CMS Energy Q2 2022 Earnings Call Transcript

Quartr
Provided by Quartr
July 27, 2022

Key Takeaways

  • CMS Energy delivered a strong quarter with adjusted EPS of $0.53 and reaffirmed full-year guidance of $2.85–$2.89, driven by favorable weather and higher weather-normalized sales.
  • The company secured two key regulatory wins: approval of its Integrated Resource Plan to exit coal (under 2% of assets) and lead a clean energy buildout, plus a $170 million gas rate case settlement.
  • Long-term growth targets remain intact with a 6–8% adjusted EPS and dividend growth goal, and a $14.3 billion five-year customer investment plan update scheduled for the Q4 call to reflect IRP approvals.
  • Residential and commercial-industrial load trends stayed above pre-pandemic levels, benefiting from a resilient hybrid work environment and ongoing economic development in Michigan.
  • Balance sheet and liquidity remain strong with investment-grade ratings, $800 million of planned utility debt issuances in 2022, and potential hybrid or equity funding for the Covert natural gas facility acquisition in H1 2023.
AI Generated. May Contain Errors.
Earnings Conference Call
CMS Energy Q2 2022
00:00 / 00:00

There are 11 speakers on the call.

Operator

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. After the presentation, we will conduct a question and answer session. Instructions will be provided at the time.

Operator

If at any time during the conference you need to reach an operator, please press the star followed by 0. Just as a reminder, there will be a rebroadcast of this conference call today beginning at 12 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.

Speaker 1

At this

Operator

time, I would like to turn the call over to Mr. Siri Madhipati, Treasurer and Vice President of Finance and Investor Relations.

Speaker 2

Thank you, Elliot. Good morning, everyone, and thank you for joining us today. With me are Gerrick Rochow, to President and Chief Executive Officer and Reggie 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.

Speaker 2

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 Gary.

Speaker 3

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 tailwinds. And over the course of the quarter, 2 outstanding regulatory outcomes, which provide further evidence of the top tier regulatory jurisdiction in Michigan give us continued confidence in our plan. First, our integrated resource plan.

Speaker 3

If I could open this up for just a moment. 18 months of sophisticated supply modeling, Thousands of pages of testimony, 10 month schedule, a landmark across dozens of stakeholders, from interveners, the attorney general, to the company's business stakeholders and the commission staff to reach a settlement with close to 20 parties. This plan approved at the end of June validly positions us to lead the clean energy transformation. Outstanding. Next, our gas rate case.

Speaker 3

Important investments to ensure a safe, reliable, affordable

Speaker 4

and clean

Speaker 3

natural gas system settled with many of the same parties and approved on July 7, a $170,000,000 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.

Speaker 3

We have nearly 2 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 2,008, which was enhanced and updated in 2016, both with bipartisan support. This allows for timely recovery of investment, 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 positioned Michigan as one of the safest places to invest capital.

Speaker 3

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, we are confident that our proposed customer investments deliver measurable benefit while keeping those affordable. At CMS, we deliver. Our productive and supportive environment and our deliberate approach ensure that no matter the condition, today, we are positioned to deliver industry leading results. We remain committed to leading the clean energy transformation.

Speaker 3

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've 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.

Speaker 3

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 Covert, 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 plan improves the liability and limits our customers' exposure to potentially volatile capacity and energy prices. The IRP strengthens and lengthens our financial plan, Strong execution and constructive regulatory outcomes lead to strong financial results, and I couldn't be more pleased with the first half of twenty twenty two. 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.

Speaker 3

We continue to guide for long term dividend growth of 6% to 8% with a targeted payout ratio of about 60% over time. And will update our current $14,300,000,000 5 year customer investment plan on our year end call 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'll turn the call over to Reggie, who will offer additional detail.

Speaker 4

Thank you, Gerrick, and good morning, everyone. Today. As Gerrick 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 6 months and longer term. To elaborate, for the first half of twenty twenty two, we delivered adjusted net income of $499,000,000 were $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.

Speaker 4

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've continued 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 and 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 twenty twenty one. We also note was $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 Ray Compressor Station incident for which we are not seeking recovery at this time as per our recent gas late case settlement agreement and the company's recent commitment to donate $5,000,000 in support of income based bill assistance for our electric customers as per our IRP settlement agreement.

Speaker 4

These sources of negative variance are partially offset by the aforementioned strong nonweather sales performance in the first half of the year. As we look to the second half of twenty twenty two, we feel quite good about the glide path to achieve our EPS guidance range. As Gerrit mentioned, we had a constructive outcome in our gas rate case. The approved settlement agreement at $170,000,000 significantly derisks 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 twenty twenty one. 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.

Speaker 4

Moving on to cost savings, we continue to anticipate lower O and M at 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 Q3 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 Q4 of 2021 and the usual conservative assumptions for weather normalized load at the utility. Lastly, it's worth noting that we have accrued today is a healthy level of contingency given our strong year to date performance as illustrated in the 0 point 24 negative variance highlighted in the penultimate bar of the chart, which increases our confidence in delivering for you, our investors. Moving on to the balance sheet.

Speaker 4

On Slide 8, we highlight our recently reaffirmed credit ratings from all three rating agencies. 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 plant financings on Slide 9. We continue to plan for $800,000,000 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 Covert Natural Gas Facility in the first half of twenty twenty three as per our approved IRP.

Speaker 4

As a reminder, the current financing plan for Covert assumes the issuance of hybrid securities. However, we're evaluating alternatives, including using our existing ATM equity issuance today. The program given the relative costs in the current environment. It's worth noting that this would be accretive to the previously provided at $0.03 to $0.04 per share of EPS accretion attributable to the purchase of Cobalt and further strengthen our 6% to 8% is 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 Garik for some concluding remarks before Q and A.

Speaker 3

Thanks, Reggie. I'll leave you with this. Nearly 2 decades of industry leading financial performance for you, to our investors, regardless of conditions, administrations, political parties, economic environments, even a pandemic, we deliver. Our strong legislative and regulatory constructs, 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 makes us an investment you can count on.

Speaker 3

With that, Elliot, Please open the lines for Q and A.

Operator

Thank you very much, Tarek. The question and answer session will be conducted electronically. 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 will pause for just a second. Our first question comes from Shahriar Pourreza from Guggenheim Partners.

Operator

Your line is open. Please go ahead.

Speaker 5

Hey, guys. Good morning.

Speaker 6

Jack, pretty clear cut print here, but just given sort of the regulatory outcomes that are now secured like the IRP, the gas settlement, looks like the electric rate case is on track. As we're kind of thinking about maybe the cadence of updates, is the plan to still update CapEx and financing in the 4th quarter? I guess just given the visibility we have, why not provide a full guidance and capital update sometime in the Q3 or EEI timeframe. I guess, in other words, given the regulatory execution that you've clearly highlighted today, could you provide early indication on growth in 'twenty three numbers out of schedule?

Speaker 3

Well, first of all, Shahriar, thanks for the compliments. We are executing well and I am pleased with the first half of the year. But we're still on plan for our Q4 call for our capital update. And let me offer a little color and context around that. The big reason Our execution, our ability to deliver year after year is one of the things we work through is that capital plan and that's from the bottom up.

Speaker 3

Looking at every one of those capital investments to make sure it's going to offer the affordability and benefits to our customers. And so those stack on one another. We want to make sure that we're also able to to queue on those. So that's a matter of understanding our workforce, the work lined up in a year and so that we're ensure that we can deliver on that capital plan. And then you add that IRP, yes, there's COVID, which is great visibility.

Speaker 3

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 5 year plan as well as we spoke in the past about this volunteer green pricing programs, this 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 that plan. So we want to make sure that we can deliver on it.

Speaker 3

That leads to the success of our execution and so that's why we're going to be putting out in Q4 call.

Speaker 6

Okay. Got it. And then just obviously looking at the results year to date and how 'twenty two is shaping up, July looks like a strong weather month. And obviously, you guys are as you highlighted, you have normal weather in plan for the remainder of the year. Does a strong Q3 weather pushed you ahead of guidance?

Speaker 6

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

Speaker 3

Again, Shar, we feel good about where we're at here at the first half of the year. But as you know, and as I said in my prepared remarks, we planned conservatively. Here's what I know. In 2021, during the Q3, we lost $0.16 due to storms. We still delivered on 2021, but again, there's a lot of year left.

Speaker 3

And so were prudent as we move forward. The other thing we look at is where are there opportunities to reinvest, 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 For the high

Speaker 6

end. Okay, terrific. Thanks guys. Appreciate it. Thanks, Reg.

Speaker 6

You too. Bye.

Operator

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

Speaker 1

Good morning, Jeremy. Hi, good morning. Hi.

Speaker 7

Just want to pick up a

Speaker 8

little bit, I guess, with the strong results here. And it did seem like load performance was just is better than expected. 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?

Speaker 4

Hey, good morning, Jeremy. It's Reggie. 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.

Speaker 4

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 1 large low margin customer, up about 3%, And then all in, up about 1.5. And so feel quite good about that. And particularly with respect to residential, we continue to see that good stickiness with the 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 is up about a little over 2%.

Speaker 4

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 DC yesterday, I would think that the CHIPS Act and some of the other legislative items that may be coming down the pipe 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 I feel quite good about the road ahead.

Speaker 4

And going forward, again, we continue to anticipate that you'll 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 to the upside and commercial and industrial continue to trend very well. So that's our take on load at the moment.

Speaker 3

And if I could just add The macro factor here and this is from the Governor's office. This year to date, dollars 11,800,000,000 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 it still looks very robust here in Michigan when you look at it from a macro perspective.

Speaker 8

Got it. That's very helpful there. And then just want to pivot a bit towards MISO. We've seen some capacity constraints today. And that's led to some delays in Cobalt Retirement.

Speaker 8

Just wondering, should we be thinking about any implications to CMS here or anything else that you want to share on this front?

Speaker 3

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.

Speaker 3

That's a requirement of a load serving entity, which we are. So I feel good about where Michigan is headed within MISO. Now I can't speak for all of MISO, but I feel good about where Michigan is at. And I'll remind people, remind all the people on this call that part of this IRP is to bring COVID in. COVID right now is in the PGM market, And we're moving it over to the MISO market.

Speaker 3

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 get out of coal by 2025.

Speaker 8

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

Speaker 3

Jeremy, you've given me like what, 12 hours to digest it all? Here's what I would say on it because we've done some preliminary review and we're still digesting a lot of facts on it. Solar PTC is a big win in there. And that's something we've been advocating for in Washington. We've been advocating the industry.

Speaker 3

Hats off to Reggie. Reggie has been making the calls with CFO. It was 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. That'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.

Speaker 3

So we like that. We know there's a storage ITC as well that will come into play in 2024 to 2027 as we build out 75 Megawatts of Storage. There's a lot of upside for the industry. We're the birthplace of the automobile. I talked about the 11,800,000,000 most of that's in the automotive space.

Speaker 3

There's opportunities for load growth in the automotive business to grow as they make their transition. There is incentives in there for solar production in the U. S. In Michigan, one of our largest customers is the largest world's largest 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.

Speaker 3

There is a big tailwind on EVs. EVs are a nice part of load growth. It's not in our forecast, but there is a continuing credit for purchase of EVs. And so there's a lot of good stuff in here. We're still digesting of all the specifics, but feeling good, Feeling good with coming out of the Senate and of course there's negotiations with the House in front of us.

Speaker 8

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.

Speaker 9

Hey, everyone. Good morning.

Speaker 3

Good morning, Michael.

Speaker 9

Hey, Garik. Reggie, I wanted to go over to you on just the latest commentary on the potential Looking at common equity for financing in Covert, I think that was a $815,000,000 project. Any sense of how much the equity could be and how materially the $0.03 to $0.04 accretion could change?

Speaker 4

Yes, I appreciate the question, Michael. I would say we're obviously still evaluating options. You have the purchase price of COVID spot on at $815,000,000 And so as you know, our rate construct, we would fund about half of that with debt of utilities, so call it roughly $400,000,000 and the balance would be parent financing. And mathematically, that gets you to about $400,000,000 but we'll still Consider what the alternatives might be. And obviously, we've got quite a bit of time to fund it.

Speaker 4

And so, we'll look at our dribbling, our ATM equity issuance program. Whether that will be the full $400,000,000 remains to be seen. And so we'll see how the price of other alternatives like those hybrid securities, which but for the past 6 to 7 months or so have really priced quite competitively. And so if that changes over time, we may tranche it a little bit. And so I'd say it's still early days, but we could go up to about $400,000,000 We've got is not that much on the shelf, but we'll see how the pricing trends over the next handful of months.

Speaker 4

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 costs right now of our equity versus other securities.

Speaker 9

Okay. Super helpful color. And then last question, what do you guys think about making it 3 for 3 with settlements this year with the pending I like your case.

Speaker 4

We'll see. I mean, I think batting $670,000,000 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 then we'll look and see where the staff is in about a month and we'll go from there.

Speaker 4

But I would say early to hate to make any prediction at this point.

Speaker 9

Great. Thanks a lot.

Speaker 5

Thank you.

Operator

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

Speaker 1

Hey, good morning. You guys really do execute. Hey, hey. Yes. So Always, always.

Speaker 1

Hey, so let me follow-up on the slide set of Engel. Just one nuance here. AMT, just 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 can rehash as best you understood, your probably assessment of

Speaker 6

this last year, if you will.

Speaker 4

Yes. So Julien, just to be clear, you're talking about the alternative minimum tax with respect to last night's

Speaker 1

Yes, exactly, the 15%. Okay.

Speaker 4

Yes, with respect to climate Bill. So again, as Gerrick 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's a 3 year average on Pre tax operating income around $1,000,000,000 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.

Speaker 4

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 this at 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's 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's a significant impact on us again given our size and today apply that 3 year average of $1,000,000,000 of pretax operating income. We just wouldn't tune that bar for a little while.

Speaker 1

Yes. No, that makes sense. Thank you for the hot takes there. Appreciate it. OPAD contribution to the quarter here, etcetera.

Speaker 1

Just curious if you can comment here. Obviously, that subject

Speaker 3

has gotten some attention late broadly.

Speaker 4

Yes. 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 overfunded. At this point, we have 2 pension plans and both are over 120% funded.

Speaker 4

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 is structured at at this point were 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.

Speaker 1

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

Speaker 4

No. Excellent.

Speaker 1

Thanks for clarifying. And then the last one, just super quick From earlier on solar PTC, I mean, clearly, benefits customers from an NPV perspective, but also I think implicitly also helps to utilities participate from a rate base perspective as well, I take it?

Speaker 4

Yes. So, obviously, our rate construct is 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 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 PPA or contracted portion and that would make a case for owning more than 50% over time. So obviously that could add to a rate based opportunities. So we feel quite good about what we've read today, but again, obviously more to digest.

Speaker 10

Yes, clearly, clearly.

Speaker 1

Okay, Excellent. Well, thank you guys. Speak to you soon. Thanks, Julien. Thanks, Julien.

Operator

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

Speaker 3

Hi, Andrew.

Speaker 5

Hi, good morning guys. Two clarifying questions. First is for 2022, did you say that the entire $0.24 to $0.28 negative red bar is conservatism? I know you said you're trending well and you've confirmed guidance. But did I hear you right there?

Speaker 5

Is that all conservatism? And second part of that question is You mentioned the potential to accelerate O and 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?

Speaker 4

Yes. Andrew, thanks for the question. I would say starting with that $0.24 to $0.28 a negative variance in the 6 months to go bucket of that waterfall chart on Page 7. That is a combination of conservative planning. And so that's really a catchall bucket.

Speaker 4

And so we've got in there non weather sales assumptions year to go. We've got a little enterprises 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 has been a big help. It's offered upside to plan.

Speaker 4

We've seen a little cost performance as well and a little bit of non weather upside. So 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 parked the contingency, which gives us a lot of flexibility, which kind of segues into the second part of question about what we're doing with respect to pull aheads. And so I would say at this point, because we still have 6 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 storm perspective, but also in terms of earnings contribution. That's usually where we have the vast majority of our EPS contribution.

Speaker 4

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 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 an operational pull ahead perspective, I guess, effectively, the accounting benefit in the current year and then a commitment to do work in the subsequent year.

Speaker 4

And so that gives us even more flexibility as we head into Q4 and deep into Q4. If we're seeing upside, it'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 today from an O and 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.

Speaker 5

Great. Yes, 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 Covert 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?

Speaker 4

Yes. To answer the last question first, If you put aside the potential funding of Covert, as we mentioned on the call today with potentially considering equity, There's no plan to issue equity beyond that until 2025 as per our initial guidance when we rolled out our $14,300,000,000 5 year plan in Q1 of this year. So we're still committed to not issuing equity through 2024 or more specifically until 2025, but for the funding of Cobalt. And in terms of how we'll time that and how we'll think through that, obviously, we'll look at the valuation 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 is scheduled to acquire, Covert until May of next year.

Speaker 4

So quite a bit of time to evaluate and we'll be opportunistic and dribble out some likely over the coming months.

Speaker 5

Thank you very much. That's helpful.

Speaker 1

Thank you.

Operator

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

Speaker 7

Hey, today. 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 after we saw it tick down a little bit in the gas rate case.

Speaker 4

Yes. David, thanks for the question. Obviously, we would love to see equity ratios, if not stabilize, 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.

Speaker 4

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 blowback from tax reform where again we're giving back deferred taxes to customers and that has the effect of skinnying 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.

Speaker 4

However, about 50 basis points of that was offset in our rate making equity thickness because of the 0 the reduction of that 0 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.

Speaker 7

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?

Speaker 3

Yes. We certainly see a lot of customer interest. We've sent some additional contracts over the quarter. Due to non disclosure agreements, I to talk about all of them. One of my can share is the State of Michigan signed a contract over the quarter.

Speaker 3

And so recall that's 1,000 megawatts of renewable build is 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 out to RFP to look at what it would cost to construct that 1,000 megawatts. Again, I wouldn't put it as 1,000, that's going to come very module. It's is coming 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.

Speaker 3

Is that helpful?

Speaker 7

Okay, got it. Yes. No, that's helpful. Thanks. Maybe one more, just Quick one.

Speaker 7

To the extent that, Reggie, you were to do common equity or something with kind of 100% equity content here for Covert, does that to offset potential equity needs later in the plan just given the initial thinking was something with a lower equity content 50% or so?

Speaker 4

So I'm just going to go back to what we committed to when we rolled out our 5 year plan again before the IRP and before COVID. So just so everyone's grounded. So we said $14,300,000,000 of capital and we would not need to issue equity until 2025 and 2026, so the outer years of the plan. And at that point, we would do about $250,000,000 per year in 2025 and 2026. So now with COVORT, we've said we may dribble a portion of that.

Speaker 4

And I would say the funding of COBRA, that's not going to eliminate those outer year needs if that's specifically the question. So the $250,000,000 we said we'd issue in $25,000,000 $26,000,000 because we're issuing equity to fund COVID. 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.

Speaker 4

But again, from where we sit today, this does not eliminate the need for equity in those outer years.

Speaker 7

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

Speaker 5

Thank you. Thanks.

Operator

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

Speaker 1

Good morning. Good morning, Ryan.

Speaker 10

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

Speaker 8

in your service territory?

Speaker 4

Yes. So, our residential load to be clear, Ryan, are you speaking about it, you said year to date Like 2022 percent.

Speaker 10

So, yes, year to date and for

Speaker 1

the it seems like Q2 was

Speaker 10

a little bit better than Q1, but curious what you're seeing?

Speaker 4

Yes. So year to date, yes, 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.

Speaker 4

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 and resilience is still there and that's obviously offering favorable mix.

Speaker 4

I think it's also worth noting that we plan and we'll continue to plan incredibly conservative conservatively, Ryan. And so when we see performance like that, even though it's slightly down, it's still offering upside relative to plan.

Speaker 9

I just want to add on

Speaker 3

to this too. In both 2020 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 low performance across our service territory.

Speaker 10

Appreciate that. And then the follow-up on some of the potential pull forward of 2023 costs into '22, you highlighted forestry and a few other items. Curious if you're seeing anything on the labor front, to combat some of the inflationary pressures and Competition for labor that may lead to some elevated costs in the back half of the year.

Speaker 3

Well, Remember, one of the just roughly 40% of our workforce is unionized and we have a union contract for those and those were signed in 2020. And that contract is a 5 year contract that goes to 2025. And so there's some normal escalation. But if you go back to 2020 when that contract was signed, Again, we didn't see quite this inflationary pressure. And so again, it's measured, it's budgeted, it's planned for and so not seeing much change there.

Speaker 3

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

Operator

Yes,

Speaker 3

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.

Speaker 10

Appreciate the color. Thank you.

Operator

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

Speaker 3

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

Operator

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

Powered by Quartr