Earnings Call Transcript - CMS Q2 2022

Operator, Operator

Good morning, everyone, and welcome to the CMS Energy 2022 Second Quarter Results. The earnings news release issued earlier today and the presentation used in this webcast are available on CMS Energy's website in the Investor Relations section. This call is being recorded. After the presentation, we will conduct a question-and-answer session. Instructions will be provided at that time. Just as a reminder, there will be a rebroadcast of this conference call today beginning at 12:00 PM 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. Sri Maddipati, Treasurer and Vice President of Finance and Investor Relations.

Sri Maddipati, Treasurer and VP of Finance and Investor Relations

Thank you, Elliot. Good morning, everyone, and thank you for joining us today. With me are Garrick Rochow, President and Chief Executive Officer; and Rejji Hayes, Executive Vice President and Chief Financial Officer. This presentation contains forward-looking statements, which are subject to risks and uncertainties. Please refer to our SEC filings for more information regarding the risks and other factors that could cause our actual results to differ materially. This presentation also includes non-GAAP measures. Reconciliations of these measures to the most directly comparable GAAP measures are included in the appendix and posted on our website. Now I'll turn the call over to Garrick.

Garrick Rochow, President and CEO

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, two outstanding regulatory outcomes provide further evidence of the top-tier regulatory jurisdiction in Michigan and give us continued confidence in our plan. First, our integrated resource plan. If I could open this up for just a moment, 18 months of sophisticated supply modeling, thousands of pages of testimony, 10-month schedule, alignment across dozens of stakeholders from interveners, the attorney general, business stakeholders, and the commission staff to reach a settlement with close to 20 parties. This plan, approved at the end of June, solidly positions us to lead the clean energy transformation. Outstanding. Next, our gas rate case. Important investments to ensure a safe, reliable, affordable, and clean natural gas system settled with many of the same parties and approved on July 7th, a $170 million increase. Over 95% of our customer investment was approved. Excellent. Both outcomes demonstrate the quality of our regulatory environment in Michigan and increase our confidence in delivering the rest of the year and our long-term plan. I want to emphasize why we continue to be confident in our plan. Delivering is not new for us. We have nearly two decades of commitments made and kept for all our stakeholders, including you, our investors. A key element in our performance is strong energy law in Michigan. We have a productive and solid energy law passed in 2008, which was enhanced and updated in 2016, both with bipartisan support. This allows for timely recovery of 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, allows us timely recovery of fuel and power supply costs, as well as attractive economics on renewable energy investments and energy waste reduction programs, uniquely positioning Michigan as one of the safest places to invest capital. But let me be clear, we don't take this for granted. We continue to improve our processes for stakeholder alignment, testimony development, and business cases, so we are confident that our proposed customer investments deliver measurable benefits while keeping this affordable. At CMS, we deliver; our productive and supportive environment and our deliberate approach 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 IRP. This makes us one of the first utilities in the country to completely exit coal. As of the end of the 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 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 in our ongoing energy efficiency and demand response programs ensure that we have sufficient capacity to meet the needs of our customers. This plan improves reliability and limits our customers' exposure to potentially volatile capacity and energy prices. The IRP strengthens and lengthens our financial plan, eliminates our exposure to coal, improves reliability, and is a solid win for everyone. Strong execution and constructive regulatory outcomes lead to strong financial results, and I couldn't be more pleased with the first half of 2022. As I stated in my opening remarks, a strong quarter and a great first half of the year, where we delivered adjusted earnings per share of $0.53 for the quarter. We remain confident in delivering full-year adjusted earnings per share of $2.85 to $2.89, and we continue to guide for the high end of our long-term adjusted EPS growth range of 6% to 8%, which, as I noted, is strengthened and lengthened by our IRP. We continue to guide toward long-term dividend growth of 6% to 8% with a targeted payout ratio of about 60% over time, and we'll update our current $14.3 billion five-year customer investment plan on our year-end call to include the anticipated upside from the approval of our IRP. We are strongly positioned to deliver in the remainder of the year. With that, I'll turn the call over to Rejji, who will offer additional detail.

Rejji Hayes, Executive VP and CFO

Thank you, Garrick, and good morning, everyone. As Garrick noted, we had a strong first half of the year, are ahead of plan, and are well positioned to achieve our financial objectives over the next six months and longer-term. To elaborate, for the first half of 2022, we delivered adjusted net income of $499 million, or $1.73 per share, up $0.09 per share versus our 2021 first half results, largely driven by favorable weather and economic conditions in the state. The waterfall chart on Slide 7 provides more detail on the key year-to-date drivers of our financial performance versus 2021. As noted, favorable sales have been the primary driver of our positive year-over-year variance to the tune of $0.16 per share driven by weather. From an economic standpoint, we've continued to see strong commercial and industrial load in our electric business, while weather-normalized residential load continues to exceed our plan assumptions and pre-pandemic levels. Rate relief net of investment-related expenses contributed $0.03 per share of upside as we continue to benefit from our prior gas and electric rate cases. These sources of upside were partially offset by increased operating and maintenance or O&M expenses largely driven by customer initiatives embedded in rates to improve safety, reliability, and our rate of decarbonization, which equated to $0.07 per share of negative variance versus the first half of 2021. We also note the $0.03 per share of negative variance in the final year-to-date bucket, which is primarily driven by investment costs related to the 2019 rate-compressor station incident for which we are not seeking recovery at this time, as per our recent gas rate case settlement agreement, and the company's recent commitment to donate $5 million in support of income-based bill assistance for our electric customers as per our IRP settlement agreement. These sources of negative variances are partially offset by the aforementioned strong non-weather sales performance in the first half of the year. As we look to the second half of 2022, we feel quite good about the glide path to achieve our EPS guidance range. As Garrick mentioned, we had a constructive outcome in our gas rate case. The approved settlement agreement at $170 million significantly de-risked our financial plan, and when coupled with our December 2021 electric rate order provides $0.10 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 we assume will provide $0.01 per share a negative variance versus the comparable period in 2021. Moving on to cost savings, we continue to anticipate lower O&M expenses of the utility driven by the expectation of a more normalized level of storm activity this year versus the atypical levels experienced in 2021, which I'll remind you equated to $0.16 per share of downside in the third quarter of 2021 versus our financial plan. We also expect the usual solid cost performance driven by the CE Way as well as other cost reduction initiatives in motion. To close out our assumptions for the second half of the year, we assume normal operating conditions at enterprises given the outage at DIG in the fourth quarter of 2021 and the usual conservative assumptions for weather-normalized load at utilities. Lastly, it's worth noting that we have accrued a healthy level of contingency given our strong year-to-date performance as illustrated in the $0.24 to $0.28 of negative variance highlighted in the penultimate bar of the chart, which increases our confidence in delivering for you, our investors. Moving on to the balance sheet, on slide 8, we highlight our recently reaffirmed credit ratings from all three rating agencies. As you know, we continue to target mid-teens FFO to debt over our planning period. As always, we remain focused on maintaining our strong financial position, which coupled with the supportive regulatory construct and predictable operating capital growth supports our solid investment-grade ratings to the benefit of customers and investors. Turning to our 2022 plan financings on slide 9, we continue to plan for $800 million of debt issuances at the utility. And while our plan does not call for any financing 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 2023 as per our approved IRP. As a reminder, the current financing plan for Covert assumes the issuance of hybrid securities. However, we are evaluating alternatives including using our existing ATM equity issuance program given the relative costs in the current environment. It's worth noting that this would be accretive to the previously provided $0.03 or $0.04 per share of EPS accretion attributable to the purchase of Covert and further strengthened our 6% to 8% long-term adjusted EPS growth outlook. Lastly, we have preserved a strong liquidity position, which supplements our use of commercial paper over the coming months. And with that, I'll turn the call back to Garrick for some concluding remarks before Q&A.

Garrick Rochow, President and CEO

Thank you, Rejji. I want to emphasize that we have maintained nearly two decades of outstanding financial performance for our investors, regardless of varying conditions, administrations, political parties, economic environments, or even a pandemic. We consistently deliver results. Our solid legislative and regulatory framework, strong capital runway, industry-leading cost management, prudent planning, and our commitment to the triple bottom line all contribute to a compelling investment case, making us a reliable choice. With that, Elliot, please open the lines for questions.

Operator, Operator

Thank you very much, Garrick. Our first question comes from Shar Pourreza from Guggenheim Partners. Your line is open. Please go ahead.

Garrick Rochow, President and CEO

Hey, Shar.

Shar Pourreza, Analyst

Hey, guys. Good morning. Garrick, pretty clear-cut print here. But just given sort of the regulatory outcomes that are now secured like the IRP, the gas settlements, it 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 fourth quarter? I guess just given the visibility we have, why not provide a full guidance and capital update sometime in the third quarter or EEI time frame? I guess in other words, given the regulatory execution that you've clearly highlighted today, could you provide early indication on growth 2023 numbers out of schedule?

Garrick Rochow, President and CEO

Thank you for your kind words, Shar. We are performing well, and I’m satisfied with our progress in the first half of the year. We remain committed to our plan for the Q4 capital update. I want to provide some additional insights on this. A significant factor in our consistent execution year after year stems from our capital plan, which we approach thoroughly. We evaluate each capital investment to ensure it delivers affordability and benefits for our customers, accumulating over time. We also need to ensure we can execute these plans effectively, which requires a solid understanding of our workforce and the projects we have scheduled for the year. Regarding the IRP, while there is good visibility from Covert, another aspect of our settlement involves integrating battery storage of 75 megawatts from 2024 to 2027. We need to ensure this is included in our five-year plan, along with the Voluntary Green Pricing programs and additional renewables for some of our largest customers, which are also developing. It’s crucial that we can fulfill these commitments, as that is key to our successful execution. That’s why we will provide updates during our Q4 call.

Shar Pourreza, Analyst

Okay, I understand. Looking at the results year-to-date, it appears that 2022 is progressing well, with July showing strong weather conditions. As you mentioned, you have normal weather anticipated for the rest of the year. Will favorable weather in the third quarter allow you to exceed your guidance? What are some of the factors or variables we should consider in this context? It seems you are performing well against your targets so far.

Garrick Rochow, President and CEO

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 plan conservatively. Here's what I know: in 2021, during the third quarter, we lost $0.16 due to storms. We still delivered on 2021, but again, there's a lot of year left. And so we're prudent as we move forward. The other thing we look at is where are the opportunities to reinvest, provide benefit for our customers and investors as we move toward 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 6% to 8% toward the high end.

Operator, Operator

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

Garrick Rochow, President and CEO

Good morning, Jeremy.

Jeremy Tonet, Analyst

Hi, good morning. Just wanted to pick up a little bit, I guess with the strong results here and it did seem like load performance was just 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 perspective, even absent weather, is load growth continuing at this pace, or do you see something stopping?

Rejji Hayes, Executive VP and CFO

Hey, good morning, Jeremy, it's Rejji. I appreciate the question. Obviously, we feel quite good about the load trends we're seeing in our service territory and I'll just remind folks on some of the specifics. So we had residential down a little over 0.5%. So that's year-to-date versus year-to-date 2021. Commercial and industrial, and as always our industrial, excludes one large low-margin customer, up about 3% and then all in up about 1.5 points. 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. Obviously, that's a high-margin segment. 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 the service territory. And obviously, with some of the news in D.C. yesterday, I would think that the CHIPS Act and some of the other legislative items that may be coming down the pipe could lead to more economic development opportunities or increase the probability of some of the stuff that is coming in Michigan's way or is in the prospects for Michigan. So very encouraged with the load trends and anecdotal again, we're hearing from our customers that they continue to feel good about the economic environment. I feel quite good about the road ahead. Going forward, again we continue to anticipate that you'll start to head back to those pre-pandemic levels. 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.

Garrick Rochow, President and CEO

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

Jeremy Tonet, Analyst

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

Garrick Rochow, President and CEO

I love our energy law. I really do. I'm not joking there. The 2016 energy law here in Michigan was solid on the supply and demand side. When we go through an integrated resource plan, we've got to do all the modeling and analysis to show that the supply and demand is going to meet and have some reserve margin on that. That's a requirement of a load-serving entity, which we are. So I feel good about where Michigan is headed within MISO. I can't speak for all of MISO, but I feel good about where Michigan is at. I'll remind people that part of this IRP is to bring Covert in. Covert right now is in the PJM market, and we're moving it over to the MISO market. That's 1.2 gigawatts of additional supply being brought into MISO to serve our customers. And so that's why we feel good about it. Our IRP, we're still on pace and plan for the retirement of all coal to be out of coal by 2025.

Jeremy Tonet, Analyst

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

Garrick Rochow, President and CEO

Jeremy, you've given us a good amount of time to digest everything. Here's what I can say: we've done some initial reviews and are still processing a lot of information. The Solar PTC is a significant achievement, and we've been advocating for it in Washington. Special thanks to Rejji, who has been reaching out to CFOs for the past 1.5 years as this has developed. We're enthusiastic about what this means for 8 gigawatts; it will lower costs for our customers as we expand solar and will level the playing field with developers, which we appreciate. Additionally, the upcoming storage ITC from 2024 to 2027 will be beneficial as we plan to build out 75 megawatts of storage. There's considerable potential for growth in the industry, particularly in the automotive sector, where most of the $11.8 billion resides. We see opportunities for load growth as the automotive industry transitions. There are also incentives for solar production in the U.S. Notably, one of our largest customers in Michigan is a leading producer of polysilicon crystals used in solar panels and electronic technologies, which we view as a positive development. The momentum behind EVs is also promising for load growth. While it's not included in our forecast, there are ongoing credits available for EV purchases. There's a lot of positive information here. We're still analyzing the details but are optimistic about the outcome from the Senate. Of course, negotiations with the House are ahead of us.

Jeremy Tonet, Analyst

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

Operator, Operator

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

Garrick Rochow, President and CEO

Hey, everyone. Good morning.

Michael Sullivan, Analyst

Hey, Garrick. Rejji, I wanted to go over to you on just the latest commentary on the potential looking at common equity for financing Covert. I think that was an $815 million project. Any sense of how much the equity could be and how materially the $0.03 to $0.04 accretion could change?

Rejji Hayes, Executive VP and CFO

I appreciate the question, Michael. I would say, we're obviously still evaluating options. You have the purchase price of Covert spot on at $815 million. As you know, our rate construct we would fund about half of that debt at the utilities to call it roughly $400 million, and the balance would be parent financing. Mathematically, that gets you to about $400 million, but we'll still consider what the alternatives might be. Obviously, we've got quite a bit of time to fund it. We'll look at our dribbling our ATM equity issuance program, whether that will be the full $400 million remains to be seen. We'll see how the price of other alternatives like those hybrid securities, which for the past six to seven months have really priced quite competitively. If that changes over time, we may tranche it a little bit. At this point, it's still early days, but we could go up to about $400 million. We've got that much on the shelf, but we'll see how pricing trends over the next handful of months. With respect to the accretion at this point, I'd say it's a little premature to offer 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. So I'd say more variables at this point to provide any prescriptive point of view, but it would be directionally accretive based on the relative cost right now of our equity versus other securities.

Michael Sullivan, Analyst

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

Rejji Hayes, Executive VP and CFO

We'll see. I mean, betting at 670 still gets you into Cooperstown. We've been encouraged with the IRP and the gas rate settlement; electric, obviously, many more stakeholders, many more variables. We've been successful there before. So we're cautiously optimistic, but early days, and we'll look and see where the staff is in about a month, and we'll go from there. But I would say it's early days to make any prediction at this point.

Operator, Operator

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

Julien Dumoulin-Smith, Analyst

Hi, good morning. You guys really do execute. Always, always, so let me follow up on this legislative angle, just one nuance here. AMT is just going to get a lot of attention to speak I imagine for all the utilities here. What are you guys saying on that? I know, we asked you for your hot takes a second ago, but just can rehash as best you understood your probably assessment of this last year if you will?

Rejji Hayes, Executive VP and CFO

Julien, just to clarify, you're referring to the alternative minimum tax related to last night's climate bill? As Garrick mentioned, we are still reviewing the approximately 700 pages of the bill. Our team in federal affairs, along with our tax experts, are quite efficient, but processing that much information in 12 hours is challenging. From what I gather, the structure aligns with our discussions at EEI several months ago, which mentioned a three-year average of pre-tax operating income around $1 billion. Companies below this threshold are exempt from the minimum tax. Given our size, it's likely we won't meet that threshold for a while, although we do aim to grow and reach it eventually. In the short term, we probably won't be subject to the minimum tax. We're also checking to see if the ability to apply tax credits against up to 75% of the tax liability is included in the bill, as that was part of the initial structure when we discussed it at EEI. Overall, we don't anticipate a significant impact on our company considering our size, especially with the three-year average of $1 billion in pre-tax operating income, which we won't reach just yet.

Julien Dumoulin-Smith, Analyst

Yeah, no, that makes sense. Thank you for the hot takes there. Appreciate it. OPEB contribution to the quarter here, etc. Just curious if you can comment here. Obviously, that subject has got some attention late broadly.

Rejji Hayes, Executive VP and CFO

Yeah. From a pension perspective, again, our story has been quite good for some time now. As you may recall, we have been very active in making discretionary contributions to our pension plan over the year particularly in years in which we were pretty flush from an operating cash flow perspective. We are 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 in our pension plans. I would say based on how our pension is structured at this point we're a bit more levered to interest rate movement. With discount rates effectively going up year-over-year, we actually see it in the short term as a net benefit. We are actually seeing a little bit of upside particularly since we recently remeasured our plan. From our perspective, it's actually net positive at the moment, and we feel quite good about the level of funding for the plan.

Julien Dumoulin-Smith, Analyst

Totally. All right. So no material OPEB impact here in the quarter?

Rejji Hayes, Executive VP and CFO

No. No.

Julien Dumoulin-Smith, Analyst

Thanks a lot. And then last one just a quick clarification from earlier on Solar TTC. I mean clearly, it benefits customers from an NPV perspective, but also I think implicitly also helps utilities participate from a rate base perspective as well, I take it?

Rejji Hayes, Executive VP and CFO

Yes. Obviously, our rate construct is a little nuanced 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. If we can be more competitive because of that benefit with the — obviously, the elimination of normalization, then we could potentially pencil the own projects in a manner that's comparable with the PPA or contracted portion. That would make a case for owning more than 50% over time. So we feel quite good about what we've read today. But again, obviously more to digest. Thank you.

Operator, Operator

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

Rejji Hayes, Executive VP and CFO

Hi, Andrew.

Andrew Weisel, Analyst

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 affirmed guidance. But did I hear you right, is that all conservatism? And second part of that question is, you mentioned the 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?

Rejji Hayes, Executive VP and CFO

Yes. Andrew, thanks for the question. I would say starting with that $0.24 to $0.28 negative variance in the six months to go bucket of that waterfall chart on Page 7, that is a combination of conservative planning. That's really a catch-all bucket. We've got in there non-weather sales assumptions year to go. We've got a little enterprises performance and some parent expenses. 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. Obviously, weather 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 upside. Sales have been strong as well as cost performance, and that's what's driving a good portion of that bucket. 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 your question about what we're doing with respect to pull ahead. I would say, at this point, because we still have six months to go, we've really tried 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. 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. Those are things we like to do, and we'll continue to evaluate opportunities for pull-aheads to de-risk 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 to get effectively the accounting benefit in the current year and then a commitment to do work in the subsequent year. That gives us even more flexibility as we head into Q4 and deep into Q4; if we're seeing upside that's in excess of plan, it just gives us a bit more flexibility to commit to more work and again see the sort of accounting benefits of that in the current year. So a lot of flexibility going forward. We've made some moves to date from an O&M pull ahead perspective. But again, we're obviously cautious at this point because we've got a lot of Q3 left and we're waiting to see what happens with storms and weather.

Andrew Weisel, Analyst

Great. Yes, that's definitely a helpful mechanism you have. And then the other question, I just wanted to clarify on equity. So I guess the first question is, when would you decide how to finance Covert 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 financing?

Rejji Hayes, Executive VP and CFO

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 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. We're still committed to not issuing equity through 2024, or more specifically until 2025; but for the funding of Covert. In terms of how we'll time that and how we'll think through that, obviously we'll look at the valuation of the stock versus the relative cost of other hybrid securities. We'll look to be opportunistic from time to time. We've seen just great pricing in the past with those dribble programs, so we'll look to utilize some of that. We've got a lot of flexibility because we're not scheduled to acquire Covert until May of next year. So quite a bit of time to evaluate, and we'll be opportunistic and dribble out likely over the coming months.

Andrew Weisel, Analyst

Thank you very much. That’s helpful.

Operator, Operator

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

Rejji Hayes, Executive VP and CFO

Good morning, thanks so much for taking my question.

David Arcaro, Analyst

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?

Rejji Hayes, Executive VP and CFO

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. We're going to continue to make the case. In our cases that we filed, the equity thickness should go up. Again, we'll make the case going forward. 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. Still, we think it should be higher than that. It's also important to note that we still have deferred tax flowbacks from tax reform, where again we're giving back deferred taxes to customers. This has the effect of reducing the zero-cost of capital component in our rate-making capital structure, which offsets some of that reduction in authorized equity thickness. To be very specific here, our equity thickness in this gas settlement went down from a little over 52% to about 50.75%, which is roughly a 130-basis point reduction. However, about 50 basis points of that was offset in our ratemaking equity thickness because of the reduction of that zero-cost of capital layer. Again, we'll continue to make the case. We still think equity thickness should continue to go up or should start to go up. The onus is on us to make the case.

David Arcaro, Analyst

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

Garrick Rochow, President and CEO

Yes, we definitely see a strong interest from customers. We've secured additional contracts this quarter, but I can't disclose all of them due to nondisclosure agreements. One significant development is that the state of Michigan signed a contract this quarter, which represents 1,000 megawatts of renewable energy that is beyond our initial plans. We are beginning to integrate these contracts as we advance and have customers confirmed. Additionally, we initiated a request for proposals to determine the costs associated with constructing the 1,000 megawatts. I want to emphasize that while it's a thousand megawatts, it will be delivered in smaller increments as we develop the projects for our customers. There is excellent interest continuing, and we are consistently securing contracts to support this growth. Is that clear?

David Arcaro, Analyst

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

Rejji Hayes, Executive VP and CFO

So I'm just going to go back to what we committed to when we rolled out our five-year plan again, before the IRP and before Covert. So just so everyone's granted, we said $14.3 billion of capital, and we would not need to issue equity until 2025 and 2026, the outer years of the plan. At that point we would do about $250 million per year in 2025 and 2026. So now with Covert, we said we may dribble a portion of that. I would say the funding of Covert, that's not going to eliminate those outer-year needs if that's specifically the question. So the $250 million we said we'd issue in 2025 and 2026 because we're issuing equity to fund Covert; from where we sit today, we don't think that obviates the need to do that equity in those outer years. But we'll see what happens with respect to economic performance, load, EPS, how much earnings we retain, and so on. But again, from where we sit today, this does not eliminate the need for equity in those outer years.

David Arcaro, Analyst

Okay, great. Thanks. Much appreciated.

Garrick Rochow, President and CEO

Thanks.

Operator, Operator

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

Ryan Levine, Analyst

Good morning.

Garrick Rochow, President and CEO

Good morning, Ryan.

Ryan Levine, Analyst

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

Rejji Hayes, Executive VP and CFO

Yeah. So our residential load to be clear, Ryan, are you speaking about it you said year-to-date 2022?

Ryan Levine, Analyst

It appears that the second quarter has performed slightly better than the first quarter, but I'm interested in your observations.

Rejji Hayes, Executive VP and CFO

Year-to-date, we are slightly down about 0.5% compared to the same period in 2021, while for the second quarter, we have seen an increase of about 25 basis points compared to Q2 of 2021. We are quite pleased with the residential load, which has exceeded our expectations. Initially, we anticipated a more aggressive return to work in 2022, but we are still experiencing a strong hybrid work environment and significant load in the residential segment, which typically has higher margins. Although we are down 0.5% year-to-date, it is important to remember that we are up over 2% compared to pre-pandemic levels, indicating strong stickiness and resilience that favorably impacts our mix. Additionally, we continue to plan conservatively, so even with a slight decline in performance, it still offers positive potential relative to our plans.

Garrick Rochow, President and CEO

I just want to add on to this too. In both 2020 and 2021, we saw record interconnections and service line connections with residential homes. And so record from a company perspective, an annual perspective. Again, I can't compare that to what other utilities are seeing, but for us, it's really nice residential load performance across our service territory.

Ryan Levine, Analyst

I appreciate that. And then a follow-up on some of the kind of potential pull forward of 2023 costs into 2022 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?

Garrick Rochow, President and CEO

Approximately 40% of our workforce is unionized, and we have a union contract with them that was signed in 2020. This five-year contract will be in effect until 2025. While there are some typical escalations, the contract was established during a period without significant dis-inflationary pressure. It's accounted for in our budget and planning, and I'm not observing any major changes in that regard. For our non-unionized workforce, our retention rate has remained strong; we haven't experienced the Great Resignation at all. Retention has been solid throughout the pandemic, which has been beneficial from both a cost and labor perspective.

Ryan Levine, Analyst

I appreciate the color. Thank you.

Operator, Operator

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

Garrick Rochow, President and CEO

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

Operator, Operator

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