CMS能源 (CMS) 2017 Q2 法說會逐字稿

Good morning, everyone, and welcome to the CMS Energy 2017 Second Quarter Results and Outlook Call.

The earnings news release issued earlier today and the presentation used in this webcast are available on CMS Energy's website in the Investor Relations section.

This call is being recorded.

(Operator Instructions) Just a reminder, there will be a rebroadcast of this conference call today, beginning at 12:00 p.m.

Eastern time, running through August 4. This presentation is also being webcast and is available on CMS Energy's website in the Investor Relations section.

At this time, I'd like to turn the call over to Mr. Sri Maddipati, Vice President of Treasury and Investor Relations.

Thank you.

Good morning, and thank you for joining us today.

With me are Patti Poppe, President and Chief Executive Officer; Rejji Hayes, Executive Vice President and Chief Financial Officer; and Tom Webb, Vice Chairman.

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 measure are included in the appendix and posted on our website.

Now I'll turn the call over to Patti.

Thank you, Sri.

Good morning, everyone.

Thanks for joining the call.

It's great to be with you this morning.

I'll be sharing our first half results and an operational update, and then Rejji will give the details of our first half financial performance and our outlook.

Our stand for people, planet and profit will be reflected in our presentation today.

And frankly, it's what we work on every day.

Our ability to commit to all 3 is enabled by our performance, which we're continuously improving through the CE Way.

I look forward to sharing our latest updates, and not to worry, I've got a great story of the month for you.

We are happy to report, in spite of record-breaking storms in our service territory and mild weather in the first half of the year, we're up 7% on a weather-normalized basis, and perhaps more importantly, we're ahead of our plan by $0.04 year-to-date.

And therefore, we are reaffirming our year-end adjusted EPS guidance of 6% to 8% or $2.14 to $2.18.

As you've come to expect, our delivery of profits takes the form of a consistent 7% growth over the past 14 years, no matter the conditions we've faced.

Because we're confident about that continued consistent performance, we continue to reaffirm a range of 6% to 8% EPS growth for this year and many years to come.

In tough external conditions, consistent top-end financial performance only comes through extraordinary efforts of extraordinary people, one of the cornerstones of our triple bottom line.

Now we've been best-in-class in employee engagement for several years, but we must confess, we were thrilled to be named the #1 employer in Michigan in the annual Forbes' Best Large Employers survey in May.

And it's no coincidence that the customers served by this engaged team have named us a most trusted brand through a survey conducted by Market Strategies International.

As a result of the energy law passing in December, our regulatory calendar is full and active.

We recognize and appreciate our MPSC staff and commissioners for all their hard work.

The energy law implementation is going well and is on track.

The MPSC Chairman, Sally Talberg, has done a great job of organizing the working groups and leading a very systematic process to implement this high-value legislation.

The state reliability mechanism is being evaluated and designed as we speak.

It's scheduled for a final determination in December with a June 2018 implementation.

Our energy efficiency team is ramping up new 1.5% electric and 1% gas energy efficiency targets, enabling the new incentive mechanism to go into place.

And simultaneously, we have a gas rate case that's scheduled for a final order this coming Monday, and our electric rate case will be self-implemented in October.

Finally, our Palisades early termination securitization is scheduled for a final order at the end of September.

Though this proceeding has no impact on our earnings and it is not baked into our plan, we do believe that this early termination is in the best interest of Michigan.

We don't have too many opportunities to save our customers $45 million a year, so we would love to pass this along to them.

We also believe that the early termination of this out-of-market PPA enables the governor's energy agenda through the elimination of energy waste and improving energy affordability in Michigan while not jeopardizing reliability as a result of our replacement plan, which serves both people and the planet.

Our promise to improve the planet is coming to fruition at a rapid rate.

The closure of our 7 coal plants in 2016 moved us from 49% coal generation to 22%, more coal retired than any other investor-owned utility in the nation.

Our actions resulted in a reduction in carbon intensity of 30% and ranking us as the #1 U.S. utility by Sustainalytics.

And we aren't finished.

Our clean and lean strategy enables further coal reductions without big bets to achieve the replacement.

Fulfilling the RPS standard and providing for large-business customer preferences for renewables, creates the perfect conditions to modernize our generation fleet in a cost-efficient, low-risk way.

Now when we talk about our commitment to the planet, we're talking about reducing our environmental impact, including reductions in water, land use, emissions and carbon.

We've self-imposed improvement targets that go beyond environmental compliance, and we're ahead of our plan in all of these areas.

There was a time when this would have implied higher costs for customers but not at CMS.

We find a way to deliver the and in clean and lean.

Lean has many descriptors and attributes, one of which is the concept of waste and waste elimination.

An example of waste in our business is the underutilization of assets.

Traditionally, generation planners forecast load growth, build a plant big enough to serve that growth and add additional spending reserve.

We see modular additions of renewables as a more flexible way to provide adequate supply resources with smaller bets and less potential waste.

Modular renewables are a great choice for us because we have ample capital opportunities outside of generation.

We have more upgrades than our customers can afford across the entire business.

So we're always making choices that maximize customer benefits while, at the same time, reducing cost so we can deliver more customer value for every dollar invested.

Our customers will benefit from investments in our backlog of upgrades on our grid and on our gas system, and our investors can rely on a sustainable growth strategy.

In addition to our own vision for clean and lean generation fleet, the new Michigan energy law requires, and our customers are asking for more renewable energy.

We're expanding our Cross Winds to a wind park to grow toward our 15% RPS standard.

We conducted an RFP, and we were the most competitively priced bidder.

Therefore, we're building that expansion ourselves.

In addition to our renewable expansions, we worked closely with some of our largest and most energy-conscious customers to develop a pricing package that both meets their desired price point and their commitment to the planet.

We recently requested approval of this pricing option with the MPSC.

This pricing design can enable real attraction to our service territory and serve as an important part of our economic development strategy to grow Michigan.

Our residential customers don't want to be left out of the mix.

To serve them, we've launched our Solar Gardens, a utility-scale community solar program, and a pilot to operate rooftop solar package for residential and small commercial customers.

These are clean alternatives delivered with a lean mindset.

Our lean mindset carries over to all of our investments.

For example, the deployment of our smart meter technology has improved our meter reading accuracy and rate, but we did not just rely on technology deployment.

We've simultaneously improved the work process through applying our CE Way skills.

In fact, the remaining meters to be read for our gas-only customers and customers that have opted out of smart meters can be very inefficient to read but for our meter reading teams' improvement efforts.

And the results are, frankly, stunning.

We've improved the read rate to 99% and improved reads per hour by 45% year-over-year, which contributed to ancillary benefits, such as 64% reduction in invoice rework and a reduction of 2 million calls to our call center.

The net impact, over $8 million of savings since 2015 while, at the same time, improving the customer experience through more accurate billing and virtually eliminating estimated meter reads.

We use these cost savings to offset the capital investment in infrastructure, which delivers the value our customers deserve and helps keep rates affordable.

This is a great example of our business model put into action.

And it's not even my story of the month.

My story of the month is about a fueling pilot in our Flint service center.

We have a vision of our blue and whites pulling out of our 43 service centers all across Michigan every morning after a quick safety briefing and a daily huddle, ready to serve.

One thing that slows down our crews today is the time they spend gathering materials, equipment, fueling their vehicles, but this is changing.

We started a pilot in Flint where a lower-cost night shift has been established to prefuel the vehicles and have them prepped and ready to go before the crews arrive in the morning.

In Flint alone, this is saving 15 to 30 minutes per person daily.

When we extrapolate this to a statewide implementation, the savings potential grows to an elimination of over 100,000 hours of wasted time per year.

We can replace those wasted hours with time for our crews to do the value-adding work that our customers need.

I'm reminded every time we are implementing one of these seemingly simple improvements that we're just scratching the surface of our full potential.

You can definitely put this story in the low-hanging fruit category.

It's what gives us the confidence that we have lots more cost-savings opportunities that deliver a better customer experience.

Our commitment to the triple bottom line, powered by performance and the CE Way, is why we are so sure that we can continue to improve the experience for our customers and sustain the performance you've come to expect.

This model's been working for more than a decade.

And in spite of many changes that are outside of our control, come what may, the CMS team will deliver for our customers and our investors.

Now I'll turn the call over to Rejji.

Thank you, Patti, and good morning, everyone.

As we have highlighted in the past, we deeply appreciate your interest in our company.

We view the investment community as a key element of the people aspect of the triple bottom line, alongside customers, employees and everyone we serve.

Our second quarter results of $0.33 per share are down $0.12 from last year largely due to continued mild winter and record storm activity in our service territory.

Put the level of storms into context, year-to-date, we have had 5 official major event days in 2017 compared to 3 for all of 2016, which led to approximately $31 million in service restoration costs through the second quarter, which is more than $10 million above our 5-year average at this time of the year and roughly double the amount spent in the first half of 2016.

With that in mind, we don't make excuses and already have taken steps to mitigate the unfavorable weather impacts.

For the first half of the year, adjusted earnings of $1.04 per share were flat from last year and up $0.08 or 7% on a weather-normalized basis, which positions us well to meet our annual financial objectives.

As Patti mentioned, we are quite pleased with our performance to date and remain $0.04 ahead of plan even with the unfavorable weather and record storm activity in the first half of the year.

As indicated in the waterfall chart, we have managed to offset $0.11 of mild weather and record storms fully in the first half of the year with cost savings, outperformance at enterprises and rate relief net of investments, among other factors.

Our business model, which focuses on achieving cost savings, coupled with modest sales and other countermeasures to minimize customer rate inflation, has enabled us to end the first half of 2017 ahead of plan, which bodes well for the remainder of the year.

For the second half of 2017, we have assumed $0.07 of additional rate relief, net of investments.

And as always, we're implementing numerous cost-control measures.

Lastly, we will also benefit from the absence of discretionary activities, which occurred in the second half of 2016, such as our debt prefunding and relatively high volume of donations, the sum of which equates to $0.14 of potential EPS pickup in the back half of this year.

In summary, we believe these factors provide us with significant flexibility for the rest of the year.

As such, we remain highly confident in our ability to deliver 6% to 8% adjusted EPS growth in 2017.

I know you all are well acquainted with this EPS forecast curve, which illustrates our progress on meeting our targets -- or in meeting our earnings targets as we move through the year.

This year, we started out with mild weather and significant storm activity but took actions to remain ahead of plan in the first half of the year.

This chart also overlays the curve from 2016.

As highlighted, we enjoyed favorable weather and great cost performance in the second half of 2016, which permitted substantial reinvestment back in the business in the fourth quarter.

This, as you can imagine, makes the comparison a bit easier for 2017.

So we're right on course for another solid, predictable year in 2017.

The EPS curves for the past decade remind us that every year is different, but the results are the same: we deliver consistent, industry-leading EPS growth by managing the business on behalf of customers and investors.

During periods of better-than-expected weather and cost performance, we have reinvested in the business, as evidenced by the $340 million in aggregate that we have put to work over the past 4 years to achieve customer improvements.

Conversely, during periods of unfavorable weather or other unexpected negative variances, we have made up the difference through cost savings and good business decisions without compromising our commitments to our customers and employees.

Irrespective of the circumstances, we have managed to deliver within our earnings guidance annually, and this year will be no different.

Having spent a good deal of the past 3 months with the investment community, many have asked how CMS has achieved and will continue to achieve consistent, industry-leading earnings growth without raising customer rates above inflation year in and year out.

Admittedly, even I asked this question when I was on the outside looking in.

Well, the answer is that we have a robust capital plan of needed customer investments largely funded by annual cost savings of 2% to 3% a year; modest utility sales growth; and other enhancements, such as thoughtful tax planning, which eliminate the need for dilutive block equity issuance worth about 2%.

All this equates to us self-funding roughly 70% of our capital plan, which minimizes customer rate impacts to a level at or below inflation while our growth continues at 6% to 8%.

This simple but unique business model has driven our historical success and offers a sustainable path forward to benefit our customers and investors.

Our customer-driven capital plan is comprised of needed investments, which will enable the delivery of safe, reliable and efficient electricity and natural gas to those we serve.

We have forecasted a base case of approximately $18 billion of capital investments over the next 10 years, in alignment with our clean and lean strategy, which Patti highlighted earlier.

As we've noted in the past, we anticipate additional opportunities of approximately $7 billion in the form of enhanced gas infrastructure, grid monetization and cost-efficient PPA replacement through renewables and other sources.

As always, affordability from a customer and balance sheet perspective, commission alignment, and execution capabilities will dictate the pace at which we take on such opportunities.

As to the latter point around execution risk, this slide illustrates our confidence in our ability to execute on our 10-year plan.

As highlighted, over 90% of our 10-year capital plan of $18 billion is represented by projects less than $200 million in size, which compares favorably to our capital plan composition over the past 10 years.

Broadly speaking, project size offers directional guidance as to the complexity and duration of projects.

As such, our capital plan is not only increasing in size but is decreasing in terms of risk profile, which bodes well for customers and investors.

Our capital plan embodies the modular nature of the clean and lean strategy and perpetuates our "no big bets" investment philosophy.

A key driver of our ability to execute on our capital plan in an affordable manner is made possible by lean thinking and performance, which drives sustainable cost savings.

As you can see on the left-hand side of this slide, CMS has been a leader in this area, and our employees have embraced the CE Way to continue to come up with new and innovative ways to deliver those savings to our customers.

For investors, this creates capital investment headroom and fulfills our self-imposed commitment to keep base rate increases at or below inflation.

Over the last decade, we have been able to reduce our O&M cost by more than 3% per year, and the past 3 years were no exception.

We're projecting conservatively to continue at this pace of about 2% over the next 3 years without compromising our commitments to customers in the form of service upgrades and while keeping employee salaries and benefits competitive, 2 key constituents and the people element of the triple bottom line.

Our capital investment strategy and support of regulatory outcomes, coupled with annual cost savings and tax planning, have enabled us to grow our operating cash flow by about $100 million annually.

In fact, we've increased our operating cash flow by $1.8 billion in aggregate since 2004.

Our past and prospective cash flow generation has and will continue to eliminate the need for dilutive block equity issuance going forward, which further supports the self-funding strategy.

For reference, as of June 30, 2017, we have generated over $1.1 billion of operating cash flow, which is slightly ahead of plan and the corresponding period in 2016.

Switching gears to sales.

The economic outlook for our service territory, particularly in Grand Rapids, the largest city in our service territory and in the heart of our footprint, remains relatively strong, as indicated on this slide.

As stated in the past, we don't rely heavily on sales growth, as evidenced by our forecast of 0.5% to 1% of -- for 2017, but we continue to be encouraged by the increased expansion and diversification of our service territory.

We continue to work closely with the Governor's Office, the legislative branch and key regulators to bring business to Michigan because we win when Michigan wins.

Moving on to enterprises.

DIG continues to drive the performance of this business unit.

Enterprises was ahead of both the plan and the corresponding period in 2016 due to operational efficiencies attributable to upgrades completed in 2015 and higher capacity prices.

As you'll note on the bottom of this slide, capacity remains open in future years to take further advantage of attractive pricing.

As Patti noted, we'll have more visibility on the Palisades result by the end of September, which will dictate our longer-term plans for DIG.

And as stated in the past, we remain cautiously optimistic as to the outcome of the Palisades proceeding but have not factored that pending decision into our plan.

As we approach the back half of 2017, we continue to evaluate potential risks and corresponding mitigating factors to minimize volatility in our plan, as evidenced by our sensitivities slide.

A noteworthy opportunity includes energy efficiency incentives, which were doubled under a new energy law, but we've only accounted for half of the increase in our financial planning with another $0.02 of potential upside yet to be reflected.

In closing, the last slide provides a reminder of our financial objectives for 2017, all of which are well on track.

Needless to say, we remain acutely focused on delivering another year of consistent, industry-leading growth with minimal rate impacts to the benefit of customers and investors.

At this point, Brandon, please open up the lines for questions.

(Operator Instructions) Our first question comes from Michael Weinstein with Credit Suisse.

I was wondering if we could talk a little bit about the RFP and the -- or the process that's ongoing at the commission for securitization to approve securitization of the payment to Entergy as well -- like what timing do you see on that?

And then also, what kind of timing do you see on getting a replacement for Palisades that you've bid DIG into?

Right.

So just a couple high-level dates.

So first of all, we expect the order from the commission on the securitization at the end of September.

And keep in mind, that's just approving the financing mechanism for the payment to Entergy of $172 million.

And then after that, we'll be -- and they may provide some color in that order about the replacement plan, but the replacement plan really is filled out in a forward-looking rate case that we'll be filing later.

So it is definitely a process.

Now they may give some clear indications that say they want us to sign a contract, or they give indications they would want us to bring DIG, for example, into the utility.

But none of that would be -- we don't expect that to be binding.

We expect the -- really just the order to be about the securitization and then forward cases about the backfill plan.

Right.

Rejji, you made an interesting comment.

You said that as an outsider looking in, you were skeptical of how CMS could achieve growth without large cost increases on rates.

Now I'm just wondering if -- what have you learned since you've gotten there that surprised you?

Yes.

Look, first, I would say skeptical is a paraphrase.

That was not a quote.

But I would say I have been pleasantly surprised on the inside now at how well the company has managed to not only execute on its capital plan, which as you know, is quite robust as well as risk mitigated but also to realize significant savings year in and year out.

And so you're familiar with that slide where we show our benchmark relative to the sector.

And that's a real achievement of O&M cost reductions of 3% per year over the last 10 years.

And if you look at the next 3 years going forward, we think that there are significant opportunities to realize additional O&M cost reductions.

And we've talked about this in the past, but candidly, I would submit that a lot of the cost savings we've realized in the past are really through sheer will and just a lot of good discipline.

But through the CE Way, we think we can offer a much greater level of sophistication realizing cost savings in a scalable and replicable way.

And so we think a combination of process-oriented and related savings as well as technology-enabled savings through smart meters and other measures should continue to lead us down this path of consistent cost reduction in years to come.

So I have seen a lot of opportunities within these walls.

And if you look at some of the other metrics that Patti highlights in our stories of the month, there's a lot of low-hanging fruit here.

And so that's what encouraged me that this path we've been on for so long is sustainable in the long run.

Got one last question.

On the -- you said that there was a filing at the commission to approve your prepackaged -- your packaged renewable offering, right, to customers that's going to be competitive.

Can you just talk a little bit more about that, like what kind of an approval you're looking for and when that might come?

Yes.

It -- so it's a tariff, and they do have to approve that tariff, and there's a range of time.

Next couple of months, we expect to hear the results of that tariff approval.

What we like about it and what we think is particularly unique is that it is -- does not have a cross -- cost shift.

It really provides the access for our large-business customers to have access to renewable energy.

They remain a full-bundled customer, but then they're able -- they have a couple options.

They can either bring their own PPA, which we're agnostic to, or we will provide the renewables for them, and they can then sell that on -- in MISO.

And if prices go up, then they get the upside because we've signed a fixed contract with them.

So that's very appealing to them.

What's appealing to us is they remain full-bundled customers, and we're able to provide the energy in the form that they prefer.

So what we've heard from our large-business customers is -- I mean, a direct quote from one of them was, "This is the first time a utility has figured this out.

This is exactly what we need, and it makes Michigan very attractive." So we're optimistic that the commission will approve the tariff, especially since it doesn't have any kind of cost shift to others.

Is that something you expect to happen in the next month or 2?

Or is this kind of...

.

Yes.

In the next 90 days, we expect an outcome.

Our next question comes from Jonathan Arnold with Deutsche Bank.

Quick, so I was just looking at your 2017 first half to full year bridge slide, I think it's Slide 13.

And you're showing first half cost savings of $0.04 through the first half, but it was $0.08 through the first quarter.

I'm just kind of -- judging by how you tend to manage the business, I would have thought that you would have been pushing for more cost savings outside of storm given the storm experience you were having during the quarter.

So just curious why we have seen the cost saving number reverse in the second quarter.

Well, I wouldn't say it's necessarily a reverse, Jonathan.

This is just the math.

If you're looking -- you're specifically referencing on Slide 13 or Slide 14, this bucket we have here of what bridges the gap if you take into the account the rates and investment -- or the rate net of investments and then the $0.12 to $0.16, the 16 month -- 6 months to go.

Well, I mean, the reason why we feel confident in our ability to close this gap is that we have all of these activities that we've put in place, which are really discretionary in the second half of 2016, which we don't need to replicate in this year as we think about closing this gap.

And so the only specificity we have as it pertains to the cost savings as other is just this math here that closes the gap between the discretionary items that we won't have to replicate again in 2017, and then there's cost savings and other line item.

That gets you to the $0.12 to $0.16.

But we believe that we can realize cost savings beyond that.

So just to be clear, that number is effectively just a plug here for illustrative purposes, but we believe we can realize more cost savings over the course of the second half of the year.

We're already seeing that in the form of customer operations (inaudible) Patti highlighted a lot of good achievements (inaudible) utilize in uncollected accounts.

And we think there are much more cost (inaudible) beyond what's just on this page.

So again, the math here is more for illustrative purposes that just closes the gap on the $0.12 to $0.16, but we think there's a lot more opportunities on that going forward.

But the fact you were $0.08 ahead of savings plan or you were guessing $0.08 benefit from cost in the first quarter, and it's only $0.04 in the first half, can we kind of dig into that a little?

So we -- in the first half, we had improvement in benefits of about $0.04.

And that was largely due to an accelerated pension funding that we did in the fourth quarter of last year, so that helped us out by $0.04.

And then we had some other good news on property tax related to our Zeeland plant in the first quarter of the year.

And so that drove a lot of the performance.

But as we go into the second half, again, we have additional cost savings that we have factored in the plan.

Again, that should help us get through to the second quarter -- through the second half of the year and get us to our guidance of $2.14 to $2.18.

So again -- sorry?

No, I'm sorry -- okay.

I guess I would just add, Jonathan, too, remember, we don't work to the quarter.

We work to a year-end number.

And we're -- as our little S curve that's on Slide 16 shows that every year is a little different.

And the comparison sometimes from 1 quarter and 1 year to the quarter before is not necessarily reflective of the year-end confidence, which is what we're trying to express with our reaffirmation of our year-end guidance.

We feel real good about the full year performance.

That's what we're working to.

Okay.

And then, Rejji, you did allude to the fact that you feel there -- that you view this cost savings number for the second half is kind of a plug of things that you just have coming to you anyway.

So you did have continued storm and/or unfavorable weather.

Can give us some sense of how much you think you could flex the business if you get further headwinds?

Yes.

So we're already anticipating -- if you look again on Slide 13, we -- if we have a weather-normalized second half of the year, that'll cost us $0.07 because we obviously had a very nice second half of the year in 2016.

And we think rates net of investments, again, that's comprised of our electric self-implementation and then where we end up on gas, the gas rate case in this upcoming Monday.

And so that should offset the weather.

And then as you look at the latter portion of this year, we think that a combination of cost savings and, again, discretionary activities that we executed in the second half of last year because we had a very good summer and had the opportunity to reinvest back in the business.

We don't have to replicate such activities going forward.

So we think a combination of those or the lack of those activities or the absence of those activities, coupled with uncollectible account utilization -- and we also have some items that we forecasted rather conservatively at the parent level that we could potentially defer going into 2018.

The combination of all those items should get us through to next year -- through our guide for this year, excuse me.

Great.

Could I just ask one other thing?

I noticed on the cash flow slide, the NOLs and credits line now has $700 million in 2020 and '21 where it was only $200 million last quarter.

Seems like there's been a change at the back end there.

Is there anything to explain that?

Yes.

So there are a couple of changes that have come about reflected in our NOL and credits.

So you're referring to that bottom yellow row on Slide 20.

We have -- sorry?

Yes, it dropped off pretty much, much faster before.

Yes.

So what we're seeing there is we have -- obviously, we have to plan to invest about $1 billion-or-so to get to our RPS standard of 15% as stipulated by the energy law.

And so obviously, by increasing our estimates for capital expenditures related to renewables, that does help the balance of NOLs and credits we have forecasted for the next 4 or 5 years.

And again, as we sit here today, we don't expect to be a federal taxpayer all the way through 2020.

And so we only start paying a portion of federal taxes come 2021.

So a lot of it has to do with basically pulling forward spending to meet the new RPS standard.

But does this effectively sort of help to defray equity a little further?

Precisely.

And so again, we do not anticipate, through our 5-year plan, issuing dilutive block equity for the next 5 years or even beyond that potentially.

Our next question comes from Ali Agha with SunTrust.

First question.

I noticed that in the second quarter, the weather-normalized electric sales actually declined.

They were down 0.4%.

Does that still keep you on track for the plus 0.5% to 1% you're budgeting for the year?

Anything particular that caused that decline?

Yes.

It's a good question, Ali.

We have said for some time now that we foresee weather-adjusted electric sales at about 0.5% to 1%.

And as you may recall in Q4 or on the Q4 earnings call and also on the Q1 earnings call, we historically had attributed that to strong performance on the industrial side.

And we have very good visibility on the performance of that segment, as you probably saw.

That has been tailing off quite a bit.

But what encourages us and the reason why we still feel good about that 0.5% to 1% forecast is we're seeing a wonderful trend in terms of sales mix.

And so our residential performance has been well in excess of our expectations.

And so we're about 0.5% up for residential on the electric side on a weather-adjusted basis and almost 2% up for commercial.

And so we've seen a nice bit of favorable sales mix, which gives us confidence in that 0.5% to 1%.

And what I would also say, just peeling the onion a bit on industrial, the downward trend you see for industrial, that's largely attributable to our retail open-access customers and then one large customer who has had lower-than-expected performance.

And so those are lower-margin customers, and our remaining balance of industrial customers have performed quite well.

And so we feel very good about the 0.5% to 1% weather-adjusted sales forecast.

Okay.

And then secondly, more conceptually, when you talk about the ability to keep customer rates at or below inflation, one of the categories that you put in that is the no block equity requirement.

So I mean, intuitively, the equity, whether you want to issue or not, shouldn't have a direct impact on customer rates.

But to interpret that, is that saying, to get to the 6% to 8% growth rate to solve for that equation, the fact that you don't need equity helps you in keeping customer rates down?

Is that the way to interpret that?

That's exactly right because, obviously, if you issue a significant portion of equity, it's going to be dilutive on your earnings.

And so we take pride in the fact that we have enough capability on the cost-cutting side to fund a good portion of that capital investment backlog execution, the $18 billion plan.

We've been realizing cost cuts to, say, 2% to 3% over the last 10 years and are forecasting that going forward.

And so that, coupled with the very good tax planning that has allowed us to not pay federal taxes for the last several years and for the next 4 or 5 years forward, coupled with a little bit of sales performance at the utility, has enabled us to avoid doing those real dilutive block equity deals, which others may need to do.

And that obviously keeps our EPS right where we'd like it to be at that healthy 6% to 8% adjusted growth level.

Right.

And then as you mentioned, the gas rate case decision should be coming out next week.

Currently, there is a slight variance between your last authorized electric ROE and gas.

For planning purposes, do you assume that they would align, and that 20 basis point reduction that you're seeing in electric, that gas probably gets to the same level?

So just to align on the facts, so we requested to be clear at 10.6% ROE for the gas rate case.

Obviously, as a result of the self-implementation order as well as what we're seeing in terms of some of the other data points in the [LJ,] our expectations have been tempered.

And so we have assumed a double-digit ROE, to be sure.

And there may be a chance that we get to levels either obtained by DTE in recent cases or closer to electric.

And so we'll see where we end up, but it's, I think, a little early to speculate as to where we may end up on the gas rate case.

Our next question comes from Paul Ridzon with KeyBanc.

Just a clarification.

Are you $0.04 ahead of plan on a weather-adjusted basis or absolute?

Absolute.

Okay, great.

And then, Rejji, you mentioned that there's -- you got $0.02 in your hip pocket around energy efficiency.

How challenging is that to execute?

Yes.

I'd say if you look at our track record over the last couple of years, we've been quite good at realizing the required reductions on electric and gas.

And so in the prior energy law, you needed to get basically a 1% reduction -- or sorry, a 1 gigawatt hour reduction on the electric side and a 0.75 billion cubic feet reduction in gas.

And that has now changes for the new energy law to 1.5% and 1% for electric and gas, respectively, and then you get now 20% of the cost to achieve those savings.

And so we feel good about our ability to execute on that.

What remains to be seen is how much of that upside we can realize in this year because, as you may know, the new energy law came into effect in April of this year.

And so there's only a question about whether that should be a prorated earnings or should it be the full year.

If it's full year, it could be worth $0.02.

If it's a prorated portion, it could be $0.01.

And so that's the only concern we have at this point.

But we, looking at our historical track record, are highly confident we can execute on realizing those customer savings and then realizing the benefits associated therewith.

And we'll get clarity on that by September 30 in a final order from the commission.

Is the test based on a cumulative amount or a run rate at a certain kind of a snapshot date?

It's a cumulative amount.

Our next question comes from Travis Miller with Morningstar.

You answered most of my questions, but I had one longer strategic one.

At what point do you look for landmarks for that extra $7 billion of CapEx?

So the key signpost that we would look for as we execute on our capital plan and potentially realize those upside opportunities -- and just to be clear what's in that, so to go from $18 billion to $25 billion, you really have a few pieces in there.

You've got gas infrastructure, which is just north of about $2.25 billion.

And then you've got, call it, just under $0.75 billion attributable to grid modernization and then potential Palisades replacement.

And the balance is really a potential replacement option for the MCV contract, which expires in 2025.

And that's about, call it, $3.5 billion or thereabouts if you include potential wind replacement coupled with gas peaker plant support.

And so as we think about what may allow us to pull those levers, it really is the historical constraints.

And that's customer affordability and/or the need to fund that in a efficient way on our balance sheet.

And so as the signpost we'd need to see is how economic does wind become over time, what cost savings are we able to realize to self-fund the business and, again, permit us to fund or execute on the capital plan of that magnitude and, again, if the economics associated with renewables or other potential alternative means to replace that MCV PPA come into effect.

So it's combination of, I'd say, affordability and balance sheet capacity in order to take that on.

Okay.

And would that Palisades replacement portion of it, is there any kind of indication that, that might be out of the capital plan after the regulatory proceedings?

As Patti highlighted, we should have visibility by the end of September as to where we'll come out on Palisades.

And then with respect to whether DIG or some other entity becomes being a part of the longer-term plan, we won't have visibility on that until we file a rate case in the subsequent year.

And then there's a bit of process that we need to take place.

We need to get approval from the commission for whatever purchase plan we have on the gas side.

Our next question comes from Gregg Orrill with Barclays.

Just maybe it's a little too early, but following up on the question around the Palisades replacement and DIG, is that something that you would like to do or that's still a bucket of options that you're looking at?

I would call it, in your words, the bucket of options.

The one thing that we want to make sure that we're doing is reducing and passing along the reduced cost to our customers.

And we think that's most important.

And on one hand, just on the question of DIG, inside the utility or outside the utility, we think it's a win either way.

When it's outside of the utility, it's available to provide bilateral contracts, and we think there's potential in that market.

If it's inside the utility, we think it can add value to utility customers.

And so we feel very comfortable working through the alternatives and making sure that both the commission and we are aligned and satisfied that we've got the resource adequacy for the state of Michigan, the visibility that we need for that resource adequacy and, most importantly, that we're able to pass along the savings as a result of the early termination of out-of-market PPA.

So we really are, at the end of the day, just going to look for the lowest-cost method to backfill that PPA.

Our next question comes from Jon Donnel with Scotia Howard Weil.

Just a couple more details on the waterfall slide there kind of bridging the last 6 months of the year.

In terms of the rates and investment piece, the $0.07, are you assuming anything for the gas rates beyond what you've self-implemented to date or just sticking with the $20 million?

As you know, historically, we've been very conservative around our accounting and expectations.

And so we've self-implemented $20 million, and so that's where we're at.

Okay, great.

That's helpful.

And then similarly for the foundation spending, I think that was higher than normal in 2016.

Is the $0.05 delta that's kind of baked in here, does that assume any payments made in 2017?

Or is there still just kind of the normal year expectation of what you would spend on that?

Yes.

In our financial planning, we always presuppose that we'll make donations to the foundation, but it's always a function of how well the business performs over the course of the first few quarters of the year.

And so we'll see where we're at by the fourth quarter.

And if we continue to trend well economically, we'd love to take advantage of those opportunities to put more money in the foundation.

Obviously, last year, the second half was quite good.

And so we really stepped up on the donations, not just to the foundation but for other opportunities of interest.

And as I've said before, if we see a soft or mild summer and we don't have those source of opportunities this year, we can clearly pull back on that sort of activity to meet our earnings guidance of $2.14 to $2.18

So there could be some more room besides just the $0.05 that's baked in that slide?

Potentially, but that said, we're still focused on $2.14 to $2.18 and 6% to 8% growth.

This concludes our questions.

So I'd like to turn it back over to Ms. Poppe for any closing remarks.

Thank you, Brandon.

And thanks again for all of you for joining us this morning.

I'll just reiterate that we feel good about our performance in the first half in spite of the headwinds.

We are ahead of our plan, and it's why we're reiterating our year-end guidance of 6% to 8% EPS growth.

As you know, you can count on us to deliver.

And we definitely hope to see you September 25 at our Investor Day in New York.

Thanks, Brandon.

Thank you.

This concludes today's conference.

We thank everyone for your participation.

Now release your lines.