CMS Energy Q2 2022 Earnings Call Transcript

Participants

Corporate Executives

• Srikanth Maddipati, Vice President of Investor Relations & Finance and Treasurer
• Garrick J. Rochow, President and Chief Executive Officer
• Rejji P. Hayes, Executive Vice President and Chief Financial Officer

Analysts

• Shar Pourreza, Guggenheim Partners
• Jeremy Tonet, JPMorgan Chase & Co.
• Michael Sullivan, Wolfe Research
• Julien Dumoulin-Smith, Bank of America Co.
• Andrew Weisel, Scotiabank
• David Arcaro, Morgan Stanley
• Ryan Levine, Smith Barney Citigroup

Presentation

[Operator]

Good morning, everyone, and welcome to the CMS Energy 2022 second-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 as a reminder, there will be -- it will be a rebroadcast of this conference call today beginning at 12:00 P.M. Eastern Time, running through August 4. This presentation is also being webcast and is available on CMS Energy's website in the Investor Relations section.

At this time, I would like to turn the call over to Mr. Sri Maddipati, Treasurer and Vice President of Finance and Investor Relations

[Srikanth Maddipati, Vice President of Investor Relations & Finance and Treasurer at CMS Energy]

Thank you, Elliot [Phonetic]. Good morning, everyone, and thank you for joining us today.

With me are Garrick Rochow, President and Chief Executive Officer; and Rejji Hayes, Executive Vice President and Chief Financial Officer.

This presentation contains forward-looking statements, which are subject to risks and uncertainties. Please refer to our SEC filings for more information regarding the risks and other factors that could cause our actual results to differ materially. This presentation also includes non-GAAP measures, reconciliations of these measures to the most directly comparable GAAP measures are included in the appendix and posted on our website.

Now, I'll turn the call over to Garrick.

[Garrick J. Rochow, President and Chief Executive Officer at CMS Energy]

Thanks, Sri, and thank you, everyone, for joining us today.

I'm excited to share another strong quarter at CMS Energy and a great first half of the year, bolstered by favorable weather and higher weather normalized sales at the utility, great tailwind, and over the course of the quarter, two outstanding regulatory outcomes which provide further evidence of the top-tier regulatory jurisdiction in Michigan and give us continued confidence in our plan.

First, our integrated resource plan. If I could open this up for just a moment. 18 months of sophisticated supply modeling, thousands of pages of testimony, 10-month schedule, alignment across dozens of stakeholders, from interveners, the Attorney General, business stakeholders, and the Commission staff to reach a settlement with close to 20 parties. This plan, approved at the end of June, solidly positioned us to lead the clean energy transformation. Outstanding.

Next, our gas rate case. Important investments to ensure a safe, reliable, affordable, and clean natural gas system; settled with many of the same parties, and approved on July 7, a $170 million increase over 95% of our customer investment approved. Excellent. Both outcomes demonstrate the quality of our regulatory environment in Michigan and increase our confidence in delivering the rest of the year and our long-term plan.

I want to emphasize why we continue to be confident in our plan. Delivering is not new for us. We have nearly two decades of commitments made and kept for all our stakeholders, including you, our investors. A key element in our performance is strong energy law in Michigan. We have a productive and solid energy law passed in 2008, which was enhanced and updated in 2016, both with bipartisan support. This allows for timely recovery of investments which we've outlined through long-term plans, such as our IRP, as well as our electric and natural gas distribution plans, which we filed in our rate cases. This, coupled with separate mechanisms, allow us timely recovery of fuel and power supply costs as well as attractive economics on renewable energy investments and energy waste reduction programs. And uniquely position Michigan as one of the safest places to invest capital.

But let me be clear, we don't take this for granted. We continue to improve our processes for stakeholder alignment, testimony development, and business cases, so we are confident that our proposed customer investments deliver measurable benefit, while keeping bills affordable. At CMS, we deliver. Our productive and supportive environment and our deliberate approach ensure that no matter the conditions, we are positioned to deliver industry-leading result.

We remain committed to leading the clean energy transformation. On the solid foundation of strong energy law, we delivered and settled our IRP. This makes us one of the first utilities in the country to completely exit coal. As of the end of second quarter, we have nearly eliminated our long-term economic exposure to coal, which is now less than 2% of property, plant, and equipment.

Not only have we reduced our long-term financial risk, but we have significantly mitigated our operational risk as well. The acquisition of simpler, more flexible natural gas units means fewer people to operate, a better heat rate, and less maintenance. The ability to quickly ramp up and down the dispatch of these units will allow us to flex with changing market conditions and to better support the intermittent nature of renewables.

The acquisition of Colbert combined with the RFP for 700 megawatts of capacity through PPAs, the build-out of 8 gigawatts of solar, and our ongoing energy efficiency and demand response programs ensure that we have sufficient capacity to meet the needs of our customers. This plant improves reliability and limits our customers' exposure to potentially volatile capacity and energy prices. The IRP strengthened and lengthened our financial plan, eliminates our exposure to coal, improves reliability, and is a solid win for everyone.

Strong execution and constructive regulatory outcomes lead to strong financial results. And I couldn't be more pleased with the first half of 2022. As I stated in my opening remarks, a strong quarter and a great first half of the year, where we delivered adjusted earnings per share of $0.53 for the quarter. We remain confident in delivering full-year adjusted earnings per share of $2.85 to $2.89. And we continue to guide for the high-end of our long-term adjusted EPS growth range of 6% to 8%, which as I noted, is strengthened and lengthened by our IRP.

We continue to guide for long-term dividend growth of 6% to 8% with a targeted payout ratio of about 60% [Phonetic] over time. And we'll update our current $14.3 billion, five-year customer investment plan on our year-end call to include the anticipated upside from the approval of our IRP. We are strongly positioned to deliver in the remainder of the year.

With that, I will turn the call over to Rejji who will offer additional detail.

[Rejji P. Hayes, Executive Vice President and Chief Financial Officer at CMS Energy]

Thank you, Garrick, and good morning, everyone.

As Garrick noted, we had a strong first half of the year, are ahead of plan, and are well-positioned to achieve our financial objectives over the next six months and longer term. To elaborate, in the first half of 2022, we delivered adjusted net income of $499 million or $1.73 per share, up $0.09 per share versus our 2021 first-half results, largely driven by favorable weather and economic conditions in the state.

The waterfall chart on Slide 7 provides more detail on the key year-to-date drivers of our financial performance versus 2021. As noted, favorable sales have been the primary driver of our positive year-over-year variance to the tune of $0.16 per share, driven by weather. From an economic standpoint, we continue to see strong commercial industrial load in our electric business, while weather normalized residential load continues to exceed our plan assumptions and pre-pandemic levels.

Rate relief net of investment-related expenses contributed $0.03 per share of upside as we continue to benefit from our prior gas and electric rate cases. These sources of upside were partially offset by increased operating and maintenance or O&M expenses, largely driven by customer initiatives embedded in rates to improve safety, reliability, and our rate of decarbonization, which equated to $0.07 per share of negative variance versus the first half of 2021.

We also note the $0.03 per share of negative variance in the final year-to-date bucket, which is primarily driven by investment costs related to the 2019 rate compressor station incident for which we are not seeking recovery at this time as per our recent gas rate case settlement agreement and the company's recent commitment to donate $5 million in support of income-based bill assistance for our electric customers as per our IRP settlement agreement. These sources of negative variance are partially offset by the aforementioned strong non-weather sales performance in the first half of the year.

As we look to the second half of 2022, we feel quite good about the glide path to achieve our EPS guidance range. As Garrick mentioned, we had a constructive outcome in our gas rate case. The approved settlement agreement at $170 million significantly derisked our financial plan, and when coupled with our December 2021 electric rate order, provides $0.10 per share of positive variance versus the second half of 2021. The forecasted rate relief net of investment-related costs in the second half of the year more than offsets our estimated impact of normal weather, which we assume will provide a $0.01 per share of negative variance versus the comparable period in 2021.

Moving on to cost savings, we continue to anticipate lower O&M expenses of the utility, driven by the expectation of a more normalized level of storm activity this year versus the atypical levels experienced in 2021, which I'll remind you equated to $0.16 per share of downside in the third quarter of 2021 versus our financial plan.

We also expect the usual solid cost performance driven by the CE Way as well as other cost reduction initiatives in motion. To close out our assumptions for the second half of the year, we assume normal operating conditions at enterprises given the outage at DIG in the fourth quarter of 2021, and the usual conservative assumptions for weather normalized load at the utility.

Lastly, it's worth noting that we have accrued a healthy level of contingency given our strong year-to-date performance as illustrated in the $0.24 to $0.28 of negative variance highlighted in the penultimate bar of the chart, which increases our confidence in delivering to you, our investors.

Moving onto the balance sheet on Slide 8, we highlight our recently reaffirmed credit ratings from all three rating agencies. As you know, we continue to target mid-teens FFO to debt over our planning period. As always, we remain focused on maintaining a strong financial position which coupled with a supportive regulatory construct and predictable operating cash flow growth supports our solid investment grade ratings to the benefit of customers and investors.

Turning to our 2022 planned financings on Slide 9, we continue to plan for $800 million of debt issuances at the utility. And while our plan does not call for any financings at the parent this year, we are currently assessing funding options for the acquisition of the Colbert natural gas facility in the first half of 2023 as per our approved IRP.

As a reminder, the current financing plan for Colbert assumes the issuance of hybrid securities. However, we're evaluating alternatives including using our existing ATM equity issuance program given the relative costs in the current environment. It's worth noting that this would be accretive to the previously provided $0.03 to $0.04 per share of EPS accretion attributable to the purchase of Colbert and further strengthen our 6% to 8% long-term adjusted EPS growth outlook.

Lastly, we have preserved a strong liquidity position which supplements our use of commercial paper over the coming months. And with that, I'll turn the call back to Garrick for some concluding remarks before Q&A.

[Garrick J. Rochow, President and Chief Executive Officer at CMS Energy]

Thanks, Rejji. I'll leave you with this: nearly two decades of industry-leading financial performance for you, our investors. Regardless of conditions, administrations, political parties, economic environments, even a pandemic, we deliver. Our strong legislative and regulatory construct and a robust capital runway, industry-leading cost management, conservative planning, and our commitment to deliver across the triple bottom line. All of this makes for a strong investment thesis and it makes us an investment you can count on.

With that, Elliot, please open the lines for Q&A.

Questions and Answers

[Operator]

Thank you very much, Garrick. The question-and-answer session will be conducted electronically. [Operator Instructions]

Our first question comes from Shar Pourreza from Guggenheim Partners. Your line is open. Please go ahead.

[Shar Pourreza, Analyst at Guggenheim Partners]

Hey, guys. Good morning. [Speech Overlap]

Just putting [Phonetic] a pretty clear-cut print here, but just given sort of the regulatory outcomes that are now secured -- like the IRP, the gas settlements, looks like the electric rate case is on track, as we come at thinking about maybe the cadence of updates, is the plan to still update capex and financing in the fourth quarter? I guess, just given the visibility we have, why not provide a full guidance in capital update sometime in the third quarter or EEI timeframe? Or I guess, in another words, given the regulatory execution that you've clearly highlighted today, could you provide early indication on growth in '23 numbers that are scheduled?

[Garrick J. Rochow, President and Chief Executive Officer at CMS Energy]

Well, first of all, Shar, thanks for the compliments.

We are executing [Speech Overlap] I'm pleased with the first half of the year. But we're still on plan for our Q4 call for our capital update. Let me offer little color and context around that. Big reason for our execution and our ability to deliver year after year is one of the things we worked through is that capital plan, and that's from the bottom up, looking at every one of those capital investments to make sure that it's going to offer the affordability and benefits to our customers. And so, those stack on one another. And we want to make sure that we're also able to execute on those. So, that's a matter of understanding our workforce, the work lined up in a year, and so that we [Phonetic] ensure that we can deliver on that -- on that capital plan.

And then you add that IRP. Yes, there's Colbert, which is a great visibility, but one of the other portions of that settlement was bringing in storage, battery storage, 75 megawatts in the period of 2024 to 2027. So, we've got to make sure that that's constructed and built into this five-year plan as well as we spoke in the past about this voluntary green pricing programs as additional renewables for some of our largest customers. And so, that's materializing as well. And so, that's another factor that's going into our plan.

So, we want to make sure that we can deliver on it. That leads to the success of our execution. And so that's -- that's why we're going to be putting it out in Q4, our Q4 call.

[Shar Pourreza, Analyst at Guggenheim Partners]

Okay, got it. And then, just obviously looking at the results year-to-date and how '22 is shaping up. July looks like a strong weather month, and obviously, you guys are -- because you highlighted you have normal weather in plan for the remainder of the year. Does a strong third-quarter weather push you ahead of guidance? And maybe what are sort of some of the offsets and moving pieces there that we should be thinking about because just looking at the results to date, it seems like you're well ahead of your numbers, but...

[Garrick J. Rochow, President and Chief Executive Officer at CMS Energy]

Again, Shar, we feel good about where we're at here, at the first half -- first half of the year. But as you know, and as I said in my prepared remarks, we plan conservatively. Here's what I know, in 2021, during the third quarter, we lost $0.16 due to storms. We still delivered on 2021, but again, there's a lot of year left. And so, we're prudent as we move forward.

The other thing we look at is where are there opportunities to reinvest, to provide benefit for our customers and investors as we move toward the end of the year. That helps to derisk future years, and again, continues to strengthen and lengthen that long-term EPS growth rate of 6% to 8% toward the high-end.

[Shar Pourreza, Analyst at Guggenheim Partners]

Okay, terrific. Thanks, guys. Appreciate it. Thanks, Rejji [Phonetic]. You too. Bye.

[Operator]

Our next question comes from Jeremy Tonet from JP Morgan. Your line is open.

[Garrick J. Rochow, President and Chief Executive Officer at CMS Energy]

Good morning, Jeremy.

[Jeremy Tonet, Analyst at JPMorgan Chase & Co.]

Hi. Good morning. Hey. I just want to pick up a little bit I guess with the strong results here, and it did seem like lower performance that was just better than expected. And I'm wondering if you could provide a bit more commentary on that? And I guess, do you see any of that abating or just kind of things in general from a load, even absent weather, a load-growth perspective is going to continue at this pace or do you see something stopping?

[Rejji P. Hayes, Executive Vice President and Chief Financial Officer at CMS Energy]

Hey, good morning, Jeremy. It's Rejji. I appreciate the question.

Obviously, we feel quite good about the load trends we're seeing in our service territory. And I'll just remind folks on some of the specifics. And so, we had residential down a little over 0.5%, so that's year-to-date versus year-to-date 2021 commercial and industrial. And as always, our industrial excludes one large low-margin customer, up about 3%, and then all in, up about 0.5%. And so, we feel quite good about that. And particularly with respect to residential, we continue to see that good stickiness with a hybrid workforce, which likely will be a trend that continues on. And obviously, that's a high-margin segment. And so, for relative to 2019, residential's up about a little over 2%. And so again, that stickiness just really carries on.

We continue to see from an economic development perspective, just good activity in the service territory, and obviously, with some of the news in D.C. yesterday, I would think that -- the CHIPS Act and some of the other legislative items that may be coming down the pike could lead to more economic development opportunities or increase the probability of some of the stuff that is coming Michigan's way or is in the prospects for Michigan.

So, very encouraged with the load trends, and anecdotally again, we're hearing from our customers that they continue to feel good about the economic environment. So, feel quite good about the road ahead. And going forward, again, we continue to anticipate that you will start to head back to those pre-pandemic levels. And so, we would anticipate that from a residential perspective, but we continue to be surprised with the upside, and commercial and industrial continue to trend very well. So, that's our take on load and development.

[Garrick J. Rochow, President and Chief Executive Officer at CMS Energy]

And if I could just add just a macro factor here, and this is from the Governor's office, this year-to-date $11.8 billion of investment opportunities announced in Michigan. Those are projects that have agreed to locate, expand. There's actually 30 companies in all and 15,000 new jobs. And so, that's out of the governor's office here, mid-July. And so, still looks very robust here in Michigan, we look at it from a macro perspective.

[Jeremy Tonet, Analyst at JPMorgan Chase & Co.]

Got it. That's very helpful there. And then, I just wanted to pivot a bit towards MISO, we've seen some capacity constraints there and that's led to some delays in Colbert [Phonetic] retirement. Just wondering, should we be thinking about any implications to CMS here or anything else that you want to share on this front?

[Garrick J. Rochow, President and Chief Executive Officer at CMS Energy]

I love our energy law, I really do. I'm not joking there. The 2016 energy law was -- here in Michigan was solid on the supply and demand side. And so, when we go through an integrated resource plan, we've got to do all the modeling, all the analysis to show that the supply and demand is going to meet and have some reserve margin on that. That's a requirement of a load-serving entity, which we are. So, I feel good about where Michigan is headed within MISO. And I can't speak for all of MISO, but I feel good about where Michigan's at.

And I'll remind people -- remind all of the people on this call that part of this IRP is to bring Colbert in. Colbert right now is in the PJM market, and we're moving it over to the MISO market. That's 1.2 gigawatts of additional supply that's being brought into MISO, and brought here to serve our customers. And so, that's why we feel good about it, our IRP. We're still on pace and plan for retirement of all coal, to be out of coal by 2025.

[Jeremy Tonet, Analyst at JPMorgan Chase & Co.]

Got it. That's very helpful. Last one if I could, hot off the press, climate BBB package, climate package being supported by Manchin here. Any preliminary thoughts at this point?

[Garrick J. Rochow, President and Chief Executive Officer at CMS Energy]

Jeremy, you give me like what 12 hours to digest it all?

Here is what I would say -- here's what I would say on it because we've done some preliminary -- a preliminary review and we're still digesting a lot of facts on it. So, we're a PTC. There's a big win in there. And that's something we've been advocating for in Washington, we've been advocating the industry. Hats off to Rejji. Rejji has been making the calls with CFOs a year-and-a-half ago, when it was first being talked about. And so, we're excited about that portion of it, what that means for our 8 gigawatts. It's going to be lower cost for our customers as we build out more solar and it will provide -- put us on par with developers.

So, we like that. We know there is a storage ITC as well. That will come into play in 2024 to 2027 as we build out 7 -- 75 megawatts of storage. There's a lot of upside for the industry. We're the [Phonetic] birthplace of the automobile. I talked about the $11.8 billion. Most of that's in the automotive space. There's opportunities for load growth, and the automotive business to grow as they make their transition. There is incentives in there for solar production in the US. In Michigan, one of our largest customers is the largest worldwide -- one of the world's largest producers of polysilicon crystals which go into solar panels, and in technology, electronics. And so, that's another -- we see that as an upside. There is a big tailwind on EVs. The EVs are a nice part of load growth. It's not in our forecast, but there is the continuing credits for purchase of EVs.

And so, there's a lot of good stuff in here. We're still digesting in all the specifics, but feeling good what's coming out of the Senate and, of course, there is negotiations with the House in front of us.

[Jeremy Tonet, Analyst at JPMorgan Chase & Co.]

Great. That's helpful. I'll leave it there. Thanks.

[Operator]

Our next question comes from Michael Sullivan from Wolfe Research. Your line is open. Please go ahead.

[Michael Sullivan, Analyst at Wolfe Research]

Hey, everyone. Good morning.

[Garrick J. Rochow, President and Chief Executive Officer at CMS Energy]

Hey, Michael.

[Michael Sullivan, Analyst at Wolfe Research]

Hey, Garrick. Rejji, wanted to go over to you on just the latest commentary on the potential -- looking at common equity for financing in Colbert? I think that was a $815 [Phonetic] million project, any sense of how much the equity could be and how materially the $0.03 to $0.04 accretion could change?

[Rejji P. Hayes, Executive Vice President and Chief Financial Officer at CMS Energy]

I appreciate the question, Michael. I would say we're obviously still evaluating the options. You have the purchase price of Colbert spot on at $815 million. And so, as you know, our rate construct, we would fund about half of that with debt at the utility, so call it roughly $400 million, and the balance would be parent financing. And mathematically, that gets you to about $400 million, but we'll still consider what the alternatives might be. And obviously, we've got quite a bit of time to fund it.

And so -- we'll look at our dribbling, our ATM equity issuance program, whether that will be the full $400 million remains to be seen. And so, we'll see how the price of other alternatives like those hybrid securities, which -- but for the past six to seven months or so have really priced quite competitively. And so, if that changes over time, we may tranche a little bit.

And so, I'd say it's still early days, but we could go up to about $400 million. We've got that much on the shelf, but we'll see how the part -- the pricing trends over the next handful of months.

And then with respect to the accretion, at this point, I'd say it's a little premature to offers precisely how accretive it would be to the $0.03 to $0.04 that we initially provided because clearly, that would depend on the price at which we issue equity if we do choose to dribble. And so, I'd say more variables at this point to provide any prescriptive point of view, but it would be directionally accretive just based on the relative cost right now of our equity versus other securities.

[Michael Sullivan, Analyst at Wolfe Research]

Okay, super helpful color. And then last question, what do you guys think about making it a three for three with settlements this year, with the pending electric case?

[Rejji P. Hayes, Executive Vice President and Chief Financial Officer at CMS Energy]

We'll see. I mean, I think, betting, what, 6.70 [Phonetic] still gets you into Cooperstown, so we've been encouraged with the IRP and the gas rate settlement. Electric, obviously, many more stakeholders, many more variables, and we've been successful there before. So, we're cautiously optimistic, but early days. And we will look and see where the staff is in about a month and we'll go from there. But I would say early days to make any prediction at this point.

[Michael Sullivan, Analyst at Wolfe Research]

Great. Thanks a lot.

[Rejji P. Hayes, Executive Vice President and Chief Financial Officer at CMS Energy]

Thank you.

[Operator]

Our next question comes from Julien Dumoulin-Smith from Bank of America. Your line is open.

[Julien Dumoulin-Smith, Analyst at Bank of America]

Hey. Good morning. You guys really do execute. Hey, hey.

[Garrick J. Rochow, President and Chief Executive Officer at CMS Energy]

Yeah. Thanks, Julien.

[Julien Dumoulin-Smith, Analyst at Bank of America]

Always, always.

Hey, so let me follow-up on this last bit of [Indecipherable]. Just one nuance here, AMP [Phonetic] is going to get a lot of attention this week, I imagine, for all the utilities here. What are you guys saying on that? I know we asked you here for your hot takes a second ago, but just if you could rehash as best you understood -- your, probably, assessment of this last year if you will?

[Rejji P. Hayes, Executive Vice President and Chief Financial Officer at CMS Energy]

Yeah, so, Julien, just to be clear, you're talking about the alternative minimum tax with respect to the last night?

[Julien Dumoulin-Smith, Analyst at Bank of America]

Yes, exactly. The 15%.

[Rejji P. Hayes, Executive Vice President and Chief Financial Officer at CMS Energy]

Okay. Yeah, with respect to climate bill. So again, Garrick noted, we're still digesting. I think it's about 700 pages, and our folks in federal affairs and on the tax side are really, really good at what they do and they're fast readers, but 700 pages is a lot to digest in 12 hours.

But I'd say, based on what we've gleaned so far, as I understand it, the structure that's contemplated is consistent with what we were talking about around EEI, several months ago, where there is a three-year average on pretax operating income, around $1 billion. And if you're below that threshold, you're not subject to the minimum tax.

And so, from our perspective, given our size, we would likely not chin that bar for some time now. Needless to say, we aspire to at some point, because we're a growing company, but in the short term, I think we'd be perhaps not subject to it initially. And we're still looking at -- again, if it's structured, how it was when we're talking about the city EEI. You could apply tax credits to up to 75% of the tax liability. And again, we're still looking to see whether that's in the bill, but that's how it was structured initially.

And so, I'd say, there is a bit more work to be done on our side before we can speak to it, but I'd say, to cut through it in the short term, we don't think there is a significant impact on us, again, given our size, and if they apply that three-year average of $1 billion of pre-tax operating income, we just wouldn't chin that bar for a little while.

[Julien Dumoulin-Smith, Analyst at Bank of America]

Yeah, no, that makes sense. Thank you for the hot takes there. Appreciate it.

OPEB contributions in the quarter here, etc., just curious if you can comment here? And obviously, that subject's gotten some attention right [Phonetic]? Broadly?

[Rejji P. Hayes, Executive Vice President and Chief Financial Officer at CMS Energy]

Oh yeah, from a pension perspective, again, our story has been quite good for some time now. As you may recall, we have been very active in making discretionary contributions to our pensions -- pension plan over the year, particularly in years in which we were pretty flush from an OCF perspective.

And so, we're well over-funded at this point where we have two pension plans and both are over 120% funded. Clearly, asset experience is tough for most, but we have relatively low equity content in our pension plans. And I would say based on how our pension structure at this point, we're a bit more levered to interest rate movement. And with discount rates effectively going up, year-over-year, we actually see it in the short term as a net benefit. And so, we actually are seeing actually a little bit of upside, particularly since we recently remeasured our plan.

So, from our perspective, it's actually net positive at the moment, and we feel quite good about the level of funding for the plan.

[Julien Dumoulin-Smith, Analyst at Bank of America]

Totally. So, no material impact here in the quarter?

[Rejji P. Hayes, Executive Vice President and Chief Financial Officer at CMS Energy]

No, no.

[Julien Dumoulin-Smith, Analyst at Bank of America]

Thanks lot. Thanks to clarify. And then the last one, just a real quick clarification from earlier on solar PVC [Phonetic], I mean, clearly benefits customers from an NPV perspective, but also I think implicitly also helps utilities participate from a rate base perspective as well, I take it?

[Rejji P. Hayes, Executive Vice President and Chief Financial Officer at CMS Energy]

Yeah. So, obviously, our rate construct's a little nuance but it would help us as well, because obviously, it would allow us, potentially, if you think about the 8 gigawatts of solar that we're going to be executing on over the next 15 years to 20 years. We're currently structured to -- at a minimum, own about half of that. And if we can be more competitive because of that benefit with -- obviously, the elimination of normalization, then we could potentially pencil the owned projects in a manner that's comparable with the PPA or contracted portion and that would make a case for owning more than 50% over time. So, obviously, that could add to rate base opportunities.

So, we feel quite good about what we've read today. But again, obviously, more to digest.

[Julien Dumoulin-Smith, Analyst at Bank of America]

Yeah. Clearly, clearly. Okay, excellent. Well, thank you, guys. Speak to you soon.

[Garrick J. Rochow, President and Chief Executive Officer at CMS Energy]

Thanks, Julien.

[Rejji P. Hayes, Executive Vice President and Chief Financial Officer at CMS Energy]

Thanks, Julien.

[Operator]

Our next question comes from Andrew Weisel from Scotiabank. Your line is open.

[Garrick J. Rochow, President and Chief Executive Officer at CMS Energy]

Hey, Andrew.

[Andrew Weisel, Analyst at Scotiabank]

Hi. Good morning, guys. Two clarifying questions. First is, for 2022, did you see that the entire $0.24 to $0.28 negative red bar is conservatism? I know you said you're trending well and you've affirmed guidance, but did I hear you right, is that all conservatism?

And second part of that question is, you mentioned the potential -- the potential to accelerate O&M expenses from 2023, have you started that yet, or are you waiting to get through the summer and the storm season? How flexible can you be to do that, late in the year, in other words?

[Rejji P. Hayes, Executive Vice President and Chief Financial Officer at CMS Energy]

Yeah, Andrew, thanks for the question.

I would say, starting with that $0.24 to $0.28 and negative variance and the six months-to-go bucket of that waterfall chart on page 7, that is a combination of conservative planning. And so that's really a catch-all bucket. And so, we've got in there a non-weather sales assumptions, year to go; we've got enterprise's performance, and so -- and some parent expenses. So, there's conservatism as it pertains to those variables, but the vast majority of that is just contingency that we've accrued just based on the performance in the first half of the year.

And so, obviously, weather was -- has been a big help. It's offered upside to plan. We've seen a little cost performance as well in that little bit of non-weather. Upsides of sales have been strong as well as cost performance, and that's what's driving a good portion of that bucket. So, it's really just where we've caught the contingency, which gives us a lot of flexibility which kind of segues into the second part of your question about what we're doing with respect to pull-aheads.

And so, I would say, at this point, because we saw it six months ago, we really try not to do a whole lot because we still have to get through storm season and see where Q3 is, which, not just from a store perspective, but also in terms of earnings contribution, that's usually where we have the vast majority of our EPS contribution.

And so, we've been cautious. We've done a little bit more with respect to forestry and we've done a little bit more reliability work. Obviously, we made some commitments as part of the IRP and gas settlements with respect to low-income support. And so, those are things we'd like to do and we'll continue to evaluate opportunities for pull-aheads to derisk 2023 some more, going into the second half of the year.

It's also important to remember, we also put in place a really nice regulatory mechanism a few years ago, our voluntary refund mechanism, which effectively allows us to make decisions late in the year from a operational pull-ahead perspective. Get the -- effectively, the accounting benefit in the current year, and then a commitment to do work in the subsequent year. And so that gives us even more flexibility as we head into Q4 and deep into Q4, if we are seeing upside that's in excess of plan, it just gives us a bit more flexibility to commit to more work, and again, see the -- sort of accounting benefits of that in the current year.

So, a lot of flexibility going forward. We've made some moves to date from an O&M pull-ahead perspective. But again, we're obviously cautious at this point, because we've got a lot of Q3 left, and we're waiting to see what happens with storms and weather.

[Andrew Weisel, Analyst at Scotiabank]

Great. Yeah, it's definitely a helpful mechanism you have. Then the other question I just wanted to clarify on equity. So, I guess first question is, when would you decide how to finance Colbert? And could that be something like an equity forward to derisk, but then, just to be very clear beyond financing that acquisition, are you still affirming no plans for equity in the general business financing?

[Rejji P. Hayes, Executive Vice President and Chief Financial Officer at CMS Energy]

Yeah. To answer the last question first, if you put aside the potential funding of Colbert, as we mentioned on the call today, with the -- potentially considering equity, there is no plan to issue equity beyond that until 2025 as per our initial guidance when we rolled out our $14.3 billion five-year plan in Q1 of this year. And so, we're still committed to not issuing equity through 2024, or more specifically until 2025, but for the funding of Colbert.

And in terms of how we'll time that and how we'll think through that, obviously, we will look at the valuation of the stock versus the relative cost of other hybrid securities, and we'll look to be opportunistic from time to time. And we've seen just great pricing in the past with those dribble programs, and so, we'll look to utilize some of that. But again, I think we've got a lot of flexibility because we're not scheduled to acquire Colbert until May of next year. So, quite a bit of time to evaluate, and we'll be opportunistic and dribble out some, likely over the coming months.

[Andrew Weisel, Analyst at Scotiabank]

Thank you very much. That's helpful.

[Rejji P. Hayes, Executive Vice President and Chief Financial Officer at CMS Energy]

Thank you.

[Operator]

Our next question comes from David Arcaro from Morgan Stanley. Your line is open. Please go ahead.

[Garrick J. Rochow, President and Chief Executive Officer at CMS Energy]

Good morning, David.

[David Arcaro, Analyst at Morgan Stanley]

Hey. Good morning. Thanks so much for taking my question. Good morning. I was wondering if you could just comment on how you see the equity ratio at the utilities trending over time? Last, we saw it ticked down a little bit in the gas rate case.

[Rejji P. Hayes, Executive Vice President and Chief Financial Officer at CMS Energy]

Yeah. David, thanks for the question. Obviously, we would love to see equity ratios, if not stabilized, go the other way, and go up because we do believe that we have yet to see a remediation from tax reform when it was enacted in 2017, which led to a 200-basis point degradation in our FFO to debt overnight as well as cash flow degradation. And so, we're going to continue to make the case. In our cases that we filed that equity, thickness should go up, and again, we'll make the case going forward. And what I would mention is, obviously, in the case of the gas rate case settlement, there were a number of stakeholders involved in that process, we thought, given the circumstances and all the other constructive aspects of the settlement, we were comfortable with the equity thickness where it was.

But again, we still think it should be higher than that. I think it's also important to note that we still have deferred tax flow back from tax reform where, again, we're giving back deferred taxes to customers and that has the effect of stimying [Phonetic] or reducing the zero cost of capital component in our rate making capital structure, which offsets some of that reduction in the authorized equity thickness. And so, to be very specific here, our equity thickness in this gas settlement went down from a little over 52% to about 50.75%, so roughly 130 basis points of reduction. However, about 50 basis points of that was offset in our rate-making equity thickness because of the zero -- the reduction of that zero cost of capital there.

And so, again, we'll continue to make the case. We still think equity thickness should continue to go up or should start to go up, and again, the onus is on us to make the case.

[David Arcaro, Analyst at Morgan Stanley]

Got it. Thanks. That's helpful color. And the other topic I was curious about was on the VGP. And could you talk about your progress there and if you see a case for seeing momentum kind of accelerate in customer interest?

[Garrick J. Rochow, President and Chief Executive Officer at CMS Energy]

Yeah, we certainly see a lot of customer interest. We've signed some additional contracts over the quarter. Due to non-disclosure agreements, I can't talk about all of them. One of -- I can share [Phonetic] is the state of Michigan signed a contract over the quarter. And so, recall that's 1,000 megawatts of renewable build, incremental to our plan. And so we're starting to layer in those contracts as we move forward and have those customers secured.

In addition, we look at -- went on to RFP to look at what it would cost to construct that 1,000 megawatts. Again, I won't put it as 1,000, it's going to come very module. It's going to come in little tranches as we build out for our customers, but still good interest -- really good interest, and we continue to line up contracts to support that build. Is that helpful?

[David Arcaro, Analyst at Morgan Stanley]

Okay, got it. Yup, no, that's helpful. Thanks. Maybe one more just quick one to the extent, Rejji, you were to do common equity or something with kind of 100% equity content here for Colbert? Does that offset potential equity needs later in the plan, just given the initial thinking was something with a lower equity content, 50% or so?

[Rejji P. Hayes, Executive Vice President and Chief Financial Officer at CMS Energy]

So, I'm just going to go back to what we committed to when we rolled out our five-year plan, again, before the IRP and before Colbert, so just so everyone's grounded [Phonetic]. So, we said $14.3 billion of capital and we would not need to issue equity until '25 and '26, so the outer years to the plan. And at that point, we would do about $250 million per year in '25 and '26. And now, with Colbert, we said we may dribble some of that. And I would say the funding of Colbert, that's not going to eliminate those outer year needs, if that's specifically the question. So, the $250 million we said we'd issue in '25 and '26 because we are issuing equity to fund Colbert, where we sit today, we don't think that obviates the need to do that equity in those outer years. But we'll see. I mean, obviously, we'll see what happens with respect to economic performance, load, EPS, how much earnings we retain, and so on. But again, from where we sit today, this does not eliminate the need for equity in those outer years.

[David Arcaro, Analyst at Morgan Stanley]

Okay, great. Thanks. Yeah, that's what I was getting at. Much appreciated.

[Rejji P. Hayes, Executive Vice President and Chief Financial Officer at CMS Energy]

Thank you.

[Garrick J. Rochow, President and Chief Executive Officer at CMS Energy]

Thanks.

[Operator]

Our next question comes from Ryan Levine from Citi. Your line is open.

[Ryan Levine, Analyst at Smith Barney Citigroup]

Good morning.

[Garrick J. Rochow, President and Chief Executive Officer at CMS Energy]

Good morning, Ryan.

[Ryan Levine, Analyst at Smith Barney Citigroup]

Good morning. Hoping to follow up on residential load patterns, it looks like your year-over-year residential load on a weather-normalized basis is a little bit softer than some of your peers in neighboring jurisdictions. Curious if there's any color you could share on the drivers, what you're seeing in your service territory?

[Rejji P. Hayes, Executive Vice President and Chief Financial Officer at CMS Energy]

Yeah. So, our residential load -- to be clear, Ryan, are you speaking about, as you said, year-to-date --

[Ryan Levine, Analyst at Smith Barney Citigroup]

Electric.

[Rejji P. Hayes, Executive Vice President and Chief Financial Officer at CMS Energy]

-- 2022?

[Ryan Levine, Analyst at Smith Barney Citigroup]

So, yeah.

[Rejji P. Hayes, Executive Vice President and Chief Financial Officer at CMS Energy]

Yeah.

[Ryan Levine, Analyst at Smith Barney Citigroup]

Year-to-date and for the -- seems like second quarter was a little bit better than first quarter but curious what you're seeing.

[Rejji P. Hayes, Executive Vice President and Chief Financial Officer at CMS Energy]

Yeah. So, year-to-date, yeah, like I said about a little over 0.5% down versus year-to-date 2021. And then on a quarterly basis, Q2 was a little up, about a quarter or 25 basis points versus Q2 of 2021. And so, as we said in the past, we've actually been quite pleased with what we've seen. We've been quite pleased with what we've seen so far in terms of residential load, it exceeds our expectations. We assumed a much more aggressive sort of return to work or return to facilities type of work environment in 2022. And we're still seeing pretty good stickiness in that hybrid work environment and still seeing pretty good load in the residential segment, which obviously is higher margin.

So, it's exceeded our expectations of performance. I can't speak to the performance of others, but we've been quite pleased with what we've seen, being down only about 0.5% year to date. And again, I'll remind you, we're up over 2% versus where we were pre-pandemic. So, the stickiness and resilience is still there. And that's up, it's obviously offering favorable mix. I think it's also worth noting that we plan and we'll continue to plan incredibly conservatively, Ryan. And so, when we see performance like that, even though it's slightly down, it's still offering upside relative to plan.

[Garrick J. Rochow, President and Chief Executive Officer at CMS Energy]

I just want to add on to this too. In both 2020 and 2021, we saw record interconnections -- service line connections with residential homes. And so, record from a company perspective, annual perspective.

And so, again, I can't compare that to what other utilities are seeing, but for us, it's really nice residential load performance across our service territory.

[Ryan Levine, Analyst at Smith Barney Citigroup]

Appreciate that. And then to follow-up on some of the potential pull-forward of '23 costs into '22. You highlighted forestry and a few other items. Curious if you're seeing anything on the labor front there -- to combat some of the inflationary pressures and competition for labor that they may weed to some elevated costs in the back half of the year?

[Garrick J. Rochow, President and Chief Executive Officer at CMS Energy]

Well, remember, one of the -- just -- so 40 -- roughly 40% of our workforce is unionized. And we have a union contract for those and those were signed in 2020. And that contract was a five-year contract that goes to 2025. And so there is some normal escalation. But if you go back to 2021 when that contract was signed, again we didn't see or equate [Phonetic] this inflationary pressure.

And so, again, it's measured, it's budgeted, it's planned for. And so we're not seeing much change there. Across our non-unionized workforce, we've had roughly -- our retention rate -- we haven't seen the great resignation at all. And we've seen solid retention across the pandemic period. And so, again, we haven't had to go out and do a lot of hiring over the time period. And so that's been helpful too from a cost perspective, labor perspective.

[Ryan Levine, Analyst at Smith Barney Citigroup]

I appreciate the color. Thank you.

[Operator]

We have no further questions. I'll now hand back to Mr. Garrick Rochow for closing remarks.

[Garrick J. Rochow, President and Chief Executive Officer at CMS Energy]

Thanks, Elliot. And thank you, everyone, for joining us today. Take care and stay safe.

[Operator]

[Operator Closing Remarks]