a little bit, even pre-Interbank, we guided at 6% to 8% and always said we had a bias toward the midpoint. That's how we approached it. Our language is definitely different now. It's 6% to 8%, and we expect to be toward the high end moving forward. We’re looking for that repeatability in delivering this industry-leading financial performance. So as you saw in our 2023 preliminary guidance, it's off the midpoint of 2022, but we expect to be at the higher side of that range. We’ll rebase off actuals as we always do, but you can expect year after year that we will continue to maintain that industry-leading consistency that we’ll guide in that 6% to 8% range from the high end. Is that helpful?

Anthony Crowdell, Analyst

Okay. Let’s shot at it and then I’m finished. If I look back to the last 18 years, you all delivered very consistent 7%. Do you view the performance when looking back to '18 that you hit the high end of that 6% to 8% range?

Garrick Rochow, President and CEO

I can only talk about what we have, we’re in the context of the call here and our 2023 guidance. We've provided the range of $3.05 to $3.11, and I would expect we’d be at the top half of that range. Is that clear?

Michael Sullivan, Analyst

Hey, good morning.

Garrick Rochow, President and CEO

Good morning, Michael.

Michael Sullivan, Analyst

Just wanted to ask on - just with your own renewables becoming more competitive post-IRA. I think the current plan has 50% ownership in there. What is the CapEx associated with that? And if you were to be cost competitive across the board and go to 100%, what would that look like theoretically?

Rejji Hayes, Executive Vice President and CFO

Yes, Michael, I assume you're asking about the full portfolio of 8 gigawatts, is that fair?

Michael Sullivan, Analyst

In the current 5-year plan, the IRP that just got approved.

Rejji Hayes, Executive Vice President and CFO

Yeah. For the 8 gigawatts, we've roughly quantified that 50% ownership of that could be around $4 billion. But again, with cost curves reducing the way they are, that was a pre-IRA assumption, so presumably, it could be a lower amount of CapEx. We would expect to own, as Garrick highlighted, greater than 50% over time if we continue to see the cost of ownership be more competitive with the cost of contracting. We will revise those estimates over time. In the 5-year plan, currently, we've got about $1 billion of solar in the plan. We’ll refresh the capital plan in the first quarter as we have our fourth quarter earnings call next year. So we’ll give an update then. But the current plan has about roughly $1 billion in it.

Michael Sullivan, Analyst

Okay. That's super helpful. And then just kind of following along that, again, this is kind of theoretical. But if you start finding that you are more cost-competitive more regularly here, do you limit that at all if that introduces more equity needs into the plan?

Rejji Hayes, Executive Vice President and CFO

Yes. The current construct per the settlement agreement has a natural cap of 60%. It’s effectively a collar from 50% to 60% for ownership. We wouldn’t be able contractually to go above that now. In subsequent IRPs, we could potentially earn more than that. We’ll revisit it. Particularly if we are cost competitive with contracted solutions, we’d like to think that ceiling could come off. I’d emphasize that when we think through the capital plan, constraining factors are three things: affordability so that rate increases remain modest; the feasibility of execution such that we do not significantly grow our workforce because that carries structural cost implications, and balance sheet. We’d prefer not to over-excite or over-leverage the balance sheet to fund the capital plan. These considerations will be taken into account as we construct this latest capital plan scheduled for the first quarter of next year, in addition to subsequent capital plans after that.

Michael Sullivan, Analyst

Thanks, Rejji. Super helpful.

Operator, Operator

That concludes our Q&A session for today. I will now turn the call over to Mr. Garrick Rochow for closing remarks.

Garrick Rochow, President and CEO

Thanks, Maxine, and thank you, everyone, for joining us today. I look forward to seeing you at EEI in a few weeks. Take care and stay safe.

Operator, Operator

This concludes today's conference. We thank you for your participation.