Good morning, everyone, and welcome to the CMS Energy 2016 third quarter results and outlook call. The earnings news release issued earlier today and the presentation used in this webcast are available on CMS Energy's website in the investor relations section. This call is being recorded. After the presentation, we will conduct a question and answer session. Instructions will be provided at that time. If at any time during the conference you need to reach an operator, please press the star followed by zero. Just a reminder, there will be a rebroadcast of this conference call today beginning at 1:00 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, Vice President of Treasury and Investor Relations.
Good morning, and thank you for joining us today. With me are Patti Poppe, President and Chief Executive Officer, and Tom Webb, Executive Vice President and Chief Financial Officer. This presentation contains forward-looking statements, which are subject to risks and uncertainties. Please refer to our SEC filings for more information regarding the risks and other factors that could cause our actual results to differ materially. This presentation also includes non-GAAP measures. Reconciliations of these measures to the most directly comparable GAAP measures are included in the appendix and posted on our website. Now, I'll turn the call over to Patti.
Thanks, Sri. Good morning, everyone. Thanks for joining us on our third quarter earnings call. For those of you who have not yet met Sri, he is our new Treasurer and Vice President of IR. Sri has been with CMS for a couple of years, and we're excited to have him in his new role. I'll begin the presentation with an update to earnings and describe our simple but powerful model. Tom will then provide the detailed financial results and outlook, and we'll finish with some Q&A. We are happy to report adjusted earnings for the first three quarters are up $0.22, and we've narrowed our guidance to the high end of our forecasted range of $2.00-$2.02 or 6%-7% over last year's performance.
As a reminder, we previously announced our long-term adjusted EPS guidance of 6%-8%, and we are introducing today specific 2017 earnings guidance of $2.13-$2.17 a share. It was a strong quarter, that sets us up for a strong finish to 2016. That strong finish will be led by our continued implementation of the Consumers Energy Way. We're proud of our consistent financial performance. My coworkers are motivated to serve our families, friends, and neighbors. There are many times, however, when those same coworkers, in spite of their best efforts, are unable to serve our customers to our desired standard.
Many of our processes are burdened with waste that goes unchecked, the CE Way is simply a lean operations model focused squarely on business results through customer-focused standards implemented by enabled employees working within well-designed and standard processes in a mindset that every day there's an opportunity for continuous improvement. Completing our work safely with high quality, low cost, and on time will deliver the same consistent results for customers and investors that we've had for over a decade. As a result of our efforts, I'm more confident than ever in our ability to deliver our simple but powerful model. We have depth in our organic capital plan. I've yet to attend a meeting where we have trouble identifying opportunities to invest. We have a long shopping list with lots of investments that improve safety, reliability, affordability, and our customer's experience. Nothing new here.
We'll tackle the structural costs with these smart investments, good business decision-making, and continuous process improvement. We plan conservatively for sales growth, we don't dilute our earnings with black equity. All of this adds up to a sustainable model that enables investment while keeping our rates affordable. Like I said, our shopping list is long, we are not making any big bets to fill out the plan. We have a large electric distribution system. It's made up of over 70,000 miles of conductor, 1,200 substations that all need to be upgraded and maintained, we have a lot of work to do just to modernize our grid, starting with completing our electric smart meter installations in 2017. We continue to increase our gas investments. I like to remind people that we have a great gas business where smart investments have real return for our customers.
We still have to say no to projects because we can't spend more than our customers can afford. Our generation fleet continues to evolve in small bites. Incremental renewables, capacity upgrades, coal-to-gas conversions. These are all small bets that add real value in cost savings, cleaner energy, and reliability for our customers. Future PPA replacements could even potentially allow for additional investment without affecting customers' bills. The ability to pay is always our limiting factor, which is why we are so focused on sustainable and structural cost reductions. It's not easy to be the leader of the pack on cost reductions year-over-year-over-year. However, that is our ambition. Let me remind you that many of our previous decisions were structural, permanent, and have many years of favorable impact. For example, our conversion to defined contribution plans that significantly reduced our long-term liabilities.
Each year as my coworkers retire and are replaced by a new workforce, we save about 1.6% of the previous year's O&M before we tackle a single work process improvement with the CE Way. We have a lot more gas pedal and waste elimination that results in real cost savings. Those cost savings allow us to be focused on making our prices competitive so that we can continue to be part of the Michigan growth story. We're seeing positive momentum, cooperation, and success stories related to our customers' growth and economic development in our service territory. We are bullish on Michigan. The more we improve our business model, the more companies and their employees will choose Michigan as a place to locate or grow their businesses. The stats don't lie.
Michigan is growing faster than the U.S. average, Grand Rapids, the heart of our electric territory, is growing faster than the Michigan average. We feel great about being part of that success today and into the future. Still, we plan conservatively for load growth. As we continue to maximize customer value with a strong investment portfolio, to drive waste out of our operations, and to let customer affordability be our throttle, we will continue to deliver high-end and quality earnings growth. Our constructive relationships with our state policymakers, legislators, and regulators is based on keeping our promise to perform and to care for our customers and communities. Performance is power. When we perform at best-in-class levels, we can earn the trust and admiration and deliver a hometown service for our customers. Day in and day out, you and our customers can count on us.
I'll turn the call over to Tom.
Thanks, Patti. Third quarter results at $0.67 were up $0.14 compared with a year ago. Adjusted to exclude the cost of our voluntary separation program, results were $0.70 or up $0.17. In either case, this is substantially better than our original plan, even as it reflects meaningful O&M reinvestment permitted by cost reductions ahead of plan in the warm, muggy summer. For the first nine months overall, our GAAP earnings were $1.70 a share, up $0.19 from last year. Adjusted for the VSP cost, results were $1.73, up $0.22, or 23% on a weather-normalized basis. As you can see here again, our performance in the first nine months is $0.22 better than last year. Adverse weather hurt $0.10. We blew away our 5%-7% EPS growth target, growing more than 10%, including the mild winter weather.
Improvements included benefit savings, lower uncollectible accounts, coal plant closures, full top Hardening, higher demand, and productivity at DIG, to name just a few of the areas. Looking ahead into the fourth quarter, if weather is just normal, we'll accomplish a nice uptick of $0.13 compared with 2015. As you know, we already have a head start on the fourth quarter with cost reductions well ahead of plan. We also have an electric rate case underway, that was self-implemented at $170 million on September 1. We filed a gas rate case last August, which will support 2017. We have plenty of room for reinvesting O&M for our customers this year, we raised our 2016 guidance to the high end of our 5%-7% range. This has become an investor favorite slide where we show our projected earnings-per-share growth for the full year.
This is as the year progresses. During the first quarter, mild winter weather and abnormal storms reduced earnings per share by $0.13. In a very short period of time, we were right back on track for our adjusted earnings growth at 5%-7%. You can see the improvements that offset the abnormal weather with no impact on customers. We are well ahead of our guidance and, as always, are putting the upside to work for customers, improving reliability, pulling ahead work from next year, as well as pre-funding debt maturities. We'll deliver consistent peer-leading earnings-per-share growth. We beat guidance and delivered 7% adjusted earnings growth for almost 15 years. Here's a picture of that track record. It shows how we consistently offset bad news and put good news to use for our customers without compromising predictable earnings growth of 7% each and every year.
Over the last three years, favorable weather and cost reductions in excess of our plan generated room to reinvest one-quarter of a billion dollars for our customers. One-quarter of a billion dollars. Half of that came from favorable weather and half from cost productivity better than planned. That's a big number. We put these savings to work in many beneficial ways. So far this year, we are 20% ahead of our plan. Our customers and investors really will benefit. In addition to our cost performance, our conservative view of sales growth, and our ability to avoid dilutive equity, we still have other attractive upsides. As you can see in this slide, continued layering in of energy and capacity sales could enable us to increase our profitability by $20 million-$40 million at our Dearborn Industrial Generation operations. Recent capacity sales have exceeded $4 a kilowatt month.
This is a nice insurance policy for our utility if it needs more capacity and a catalyst for new growth. To help you with your own assessment of our future performance, here's our standard profit and cash flow sensitivity slide. Recall that impacts from any legislative changes are not in our plan. Interest rate shifts up or down largely offset at our company as changes in debt cost offset changes in discount rates on our pension plans. We believe in no big bets and strong risk mitigation. Here's our report card. For 2016, we are right on course to achieve our plans for capital investment, a high-quality balance sheet, competitive customer prices, a robust dividend payout, and strong operating cash flow. We are well ahead of our adjusted earnings-per-share growth in the 5%-7% range. Therefore, we raised guidance to the high end.
We've introduced specific guidance for 2017 at $2.13-$2.17, up 6%-8% from this year. Out on another strong year, our 15th in a row, with high-end predictable earnings, cash flow, and dividend growth. This is my 57th CMS quarterly call in a row. Maybe my voice is wearing out. This has been sharing with you the results of a great team delivering consistent industry-leading earnings per share growth for over 14 years. We intend to continue this next year, and for a long time. Our earnings and dividend growth continue at a predictable high pace every year, no matter what's happening in the economy, the weather, politics, or succession planning. I think all of you who've met Patti can certainly attest to that. Thank you for your interest and your support. Patti and I would be delighted to take your questions.
Tracy, would you be kind enough to open the telephone lines? Thank you.
Thank you very much, Mr. Webb. The question and answer session will be conducted electronically. If you would like to ask a question, please do so by pressing the star key, followed by the digit one on your touch-tone telephone. If you're using a speaker function, please make sure you pick up your headset. We'll proceed in the order you signal us, and we'll take as many questions as time permits. If you do find that your question has been answered, you may remove yourself by pressing the pound key. We'll pause for just a second. Our first question comes from the line of Julien Dumoulin-Smith with UBS. Your line is now open.
Good morning.
Hey, good morning. It's Julien.
Good morning, Julien. I thought you changed your name on us.
Yeah.
There we go. Excellent. Well, hey, good morning, congrats again. Just a couple questions. Can you go over a little bit of what the pull-forward opportunities are for the $0.15 you kind of delayed here? Just give us a little bit of the flavor of each one of those in terms of what they mean in terms from a timing perspective, recognition of 2017 onwards, I got a follow-up on some of the policy stuff.
Absolutely. What Julien's talking to, if you all have the slides handy, it was slide number 12, the slide I called an investor favorite. I know it's mine. It's got that curve in it with a little blue box in it. That blue box talks in terms of what are some of the pull-aheads, what are some of the choices that we have with all this favorable performance from better cost reductions than we had actually planned. We had a nice toasty summer here at the end with a nice humidity that we don't always get in lovely Michigan, which helped us a bit. In that box, you'll see a few different items. First one's pull-aheads. Those are traditional things that we do.
If we can take work from next year and pull it into this year, it makes the job we have to do next year easier. Some examples are, there's some small outages that we were able to pull ahead. A little bit of tree trimming got pulled ahead during the course of the year. Things that improve reliability, things that help us be a better company for our customers and make our job a little bit easier as we go into 2017. Pardon me. The next item that's listed there is called debt prefunding. I think everybody knows we're such chickens that we go out and prefund our parent debt at least two years in advance to ensure that if there was a nightmare scenario of 2007, 2008 proportions, we wouldn't have any exposure in the capital markets. Well, this is some of that.
This is simply pulling ahead some debt that's going to mature, calling that potentially when it's economic, and doing a little more financing for that. It's a little bit of bad news for this year, so it's one of those choices that helps you in the next year and two. That's a nice one. There's a list at the bottom there that talks about operations and quality. There are so many things that we can do to be better for our customers that aren't necessarily in our rate cases, they aren't necessarily in our basic plans, but we will do those. I'll just give you one example. Patti's talked and I've talked a lot about the Consumers Energy Way.
Sometimes it takes a little bit of money to bring in the talent to help you make these changes in your processes to the better ways of doing things. This gives us a little more resource to do some of that work even sooner than we plan to do, so that we can get ahead of the game that improves on our quality, improves on our delivery, improves on our cost, and makes us a healthier, better company for you, but importantly for our customers. The reason I picked the third one last, it's sort of what happens towards the end of the year. We get a choice of how much money can we put into our company foundation and low-income funds to help customers, to help the people of Michigan, to help our hometown team, quite candidly.
In some years, even though we've been strained, where we have a very big storm at the end of the year, and maybe we don't have as many resources to put towards that. In other years, we have an opportunity to catch up a little bit and put some more money into the foundation, and those are choices we get to make towards the end of the year. That gives you a little bit of sense on what the things are, the categories, and how they can help you next year ensure that your growth in the 6%-8% zone, which is an important commitment for us, becomes easier to do or more difficult to do as far as that goes. In this case, it makes it a little bit easier. Julien, I hope that helps. We'll go to your next question.
Absolutely. Just real quickly, if you will, can you elaborate a little bit on what your thoughts and expectations coming out of this MISO Michigan deal are? Certainly, we heard from your peers yesterday, but want to get your view. Specifically, can you comment at all, what kind of rate, what's the ballpark? To the extent to which that rate may be higher than what you're seeing out there in MISO capacity, would that also bode well for your pricing on your DIG assets to the extent to which folks might want to contract with local merchant assets instead of paying the capacity charge under that construct?
Great question, Julien. There's a lot of things in flight right now with the MISO filing and what the implications are. I'll try and break it down a little bit and then answer completely your question. First of all, MISO is filing with FERC somewhere around November 1st, this opportunity for a three-year forward-looking auction. We think that's an important addition to Michigan for all of MISO, but it definitely is important to Michigan given our hybrid regulatory construct. Therefore, their filing has a provision for what's called a Prevailing State Compensation Mechanism, which the state worked with MISO to establish in order for the state to have an alternative in the event that forward-showing auction and our forward-looking capacity shows shortfall. In the event of a shortfall, typically the auction would go simply to CONE and that would set the price.
To your question on prices, yes, the capacity prices would go up just with the auction. If Michigan sees a look at shortfall, then they can implement the Prevailing State Compensation Mechanism, which requires then the alternative energy suppliers to show that they have owned or contracted capacity for the subsequent three planning years. Their customers pay a capacity charge that the MPSC will have the authority to set. Obviously, that charge has an impact on the alternative energy supplier customers. What we think is fair about that is that if additional capacity is required, then the people who are requiring it are actually paying for it versus our bundled customers. It protects our full bundled customers because we know that we will have adequate supply to serve our customers.
Now from a DIG perspective, I'll let Tom address what the implications for DIG might be of that MISO auction.
Yeah. Naturally, the more people have to turn to find those resources now, they can't get, I'll call it a free ride, but I mean that in a very constructive and a complimentary way. They can't get a free ride. They've got to go secure that capacity. Well, there's only so many places to go to get capacity in Zone 7 and nearby zones. Obviously that could help, and that fits in with why we set this layering-in strategy. We try not to be too greedy, thinking that if we stay out of the capacity markets, all of a sudden we can get everything at some peak price. We're trying to layer it in, and just recently we layered in, I mentioned in the text, a little more good news. We did a little bit more capacity sales above $4 a kilowatt month.
That's an opportunity that could help. Don't forget, DIG can also be just an excellent backup to our own utility if there's a need for that capacity, and that's another reason why we haven't committed all of it so far. Thanks, Julien.
Julien, I guess I'd just add one more implication then for the utility in the event of this implementation. If the alternative energy supplier can't secure additional capacity, then it defaults to, and the MPSC can direct the utility to build out that capacity. Those charges will be assigned to those alternative energy suppliers. That is definitely a potential. Now, the timing of all of this, the filing for MISO is November of this year. We think there won't be a final ruling from FERC until 2017. That implies then that the earliest it would be available would be in the 2018 auction, which is actually for the 2021, 2022 planning years. There's a lot of time and a lot of things that can change between here and there.
We know why MISO's motivated, because they're concerned about reliability long term and transparency of the supply. We agree with their concern. I will reiterate, though, that our plan and our CapEx forward plans do not require that this MISO provision be in place. We don't require that the energy law be passed. We really are in a position where our plan is solid with or without either the energy law or the MISO tariff approval.
Thank you for your question.
Great. Thank you.
Thanks, Julien.
Your next question comes from the line of Greg Gordon with Evercore. Your line is now open.
Morning, Greg.
Good morning, guys. Just to be clear, your base plan and the growth rate don't necessarily rely on or expect significant improvement in financial performance at DIG. When I look at slide 14, and you've said this before, I just want to make sure it's still the case. That potential theoretical expansion in revenues is not necessary for you to achieve your growth targets, correct?
It definitely is not. What you see in yellow on that slide is all the ability to create more headroom. We do not need any of that to meet our growth targets starting next year at 6%-8%.
Great. Can I go a little bit further afield and ask a question with regard to the Palisades nuclear contract? It strikes me that when that contract was initially signed, power prices were on a totally different planet than they are today. It looks like that MISO power prices are significantly lower than what you're going to be paying over time for the power coming from that asset. When you think about both the energy and the capacity that you're getting from Palisades, is there a theoretical
construct where it would be in the best interest of the customers to restructure or buy out that contract?
You're always very good at your analysis, but this is a subject that we actually can't talk about today, and I hope you'll appreciate that.
Okay. Thank you. Have a great morning.
Apologies. Thank you very much, Greg.
Thanks, Greg.
Your next question comes from the line of Ali Agha with SunTrust. Your line is now open.
Thank you. Good morning.
Good morning.
Looking at the weather-normalized electric sales through the nine months, it appears that they're up 0.5%. Does the 1% target for the year still look good, or what should we be assuming now for the year?
Still good. It really does look good. I know you can see the pieces there. When you look at the pieces, I call residential up half a point, commercial down half a point for the year-to-date September. I call that flat. I just wash those out. Even though net those numbers were positive to earnings. We see the industrial side's up about 2%, and we see some good information that's flowing through production plans that people have for the rest of the year, and we're quite comfortable with assuming that residential and commercial will still be flattish. We're not going to try to predict a tenth or two or three up or down either way. We still think the industrial side is going to be up about 2.5%, giving us a good 1% growth. Let me give you a little color.
We've seen some pipelines and other utilities, not us, but other utilities doing pretty well, and we've watched the manufacturing side in chemicals and plastics doing very well. Duh. Nice oil prices and gas prices, they're able to do good business here from Michigan. Even the automotive side continues to be robust. Now, on the negative side, we have seen some of the steel fabrication businesses and companies struggling a little bit. Some of that mineral side and steel fabrication not doing as well. Net-net, some nice upticks in the sector, and when we get a chance to look at where people are scheduling their production for the rest of the year and the things they're going to do, we feel pretty comfortable about where we are.
Tom, remind me, is that sort of the run rate you use as well going forward, roughly 1% annual growth?
We probably wouldn't say that. We're so doggone conservative that we like to tell you, just think somewhere between flat to 1% growth. That's how we plan the future because that's how we look at our business. We try to get a sense that plan it low. You've heard my story many times about my experiences back at Ford on why that pays out. If you're wrong and it's a little bit higher than you think, well, that's a helpful thing as you go through a given year. If you're wrong and it's lower, that's a struggle. You got to do things that you might not have planned to do to make your commitment to your customers and your commitment to your investors. We'd rather be on that conservative side.
I just, off the top of my head, I like to think when we run numbers, we run them from flat to one, and anywhere in that zone, we feel pretty good.
Yeah. Separately, when you benchmark your costs versus your peer group right now, where do you think you are? Are you in the top quartile, second quartile? Where are we in terms of just benchmarking what all you've done so far?
Yeah. I would say, Ali, total costs were in the top quartile. Those structural changes that we've made, the long-term cost savings that we've put in place puts us in total. However, where we see the big opportunity is in our distribution operations. Both gas and electric are still middle of the pack. Our pursuit of both a great customer experience and low-cost structure, really, we feel like that's where a lot of our headroom lives. That's why we're working so hard on our process improvements.
I see. Last question. I know in both the rate cases, you again asked for the investment recovery mechanism. Previously, the staff and the commission hasn't been very supportive of that. Any signs that this time around they're thinking differently or anything you can point to?
Well, we've had good luck with our Enhanced Infrastructure Replacement Program, which is essentially an investment recovery mechanism on our gas business. I think that's earned some trust and respect with the commission. I think they're more open to it. Their bigger concern is infrastructure reliability in the state. Post-Flint, our commission is very adamant that not on our watch will we have another infrastructure crisis related to the utilities. It makes the conditions more amenable to these investment recovery mechanisms. Though they do want to, and they've gone on the record saying they like having annual rate cases where they can see, and we can pass on cost savings. I think it's an opportunity to continue to grow those investment recovery mechanisms, but not necessarily get a flat rider on capital where we don't have to go in for rate cases.
Understood. Thank you.
Yep. Thanks, Ali.
Thanks very much.
Your next question comes from the line of Travis Miller from Morningstar. Your line is now open.
Good morning. Thank you.
Good morning.
Morning.
I was wondering when you talk about this play between the cost savings that you guys are realizing in a big way and being able to keep customer bills either low or from rising faster, I wonder if you could kind of give a sense for how much of that cost savings you're seeing right now is at $0.32 from the nine months or even the future cost savings would go back to that customer, i.e., through lower bills or through slower rising bills?
100%. Here's the point behind that. In a short period of time where we might have a cost reduction this year that clearly will have an impact on our business and our results, we look for those annual rate cases that Patti just talked about, and it's one of the key features of the annual rate case. Primarily, it's to collect on the capital investment that we're making for our customers, but it's also our mechanism to give back that money to our customers with our O&M cost reductions. The lag is just from the period that there is to the next rate case. We'll share that with them. We set as a goal on our base rates to try to keep that growth at or below the rate of inflation. Pick your number.
Everyone has a different real inflation number, but let's just say it's 2%. If we can stay under that 2%, then that means those base rates are going down negatively on a real basis. That's our goal, and we're constantly doing that work to share with them. I grant you, it gives us more headroom so that we can do more of that capital investment, which does then grow the business for earnings. Does that get at your question?
Yeah, absolutely.
Thank you.
Thank you very much.
Your next question comes from the line of Paul Ridzon with KeyBanc. Your line is now open.
Good morning.
Morning, Paul.
Morning, Paul.
Can you give your view of what's happening in the legislature and what we can expect before year-end?
You bet. As I'm sure you've seen a little bit of the press that's been out in the last week or so, the Michigan Chamber has now endorsed the bill package, and that is allowing for some more momentum. There's been a compromise on the renewable portfolio standard at 15% for 2021 that's bringing some more Democrats on board. There seems to be quite a bit of momentum. We've seen momentum before, so we really are cautiously optimistic. Arlan Meekhof, the Senate Majority Leader, and Mike Nofs, the Energy Chair out of the Senate, are working hard toward a vote post-election. With the proper momentum and a good vote count, they'll take that vote and potentially move it then into the House. There's a lot of things that would have to come to fruition to get it to pass in the House.
With the right momentum and bipartisan support and the support of the Michigan Chamber, it's more likely, I would say, than ever, but I still put odds around 50/50 that it gets done before year-end. As you know, Paul, we continue to reiterate our plan doesn't require the law, but we think it's good policy for Michigan. We think it's important that energy resource supply be transparent and that the cost allocations be fair for new and additional capacity. This suite of bills does that work and does a good job of it, so we're supportive of it. Again, our plan doesn't count on it, and it doesn't require it.
None of the compromises that have been made, or I should say all the compromises have been vetted with the governor, and he's still okay with it?
Yes. The administration has been very supportive. They have concern about resource adequacy in Michigan, particularly for the power provided by the alternative energy suppliers. They have real frustration that it's not transparent where that power is coming from. The administration and the commission and the utilities have been very clear that we want to make sure that it's transparent, that we have adequate supply for the whole state. We know we have adequate supply for our customers. We want to make sure that the alternative energy suppliers also have adequate supply, one way or another, for their customers.
Thank you very much.
You're welcome.
Thanks, Paul. Nice to hear your voice.
Go Indians.
Yes.
Your next question comes from the line of Brian Russo with Ladenburg Thalmann. Your line is open.
Yeah. Hi, good morning.
Morning, Brian.
Most of my questions have been asked and answered. I'm just curious that the Senate Bill 437 that was just referenced, will that change your capital budget either by size or mix of investments?
We don't think so. Our CapEx plan, as you saw in our slides, our generation strategy is smaller and smaller bets. We want to make sure that we build for necessary load, that we're focused on a diverse portfolio that can adjust as load shifts, that we can make quicker, smaller bets rather than long, long-term big bets. There's nothing in the provisions of the law that would change that strategy.
Okay. Thank you.
Great. Thanks, Brian.
Your next question comes from the line of Andy Levy with Avon Capital Advisors. Your line is open.
Morning, Andy.
Hi, good morning. How are you?
Good morning.
Morning.
Hey, just what was the reason that you can't discuss Palisades?
Usually when you make a no-comment answer, that's it. Actually, it's because my voice is cracking up. I've got nothing left.
Okay
This just is one of those subjects that we're not able to talk about, and you can imagine why.
Okay. Fair enough.
Thank you very much, though.
Then just on a bigger picture, if the Palisades contract was ceased, we'll just leave it like that, how many megawatts, I guess, just remind us how many megawatts that would be.
Yeah. Think about 800 megawatts.
800 megawatts. Obviously, I guess number 1, it could either be restructured. That could be a way. You could also get out of it. I guess one of the opportunities would be for you to replace that power with your own generation or with-
With DIG or what would be the strategy-
Yeah. That's something-
Overall, the opportunity for CMS.
It's something that we really can't get into. We appreciate the question and your patience.
Okay.
I'll say this, generally, about our capacity planning strategy. We have alternative options, and when PPAs do come off, and we have many PPAs, and as they retire and we decide whether we're going to renegotiate those PPAs or replace them, we do have options to bring in to do more bilaterals with other energy suppliers or to build new capacity, incremental renewables, more demand response, and energy efficiency. We're doing a lot of, obviously, capacity planning to make sure that we have adequate supply for all of our customers for all the years to come. It's an exciting time because we have a lot of smaller bet options that can provide for a very diverse portfolio for serving our customers. That frees up, then, investment room in our electric distribution system and our gas business, where we have significant investment requirements.
We really have a good balanced approach right now.
Really the bottom line is whether it's this contract or any contract PPAs that are dropping off, one of the opportunities is to replace it with basically a self-build or some type of capacity that you would be the owner of.
Sure.
Right. Okay. Just want to be clear on that. Thank you very much.
Yep. You're welcome. Thank you.
Thank you. Thank you a lot. Good to hear your voice.
Your next question comes from the line of Paul Patterson from Glenrock Associates. Your line is open.
Morning, Paul.
Good morning.
Morning, Paul.
I just wanted to follow up on the MISO capacity theme or scheme. I guess what I'm wondering is that, if an alternative energy provider doesn't buy capacity on his own, he would be assessed a capacity charge, is my understanding, for buying it from, I guess, you guys or other utilities. Is that correct?
It actually would work as a charge to the customer of the alternative energy supplier, not the energy supplier themselves.
Okay. Well, that actually answers my question. Thank you.
Yep. You're welcome.
Then the second question that I have is there is this transmission discussion with MISO and the governor about bringing in Canadian power to Michigan as a means of lowering prices, and I was wondering if you had any color on that, if you guys might participate in some projects or something like that, or just any thoughts you guys had on that.
The MISO study that the state requested really has several components. One is the feasibility of connecting the Upper Peninsula, which is not our service territory, Zone 2 in the MISO zone, to Sault Ste. Marie and between Sault Ste. Marie and Ontario. Looking at connecting the UP and the Lower Peninsula to an existing transmission project in Gaylord or starting a large gas plant constructed up north somewhere up in the UP. It's a variety of studies, they're all pointing to one situation that's trying to be corrected, that's the resource adequacy issue. Because of our regulatory construct in Michigan, there's this loophole up in the UP that has caused a major cost shift up there. They're trying to figure out a way to better serve the people of the Upper Peninsula.
We participate to the extent that we're energy experts, the governor relies on us for our input and insights. The study that they requested from MISO really will help frame up the situation, I would say. When it's complete, we'll certainly, obviously, take a look and see what the options are.
Okay, great. Thanks a lot. My other questions were answered.
Great.
Thank you.
Your next question comes from the line of Paul Ridzon with KeyBanc. Your line is open.
I recently saw someone's planning a large gas plant in Michigan right on the Indiana border. Do you have any thoughts on that? I don't know if you've seen it or not. I don't remember the name of the plant, unfortunately.
I don't know who you're talking about that's doing that, but people are constantly looking at, should we build here, build there. You're probably aware that, for instance, Covert, one of the larger IPPs that's left, is hooked up to PJM, but they're in the process, potentially, of selling their plant. These things are dynamic, but I don't have a lot of specifics on that particular question. I tell you what I'll do. I will double-check after I'm off the call, and if there's something of substance we know about, we'll share that.
Thank you very much.
Thanks, Paul.
If there are no further questions, I turn the call back over to the presenters.
Great. Thank you, and thanks for listening to our call today, everybody. We appreciate your interest and definitely appreciate your ownership. Tom and I look forward to seeing many of you at EEI in just a couple weeks.
This concludes today's conference. We thank everyone for your participation.