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CMS Energy (CMS) Q1 2019 Earnings Call Transcript

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CMS Energy (NYSE: CMS)
Q1 2019 Earnings Call
April 25, 2019 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, everyone, and welcome to the CMS Energy 2019 first-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. [Operator instructions] Just a reminder, there will be a rebroadcast of this conference call today beginning at 12:00 p.m.

eastern time, running through May 2nd. 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, vice president of treasury and investor relations.

Please go ahead.

Sri Maddipati -- Vice President of Treasury and Investor Relations

Thanks, Rocco. 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.

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Patti Poppe -- President and Chief Executive Officer

Thanks, Sri. Thanks, everyone, for joining us for our first-quarter earnings call. This morning, I'll share our first-quarter financial and operating results and review our regulatory calendar. Rejji will add more details on our financial results and outlook and as always, we'll close with Q&A.

Despite two large storms and an unprecedented polar vortex which challenged our electric and gas systems, we were able to deliver solid first-quarter earnings of $0.75 per share, which are better than our plan. Regardless of changing weather, economy, political or regulatory conditions, we pride ourselves on our adaptability, which enables the delivery of consistent financial results on which you've come to rely year after year after year. We're pleased to reaffirm our full year guidance of 6% to 8% EPS growth based on last year's actual results and are biased for the mids. We're also reaffirming our plans to grow dividends in line with earnings.

Our predictability is enabled by our focus and commitment to our triple-bottom-line of people, planet and profit, underpinned by financial and operating performance, which remains a low-risk and sustainable business approach and it continues to deliver for our customers and our investors. Every dollar of our capital plan is invested with a triple-bottom-line in mind, and we've seen solid support for this thought process over the years, but most recently with the settlement of our gas and electric rate cases, as well as, our integrated resource plan. Our continued focus on needed investments in the safety and reliability of our gas and electric systems and our approach toward a cleaner generation fleet with the modular build-out of renewable energy has been reinforced by these positive regulatory outcomes. The settlement agreement of the integrated resource plan is a great example of how we work with all stakeholders in Michigan.

We're excited to report that our clean energy plan reflected in our IRP, received a broad coalition of support, including the Public service commission staff, attorney general, our customer advocacy groups and environmental advocates. Considering the complexity of this case, the parties involved and the long-term planning of our generation system, this was no easy feat, which is why I'm so proud of all the work our team has put into creating a breakthrough outcome for our company, our customers, and our state. The settlement lays the groundwork for our clean and lean energy future and includes the early retirement of our coal unit, Karn one and two, and the scheduled expiration of our Palisades PPA. The agreement also calls for accelerated energy efficiency, demand response programs and 1,100 megawatts of solar through 2024, of which half will be owned in rate-base and the other half will be contracted with a financial compensation mechanism.

The settlement also includes competitive bidding for future solds, so we can have the lowest cost and cleanest energy for the people of Michigan. Longer-term, the plan calls for a total of 6,000 megawatts of solar and looks at battery storage in the next decade. The modular and low-risk approach coupled with the iterative nature of the IRP filing process provides flexibility and will allow us to take advantage of declining costs and potential technology breakthroughs. We expect the commission decision on the settlement by mid-June.

Looking at our calendar for the year, you'll see another successful quarter on the regulatory front. This included the approval of 525 megawatts of wind in our renewable energy plant, the filed settlement agreement for our IRP and the commission order in our electric rate case settlement in where we have agreed to stay out of an electric rate case until 2020. This quarter was just another demonstration of the strength in our regulatory environment in Michigan. While we are on top of recent regulatory developments, we'd like to take this opportunity to congratulate Dan Scripps in his recent appointment to the commission.

We really look forward to working with Commissioner Scripps moving forward. Our gas rate case is also moving along. The staff having filed their position earlier this month for an additional $146 million of revenue, with support for nearly all of the investments and the O&M we have requested. We'll continue to work with the staff and stakeholders in this case and expect a final order from the commission by September 30th.

With the continued support of the MPSC staff and other stakeholders, our electric rate case settlement allowed for increased investment in electric reliability of $200 million. The case was completed in just eight months after filing and marked only the second time in our history where we settled an electric rate case. The settlement also included deferred accounting for emergent work, which enables us to better plan and manage our electric distribution related to capital investments. One of those reliability projects was a circuit upgrade outside of Grand Rapids.

As part of their project, we needed to disconnect a customer for a few hours during the week. It was the home of an elderly couple and the husband had voiced a concern to one of our coworkers. His wife was sick, and he was worried about keeping her comfortable while the power was out. One of our field leaders, Jimmy Brady, reached out to the customer to understand his concerns better.

What Jimmy found was that they just needed somewhere warm to stay during this planned outage. Jimmy purchased gift cards for gas and dinner and took the extra step to put the gift cards in a get-well card and delivered it to the customer, so he could care for his wife. Now I make calls to customers every week to get direct sense of what they're experiencing with our team, and I heard this story for the first time on one of those calls. Our customer was so touched by Jimmy's kindness that he shared the story with me, he broke down into tears.

He was overwhelmed because he had been working so hard to care for his wife and Jimmy's simple act of kindness hit the spot. And by the way, we completed the maintenance work on time too, continuing to improve our customer's reliability. We don't have a procedure 42-B that they told Jimmy how to live our purpose. We just have people, serving people.

That is world class performance delivering home comfort. Another great example of our purpose at work is our simple but, perhaps, unique business model. Now this is not new and it has lots of runway. At the core of our business model is our ability to self-fund the majority of our needed no-big-bet capital investments.

These needed capital investments are demonstrated by the settlements of our recent gas and electric cases and the approval of our renewable energy plan with 525 megawatts of new wind, the settlement agreement for IRP, which includes 1,100 megawatts of solar in the near-term, and staff support for the capital investments in our pending gas rate case. In fact, less than 15% of project in our $11 billion capital plan are over $200 million, and half of those are renewable projects that have already been approved. While we continue to grow rate base, we remain focused on customer affordability. One of our key strengths is our ability to manage costs.

And while we continue to focus on waste elimination across all of our cost drivers by executing the CE Way, we also see significant cost-reduction opportunities as we retire coal and allow high price PPAs to expire over time. Rejji will cover some of that in more detail. Sales enable us to manage customer prices as our economic development efforts allow us to spread our cost over greater volume. In addition to this, our energy efficiency programs help our customers reduce their usage and ultimately lower their bills.

We earned $34 million through our energy efficiency incentive in 2018, and we forecast it growing to $44 million as we implement our IRP energy waste reduction plan. We're also able to queue-up our sales through our forward-looking rate making process. Finally, we used prudent tax planning and modest contributions from our non-utility businesses further support our ability to deliver consistent premier growth. In fact, despite investing $11 billion of capital into our system over the next five years, we expect customer prices to remain flat after inflation.

Our model has proven durable over the last decade, and we are confident in its continued durability over the next. This simple model and our ability to adapt to changing conditions enables us to continue to deliver regardless of weather, the economy or other external factors. Just look at our track record. 10 years at seven plus percent EPS growth.

We provide consistent premium results supported by strong operations. With that, I'll turn the call over to Rejji.

Rejji Hayes -- Executive Vice President and Chief Financial Officer

Thank you, Patti, and good morning, everyone. As Patti highlighted, we're pleased to report our first-quarter results for 2019, which are slightly ahead of plan despite severe weather experienced during the quarter. We delivered net income of $213 million, which translates into earnings per share of $0.75 per quarter. Our first-quarter earnings per share for 2019 were $0.11 below our Q1 2018 results, largely due to heavy ice forms experienced in our electric service grid in February.

Like always, we plan conservatively, manage the work and continue to be ahead of plan. Despite the storm activity, utility was the key driver of our financial performance in Q1, contributing $0.80 per share, largely due to electric rate case settlement and a relatively cold winter in Michigan, which benefited our gas volume metric sales during [Audio gap]. The utility's strong performance was modestly offset by expected underperformance in enterprises versus Q1 of 2018 due to lower capacity sales [Inaudible] contributable to the residual effects of the 2018 MISO planning resource auction and a planned outage at our Filer city plant both of which were reflected in our full year EPS guidance. All in, we've started 2019 right on track, and we are confident in our ability to deliver another year of consistent industry leading [Inaudible] performance.

On Slide 12, you can see the key factors impacting our financial performance relative to 2018 in our waterfall chart. Favorable weather provided $0.08 per share, positive varience Q1 2018 and rate-related net investments contributed another $0.03. These sources of financial upside more than offset by the substantial storm activity, which negatively impacted earnings by $0.10 a share, the aforementioned underperformance in enterprises and the higher effective tax rate the latter two of which, in line with our expectations and as mentioned are already incorporated in our full-year estimates. As we look ahead to the remainder of 2019 and encouraged by the glide path to achieve our full year 2019 [Inaudible] guide.

As illustrated in the chart, the absence of favorable weather last year is largely offset by the numerous possibilities ahead we execute in the second half of 2018. The remaining nine months also include additional rate related net of investments and the previously settled gas and electric rate cases, and the expectation of a constructive outcome in our pending gas case. Lastly, we expect to realize cost savings across the organization in line with historical trends enterprises's EPS contribution weighted toward the second half of the year. Needless to say, we'll continue to manage the business with focus on executing on our capital plan and identifying additional cost savings, mitigate future risks to the plan, the benefit [Audio gap].

To that end, Slide 13 best illustrates our historical track record of managing the work during periods of uncertainty to meet our operational and financial objectives. As noted in the past during periods of unfavorable weather or other sources of downside, we rely on our ability to flex operating and non-operating levers, to meet our financial objectives without compromising customer service. Conversely, during strong periods, we focus on reinvestment into business to de-risk future years and achieve longer-term benefits for customers and investors. Every year is different, but we manage to deliver for all stakeholders year in and year out without excuses based on our ability to adapt changing circumstances in any given year by self-funding the vast majority of our rate base growth over the long term to minimize the cost-of-bill impact, as Patti discussed earlier.

To elaborate on the core elements of our business model, we've an extensive inventory of capital investment projects of utility due to our large and aging electric gas systems, as noted on Slide 14. As we highlighted on our Q4 call in January, our 5-year capital investment program is approximately $11 billion and is largely comprised of gas and electric infrastructure upgrades and investments in local generation, the latter which was supported by the commission's recent approval by 525 megawatts of wind generation investment to meet the 15% renewable portfolio standard emission. Our robust capital plan will further improve the safety and reliability of our electric and gas systems to benefit customers, evolve our generation portfolio to the benefit of the planet, and extend the runway for EPS growth benefit of investment. It's also worth noting that our capital investment needs remain significant beyond the 5-year period as well.

As we work through regulatory proceedings, most notably the IRP, and our financial planning cycle, we expect that the longer-term capital mix will continue to evolve, and we look forward to providing an update to our 10-year capital plan in the second half of the year. As discussed in the past, we invest in our electric and gas systems at a measured pace given customer affordability constraints in order to execute on capital investments of this magnitude, while maintaining affordable bills, our funding strategy is heavily reliant on the identification of cost-reduction opportunities. And we are confident that we can continue to deliver in this regard. Historically, we've emphasized our substantial focus on reducing operating and maintenance expenses, and we've been successful there in the past with full-plan retirement, capital enabled savings, like our smart meter installations, and attrition management, to name a few.

We'll continue to realize cost savings in O&M through those historical measures, as well as waste elimination driven by the CE Way, among other initiatives. However, we do not discriminate when it comes to cost savings, and we view every component of our cost structure as an opportunity. As we look ahead, there are highly visible cost-reduction opportunities in our power supply cost through the expiration of the Palisades and MCV power purchase agreement, both priced on average around $55 to $60 per megawatt hour, roughly two times the market loss of power in MISO, which collectively should deliver approximately [Inaudible] of savings per year over time. And in the interim, we will continue to realize benefits from modernizing our gas and electric distribution systems to reduce service restoration, gas leak repair costs among other opportunities.

These opportunities coupled with our perpetual search for non-operating cost savings offer sustainable funding strategy for our capital plan, which can keep customer bills low on an absolute basis and relative to other household staples in Michigan depicted in the chart on the right. From our perspective, paying roughly $5 a day combined for safe and reliable electric and gas delivery in the residential channel is an extraordinary value proposition, the importance of this service to today's standard of living and the substantial cost required to own and operate these systems. In addition to our emphasis on strong cost controls, our self-funding strategy also benefits economic development. Slide 16 highlights our success in contracting new industrial activity in our service territory over the past years, which has supplemented modest organic growth in our residential and commercial segments.

2018, we attracted over 100 megawatts of new load, which was up from 69 megawatts in 2017. And we're targeting another 100 megawatts in 2019 and are right on track with over 25 megawatts secured in Q1. Our load growth in these efforts will collectively offer roughly 5,500 jobs, $2 billion of investment in Michigan, and included companies ranging from internet-based retailers food manufacturers, among other industries. This level of sector diversity in our new load is indicative of our electric service territory, which represents about two thirds of our revenue and is often misperceived as highly cyclical.

In fact, in 2018, approximately 2% of our customer contributions came from the auto industry as noted in the pie chart on the right-hand side of the page. Our proactive efforts on economic development and strong track record of realizing cost savings on our growth, not only enable us to perpetuate our success for the long-run, but also de-risk our financial plan in the short-term when we over achieve in the year. And over achievement has become a habit, which is a nice segue to our 2019 financing plan. On Slide 17, you'll see that our financing plan is largely de-risked for 2019 due to opportunistic transactions in 2018 and year-to-date.

In the first quarter, we completed just under $1 billion of debt financing from parent, including a $630 million 6-year hybrid issuance, which garners up to 50% equity credit S&P, and an attractive rate 5.875% pre-tax. We've also completed roughly $250 million forward equity issuance for our ATM program over the past 12 months, which eliminates pricing risk for planned equity issuance needs through 2020. As we evaluate the potential sources of volatility for the remainder of the year, the accelerated execution of the majority of our financing plan, early settlement of our electric rate case, and the aforementioned 2018 pull-aheads reduce probability of large variances in our plan. There will always be sources of volatility in this business be they weather, fuel cost, regulatory appeture or otherwise.

And every year, we view it as our mandate to do the warring for you and mitigate the risk accordingly. And with that, I'll hand it back to Patti for some closing remarks before Q&A.

Patti Poppe -- President and Chief Executive Officer

Thanks, Rejji. With our unique self-funding model, enhance privacy CE Way, a large and aging system and need of capital investment, a constructive regulatory framework and a healthy balance sheet plan cost effectively, we believe our financial performance is sustainable over the long term. With that, Rocco, please open the lines for Q&A. 

Questions and Answers:

Operator

Thank you very much Patti. [Operator instructions] And today's first question is from Greg Gordon of Evercore ISI. Please go ahead.

Greg Gordon -- Evercore ISI -- Analyst

Hey, good morning. How are you guys?

Patti Poppe -- President and Chief Executive Officer

Good morning, Greg.

Rejji Hayes -- Executive Vice President and Chief Financial Officer

Good morning, Greg.

Greg Gordon -- Evercore ISI -- Analyst

So I mean, I think it goes without saying 'cause you've been very clear. But you know, you had a very rare, modest miss versus streak consensus in the quarter because you had such extraordinary storm activity, but given your historic ability to manage the business, you don't have any concerns about being able to bring in the earnings expectation as you articulated for the year. Just because the first quarter was was challenging correct?

Patti Poppe -- President and Chief Executive Officer

That's correct, Greg. You know we always adapt, and as we mentioned, we're ahead of our own plan. And so we're very confident in our ability to continue to deliver as always.

Greg Gordon -- Evercore ISI -- Analyst

Thanks. And then I'm sure there'll be a lot of questions on the regulatory activity, so I'll leave that for other people. I had a sort of an esoteric question on the DP call yesterday. We talked about why they don't have -- and I don't think you guys have either a large amount of lithium ion battery storage built into your expectations for future infrastructure needs, and they pointed to the fact that because you guys have to Luddington storage facility, and it's such a large and unique asset that it really creates the balancing capacity you need.

So that battery storage may not other than in very unique circumstances necessarily be a big part of Michigan's future needs. Is that is that a fair assessment or not?

Patti Poppe -- President and Chief Executive Officer

Well, first of all, yes, Luddington is storage and it's 2,200 megawatts of storage. So yes, we love that. In fact, as you've been there, Greg, I know you visited the site. We have 6 of the world's largest motors at that location.

6 500,000 horsepower motors. It is a sight to be seen. So anyone who hasn't been there, open invitation. But yes, so, obviously, we have a lot of experience actually pricing-in storage on a daily basis.

What we're waiting for -- and I think we do see more storage and in fact, in our IRP, we have storage toward the latter half of the plan -- what we're waiting for is the price curve. And I'm very confident that price curve will materialize and with all of the research that's under way with lithium-ion for vehicles today, but maybe there will be a breakthrough in solid state. I look forward to that. I think storage is going to be important on the grid to balance voltage and do voltage control for our solar installations that are going to be distributed across the state.

So we are hopeful for storage and a technological breakthrough in that, but we don't need it to execute our IRP plan until the last part of the 20-year plan.

Rejji Hayes -- Executive Vice President and Chief Financial Officer

Greg, the only point I would add is in addition to Luddington as you likely know. We also have peaking capacity in the form of our car in three and four facilities, which is over gigawatts. So that also supports us as we flush out the renewable plan.

Greg Gordon -- Evercore ISI -- Analyst

Great. Thank you guys, have a great morning.

Patti Poppe -- President and Chief Executive Officer

Yup. Thanks Greg.

Operator

And our next question today comes from Jonathan Arnold of Deutsche Bank. Please go ahead.

Jonathan Arnold -- Deutsche Bank -- Analyst

Yeah. Good morning, guys. Just have a question on -- so enterprises and and that segment came in at nothing further first quarter, and you said it's going to be more weighted to the second half is -- is that really going to be mostly a Q3 segment now. With the shift to more of an energy contract? So is it more sort of linear through the second half.

Can you just give us a bit more sense on the timing there?

Rejji Hayes -- Executive Vice President and Chief Financial Officer

Yeah. I would say it's certainly more backend weighted, and I would say it's more weighted toward Q3 and Q4. You'll get a little bit of pickup in Q2, but mostly Q3 and Q4, and the reason why that is -- Jonathan, is we had lower capacity sales, and that had to do with the fact that we had to basically sell about 400 megawatts of capacity at DIG in the planning reserve auction in MISO in mid 2018. And as you know, the planning year runs from basically, May of the prior year to June of the subsequent year, and so we've got about two quarters of exposure in 2019 of those lower capacity sales.

The reason why as you may recall that we had to subject ourselves to MISO planning reserve auction, is that we held 400 megawatts of capacity in escrow, effectively at DIG as part of the potential Palisades early termination in 2017, and so we'll wear that for a couple of more -- a couple of quarters, it's in our plan. And so we would expect that that would recover over time we've already sold through capacity through 2020. And so we feel pick up, some in Q2, but most of -- most of in Q3 and Q4.

Jonathan Arnold -- Deutsche Bank -- Analyst

And so by extension then, Q1 of next year should probably be more positive than Q1 of this year.

Rejji Hayes -- Executive Vice President and Chief Financial Officer

Yeah. You would think because again, we've sold capacity through 2020 around $2 to $3 per kilowatt month, and so we would expect to get a more favorable comp in Q1 of 2020 certainly versus Q1 of '19.

Jonathan Arnold -- Deutsche Bank -- Analyst

OK. Great. And then just one other item you talked about expecting energy efficiency earnings to increase from $34 million to $44 million or so as you implement the IRP. What's the timing on getting to that higher level? Is it -- It's not, it's not for a year or two or is it sooner than that?

Patti Poppe -- President and Chief Executive Officer

Yeah. Jonathan, great question. We're going to phase that in. We're going from 1.5% in our electric business energy efficiency to 2%, and that's when we get to that 2% that it takes it to $44 million and that'll be mid 2020.

Jonathan Arnold -- Deutsche Bank -- Analyst

Mid 20 -- OK. great. That's it. Thank you.

Rejji Hayes -- Executive Vice President and Chief Financial Officer

Thank you.

Operator

And the next question comes from Michael Weinstein Credit Suisse. Please go ahead.

Michael Weinstein -- Credit Suisse -- Analyst

Hi, good morning.

Patti Poppe -- President and Chief Executive Officer

Good morning.

Rejji Hayes -- Executive Vice President and Chief Financial Officer

Good morning.

Michael Weinstein -- Credit Suisse -- Analyst

Hay, question on the financial compensation mechanism. So I realize that there's continuing talks about this. But at 5.88%, that's above short-term debt, but belongs probably below the overall cost of capital -- weighted cost of capital to the company. I'm just wondering if this is 5.88% that was settled, is this like a kind of opening bid like if things go well later on, people might be more amenable to raising that number if, you know -- as long as the markets seem OK with it.

You know, the solar markets seem OK with it.

Rejji Hayes -- Executive Vice President and Chief Financial Officer

Michael, it's good question. So just to be clear, the 5.88%, that does reflect our WACC, our weighted average cost of capital. And that was what was agreed to in the settlement. And so we think that's the appropriate level for an FCM, particularly given the fact that we'll be able to own and rate base effectively half of the solar investment opportunity over the next few years.

And so the 1,100 megawatts that we agreed to effectively through 2024, we'll get 550 megawatts of that. And then, as you know, the filing and the IRP itself is an iterative process per the statute and so we've agreed per the settlement to file again in June of 2021. So we'll see where the fact pattern is at that point obviously cost of capital moves all the time. And so make sense to adjust at that point and suggest something else we look to do that at that point.

Patti Poppe -- President and Chief Executive Officer

To be clear, we're really excited about that FCM. It gives us optionality in the best way to have the lowest cost energy delivery and supply. We are very happy with the outcome of the IRP. We think it really reflects our values, and we think it reflects our business model.

And it just allows our business model of ample capex backed up by our ability to do it at the lowest cost to protect customers from affordability constraints. It really fits right into our plan.

Michael Weinstein -- Credit Suisse -- Analyst

OK. Could you -- I mean, could you characterize kind of what the discussions are surrounding at this point over the next month or two? What do the solar advocates want at this process at this point?

Patti Poppe -- President and Chief Executive Officer

Well, to be clear, what the -- there's a range of solar advocates. We had the sierra club, the NRDC sign onto our settlement. And certainly, they're solar advocates. I guess, I would consider us solar advocates.

We all agree that solar has an important role to play here in Michigan, matches our low profile extremely well, and combined with things like Luddington and Karn, as Rejji mentioned, we've got a really nice mix of supply. So the conversation has been how to do that at the lowest cost possible. And we feel very excited about the competitive bidding process for the supply resources. We think that's an important stand to take on behalf of the people of Michigan, that we want to make sure we have the lowest cost resources on the system, and have optionality around the capex that surrounds that so that we can invest the next best dollar where it needs to be invested in the entire system.

I would say some of the large out-of-state kind of profit-maximizing solar developers don't love the outcome because they're going have to compete on price and not lean on PURPA. And that PURPA loophole doesn't work, and it saddles the Michigan customers with unnecessary high-priced solar. And so I would suggest that our commitment to competitive bidding really changed the nature of the discussion here in Michigan that we're going to stand for the lowest cost and cleanest energy resources for the people that we serve.

Michael Weinstein -- Credit Suisse -- Analyst

Gotcha. Thank you very much.

Rejji Hayes -- Executive Vice President and Chief Financial Officer

Thank you.

Operator

Next question today comes from Julien Dumoulin-Smith of Bank of America.

Julien Dumoulin-Smith -- Bank of America Merrill Lynch -- Analyst

Good morning. Thanks for the time. Congratulations.

Patti Poppe -- President and Chief Executive Officer

Hey, Julien.

Rejji Hayes -- Executive Vice President and Chief Financial Officer

Hi, Julien.

Julien Dumoulin-Smith -- Bank of America Merrill Lynch -- Analyst

Hey. So perhaps, just to reconcile this, just a high level. The IRP, obviously, you've got just about over a gig of potential opportunity here. It split between rate base and PPA.

How does that reconcile with your current capex budget at the end of the day? And then, maybe a second, but related question is, how do you think about updating the needs for generation over time here? What, what would that timeline look like and how could that reconcile against what you all have here in the IRP today? And I know that's somewhat of transient question right, it'll change over time.

Rejji Hayes -- Executive Vice President and Chief Financial Officer

Yeah. So, Julien, good question. I'd say as it pertains the 5-year plan, we don't see a great deal of, I'll say, capital investment impact on our 5-year plan. So as you know, we're about just over $11 billion, most of which is wires and pipes capital investment.

We got $1 billion of renewables in our plan, but that's largely attributable to win build out basically to get to the 15% RPS. And so lot of the capital investment opportunity that's coming out of this settlement agreement is really beyond this 5-year plan. So you'll see some of it, we'll take ownership of some of it kind of in the '22, '23 period, but not a great deal. And so it's also worth noting that you're going to have Karn one and two in the outer years of our plan come out, if we succeed in retiring that plan in 2023, as promised.

And so when you think about the puts and takes, you'll see probably a net neutral impact, I'd say, next five to six years. Now the bigger opportunity going forward is, as you look at the incremental five gigawatts that we'll build out over the next decade plus, I think, in your six to 10 of a potential 10-year plan, you'll see more significant capital investments on the solar side. And so there could be upside there. And again, we've talked about in the back half of this year offering a new 10-year plan, which likely reflects some of that.

And then, if you think about the capacity buildout, I'll say a couple of decades from now in our capacity plan, we're going to be losing, over time, about four gigawatts of capacity. So you're going to see two gigawatts come off in the form of the MCV and Palisades, PPAs and then other two gigawatts come off over the next 20 years as we retire the coal fleet. And so substantial capital investment opportunity on the solar side over time, and we think that offers potentially around $3 billion of capital investment opportunities, you think about the spend on the capital side through 2030. So quite a bit of opportunity, but early days, of course.

Patti Poppe -- President and Chief Executive Officer

I would also offer that the capital opportunities on our entire system are not -- we don't require all of our investment to go into supply. It's not the, I'd say, the investment mix of the past. The opportunity to have distributed resources is going to require significant amount of grid investment as well to make sure that we can integrate those distributed resources into the grid and make sure that our reliability is high. So the mix between distribution and supply is going to shift to distribution as well as in our gas system.

And so when I talk about looking for the next best place to put a capital dollar, everyone can remember, and always remember that this is not a question of building up rate base, this is a question of how best to affordably deliver the capital that delivers the customer value and customer service, the reliability. All of those things are driven by how much capital is required in the system. So the system needs are driving the capex. We're not trying to backfill capex and searching for capex, and using supply as a means of doing that.

We're trying to figure out the best way to deliver the services for customers with all the capex that needs to be done and to be able to do that affordably.

Julien Dumoulin-Smith -- Bank of America Merrill Lynch -- Analyst

Got it. Just to clarify, I know you've got about $1 billion-ish in the plan today for renewables. When you talk down the materiality of '22, '23 solar, it's more because it's something of a rounding within the wider plan contemplated?

Rejji Hayes -- Executive Vice President and Chief Financial Officer

Yeah, that's right. And so you basically, in the outer years of plan, you'll start to take ownership of some of that 550 megawatts. But again, as we always talk about, the constraint on our capital plan is really affordability. And so we think based on the 5-year plan we rolled out on our Q4 call that $11 billion -- little over $11 billion of aggregate capital investments is what or customers can comfortably afford, as well as, our balance sheet, I might add.

And so the composition of that capital investment program may change a touch as we look at the outer years of the plan. But I would say, for now, it's primarily wires and pipes. Again, you may get a little additional solar, but we think $11 billion is right at this point in time.

Julien Dumoulin-Smith -- Bank of America Merrill Lynch -- Analyst

Got it. All right. Well, thank you again, very much. All the best.

Rejji Hayes -- Executive Vice President and Chief Financial Officer

Thank you.

Patti Poppe -- President and Chief Executive Officer

Thanks, Julien.

Operator

And today's next question comes from Stephen Byrd of Morgan Stanley.

Stephen Byrd -- Morgan Stanley -- Analyst

Hi, Good morning.

Rejji Hayes -- Executive Vice President and Chief Financial Officer

Good morning.

Patti Poppe -- President and Chief Executive Officer

Good morning, Stephen.

Stephen Byrd -- Morgan Stanley -- Analyst

I wanted to go back to everyone's favorite topic, the financial compensation mechanism. Really interesting and really innovative approach. I guess, the mechanic that ultimately got used here is a bit different than what you had proposed, but it strikes me that the result is broadly in line with the approach that you had initially proposed. Is that a fair characterization?

Patti Poppe -- President and Chief Executive Officer

That's a fair characterization. You know, at the end of the day, we wanted to -- first of all, the forward agnostic around who builds and who owns these assets. We wanted to make sure that we had the proper alignment, that we have the lowest cost supply resources on the system. And so conceptually what we're talking about is making sure that the reflection on our balance sheet of our being this high quality off taker for any kind of contract, there's no way a developer gets that contract or the financing approved without us being the off taker, that that's reflected.

And there's an impact on our balance sheet, at least the way S&P calculates, and so conceptually, that's what the SEM is intended to represent. And so we're very happy with this outcome. We think it's a new standard and really gives us a position to advocate for customers fully.

Stephen Byrd -- Morgan Stanley -- Analyst

That makes sense. And then my next question is really longer term when you think about renewables. In your discussion with a variety of parties in the state, this concept of basically splitting ownership versus PPA, a 50-50 split beyond the 1,100 megawatts in kind near-to-medium term. Is that an approach you think that has buy in in the longer run within the state?

Patti Poppe -- President and Chief Executive Officer

Well, it is and it worked for the 2008 energy law. As we filed subsequent IRPs, we could revisit it. We actually didn't go in asking for the opportunity to own -- our original filing did not include an opportunity for us to be guaranteed the right to own. But through the discussions -- and that's what healthy about settlement process, you can have really in depth discussions with the parties to come to a conclusion that everyone really can live with.

And so the settlement process has served, I think, the people of Michigan very well in this scenario. And certainly, you, our investors, are equally well served through the outcome of this IRP.

Stephen Byrd -- Morgan Stanley -- Analyst

Great. Thank you very much. That's all I had.

Patti Poppe -- President and Chief Executive Officer

Thank you.

Rejji Hayes -- Executive Vice President and Chief Financial Officer

Thank you.

Operator

And our next question today comes from Praful Mehtaf, Citigroup. Please go ahead.

Praful Mehta -- Citi -- Analyst

Thanks so much. Hi, guys.

Patti Poppe -- President and Chief Executive Officer

Good morning, Praful.

Rejji Hayes -- Executive Vice President and Chief Financial Officer

Good morning, Praful.

Praful Mehta -- Citi -- Analyst

So maybe just firstly on the quarter on the storm costs. This is something we've seen across the space where companies have had, utilities have had, you know, challenges with storm costs. What is the threshold we should be thinking about as it relates to CMS in terms of what size storms are recoverable? What size storms are not? And how do you see this going forward as an impact to your earnings?

Rejji Hayes -- Executive Vice President and Chief Financial Officer

Yeah, it's a good question, Praful. So recoverable, I'll go about that in a couple of ways. So there's recoverable in the form of what's in rates, and then there's recoverable in the form of what we do have transmission and distribution insurance which also offers a little bit of risk mitigation. And so in terms of what's in rates, the amount of storms that we realized over the course of Q1 is already in excess of what's currently incorporated in rates.

So we do plan conservatively. And so in our budget, we did assume that there would be service restoration needs in excess of what's in rates. And then, as you think about the insurance programs we have in place, then it's a function of the deductibles you have and whether a particular storm exceeds that deductible and that's what allows you get recovery. And so, as you may recall, when we had the significant storm activity in March of 2017, we actually got quite a bit of claims back our way because of the levels of deductible at that point.

And admittedly deductibles have gone up a bit, and so I would say that you need a pretty substantial storm activity to get insurance recovery, but we did get some recovery of the storms we saw in early February in the Grand Rapids area. Is that helpful?

Praful Mehta -- Citi -- Analyst

Yeah. That's a super helpful color. I appreciate that. And maybe for the second question, you guys talked about the runway of the plan where cost management clearly is something that you guys have executed successfully.

And one important part of that is these PPAs rolling off. I guess, as these PPAs do roll off, do you see limited scopes going beyond that? Or do you see this horizon of the ability to kind of manage costs and keep rates low, while you get out and capex even beyond that PPA roll off?

Patti Poppe -- President and Chief Executive Officer

Oh, Praful, the cost savings, as far as the eye can see, and it's certainly the PPAs, I like to call those, well, I call them our cash for clunkers because those PPAs are out of market, they're high priced. And when we replace those with fuel free energy, it really is an amazing combination to grow earnings, while we're reducing costs for customers. So certainly, we've got in the 5-year plan, ample cost savings. But beyond that, our abilities that we are creating through our Consumers Energy Way to see and eliminate waste on-demand are still in their early stages.

I'm just watching the team really develop the skills to see and eliminate waste that reduces the human struggle for our coworkers as they're attempting to serve customers and at the same time reduces cost and improves the customer experience. And so rest assured, there is -- our, our simple unique business model has lots of runway. This model lives. We've got ample capex, lots of cost yet to be reduced and then that just protects our customers from affordability constraints and enables positive regulatory outcomes.

It improves service to customers every single day. So rest easy, the model lives.

Praful Mehta -- Citi -- Analyst

Great story, guys. I really appreciate it. Thank you.

Patti Poppe -- President and Chief Executive Officer

Thanks, Praful.

Rejji Hayes -- Executive Vice President and Chief Financial Officer

Thank you.

Operator

And our next question comes from Andrew Weisel of Scotia Howard Weil.

Andrew Weisel -- Scotia Howard Weil -- Analyst

Hey, good morning, everyone. Just another question on the FCM. The WACC, I believe, is -- as you've previously discussed a little bit, it's relatively low at 5.88%, but I believe that's because of the deferred taxes in your capital structure, right? So can you remind us what percent of the cap structure is deferred taxes? And over how many years, you expect to work that down to zero?

Rejji Hayes -- Executive Vice President and Chief Financial Officer

Yes. So you're right, Andrew. And so the 5.88% WACC that we agreed to as part of the financial compensation mechanism, that is on an after-tax basis. It does take into account, what I'll call, that 20% or just under that of deferred federal income taxes that are a component of a rate making capital structure.

I can't tell you exactly when that will amortize down to 0, but I can say, directionally, as you think about the glide path for refunding customers effectively, the deferred income taxes that we collected over the last several years is part of normalization. And then also as part of the settlement for unprotected assets and liabilities at some point will be returned to customers. I would say you'd have a gradual, somewhere between $35 million to $45 million reduction in that deferred federal income tax component of a rate making capital structure over the next several years. So probably, 35 to 45 years depending on the asset class, electric amortizes a little faster because it has a little bit shorter useful life than the gas assets.

And so my sense is about 35 to 45 years is that ticks down.

Andrew Weisel -- Scotia Howard Weil -- Analyst

I certainly hope to not still be following your stock when that happens.

Rejji Hayes -- Executive Vice President and Chief Financial Officer

As do I.

Andrew Weisel -- Scotia Howard Weil -- Analyst

You previously said you don't expect to be a cash taxpayer until 2023. Is that still the case given the solar plans?

Rejji Hayes -- Executive Vice President and Chief Financial Officer

That's right. And I would just qualify it a little bit. We expect to be about a partial cash taxpayer at that point and more closer to a fully -- a full cash taxpayer by about 2024.

Andrew Weisel -- Scotia Howard Weil -- Analyst

OK. Great. Then, lastly, what do you think about -- I know the plan for the next three years is just solar and beyond that you talked about solar and batteries. What would it take wind to become a part of that plan going forward?

Patti Poppe -- President and Chief Executive Officer

Well, we do have 525 megawatts of additional wind that we're going to be adding to achieve our renewable portfolio standard in the near-term. So that's under way. What we see about wind is, is it's getting harder and harder to site. And so as we did the analysis for the long term, distributed solar really matches the load curve here in Michigan, combined with -- we do have 1,200 megawatts of base load gas, plus the Luddington pump storage, we have our baseload power really available.

And so solar, because it's distributed, because it's modular, because we can build it fast, and because that cost curve is occurring so fast that we really do see that combined with the current wind we have the 525 additional megawatts of wind is the right mix.

Andrew Weisel -- Scotia Howard Weil -- Analyst

Very good. Thank you.

Rejji Hayes -- Executive Vice President and Chief Financial Officer

Thank you.

Operator

And our next question today comes from David Fishman of Goldman Sachs. Please go ahead.

David Fishman -- Goldman Sachs -- Analyst

Hi, good morning.

Patti Poppe -- President and Chief Executive Officer

Good morning.

Rejji Hayes -- Executive Vice President and Chief Financial Officer

Good morning.

David Fishman -- Goldman Sachs -- Analyst

So just following on, I think it was Stephen's IRP question, is there an expectation or goal that when you refile in 2021 or at some other point for the larger 6- to 10-year opportunities that CMS can show effectively that utility-owned renewables is more economic than some of the third parties prices that you expect to see or have been seeing? And as a result, maybe it'll be easier in the future to get a guarantee higher than 50% for owning.

Patti Poppe -- President and Chief Executive Officer

I think -- I would say that because of the way the law was written and then we do these ongoing filings, it does mean the plan is adaptable and can change over time. If we do demonstrate that we're the most cost-effective, then, I think, that will be compelling. What I would suggest is that being able to build 50% is a really great position to be in and being able to then deploy our capital elsewhere in other parts of our system that are in high demand, really works for our model because, again, I can't overemphasize the amount of capital that the system demands relative to customer's ability to pay and the balance sheet to be able to afford. It's a constant internal battle for where the next best capital dollar is and so having some optionality on the supply side actually really works for us, especially with the FCM.

It really is a great mix for us in our opinion. And as we do future filings, of course, the plan can adapt and change as conditions change. And that's really the secret -- one of the secrets, I would say, of CMS. There's no big-bet strategy, modular, adaptable, changing conditions, whether it's weather or politics or the economy, this is what's special about us.

We adapt to those changing conditions because we can, because we don't have big-bets as I mentioned, only 15% of our $11 billion capex plan are projects over $200 million, and half of those are preapproved renewable projects. So the fact that our plan has so much flexibility in it going forward is part of our strength and part of the secret that we can continue to deliver year after year after year, that premium growth six to eight, reliably.

David Fishman -- Goldman Sachs -- Analyst

OK. Thank you for the very thorough explanation. That makes sense to provide you a good bit of balance and flexibility. One small follow-up, just more housekeeping item.

I think there was a small outage for DS Filer because it's no longer going to be repowered. I was just wondering does that spill over at all into the second quarter?

Rejji Hayes -- Executive Vice President and Chief Financial Officer

There may be a touch if it that spills over into the second quarter, but I wouldn't say it's a material amount. And so it's also important to note that Filer city. Yes, it's a contributor to Enterprise's performance, but it's not a significant contributor. DIG really dictates the vast majority of the financial performance of enterprises.

David Fishman -- Goldman Sachs -- Analyst

Great. OK. And I think you answered before, the DIG, you all have one more quarter of material headwind kind of go back to being in the bilateral market second half?

Rejji Hayes -- Executive Vice President and Chief Financial Officer

That's right given just the timing of the planning year versus the calendar year.

David Fishman -- Goldman Sachs -- Analyst

OK. Great. Thank you. Congrats again on the quarter.

Patti Poppe -- President and Chief Executive Officer

Thanks.

Rejji Hayes -- Executive Vice President and Chief Financial Officer

Thanks.

Operator

And our next question comes from Shar Pourreza of Guggenheim Securities. Please go ahead. Hello Shar, your line is open, perhaps you're muted.

Constantine Lednev -- Guggenheim Securities -- Analyst

Oh, sorry about that. It's actually Constantine for Shar, here. Yeah, I was on mute. A lot of great disclosure and a lot of the questions have been answered.

One kind of high level on the IRP and the 6,000 kind of megawatts of long-term solar. Are you thinking about kind of a sort of timing or a shape to how that gets deployed? I know you talked about 1,100-megawatt solar being a little bit more tail end in the five-year plan, but beyond that kind of how linear is deployment?

Patti Poppe -- President and Chief Executive Officer

Yeah, it's ahead of the retirements because, obviously, we don't want to wait for the retirement date and then start to build the solar, so we front seat, I would say, the plan and then it spreads across the time horizon up to the point that our last coal unit, Campbell three, retires. And so it really is a relatively smooth, across a 20-year time horizon. But just, again, as conditions change, if load materializes more or less, that's the strength of this plan that it's modular and we can adapt.

Constantine Lednev -- Guggenheim Securities -- Analyst

OK. That answers all of it, and thanks again for a great quarter.

Patti Poppe -- President and Chief Executive Officer

Thanks, Constantine.

Rejji Hayes -- Executive Vice President and Chief Financial Officer

Thank you.

Operator

And ladies and gentlemen, this concludes the question-and-answer session. I'll turn the conference back over to Patti Poppe for any closing remarks.

Patti Poppe -- President and Chief Executive Officer

Thanks, Rocco, and thanks, everyone, for joining us this morning. And we certainly look forward to seeing you all out on the road.

Operator

[Operator signoff]

Duration: 52 minutes

Call Participants:

Sri Maddipati -- Vice President of Treasury and Investor Relations

Patti Poppe -- President and Chief Executive Officer

Rejji Hayes -- Executive Vice President and Chief Financial Officer

Greg Gordon -- Evercore ISI -- Analyst

Jonathan Arnold -- Deutsche Bank -- Analyst

Michael Weinstein -- Credit Suisse -- Analyst

Julien Dumoulin-Smith -- Bank of America Merrill Lynch -- Analyst

Stephen Byrd -- Morgan Stanley -- Analyst

Praful Mehta -- Citi -- Analyst

Andrew Weisel -- Scotia Howard Weil -- Analyst

David Fishman -- Goldman Sachs -- Analyst

Constantine Lednev -- Guggenheim Securities -- Analyst

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