Q2 2022 CMS Energy Corp Earnings Call
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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 interim.
Mr Relations section.
This call is being recorded.
After the presentation, we will conduct a question and answer session.
Instructions will be provided at that time.
Any time today on the conference you need to reach an operator. Please press the star followed by zero.
Just as a reminder, there will be it will be a rebroadcast of this conference call today.
12 P M Eastern time running through August 4th.
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. Shealy, Multiparty Treasurer, and Vice President of Finance and Investor Relations.
Thank you Elliot and good morning, everyone and thank you for joining US today with me are Garik Rochelle, President and Chief Executive Officer, and Richard Heyse, 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 Gary.
Thanks, Sri and thank you everyone for joining us today I.
I am excited to share another strong quarter at CMS energy and a great first half of the year.
Holstered 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 can you 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 months schedule alignment across dozens of stakeholders from intervenors, 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 .
<unk> positions us to lead the clean energy transformation.
Outstanding.
Next our gas rate case important investments to ensure safe reliable affordable and clean natural gas system.
Settled with many of the same parties.
Unapproved on July seven.
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.
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 plan such as our ERP.
As well as our electric and natural gas distribution plan, which we filed in our rate cases.
This coupled with separate mechanisms allow us timely recovery of fuel and power supply costs as.
As well as attractive economics on renewable energy investments.
And energy waste reduction programs.
And <unk>.
Uniquely position, Michigan is one of the safest places to invest capital.
Well, 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.
Productive and supportive environment and our deliberate approach to ensure that no matter the condition.
We are positioned to deliver industry leading results.
We remain committed to leading the clean energy transformation.
On the solid foundation of strong energy law, we delivered and settled our IOP.
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 the.
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.
Intermittent nature of renewable.
The acquisition of cohort two.
Combined with the RFP for 700 megawatts of capacity through Ppas.
The build out of eight 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.
And limits, our customers' exposure to potentially volatile capacity and energy prices.
The ERP strengthens and lengthened our financial plan.
Eliminate.
Our exposure to coal improves reliability and is a solid win where everyone.
Strong execution.
<unk> and constructive regulatory outcomes lead to strong financial results.
Couldnt 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 <unk> 53 for.
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 towards the high end of our long term adjusted EPS growth range of 6% to 8%.
Which as I noted is strengthen and lengthen.
By our ERP.
We continue to guide for long term dividend growth of 6% to 8% with.
With a targeted payout ratio of about 50% over time.
And we will update our current $14 3 billion dollar five year customer investment plan on our yearend call to include the anticipated upside.
From the approval of our IRB.
We are strongly positioned to deliver in the remainder of the year.
With that.
I will turn the call over Rajeev well for additional detail.
Thank you Derek and good morning, everyone.
As Gary noted, we had a strong first half of the year.
We are ahead of plan and are well positioned to achieve our financial objectives over the next six months and longer term.
To elaborate for the first half of 2022, we delivered adjusted net income of $499 million.
A $1 73 per share up <unk> <unk> per share versus our 2021 first half result, largely driven by favorable weather and economic conditions in the state.
The waterfall chart on slide seven provides more detail on the key year to date drivers of our financial performance versus 2021.
As noted favorable sales had been the primary driver of our positive year over year variance to the tune of <unk> 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 <unk> <unk> 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 de carbonization, which equated to seven per share of negative variance versus the first half of 2021.
Sure.
You'll also note that <unk> 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're not 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 ERP 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 Garrett mentioned, we had a constructive outcome in our gas rate case.
<unk> settlement agreement at $170 million significantly de risk our financial plan and when coupled with our December 2021 electric rate order provides <unk> <unk> per share 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.
Which we assume will provide a penny 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 level levels experienced in 2021, which I'll remind you equated to 60 <unk> per share of downside in the third quarter of 2021.
<unk> 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 enterprises, given the outage at dig in the fourth quarter 2021, and the usual conservative assumptions for weather normalized load at the utility <unk>.
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 24 to 28 point of negative variance highlighted and the ultimate bar of the chart, which increases our confidence in delivering for you our investors move.
Moving onto the balance sheet on slide eight we highlight our recently reaffirmed credit ratings from all three rating agencies. As you know we continue to target mid teens episode of 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 nine 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 cobalt natural gas facility in the first half of 2023.
As per our approved IR Pete.
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 program given the relative cost in the current environment, It's worth noting that this would be accretive.
To the previously provided $3 <unk> per share of EPS accretion attributable to the purchase of cohort and further strengthen our 6% to 8% long term adjusted EPS growth outlook.
Lastly, we have preserved our strong liquidity position, which supplements our use of commercial paper over the coming months and with that I'll turn the call back to Gary for some concluding remarks before Q&A.
Thanks Reggie.
I'll leave you with this.
Two decades of industry, leading financial performance for you our investors regardless of conditions administrations political parties economic environment, even a pandemic.
We deliver.
Our strong legislative and regulatory construct a robust capital runway <unk>.
Industry, leading cost management conservative planning and our commitment to deliver across the.
Bottom line.
All of this makes long investment thesis and makes US an investment you can count on.
With that Elliot.
Please open the lines for Q&A.
Thank you very much alright, a question and answer session will be conducted electronically.
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<unk> taken a loss we will take as many questions as time permits.
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We'll pause for just a second.
Okay.
Our first question comes from Shar <unk> from Guggenheim Partners. Your line is open. Please go ahead.
Hey, guys good morning.
That's pretty pretty clear cut trend here, but just given sort of the regulatory outcomes that are now secured.
<unk> the gas settlement, we expect the electric rate cases 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 fourth quarter I guess, just given the visibility we have why not provide a full guidance and capital update sometime in the third quarter.
Hi 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 ahead of schedule.
Well first of all sure thanks for the complex.
We are executing.
Hi, everyone.
I am pleased with the first half of the year.
But we're still on plan for Q.
Our Q4 call for a capital update let me off a little.
Color and context around that.
The reason for our execution, our ability to deliver year after year is.
One of the things we've worked through that capital plan and Thats from the bottom up looking at every one of those capital investments.
To make sure that is going to offer the affordability and benefits to our customers. So those stack on one another we want to make sure that we're also able to execute on those.
So thats a matter of understanding our workforce work lined up in a year and so that we ensure that we can deliver on that on that capital plan and then you add the <unk> cohort, 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.
We've got to make sure that that's constructed and built into those five year plan as well as.
We've spoken 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 thats another factor thats going into that plant. So.
We want to make sure that we can deliver on it at least the success of our execution.
And so.
That's why we're going to be putting out in Q4.
Our Q4 call.
Okay got it.
And then just obviously looking at the results year to date in 'twenty.
'twenty two is shaping up July it looks like a strong weather months and obviously you guys are because you highlighted you have normal weather and plant for the remainder of the year does a strong.
Third quarter weather push ahead of guidance and maybe what are sort of some of the offset some moving pieces. There that we should be thinking about because just looking at the results to date. It seems like Youre well ahead of your numbers, but.
Yeah.
Again, we feel good about where we're at here at the first half first half of the year, but as you know.
I said in my prepared remarks, we plan conservatively, here's what I know in 2021 during the third quarter, we lost 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.
As we move towards the end of the year that helps to de risk future years, and again continues to strengthen and lengthen that long term EPS growth rate of six.
For the high end.
Okay terrific. Thanks, guys appreciate it thanks Rajiv.
Yes.
Our next question comes from Jeremy Tonet from Jpmorgan. Your line is open.
Good morning, Jeremie, Hi, good morning, Hi.
Just wanted to pick up a little bit I guess with the strong results here and it did seem like load performance is 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 load growth perspective is.
Kind of continue at this pace or do you see something stopping.
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.
Just to remind folks on some of the specifics and so we had residential down a little over 5%. So.
So thats year to date versus year to date 2021 commercial and industrial.
Our industrial excludes one large low margin customer up about 3% and then all in up about a point and a half and so we 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% and so again that stickiness just really carries on we continue to see from an economic development perspective, just good activity in our service territory and obviously with some of the news in D. C. Yesterday, I would think that the chips act and some of the <unk>.
Other legislative items that may be coming down the pie could lead to more economic development opportunities or increase the probability of some of the stuff that has come in Michigan's way or as 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 and going forward again, we continue to anticipate that youll start to head back to those pre pandemic levels and so.
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 and if I could just add.
Macro factor here and this is from the Governor's office.
Year to date.
$11 8 billion.
<unk> of investment.
Opportunities announced in Michigan those are projects that have agreed to the locate expand was actually 30 companies at all in 15000, new jobs and so that's one of the Governors office here mid July so.
Still looks very robust here in Michigan, when you look at from a from a macro perspective.
Got it that's very helpful. There and then just wanted to pivot a bit.
Towards MISO, we've seen some capacity constraints there and.
And Thats led to some delays in coal plant retirements, just wondering should we be thinking about any implications to CMS here or anything else that you want to share on this front.
I Love our energy law.
We do that 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 go.
Meat and have some reserve margin on that that's a requirement of a load serving entity, which which we are so I feel good about where michigan's headed within MISO I can't speak for all of MISO, but I feel good about where Michigan that and I'll remind people.
All of the people on this call that part of this <unk> to bring cohort cohort right now is in the PJM market and we're moving it over to the MISO market. That's one two gigawatts of additional <unk>.
Apply thats being brought into MISO and brought here to serve our customers and so that's why we feel good about it our AARP, we're still on pace and plan for retirement of all coal to be out of coal by 2025.
Got it Thats very helpful last one if I could hot off the press climate BBB.
Package climate package being support by I mentioned here any preliminary thoughts at this point.
Jeremy you can give me like what 12 hours to digest it all.
Eric what I would say, here's what I would say on it because we've done some preliminary preliminary review and were still digesting a lot of facts on it.
So we're PTC is a big win in there and that's something we've been advocating for and Washington, we've been advocating industry hats off to to Reggie Reggie as Ben.
Making the calls with CFO 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 eight gigawatts is going to be lower cost for our customers as we build out more solar and it'll provide put us on par with developers. So we like that we know theres a storage ITC as well that will come into play in 2020.
$4 27, as we build out 775 megawatts of storage, there's a lot of upside for the industry.
While the birth place of the automobile I talked about the $11 8 billion. Most of that's in the automotive space Theres opportunities for 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 worldwide one of the world.
Largest producers of poly silicon.
<unk>, 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 low growth if not in our forecast.
But there is a continuing credits for purchase of Evs and so there's a lot of good stuff in here, we're still digesting all the specifics but.
Feeling good feeling good with coming out of the Senate and of course, there is negotiations with the house in front of us.
Great that's helpful I'll leave it there thanks.
Our next question comes from Michael Sullivan from Wolfe Research. Your line is open. Please go ahead.
Hey, Michael.
Hey, Garik.
Wanted to go over to you on just the latest commentary on the potential.
Looking at at common equity financing in cohort.
I think that was $815 million project.
Any sense of how much the equity could be and how materially the three to four accretion could change.
I appreciate the question Michael I would say we are obviously still evaluating options you have the purchase price of cover it 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, and then the balance would be parent financing and mathematically that gets you to about 400 million, but we will 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 remains to be seen and so we will see how the price of other alternatives like those hybrid securities, which but for the past six to seven months or so it really priced quite competitively and so if that changes overtime, we may tranche at a little bit and so I'd say, it's still early days, but we could go up to about 400.
We've got that much on the shelf, but we'll see how the pricing trends over the next handful of months and then with respect to the accretion.
At this point I'd say, it's premature to offer precisely how accretive it would be.
To the three to four.
We provided because clearly that would depend on the price at which we issue equity if we do choose to durable 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.
Okay Super helpful color.
Then last question what are you guys thinking about making it.
Three for three with settlements this year with the pending.
Electric case.
Okay.
Alright.
We'll see I mean, I think betting that 670 still gets into cooperstown. So we've been encouraged with the IRT in the gas rate settlement electric obviously, many more stakeholders many more variables.
But we've been successful there before so we're cautiously optimistic but early days I mean, we'll 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 predictions at this point.
Great. Thanks, Thanks, a lot.
Okay.
Thank you.
Our next question comes from Julien Dumoulin Smith from Bank of America Your line.
That is open.
Hey, Good morning, you guys really do execute.
Hey.
No.
Yes.
Always always.
So let me follow up on this legislative angle I just wanted to ask your AMC is going to get a lot of attention. This week I imagine for all of the utilities here. What are you guys staying on that I know, we ask you here for your hard it takes a second ago, but just if you could rehash as best you understood.
Probably assessment of this last year, if you will.
Yeah, So Julien just to be clear youre talking about the alternative minimum tax with respected last night.
Yes, exactly the 15% okay.
Yes with respect to climate Bill. So again Garik noted, we're still digesting and I think it's about 700 pages.
Our folks in federal affairs and on the tax side, a really really good at what they do and they're fast readers, but 700 pages of a lot to digest in 12 hours, but I'd say based on what we are going so far as I understand it.
The structure Thats contemplated is consistent with what we were talking about around EI several months ago, where theres a three year average on pre tax operating income around $1 billion and if you're below that threshold you are 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 are 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 its structured how it was when we were talking about this at EI.
You can 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 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 little while.
Yes, no that makes sense. Thank you for the how it takes there I appreciate it.
Okay.
During the quarter here et cetera, just curious if you can comment here, obviously that subject has gotten some attention of late.
Broadly thank you.
Yes from a pension perspective again.
Story has been quite good for some time now as you may recall, we have been very active.
And making discretionary contributions to our pension plan.
Pension plan over the year, particularly in years in which we were pretty flush them in OCI perspective, and so we're well overfunded.
At this point, 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 and our pension plans and I would say based on how our pension structured 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 re measured our plan.
So from our perspective is actually a net positive at the moment and we feel quite good about the level of funding for the plan.
Total alright, so no material impact.
Impact here in the quarter.
No.
No.
Excellent.
Thanks for clarifying and then the last one just Super quick clarification from earlier on solar PTC 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.
Yes, Sir.
Obviously, our rate construct a little nuance, but.
Would help us as well because obviously it would allow us potentially if you think about the eight gigawatts of solar that we are going to be executing on over the next 15 to 20 years. We're currently structured to at a minimum one about half of that and if we can be more competitive because of that benefit with the 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, and so obviously that could add to rate base opportunity. So we feel quite good about what we've read today, but again, obviously more to digest.
Yes, clearly clearly okay excellent well. Thank you guys speak to you soon.
Thanks Julien.
Our next question comes from Andrew Weisel from Scotia Bank. Your line is open.
Hi, Andrew.
Hi, good morning, guys.
Two clarifying questions first is for 2022 did you see that the entire 24 to 28 negative Red bar. Its conservatism I know you said you are trending well and you've affirmed guidance.
Did I hear you right that is that all conservatism and second part of that question is you mentioned the potential.
Potential to accelerate O&M expenses through 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.
Yes, Andrew Thanks.
For the question I would say starting with that 24 to 28 tenths of negative variance in the six months ago bucket of that waterfall chart on page seven.
That is a combination of conservative planning and so that's really a catch all bucket 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 was has been a big help it's offered upside to plan, we've seen a little cost performance as well and a 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 parked the contingency which gives us a lot of flexibility which kind.
Segways into the second part of your question about what we're doing with respect to pull ahead and so I would say at this point because we still have 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 years, 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.
We've been cautious we've got 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 IRB 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 ahead to de risk 2023.
More going into the second half of the year. It's also important to remember we also.
Puts 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 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're seeing upside its in excess of plan. It just gives us a bit more flexibility to commit to more work against 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 are waiting to see what happens with storms.
And weather.
Yes.
Great. Yeah, that's definitely helpful mechanism you have.
And then the other question I just wanted to clarify on equity. So I guess first question is when would you decide how to finance covered and could that be something like an equity forward to de risk and then just to be very clear beyond financing that acquisition are you still affirming no plans for equity in the general business final.
Answering.
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, more specifically until 2025, but for the funding of cohort.
And in terms of how we will 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 gerbil programs and so we will look to utilize some of that.
But again I think we've got a lot of flexibility because we are not scheduled to acquire cohort 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.
Thank you very much that's helpful.
Thank you.
Our next question comes from David O'connor from Morgan Stanley . Your line is open. Please go ahead.
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 afterwards.
Down a little bit in the gas rate case.
Yes, David Thanks for the question.
Obviously, we would love to see equity ratios, if not stabilized go the other way.
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 <unk> 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.
Again, we will make the case going forward.
I'd mentioned 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 this 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.
We still have.
Deferred tax flow back from tax reform, where again, we're giving back.
Taxes to customers and that has the effect of cleaning of reducing the zero cost of capital component and our ratemaking capital structure, which offsets some of that reduction in the authorized equity thickness and so to be very specific here are equity thickness and this gas settlement.
Went down from a little over 52% to about 57, 5%. So roughly 130 basis points of reduction however, about 50 basis points of that was offset in our ratemaking equity thickness because of the zero.
The reduction of that zero cost of capital there and so again, we will continue to make the case, we still think equity thickness should should continue to go up.
<unk> should start to go up and again the onus is on us to make the case.
Got it. Thanks, that's helpful color and the other topic I was curious about was on the BGP and could you talk about.
Your progress there and if you see a case for seeing momentum kind of accelerate.
Customer interest.
Yes, we certainly see.
A lot of customer interest we have seen some additional contracts over the quarter.
Due to non disclosure agreements I can't talk about all of them one of them I can share is the state of Michigan signed a contract over the quarter and so recall that as a 1000 megawatts of renewable build incremental to our plan and so we're starting to layer in those contracts as we move forward.
The customer secured in addition, we've looked at went out to RFP and look at what it would cost to construct that 1000 megawatts and again I wouldn't put it as a 1000 and that's going to come very module, that's going to come in a 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.
That helpful. Okay got it no. That's helpful. Thanks, maybe one more just quick one to the extent you were to do.
Common equity or something Thats kind of a 100% equity content here for Culver does that offset potential equity needs later in the plan just given the initial thinking with something with a lower equity content to 50% or so.
So I'm just going to go back to what we committed to when we rolled out our five year plan again before the ERP and before cohort. So just so everyone's granted so we said $14 3 billion of capital and we would not need to issue equity until 'twenty five and 26 of the outer years of the plan and at that point, we would do about two.
$250 million per year, and 25% and 26, so now with cohort. We said we may drill more of them.
That.
And I would say the funding of cohort that's not going to eliminate those outer year needs. If that specifically the question. So the $250 million. We said, we would issue and 25 and 26, because we are issuing equity to fund cohort, where we sit today, we don't think that obviates the need to do that equity in those outer years, but we will see I mean, obviously, we will 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.
Okay, great. Thanks, Yeah, that's what I was getting that much.
Much appreciate it.
Thank you thanks.
Our next question comes from Ryan Levine from Citi. Your line is open.
Good morning, Good morning, Ryan.
Good morning, I'm going to follow up on residential load patterns. It looks like euro year over year residential load on a weather normalized basis, a little bit softer than some of your peers in neighboring jurisdictions curious if theres any color you could share on the drivers, but youre seeing in your service territory.
Okay.
Yes, Sir.
Residential load.
To be clear Ryan are you speaking about it you said year to date two.
2022.
Yes year to date and for the it seems like second quarter was a little bit better than first quarter, but curious what you are saying.
Yes, so year to date, yes, like I said about a little over half a percent down.
Versus year to date 2021, and then on a quarterly basis Q2 was a little up.
A quarter or 25.
<unk> points versus Q2 of 2021 and Joe.
We said in the past, we've actually been quite pleased with what.
We have seen.
And we've been quite pleased with what we've seen so far in terms of residential load it exceeded our expectations. We assumed a much more aggressive sort of return to work of returned 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 its 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 a half a percent 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 is obviously offering favorable mix I think it's also worth noting that we.
Plan and we will continue to plan incredibly conservative conservatively, Ryan and so when we see performance like that even though slightly down it's still offering upside relative to plan.
I just wanted to add onto this too in both 2020 in 2021, and 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 other utilities are seeing but for us it's really nice residential load performance.
Across our service territory.
I appreciate that and then a follow up on some of the potential pull forward of 23 costs into 'twenty. Two you highlighted <unk> and a few other items curious if youre seeing anything on the labor front.
Okay.
Combat some of the inflationary pressures and competition for labor.
We took some elevated costs in the back half of the year.
Yes.
Well remember one of the shows.
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 five year contract that goes to 2025 and so there is some normal escalation, but if you go back to 2020 when that contract was signed again, we didn't see quite as inflationary pressure and so.
Again, it's measured its budget, it's planned for and so not seeing much change there across our non unionized workforce, we've had roughly a retention rate we haven't seen the great resin 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 to from a cost cost perspective labor perspective.
I appreciate the color. Thank you.
We have no further questions I'll now hand back to Mr. <unk> for closing remarks.
Thanks Elliot.
And thank you everyone for joining us today take care and stay safe.
This concludes today's conference.
Thank you everyone for your participation.
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