CMS Energy Q2 2021 Earnings Call Transcript

Quartr
Provided by Quartr
July 28, 2021

There are 7 speakers on the call.

Operator

Good morning, everyone, and welcome to the TMS Energy Second Quarter 2021 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 that time.

Operator

As a reminder, there will be a rebroadcast of this conference call today beginning at call through Eastern Time running through August 5. 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. Sree Madhithati, Vice President of Treasury and Investor Relations. Please go ahead, sir.

Speaker 1

Thank you, Rocco. Good morning, everyone, and thank you for joining us today. With me are Gerrit Grochow, 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 1

This presentation also includes non GAAP measures. Reconciliations of these measures The most directly comparable GAAP measures are included in the appendix and posted on our website. Now I'll turn the call over to Derek. Thanks, Sri, And thank you everyone for joining us today. It's great to be with you and we thank you for your continued interest And support.

Speaker 1

I'm going to start today with the end in mind. Strong quarter and a great first half of the year, Giving us confidence as we target the high end of the guidance range. Reggie will walk through the details of the quarter And I'll share what the strong results mean for 2021 earnings. Needless to say, I'm very pleased. An important June, sales of EnerBank at 3x book value, moving from non core to the core business With a strong focus on regulated utility growth, the sale of the bank provides for greater financial flexibility, Eliminating planned equity issuance from 2022 to 2024.

Speaker 1

And Reggie will share how we have reduced our equity issuance need for 2021 in today's remarks. Furthermore, with the filing of our integrated resource plan, you can see the path for more than $1,000,000,000 into the utility, Again, without equity issuance, not only is there visibility to that investment, but certainty in the timeline for review. I'm excited about this IRP. It's a remarkable plan. Many have set net zero goals.

Speaker 1

We have industry leading net zero goals and this IRP provides the path and is an important proof point in our commitment. We are leading the clean energy transformation. It starts with our investment thesis. This simple but intentional approach has stood the test of time and continues to be our approach Going forward, it is grounded in a balanced commitment to all our stakeholders and enables us to continue to deliver On our financial objectives, with the sale of EnerBank and the plan to exit coal by 2025, Our investment thesis gets even simpler, but now it's also cleaner and leaner. We continue to mature and strengthen our Luma operating system, the CEWAY, which delivers value by reducing cost and improving quality, Ensuring affordability for our customers and our thesis is further strengthened by Michigan's supportive regulatory construct.

Speaker 1

All of this supports our long term adjusted EPS growth of 6% to 8% and combined with our dividend provides a premium total shareholder return of 9% to 11%. All of this remains thoroughly grounded in our commitment to the triple bottom line of people, Planning and profit. As I mentioned, our integrated resource plan provides the proof points to our investment thesis, Our net zero commitments and highlights our commitment to the triple bottom line by accelerating our decarbonization efforts, Making us one of the first utilities in the nation to exit coal. We're increasing our renewable build out, adding about 8 gigawatts of Soared by 2,040, up 2 gigawatts from the previous plan. Furthermore, this plan ensures reliability, A critical attribute as we place more intermittent resources on the grid.

Speaker 1

The purchase of over 2 gigawatts of existing natural gas generation allows us to exit coal and dramatically reduces our carbon Existing natural gas generation is key. And like we've done historically with the purchases of our Zealand In Jackson generating stations, this is a sweet spot for us where we reduce permitting, construction and startup risk. It is also thoughtful and that is not a 40 to 50 year commitment that you would get with a new asset, Which we believe is important as we transition to net zero carbon. And yes, on the other hand, Our plant is affordable for our customers. It will generate $650,000,000 of savings, Essentially paying for our transition to clean energy.

Speaker 1

This is truly a remarkable plan. It is carefully considered and data driven. We've analyzed hundreds of scenarios with different sensitivities And our plan was thoughtfully developed with extensive stakeholder engagement. I couldn't be more proud of this plan, and especially the team that put it together. We've done our homework and I'm confident it is the best plan for our customers, our coworkers, the great state of Michigan and of course you, our investors.

Speaker 1

It hits the triple bottom line. The integrated resource plan is a key element of Michigan's strong Regulatory construct, which is known across the industry as one of the best. It is a result of legislation Designed to ensure timely recovery of the necessary investments to advance safe and reliable energy in our state. Michigan's forward looking test years and the 3 year preapproval structure of the IRP process gives visibility on our future growth. It enables us and the commission to align on long term generation planning and provide greater certainty as we invest In our Keane Energy transformation, we anticipate an initial order for the IRP from the commission in April and a final order in June of next year.

Speaker 1

The visibility provided by Michigan's regulatory construct Enables us to grow our capital plan to make the needed investments on our system. On Slide 6, you can see Our 5 year capital plan has grown every year. Our current 5 year plan, which we'll update On our year end call includes $13,200,000,000 of needed customer investment. It does not contain the upside in our IRP. The IRP provides a clear line of sight To the timing and composition of an incremental $1,300,000,000 of opportunity.

Speaker 1

And as I shared on the previous slide, the regulatory construct provides timely approval of future capital expenditures. I really like this path forward. And beyond our IRP, there is plenty of opportunity for our 5 year capital plan to grow given the customer investment opportunities we have in our 10 year plan. Our backlog of needed investments is as vast as our system, which serves nearly 7,000,000 people in all 68 counties Of Michigan's Lower Peninsula, we see industry leading growth continuing well into the future. So where does that put us today?

Speaker 1

As I stated in my opening remarks, We had a strong quarter and a great first half of the year. The bank sale and now the IRP filing Provide important context for our future growth and positioning of the business. Let me share my confidence. For 2021, we are focused on delivering adjusted earnings on continuing operations of $2.61 To $2.65 per share and we expect to deliver toward the high end of that range. For 2022, we are reaffirming our adjusted full year guidance of $2.85 To $2.87 per share, given the strong performance we are seeing this year, The reduced financing needs next year and continued investments in the utility, there is upward momentum As we move forward, now many of you have asked about the dividend.

Speaker 1

We are reaffirming again no change To the $1.74 dividend for 2021. As we move forward, we are committed to growing the dividend in line with earnings With a target payout ratio of about 60%. While we are not going to provide 2022 dividend guidance on this call, I want to be very clear. We are committed to growing the dividend in 2022. It's what you expect.

Speaker 1

It's why you own us and it's a big part of our value. I'll offer this. Our target payout ratio does not need to be achieved immediately. It will happen naturally as we grow our earnings. Finally, I want to touch on our long term growth rate, which is 6% to 8%.

Speaker 1

This has not changed. It's driven by the capital investment needs of our system, our customers' affordability and the need for a healthy balance sheet to fund those investments. Historically, we've grown at 7%. But as we redeploy the proceeds from the bank, we will deliver For the high end through 2025. I'll also remind you that we tend to rebase higher off of actuals We have historically either met or exceeded our guidance.

Speaker 1

All in, a strong quarter, Positioned well for 2021 with upward momentum. And with EnerBank and the IRP, It all comes together nicely positioned for the long term. With that, I'll turn the call over to Reggie to discuss the details for our quarterly and year to date earnings. Reggie?

Speaker 2

Thank you, Derek, and good morning, everyone. Before I walk through the details of our financial results for the quarter, you'll note that throughout our materials, we have reported the financial performance of EnerBank As discontinued operations, thereby removing it as a reportable segment and adjusting our quarterly and year to date results in accordance with generally accepted accounting principles. And while we're on EnerBank, I'll share that the sale process continues to progress nicely As the merger application was filed in June with the various federal and state regulators, we'll be evaluating the transaction for approval. And we continue to expect the transaction to close in the Q4 of this year. Moving on to continuing operations.

Speaker 2

For the Q2, we delivered adjusted net income of $158,000,000 or $0.55 per share, which excludes $0.07 from EnerBank. For comparative purposes, our 2nd quarter adjusted EPS from continuing operations was $0.09 above our Q2 2020 results, exclusive of EnerBank's EPS contribution last year. The key drivers of our financial performance for the quarter were rate relief, net of investment related expenses, recovering commercial and industrial sales and the usual strong tax planning. Year to date, we delivered adjusted net income from continuing operations of $472,000,000 $1.64 per share, which excludes $0.19 per share from EnerBank and is up $0.37 per share versus the first half of twenty twenty, assuming a comparable adjustment for discontinued operations. All in, we're tracking well ahead of plan on all of our key financial to date, which offers great financial flexibility for the second half of the year.

Speaker 2

The waterfall chart on Slide 9 provides more detail on key year to date drivers of our financial performance versus 2020. As a reminder, this walk excludes the financial performance of EnerBank. For the first half of twenty twenty one, rate relief has been the primary driver of our positive year over year variance to the tune of $0.36 per share Given the constructive regulatory outcomes achieved in the second half of twenty twenty for our electric and gas businesses. As a reminder, Our rate relief figures are stated net of investment related costs such as depreciation and amortization, property taxes and funding costs at the utility. The rate relief related upside in 2021 has been partially offset by the planned increases in our operating and maintenance expenses to On key initiatives around safety, reliability, customer experience and decarbonization.

Speaker 2

As a reminder, These expenses align with our recent road orders and equate to $0.06 per share of negative variance versus 2020. It is also worth noting that this calculation also includes cost savings realized to date largely due to our waste elimination efforts through the CEA, which are ahead of plan. We also benefited in the first half of twenty twenty one From favorable weather relative to 2020 in the amount of $0.06 per share and recovering commercial and industrial sales, which coupled with solid tax planning provided a penny per share of positive variance in aggregate. As we look ahead to the second half of the year, We feel quite good about the glide path to delivering toward the high end of our EPS guidance range as Derek noted. As always, we plan for normal weather, which in this case translates to $0.02 per share of negative variance given the absence of the favorable weather experienced in the second half of twenty twenty.

Speaker 2

We'll continue to benefit from the residual impact of rate relief, which equates to $0.12 per share pickup. And I'll remind you, it's not subject to any further MPSC We also continue to execute on our operational and customer related projects, which we estimate will have a financial impact of $0.21 1st year of negative variance versus the comparable period in 2020 given anticipated reinvestments in the second half of the year. We've also seen the usual conservatism in our utility non and other sales assumptions and our non utility segment performance, which as a reminder, now excludes Interbank. All in, we are pleased with our strong start to the year and are well positioned for the latter part of 2021. Turning to our financing plan for the year.

Speaker 2

I'm pleased to highlight our recent successful issuance of $230,000,000 of This transaction satisfies the vast majority of funding needs at CMS Energy, our parent company for the year And given the high level of equity content ascribed to the security by the rating agencies, we have reduced our planned equity issuance needs for the year to up to $100,000,000 from up to $250,000,000 As a reminder, over Half of the $100,000,000 of revised equity issuance needs for the year are already contracted via Equity Forward. It is also worth noting that given the terms and conditions of the Interbank merger agreement, in the event Interbank continues to outperform their financial plan Prior to the closing of the transaction, we would have a favorable purchase price adjustment related to the increase in book equity value at closing, which could further reduce our financing needs for 2021 and provide additional financial flexibility in 2022. Closing out the financing plan, I'll also highlight that we recently extended our long term credit facilities by 1 year to 2024, both at the parent And the utility. Lastly, I'd be remiss if I didn't mention that later today we'll file our 10 Q, which Which will be the last 10 Q signed by Glenn Barba, our Chief Accounting Officer, who most of you know from his days leading our IR team.

Speaker 2

Glenn announced his retirement earlier this year after serving admirably for nearly 25 years at CMS, Which included him signing over 75 quarterly SEC filings during his tenure. Glenn, thank you for your wonderful service to CMS. We certainly left it better than we found it and we wish you the very best in this next chapter in your life. And with that, I'll turn the call back to Derek

Speaker 1

Thanks, Reggie, and thank you, Glenn, Thank you for your service. As we've highlighted today, we've had a great first half of the year. We're pleased to have delivered such Strong results. We're positioned well to continue that momentum into the second half of the year as we focus on finalizing the sale of the bank And moving through the IRP process. I'm proud to lead this great team and we can't wait to share our success as we move forward together.

Speaker 1

This is an exciting time at CMS Energy. With that, Rocco, please open the lines for Q and A.

Operator

Today's first question comes from Jeremy Tonet with JPMorgan. Please go ahead.

Speaker 3

Hi, good morning.

Speaker 1

Good morning, Jeremy. How are you? Good morning. Good.

Speaker 3

Thanks. Just want to start you mentioned growing earnings at the high end of the 6% to 8% range And kind of as proceeds get redeployed here over time, just wondering if you can we could dig in a little bit more, if Any more color you can provide on how to think about the timing here? It seems like a lot of opportunity with the IRP, But how should we think about the high end? I mean, basically, I'm trying to think what type of glide path could we see where the earnings trajectory Could overlap, I guess, pre EnerBank guide at that point.

Speaker 1

Jeremy, I think you said some keywords, opportunity and one word I'd add to that is Two words, I guess, I would add to that is upward momentum. And so, off of 2022, 6% to 8%, We're going to deliver toward the high end of that through 2025. And then when I think about the IRP, there's obviously 2 big Tranches, let's say, Cohort in 2023, and the acquisition of that facility and also the enterprise facilities on 2025. Those are incremental to the plan, to the capital plan. And those strengthen and lengthen that growth through that time period.

Speaker 1

And so again, I I feel confident in our ability to deliver on that. And I think this is a great plan with upward momentum as we look at that time period in 2022 to 2025.

Speaker 3

Got it. That's very helpful. Thanks for that. And then I know we're early in the IRP process here, but Just wondering if you could expand a bit more, I guess, on early stakeholder feedback and just your thoughts at this point.

Speaker 1

Jeremy, I wish you could see my face. I've got a big grin on my face. I'm smiling. I'd love to have a case where there's no push There's no interveners. That happens with every case, as you well know.

Speaker 1

But here's where I see the IRP. There's a win in here, And this is why it's a remarkable plan. There is a win for every one of the interveners or stakeholders. When I think about the environmental community, 60% reduction in CO2, well above and beyond the requirements of the Paris Accord, the 2 degree and the 1.5 degree scenario, Well, above and beyond what Biden proposed for 2,030. So a big win for the environmental community in there, a big win for our customers, Affordability, dollars 650,000,000 of savings.

Speaker 1

That's a great opportunity. Reliability Maybe better stated resiliency of the electric grid. This is a more reliable plan than our previous IRP. We've done more homework to ensure We don't have a Texas like situation as we look forward to the future with intermittent resource. I feel really great about that.

Speaker 1

And then for our investors, Over $1,000,000,000 of incremental investment, the ability to treat these assets, in other securitization is voluntary. The ability to treat these assets, The existing assets and the book value as a regulatory asset process, I feel really good there's a win in here for everyone. And when there's a win Well, everyone, the opportunity to reach settlement and even if it's not settlement to go the whole distance, I feel really good about that. And just one last reminder on this, 2018 IRP, number of interveners engaged with that, we settled that case, 2021 IRP, number of interveners in that case. And with that pattern of wins that I just walked through, there's a great way that we can We did a great outcome of our IRP.

Speaker 1

Feel good about it, Jeremy.

Speaker 3

Got you. That's really helpful. Sounds promising. Just A small one if I could, just want to reconcile, I think the equity, dollars 100,000,000 for the balance of the year, I think was in the slide and a good chunk of that already locked in. But were there any comments that's possible to be even less than that just for the balance of the year?

Speaker 1

Yes, I'm going to let Reggie grab that one.

Speaker 2

Yes. Good morning, Jeremy. Good question. So where we sit today, we're comfortable staying up to $100,000,000 because of the preferred stock issuance. And remember, we've got A little north of $50,000,000 of that already locked in through 4s.

Speaker 2

We'll continue to evaluate opportunities over the course of this year. And if we can reduce that, we may do that. For now, we're comfortable saying up to $100,000,000

Speaker 3

Got it. That's very helpful. I'll stop there. Thanks.

Speaker 4

Thank you. Thanks.

Operator

And our next question today comes from Insoo Kang with Goldman Sachs. Please go ahead.

Speaker 5

Thank you. Just first question is following up on Jeremy's question on the earnings growth trajectory. I just want to clarify from my end that you're saying off of the 2022 guidance range, your growth is going to be towards the upper, I guess, end of the 6% to 8% range through 2025 and that's irregardless of whether the IRP related CapEx opportunities

Speaker 1

Anshul, so thanks for your question. It's great to hear from you. And that's exactly what we stated 6 to 8. We expect to deliver toward the high end and the IRP cohort and those enterprises assets strengthen and lengthen that path. So Absolutely.

Speaker 1

Thank you, Howard.

Speaker 5

Got it. And then just so taking the IRPS guide, you've been so consistent in Achieving that 7% range like clockwork for a long time. I guess going to that upper end, Again, excluding the IRP, what kind of gives you confidence that maybe that could what the longer term runway could be of that type of growth rate?

Speaker 1

Well, I'd actually started with this year in 2021. This momentum that we have right now carries into 2022. Hopefully, you heard that in our comments from the $285,000,000 to $28,000,000 to $28,000,000 to $7,000,000 and we'll continue to revisit that on quarterly calls. But Again, that carries into this plan. And remember what we do.

Speaker 1

We rebase off of actual. So we deliver, we either meet or exceed guidance. And then that's the point where we base off of. And so it's that compounding effect that you've seen time and time again. And so that's an important piece of it.

Speaker 1

But also We think about the entire triple bottom line. And so I think the great example of this IRP, we're going to put $1,300,000,000 in And it saves our customers $650,000,000 That's that CEUA mindset coming to play, making these Investments attacking the cost stack, share of wallet's 3% was 4% went to 3% share of wallet. So we balance all those things, the affordability, the balance sheet And make this come together. So again, I feel really confident about our glide path forward. And Reg, you might have some comments on that as well.

Speaker 2

Incy, the only thing I would add to Gerrick's good comments is as you think longer term, we noted in the IRP that we intend to do about 8 gigawatts of solar newbuild and that's About 2 gigawatts higher than the prior plan. And so that creates additional capital investment opportunities. We're assuming it's a similar construct where it's about 50% owned And 50% contracted. However, if we continue to be more and more cost competitive, that could create additional upside to own more of that opportunity over time. You Couple that with the fact that we've talked about the $3,000,000,000 to $4,000,000,000 of upside opportunities in our 10 year capital plan, a portion of which we think will be In our next 5 year plan, but there will still be balance after that.

Speaker 2

And so as we continue to take costs, whether it's through the CE way or some of these episodic opportunities like PPAs, repricing Basic and so on, well that creates more headroom to bring in that additional capital. So we feel very good about the long term glide path for capital growth, which drives rate base growth and then earnings.

Speaker 5

Understood. That's definitely helpful. Just one more if I could. Going back to that IRP plan, I think a lot of the questions that people have is whether this plan which basically swaps out coal for Elyse, in the interim, gassing the portfolio and how that will be received by the various stakeholders. I appreciate your comments Working with the various stakeholders as well as the commission on this type of plan, but how confident are you in This plan being the best one and if there is some, I guess, room for negotiation, if this doesn't end up being the best plan for the commission, What are some of the alternatives that could potentially also work?

Speaker 1

Well, this is the best plan for Michigan. One of the things that Our first IRP taught us is that we learned a lot from that and this is, I would just say, a great plan, remarkable plan For all the reasons I mentioned a few minutes ago. And so there's a win in here for everyone. And when there's a win, there's an opportunity to reach Settlement or go the whole distance. And so again, I would just reference 2018.

Speaker 1

We were very successful with a number of interviewers and being able to This is what's great about this regulatory construct. We're working with these interveners in the process. And if there's an opportunity to settle where there's an outcome that is good for all, We will do that. And so we're early on into and again I'm very optimistic we had a great plan. And I know, Les, you want to add

Speaker 2

The only thing I would add to that is that trust that we evaluated a number of different permutations as instructed per the IRP construct. And so we certainly looked at Whether we could transition to renewable power more rapidly or fully in as a substitute for the So the retirement and the economics just don't get you there, plus you also introduced significant reliability and resilience trends Given the lack of really long term storage solutions. And so we certainly evaluated it. But as Garrick noted, we deemed this plan where it sits today as the best plan for Michigan And also with the gas facilities and obviously foregoing the O and M and capital we know we would have on our coal facilities, You take that into account with the fuel arbitrage you get from gas versus coal and just less purchases Now controllable dispatch, it just brings substantial cost savings to customers, which would not be offered if we went to a full Renewable solution in lieu of gas as a bridge fuel. So we feel like is the most economic opportunity for all stakeholders.

Speaker 1

Yes, I'm going to add to that. I just want to be just crystal clear on this, not only affordability piece, Those natural gas plants are required for resiliency in the state. You can't get here from there. That's just bottom line. And so it's that crystal clear.

Speaker 1

And that's why I have just a high degree of confidence.

Speaker 5

That's great color. Thank you so much. And our

Operator

next question today comes from Anthony Frodello with Mizuho. Anthony?

Speaker 5

Hey, good morning, Garrett. Thanks so much. Just I guess one quick question on the dividend. You've laid out a nice plan for earnings growth rates, and you're pretty confident in that 3.25%, the high end. What's your concern over providing that type of detail on the dividend growth rate?

Speaker 1

Well, you said pretty confident. I would change that word to really confident.

Speaker 2

So the rough action

Speaker 1

there in your question. But I'm equally confident in our dividend piece. And what you heard from me is Confidence and dividend growth for 2022. We recognize the importance of it and we have it built into our financial plan. I really want to hand it over to Reggie here because there's an important piece that's associated with the sale of the bank and closure in Q4 That also shapes that dividend.

Speaker 1

And so that's why we're most people have to come together so that we can share that potential here in at the end of the year. But go ahead, Reggie.

Speaker 2

Yes, that's right. So if you think about some of the dynamism we might see in the second half of the year, the closing and the timing of the Closing of the Interbank transaction could certainly impact what we might plan to do for 2022 dividend. But to go back to Garrett's Our commitment is to grow the dividend beyond the $1.74 per share where it is today. And then longer term, again, we'll certainly I have that dividend growth commensurate with earnings, but certainly the bank sale and the timing of that will have an impact in the near term and then longer term again, right in line with earnings Growth and so we feel highly confident that we will have a competitive dividend and we know that it's a core part of our value proposition as Gerrick noted in his prepared remarks. And if I could just

Speaker 1

add to that, there's with the sale and that closure there, there's upside potential there from a dividend perspective So we want to be able to our investors to be able to share in some of that positive news.

Speaker 5

If I could just jump on one last question related to the IRP. Is there any part of the IRP you think maybe be The most challenging that may generate the most concern with the interveners?

Speaker 1

I don't know about most challenging, I think that's I'll just tell you this, Anthony. Back in 2014 and 2015, I was a policy witness. I've been on the stand with intervenors, been crossed by attorneys. Hey, they go after a lot of different things in the case. And here's what again, we've got strong testimony.

Speaker 1

We've got great precedent. We're used to this stuff. We do this all the time with our rate cases. We've done it with a previous IRP. I don't think there's anything this team can't handle, frankly.

Speaker 1

And so we're and we're prepared to do that. As Reggie alluded to a minute ago, there's a lot of detail, a lot Modeling and data that went into this. And so, it's a very strong case.

Speaker 5

Great. Thanks for taking my question. And

Operator

our next question today comes from Durgesh Chopra with Evercore ISI.

Speaker 4

Hey, good morning team. Thanks for taking my questions.

Speaker 1

Yes, Dinesh, welcome. Good morning. Good morning.

Speaker 4

Maybe just on the IRP, I noticed that you proposed a couple of coal plant shutdowns, But then including them in the rate base post their shutdown, just kind of curious as to sort of if The state has done that previously or there's some precedent there that you feel comfortable with that proposal?

Speaker 1

Well, I do feel comfortable with it. There's a precedent set in Colorado, Florida, Wisconsin for a similar approach In Michigan, we do have a nice ability to securitize, but it is voluntary and that's an important piece of this. And so It's essentially 1.2025, it's about $1,200,000,000 of remaining book value. To go on through and securitize that just doesn't make sense. This is going to be a drag in credit metrics, it's going to have an impact on The capital which ultimately shows up in the customer's bill that's I mean that doesn't make sense.

Speaker 1

And so we've really got a good approach It's different than how we've approached it previously. But again, there's a nice precedent that's been set and I'm really the testimony I've reviewed the testimony. It's we're in a good spot.

Speaker 4

Understood. I appreciate the color there. And obviously, you can always fall back to securitization That ends up being the case, but appreciate the color there. And then just maybe to Reggie, can you clarify sort of the I'm trying to see the equity elimination through 2024. You don't talk about 2025.

Speaker 4

So Should we assume sort of the normal cadence of equity? I believe that was $250,000,000 per year To go back to that starting in 2025, I'm just trying to reconcile that to the comment that the $1,000,000,000 additional in the IRP, you don't need to Just any color there, Reggie, would be helpful. Thank you.

Speaker 2

Yes. Happy, Durgesh. First, let me just circle back to your Closing comment just to be unambiguous around this. And so the notion of falling back on a securitization, As we noted when we rolled out the IRP, as we noted in our prepared remarks, this is the proposed plan. This is not a buffet.

Speaker 2

We're not thinking about Any type of fallback option. And again, from a securitization perspective, to Gerrick's comments, given the impact it could have on our balance sheet, we've already done With the inclusion of Karn 1 and 2 in the retirement and securitization there, we will already have $1,000,000,000 of securitized debt on our balance sheet As of 2023. So we really cannot accommodate alternatives like that. So I want to be very clear, we do not view that as a fallback option and the proposed plan It is what it is. So with respect to the question around equity, yes, you're right in that as we disclosed when we announced the Interbank sale, we are not planning to issue any equity.

Speaker 2

We announced the Interbank sale. We are not planning to issue any equity from 2022 through 2024 Even with the capital opportunities that we've announced today with the IRP and potentially some of that upside opportunity, so no additional equity. For 2025, you can assume the up to $250,000,000 level that we articulated when we first rolled out our 5 year plan. So that's Still a good working assumption for now, but obviously there's a lot of time left. And if we can recalibrate and see the data moving away that Supports reducing that at some point we may revisit that, but for now assume $250,000,000 in that outer year of 2025.

Speaker 2

Is that helpful?

Speaker 4

Very helpful and thanks for clarifying that securitization comment. Thank you, Reggie and thanks, Garik.

Speaker 1

Thank you. Thanks.

Operator

And our next question comes from Ashar Pourreza with Guggenheim. Please go ahead.

Speaker 5

Hi, good morning team. This is actually Constantine here for Shar. Thanks for a very comprehensive update. If I can just follow-up on kind of one more kind of, I guess, IRP CapEx related question. What are some of the constructs that are that the incremental portions of CapEx fall under?

Speaker 5

Is it all Fully covered by the IRPS proposed plus kind of the annual rate case process that you have. Any kind of non Does any of the non IRP work can need any incremental trackers? And does any of this incremental work kind of start prompting more equity needs Down the line or is it fully kind of baked in at this point?

Speaker 1

Let me I think Rejji and I'll tag team this one. And so let me just Kind of frame up when I think about our capital plans and I think we'll talk about early but also this IRP. And So at the end of the year, in our January call, we're going to add another year to that 5 year capital plan, And that's going to be more capital opportunity. That 5 year plan is going to grow. And it's going to be in our gas business.

Speaker 1

It's going to be in our electric distribution business. And so There's some growth opportunity there. Then we'll continue to follow this IRP through the process through that 10 month process. Again, we feel confident in the And then that's an incremental 1.3 in the Cobalt facility and then Also an adjustment in 2025. And so you can see some of that play out over the 5 year and into the 10 year because when you look at This integrated resource plan, it goes from 25 to 27.

Speaker 1

And so some of that sort of available fall In the 10 year piece as well. And so there's some updating that will take place along those lines. So that's kind of the capital layout. But Randy, certainly tag Inves with me.

Speaker 2

Sure. Happy to. So Constantine, I appreciate the question. We're pretty methodical. So I'll put the IRP aside.

Speaker 2

We're pretty methodical on We think about the capital plan of the utility and we really spend a lot of time providing long term visibility on Customer investment opportunities across each of the businesses. And so the current 5 year plan has around 2.5 $1,000,000,000 of what I'll call clean energy generation spend and then the balance is electric and gas infrastructure spend. And so we noted when we filed our gas case A couple of years ago that we had about $10,000,000,000 of gas infrastructure related investments for safety, reliability And decarbonization of about $1,000,000,000 per year run rate. And so you can expect an extension of that capital investment opportunity In subsequent iterations of 5 year plans and so we'll do more gas infrastructure and again we're on about $1,000,000,000 per year run rate in that regard. Electric Infrastructure is comparable, where we're doing a little over $1,000,000,000 per year of electric infrastructure work to improve reliability.

Speaker 2

And the IRP is also where we're seeing capital investment opportunities. So the existing IRP, remember, we're still executing on a 1.1 gigawatt tranche And we're going to own half of that. And so all of that's going to be part of the next iteration. And so those are the sort of non new IRP opportunities. Again, we'll see those And we also talked about starting to take on some of those upside opportunities, which in our 10 year plan of $3,000,000,000 to $4,000,000,000 we wouldn't do all of that In the next vintage, but a portion of it.

Speaker 2

And again, it's more electric and gas infrastructure as well as clean energy generation related spend. And so those would be some of the Projects that we would invest in beyond this new IRP. We're highly confident that we'll be able to create the headroom to introduce those into the capital plan. You asked about The only thing I would mention in that regard is in our gas infrastructure capital plan. We do have the equivalent or a comparable Structure like a tracker and that's in our enhanced infrastructure replacement program.

Speaker 2

And so we have that on the gas side, but we don't have any other, I'll say, Sort of historical type trackers like that. And so we obviously put them into the cases, we file on a serial basis and then that Dictates what ends up in the final plan. Does that make sense?

Speaker 5

It does. I think that's very helpful. And if I may shift a little bit to more of a fundamental question. So the electric sales volumes seem to be normalizing with reopening more or less, And especially with the strong kind of C and I growth and residential coming down a bit, can you kind of talk about your thoughts on the residential load and How sticky it is versus expectations and maybe kind of the reversion of the residential load causing headwinds in terms of earnings For 'twenty one, our expectations in 'twenty two?

Speaker 1

I'm going to have Reggie start with some of the specifics and then I'll talk about some macro at the end. So, Reggie, why don't you Robert?

Speaker 2

Yes. Constantine, we've been quite pleased with what we've seen really across all of the customer classes

Speaker 1

to date.

Speaker 2

And so we have good detail in the 15 page digest we distribute also in the appendix. You can see the year to date trends of the presentation today. And We've got residential year to date down a little over 1%. That compares favorably to plan. We had much more bearish Expectations because we were assuming a more rapid return to facilities.

Speaker 2

And so our full year plan was something closer to down roughly 5% and we're ahead of plan. So that does imply that we're seeing a good level of stickiness to this mass teleworking trend, which I do think will be part of a post pandemic normal. And obviously, that's higher margin load. And so residential continues to outperform our expectations. And then we're You've seen commercial and industrial, as I mentioned in my prepared remarks, come back nicely.

Speaker 2

And so year to date, commercial is up around 3.5%. And we had in our plan about that level and then industrials at 13% year to date 2021 versus 2020. And on our plan, we said on a full year basis about 6% up. And so we're seeing surprise to the upside across all fronts. And so intra year, That obviously creates upside and potential contingency as we go into the second half of the year.

Speaker 2

But longer term, as you roll that into your rate cases, that creates headroom Because you're introducing more kilowatt hours into the denominator of your rate calculation. So we feel very good about the road ahead to date. It's still Early days, the pandemic is not behind us yet, but again, we're still seeing very encouraging trends on the load side. The other leading indicators we've talked about in the Our just interconnection activities, new service requests, they're up over 30% year to date versus where they were in 2020. 2020 may not be the best comp given the pandemic.

Speaker 2

So we also look to 2019 and again up 30% versus where we were pre pandemic. So interconnections are Staking requests are strong. Customer counts are quite good with commercial up 1%. And so again, everything seems to be trending from a load perspective In the right direction.

Speaker 1

I'll just add to that just for a little bit of clarification. So those new service connections, those interconnects, Those are installs. Those aren't someone dreaming of putting in a house or thinking about a business. Those are actually in the ground. And so again, it gives you Some idea of the momentum here.

Speaker 1

We continue to have unemployment rates well below the national average here in Michigan in the heart of our service territory. Grand Rapids, it's even better. And just to give you a little flavor over the quarter, we've even seen growth in, again, macro trends and people Opening new business in Michigan. In fact, we're under an NDA right now with the company, but It's $300,000,000 investment, 30 megawatts, 150 jobs that are located here in our service territory in Michigan. I can take 2 other examples of that.

Speaker 1

And so coming out of the pandemic here, we're seeing nice economic development and growth here in Michigan as well.

Speaker 5

That's very helpful color. Thanks so much for taking the questions and congrats on a great quarter. Thank you.

Operator

Our next question comes from Paul Patterson with Glenrock Associates. Please go ahead.

Speaker 1

Good morning, guys. How are you doing? Good. We're doing great, Paul. Good to be here.

Speaker 6

So most of my questions have been answered. But just back on that securitization question, Could you remind me the size of the asset that's now going to be amortized as opposed to securitized?

Speaker 1

Yes. The remaining book value in 2025 of those coal plants would be 1,200,000,000 That is another consideration in this filing.

Speaker 6

Okay. And you guys mentioned that the securitization you thought would be Credit negative in comparison to the plan that you're putting forward. And could you I mean just to sort of walk to sort of very high level, The reason for that is because you'll be amortizing the cash flow faster. Is that the way to sort of think about the excuse me, you'll be amortizing the asset faster The cash flow will be stronger. Is that how you're looking at this or is there something else I should be thinking about?

Speaker 2

So Paul, this is Reggie. So a couple of things there. So Moody's, as you may recall, treats securitized debt as debt in their metric calculations. And so You have that levering effect of securitizations because they are effectively non recourse debt, but Moody's is the one rating agency that does imputed as debt. And so That $1,200,000,000 that Garik noted would be dollar for dollar counted as debt in our credit metric calculation.

Speaker 2

So you've got credit dilution there. And then you couple that with the fact that you're going to forego earnings on $1,200,000,000 of rate base over time. And so you couple sort of the impact on the denominator Where you just have dollar for dollar debt of $1,200,000,000 and then you have the dilution in your numerator because you're foregoing earnings on that.

Speaker 6

I'll follow you on that. Of course, you're getting the cash upfront though with the securitization. So, I mean, I'm just sort of when you look, we can take that offline, but okay, I understand that. And then in terms of the plan, I mean, it sounds like it really is a win win win. I'm just wondering, has there been any Change in the trajectory or your what you're expecting in terms of customer base going forward as a result of the Or is it too early to sort of challenge there?

Speaker 6

Are you guys pretty much on track as you were thinking before and there's going to be some incremental savings that will

Speaker 1

I do follow what you're saying. And so we look at over across that 5 year plan of investments, we look at The rate impact and 2, the bill impact, which is also critically important for our residential and commercial customers. And so that is part of the 5 year. And as we again, this incremental capital of 1.3, it provides $650,000,000 of savings over our current plan. And so this is so again, this comes together nicely to your point, Paul, From an affordability perspective for our customers.

Speaker 6

Okay. Well, awesome. Thanks so much and congratulations.

Speaker 1

Yes. Thank you, Paul.

Operator

Ladies and gentlemen, this concludes the question and answer session. I'd like to turn the conference back over to Garrett Roushouse for closing remarks.

Speaker 1

Well, again, I want to thank everyone for joining us today. Again, strong quarter, Great first half of the year and upward momentum. And just to seeing everyone in person here as we again safely, as we

Operator

Thank you, sir. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.

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Earnings Conference Call
CMS Energy Q2 2021
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