CMS能源 (CMS) 2019 Q2 法說會逐字稿

Good morning, everyone, and welcome to the CMS Energy 2019 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.

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

Eastern time running through August 1. This presentation is also being webcast and is available in CMS Energy's website in the Investor Relations section.

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

Thank you, Rocco.

Good morning, everyone, and thank you for joining us today.

With me are Patti Poppe, 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 Patti.

Thanks, Sri, and thank you, everyone, for joining us on our second quarter earnings call.

This morning, I'll share our first half financial results and outlook, and I'll also review our approved IRP settlement that lays the groundwork for our clean energy future.

Rejji will add more details on our financial results and review the model.

And as always, we'll close with Q&A.

The first half of this year was challenging but manageable given our unique capabilities and our conservative planning.

Despite unfavorable weather and significant storm activity, we remain on track through the first half of the year with earnings of $1.08 per share.

As a result, we are reaffirming our full year guidance range of $2.47 to $2.51 per share with a bias to the midpoint.

And we'll continue to manage the work as we adapt to changing conditions through the remainder of the year to achieve the results you expect.

While every year is different, the blueprint to the CMS model is simple and repeatable.

We plan conservatively to deliver the consistent results that you can count on, year in and year out.

Our actions to reinvest positive weather in 2018 benefited customers last year and have positioned us well to meet our financial objectives this year, which Rejji will describe in more detail.

This model, where we ride the roller coaster so you can enjoy a smooth and predictable outcome, has served us well over the last decade plus, and we'll continue to utilize it going forward to achieve our 6% to 8% growth.

The major highlight for the second quarter was the MPSC's approval of our Integrated Resource Plan settlement.

As clean energy leaders, we take pride in our long-term IRP that is the map for a clean and lean energy future.

We had broad support for our plan, including the Attorney General, the MPSC staff, residential and business customer groups and environmental advocates.

In the near term, the settlement includes the planned expiration of the Palisades PPA in 2022 and the early retirement of 2 of our remaining 5 coal units, Karn 1 and 2 in 2023.

We'll meet our near-term needs with increased demand-side resources, which have economic incentives as well as 1,100 megawatts of solar, which will be procured through competitive RFPs conducted over the next 3 years for projects delivered in 2022 through 2024.

Half of the projects will be owned and included in rate base.

And the other half will be contracted through PPAs, on which we will earn our new financial incentive mechanism.

A good portion of this, including our demand response programs, are not yet baked into our financial plans, and we consider it all as upside for our customers, our planet and our investors.

Longer term, the IRP calls for a total of 6,000 megawatts of solar to replace the expiration of the MCV contract and the retirement of our remaining 3 coal plants.

You know there was once a time when we had to make a sucker's choice between clean and expensive energy or the cheap and dirty stuff.

That just isn't true anymore.

And our plan, along with the broad support we have gained for it, demonstrates that.

There's not a tradeoff here, only a trade up, affordable bills, a cleaner environment and a higher quality mix of earnings.

Our Michigan legislators understood this important balance when they passed the 2016 energy law, which included an increase in our renewable portfolio standard and incentives for demand-side resources and PPAs.

As we look to the future, we'll also begin incorporating more storage as costs continue to decline.

Let me remind you that storage is not new to us, as we have been dispatching it for some time at the Ludington Pumped Storage Facility and understand the value that it provides to our customers, which is why my story of the month really is a story of the last half century.

1969 was the year we began construction with our partners at DTE of the Ludington Pumped Storage Facility.

Those of you who heard the music while waiting for our call might have noticed it was all from 1969.

No detail left unattended at CMS.

There, on that bluff, overlooking Lake Michigan, we built what was at the time the world's largest battery that has served our customers for over 50 years.

We recently renewed its license with FERC for another 50.

While initially built to utilize excess power produced by nuclear power plants at night, now, Ludington is a key asset in our portfolio as we integrate more renewables.

We began and upgraded the facility in 2011, which will be completed next year.

This upgrade creates about 420 megawatts of additional capacity, making Ludington Pumped Storage the fourth largest pump storage facility in the world.

In fact, we have the 6 largest motors in the world, each at 500,000 horsepower of clean energy production.

Now that's a muscle car after my own heart.

The upgrade will improve the efficiency of the facility, while also reducing the time it takes to refill the pond.

In other words, recharge the battery by 5 hours.

Per our estimates, Ludington offers an annual value to our customers of about $60 million through the energy and capacity it provides.

For over 50 years, we've integrated storage in our daily generation strategy, including pricing it in to the day ahead and real time MISO markets.

As a result, we've had plenty of time to familiarize ourselves with how batteries work on our system.

In fact, we consider ourselves storage experts.

We look forward to technology advancements that allow us to take advantage of additional low-cost battery storage in the future.

Switching gears to regulatory matters.

Governor Whitmer made another appointment to the commission, and I would like to take a moment to congratulate Commissioner Tremaine Phillips on his appointment and thank Commissioner Saari who has served the state well in many capacities.

Commissioner Phillips is a Democrat and formerly served as Director of the Cincinnati 2030 District, a project focused on sustainable energies.

We also work -- he also worked in Governor Granholm's administration on Michigan-related energy policy.

Over the next few years, we look forward to working with Commissioner Phillips; Commissioner Scripps, who is another great recent addition to the commission; and Chairman Talberg, who will retain her role as chair at this time.

It's worth reminding you that our model allows us to perform consistently, regardless of changes at the commission, unfamiliar weather -- unfavorable weather conditions, the economy or other external factors.

Our track record demonstrates our ability to deliver consistent, premium results year after year after year.

And this year, you can expect the same.

With that, I'll turn the call over to Rejji.

Thank you, Patti, and good morning, everyone.

For the second quarter, we reported net income of $93 million, which translates into $0.33 of earnings per share.

Our second quarter results were $0.15 below our Q2 2018 results largely due to mild weather, which impacts our electric volumetric sales.

On a year-to-date basis, we have delivered $306 million of net income, or $1.08 per share, the latter of which is $0.26 per share lower than our financial results in the first half of 2018.

Weather continues to be the key driver of our financial performance in 2019, starting with the substantial storm activity experienced in our electric service territory in Q1, which led to $0.09 of negative variance versus the first half of 2018.

In the second quarter, we saw cooling degree days of approximately 30% below normal, which also contributed to the negative variance in electric business and has offset some of the positive gas sales we've seen over the course of 2019.

Weather aside, the balance of negative variance versus 2018 was largely driven by anticipated underperformance of enterprise in the first half of the year and a higher effective tax rate, both of which were incorporated into our EPS guidance for the year.

These headwinds were partially offset by rate relief, net investment-related cost, which provided $0.07 of positive variance relative to the first half of 2018.

That said, we remain on track to achieve our full year EPS guidance, as Patti noted, given the back-end loaded nature of our 2019 plan, which we highlighted earlier this year, and a steady implementation of cost control measures over the course of this year, which have kept us on plan.

As always, we plan conservatively and manage the work to meet our operational and financial objectives year in and year out, and 2019 will be no different.

To elaborate on the glide path of the second half of the year, on the right-hand side of the waterfall chart on Slide 12, you can see the key components of our year ago financial plan, which gives us a high degree of confidence that we'll achieve our 2019 financial objectives.

As always, we plan for normal weather, and you can see that the benefits of last year's cost pull ahead, which provide $0.23 of expected positive variance versus the second half of 2018, more than offset the absence of favorable weather in 2018.

To put the magnitude of last year's pull-ahead in context, in 2017, we had operating and maintenance expenses of approximately $970 million and spent just under $1.1 billion in 2018 funded by last year's weather-driven financial upside, which is why we're confident that 2019's O&M spend will be well below the 2018 levels.

The remaining 6 months of the year also included about $0.12 of additional rate relief net investment-related cost driven by the previously set electric rate case and the expectation of our constructive outcome in our pending gas case for which we're scheduled to get a commission order by the end of September.

Lastly, we expect the balance of our year-to-go plan to be comprised largely of cost savings and nonweather sales performance at the utility and enterprise earnings contribution, all of which have forecast enumerated in the table on the lower right-hand side of the page, and I'll touch on these in more detail.

Starting with the utility, as discussed in the past, every year, we plan for 2% to 3% net cost savings, which are reflected on our estimates of $0.06 to $0.09 of positive variance.

As to the top line, we anticipate weather-normalized sales to be flat for the year versus 2018, which reflects the usual conservatism.

And we have been encouraged by the favorable mix that we had seen over the past several months as our higher-margin residential and commercial customer segments have exceeded expectations.

So we're forecasting about $0.06 to $0.08 of EPS pickup there.

As for enterprise per our initial guidance, enterprise earnings are expected to be back-end weighted as lower capacity sales at DIG attributable to the residual effects of the 2018 MISO planning resource auction roll-off.

So we'll begin to see the positive variance versus 2018 in the second half of the year as our fully contracted 2019, 2020 plan year capacity contracts commence.

Closing out the 2019 walk, though weather has largely been a headwind for the electric business for the first 6 months of the year, we have been encouraged by the volumetric sales trends we have seen in July with cooling degree days approximately 10% above normal on our electric service territory to date.

We've estimated about $0.04 of potential upside to our plan attributable to the July weather.

But needless to say, we never plan for weather to drive our financial performance.

So we'll continue to manage the business with a healthy level of paranoia to benefit of customers and investors.

As a reminder for how we have managed to perpetuate our success over the years, our focus on cost controls, conservative financial planning and proactive risk management underpin our simple but unique business model, depicted on Slide 13, which enables us to deliver consistent industry-leading financial performance year in and year out.

We have a robust backlog of capital investments, which improve the safety and reliability of our electric and gas systems for our customers and drives earnings growth for investors.

We fund this growth largely through cost-cutting, tax planning, economic development and modest nonutility contribution, all efforts which we deem sustainable in the long run.

As such, we are confident that we can continue to improve customer experience through capital investments, while meeting our affordability and environmental targets for many years to come.

Digging into the core elements of our business model.

As announced earlier in the year, we have a capital investment plan of over $11 billion over the next 5 years, which focuses on the safety and reliability of our gas and electric systems as well as added renewable generation, as depicted on Slide 14.

And our capital investment needs remain significant beyond the 5-year period.

With our IRP on the execution phase, a gas rate order pending and the initial stages of our financial planning cycle underway, we look forward to providing an update to our 10-year capital plan in the fourth quarter.

As we plan for the future, the key constraints of our long-term capital investment plan will be customer affordability and balance sheet and workforce capacity.

As to the former, we remain acutely focused on cost reduction opportunities throughout our cost structure, which offers over $5 billion of opportunities, excluding depreciation and amortization expense.

Over the next decade, the expiration of the high-priced Palisades and MCV power purchase agreements should collectively deliver approximately $150 million of annual savings over time.

Also the gradual retirement of our coal fleet will provide substantial O&M and fuel savings beginning with the retirement of our Karn 1 and 2 units in 2023, which we estimate will generate approximately $30 million of O&M savings.

And while we remain coal plant operators, we continue to seek opportunities to reduce our structural cost, as evidenced by the recent renegotiation of a fuel transportation cost at our Campbell units, which has led to an estimated $150 million of nominal savings over the next several years.

These opportunities on the supply side of the business will be supplemented with capital-enabled savings, as we modernize our electric and gas distributions, which should reduce our operations and maintenance expenses.

Lastly, the CE Way will serve as the key pillar of our cost reduction strategy over time as we eliminate waste throughout the organization.

These efforts will provide a sustainable funding strategy for our capital plan, which will keep customer bills low on an absolute basis and relative to other household staples in Michigan as depicted on the chart on the right-hand side of Slide 15.

Another element of our self-funding strategy is economic development, and Slide 16 illustrates our success in attracting new industrial activity to our service territory in the past several years, which is augmented steady organic growth in our residential and commercial segments.

As highlighted in Q1, we're targeting 100 megawatts of new load in 2019 and continue to trend on plan with 50 megawatts secured through the first half of the year.

We also continue to see attractive levels of diversity in our new load, which is reflective of our electric service territory.

As you'll note on the pie chart on the right-hand side of the page, in 2018, approximately 2% of our customer contributions came from the auto industry.

As we continue to invest capital and manage customer prices, we are also dedicated to maintaining a healthy balance sheet and robust access to capital markets.

On Slide 17, we have a snapshot of our credit ratings at the utility and the parent, and I'm pleased to report that the positive trend continues.

Moody's recently reaffirmed their ratings for the utility secured bonds and the parent company senior unsecured bonds at AA3 and BAA1, respectively.

Fitch also recently reaffirmed their strong ratings for the utility secured bonds at A+ and S&P sits nicely with a single A for the utility secured bonds and a BBB rating for the parent senior unsecured bonds.

These ratings are reflective of our strong balance sheet and operating cash flow generation, which reduces cost for our customers and fund our capital plan efficiently to benefit investors.

And with that, I'll pass it back to Patti for some concluding remarks before Q&A.

Thanks, Rejji.

We believe we have a compelling investment thesis that will serve our customers and investors for years to come.

And with that, Rocco, please open the lines for Q&A.

(Operator Instructions) Our first question comes from Michael Sullivan of Wolfe Research.

So just first, I think in Q1, you guys described the years tracking, I think, $0.01 better relative to plan.

And now in Q2, it seems like pretty much on plan, even with some of these headwinds in Q1 and then the tailwinds in Q2.

I guess can you just give us a little more detail on what the additional levers you have to pull in case weather is below normal or worse than normal in the second half of the year since it looks like you're just budgeting for normal?

Sure, Michael.

So it's a very good question and, as always, I will just start by saying whenever we prepare our financial plan for any given year, we make sure that, first and foremost, we plan conservative.

Also our plan has sufficient contingency across a number of working assumptions to make sure that in the event weather is suboptimal, in the event there's a suboptimal regulatory outcome that we enough cushion to provide for, again, any downside case.

And so again, as we always say, we do the worrying for the investment community, and that's what our plan reflects.

And so as you think about the first couple of quarters that we've had, we're $0.01 ahead.

And we feel like we're on plan at this point, even with the, I'll say, mild weather in June as well as the storm activity in Q1.

And so we have managed the cost as we always have, and that includes a number of, I'll say, opportunities that we execute on over the course of the year.

So we have been very advantageous on the nonoperating sides.

We've done refinancings that have provided cost savings in excess of plan.

And so we did take out bond in Q2 that provided savings that we hadn't anticipated.

We've also found some tax planning opportunities that have created additional upside.

And then on the operating side, we've continued to look at opportunities to defer potential spend opportunities for stretch goals and things of that nature.

So there are always flex-down opportunities that we look at over the course of the year that we'll execute on if we see downside.

And Michael, I'll add that we really have ramped up our waste elimination work.

It is our play of the year for the CE Way and it's the power of the CE Way.

We've been -- we're in really our third full year of implementation.

And we are feeling the benefits of being able to deploy new capability quickly across the organization, and that's what's important about running a lean operation.

In a lean operation, you can adapt to changing conditions.

So the conditions this year are able to benefit from the great work that we did in '18 to pull ahead expenses.

And so as Rejji described, pulling ahead maintenance in 2018 has allowed us to defer other maintenance that might have otherwise been done in this 12-month period because we did it early, but, more importantly, I would say, the capability we're building around waste elimination.

And just imagine, our thousands of employees all across the state learning how to see and eliminate waste, simple things like how we stuff the bills at the billing and mailing center for our bills.

When we do construction projects, a contractor picks up their equipment.

Rental fees on the equipment, when we don't in a timely basis get them to come pick up their equipment, can pile up.

So we've improved our process simply to make sure that the rental equipment gets off our property and off our books and off our ledger as quickly as possible.

So it's little things all across the state that add up and allow us to be more nimble as conditions like these change.

And I would even offer in this most recent storm that we just experienced here in Michigan.

Our storm response was extraordinary.

We were able to get our contractors off the system faster.

We were able to get mutual assistance off the system faster because we have done a lot of work utilizing the CE Way to improve our processes and improve our storm response because it's such a major part of the customer experience.

So all those little things add up and create this nimbleness and provide the confidence that we have that this back-end loaded part of our plan leverages last year's favorable unplanned conditions to deal with, unplanned negative conditions that occurred this year that are outside of our control, what we can control is how we respond and we're doing that extraordinarily well.

Great.

And just to clarify as a follow-up, the July sales that you're showing there benefit, that's -- are you guys also factoring in any sort of headwind that you may have experienced from the storms over the last weekend?

So the $0.04 that I highlighted in my prepared remarks, that reflects the gross sales that we realized as a result of, at least, the July weather we've seen to date.

The impact of the storm, per our preliminary estimates, is about $8 million of O&M.

And I'd say that's about a couple of cents.

And so our $0.04 of upside, the July weather does not take that into account.

But again, going back to my initial comments, we do plan for contingency for a number of our, I'll say, cost buckets, including storms.

And so we do have contingency in our service restoration cost assumptions for the year, which will absorb the cost of that storm.

So we still feel good about the July upside that I articulated.

Okay.

Great.

And then one final one, just flipping over to the regulatory side.

I think you've got an ALJ decision due in the gas rate case next week and was just curious how you're feeling about that and potential for settlement given it seemed the parties weren't too far apart.

And then just kind of going forward, I see you're going to file again shortly thereafter and just how you're thinking about maybe being able to space out the cadence of rate cases over the long term going forward.

Yes.

One thing that became abundantly clear is abundantly clear to the staff's position on this gas rate case, Michael, is that there is a strong support for gas investment, the safety of our system.

The age of our system warrants strong and diligent attention.

And so that's why I think you would see that in that staff position, we were very close.

In fact, the rate base that they recommended and we requested was the same at $6.5 billion, so we feel good about that.

Sometimes, it's good to let a final order go all the way, let a case go all the way to a final order.

We have had success with settlements.

And I think that, that's been representative of the constructive regulatory treatment and environment here in Michigan and our relationship with all of the extended parties who participate in a rate filing.

But we think going potentially to a final order in this case would not be a risky outcome given our mutual commitment for gas investment.

We do anticipate filing our next case in the fourth quarter of this year, and that's simply because we have so much work to do on the gas system to make it safe.

And the good news is over the last 5 years, for example, we've reduced customers' bills by 28% driven both by the commodity price, but also the cost savings that we've delivered on the gas side of the business.

So our unit cost for all of the work that we do continue to decline as we implement the CE Way, and we're able to do more work for less dollars, get more value-added for customers.

And that's important because of the volume of work that the system really does require these days.

So we do anticipate filing another case at the latter half of this year -- fourth quarter of this year.

And our next question today comes from Greg Gordon of Evercore.

So I know you specifically -- Rejji, you specifically addressed this in part on the call by -- when you talked about sales growth for the year, that you're seeing reasonably good strength in higher-margin REIT residential sales.

But have you seen a lag on commercial and industrial sales relative to what your plan was?

And is that -- if so or if not, how is that related or not related to what's going on with the trade tariffs, et cetera, and pressure we're seeing on the auto industry?

Yes.

Good question, Greg.

So I would say, first, let me start with the commercial side.

We actually have been quite encouraged with the commercial activity we've seen relative to the plan.

And so when we talk about favorable mix, it's not just residential, but also commercial.

And so commercial actuals to date still exceed our expectation, along with residential.

And so I'll point you to the numbers that we have on our disclosure, but we're about 0.5% down on a weather-normalized basis year-to-date versus 2018.

And as we've said in the past, that's net of our energy efficiency program, so obviously, when you gross up the 1.5% reduction in customer usage that we work through every year, we're actually up about 1 point on commercial.

And so the customer counts really look good on the commercial side.

We're up about 1% on a rolling LTM basis.

And so customer counts are up for commercial as for residential.

And then for industrial, while we've seen a little bit of softness there, down about 2% with energy efficiency included and then about 0.5% gross taking out energy efficiency, we're actually seeing a pretty good story from our smaller industrial customers because if you take out basically one large low-margin customer, we're basically flat net of energy efficiency.

And so if you think about that again, excluding energy efficiency, up about 1.5%.

So we continue to be encouraged by the trends we're seeing across all of our customer classes.

I do think there is a little bit of a slowdown we're seeing, at least, for the first part of the year with some of our larger industrial customers.

And whether that has to do with trade wars or broader economic effects, I think, remains to be seen.

And we always highlight in the upper left-hand corner, that sales slide, that we're continuing to see a very good trend economically in Grand Rapids, which is in the heart of our service territory.

And so whether it's GDP, whether it's unemployment population growth, building permits, all of that continues to trend quite well.

So we still think it's a very nice economic story in our service territory.

And I think it's too early to tell whether there are any broader macro themes taking place nationally or globally.

And our next question today comes from Aric Li from Bank of America Merrill Lynch.

So just shifting gears a little bit.

In terms of thinking about the longer-term opportunity ahead, could you speak a bit to renewable prospects beyond initial 1.1 gigawatts laid out in the IRP approval as well as just maybe the PPA earning aspects in regard to that and the longer-term mix for the rate base and PPA there?

Sure.

Obviously, our IRP paints a very clear picture of by year when we'll be adding these additional 6,000 megawatts of specifically solar, while we are also doing the demand response and energy efficiency to soften the peak and reduce that demand that's required on peak that the whole system is built around.

And so as we look at our 6,000 megawatt path, it was important that we build the plan to prebuild that solar before the big PPA at MCV and the remaining coal plants come offline.

We need to make sure that, that solar is installed, working as planned, that we've learned how to optimize and dispatch that much solar across our system.

And so we have a pretty methodical plan as we go across actually the years.

In the neighborhood of 300 to 500 megawatts of solar, beginning in 2021 and going all the way to 2030, we end at 600 megawatts of solar by 2030 per year.

So that ends up then, when you add all of that up, that 6,000 megawatts total of solar by the end of our 2040 IRP time horizon.

So you can see it's pretty systemic.

Now keep in mind that one of the great things that we negotiated in our IRP settlement is this agreement that we would build half and rate base that half of the solar, and that's to potentially build on transfer or perhaps we'll build it ourselves.

We're going to have to do.

We, in fact, want to do an annual RFP to set the proper price for that new solar being added to the system, which really bodes well for customers and allows us to make sure we have the lowest cost new solar every single year, taking advantage of the cost curve and the technology curves in solar.

The other half then would be built by others, and we would then earn our financial compensation mechanism, which is currently at 5.88%, which is an approximation of our weighted average cost of capital to -- as a financial compensation mechanism on top of the price of those PPAs.

So we think it's very good on many fronts and, most importantly, set a level playing field here in Michigan for the implementation of new solar that's -- to benefit of both the planet and our customers.

And therefore then, you are investors through both that financial compensation mechanism and the fact that we will be rate basing half of it.

Got it.

And just quickly in regards to that.

Is there potential for perhaps beyond the initial 1.1 more rate base or even maybe say higher at CM?

We've refiled the IRP anywhere from every -- we're required by law to file it within 5 years.

We agreed in our settlement to file another IRP in 3 years.

And I can't predict what will come out of that settlement -- or another IRP, rather.

We'll obviously always look to adapt and change as conditions change, as the market changes to the benefit of customers and investors.

And so each filing that we do will, of course, have opportunities to improve the framework.

Got it.

And when should we think about storage spend kicking in more meaningfully?

I know you've spent some time on that earlier.

Yes.

Right now, we have it at the latter -- we have 450 megawatts at the latter part of the IRP.

And personally, your guess is as good as mine.

But I would be shocked if sometime in the next 20 years, there isn't some breakthrough in storage.

Given the commitment of automakers to electric vehicles does create a marketplace for technology and R&D and storage.

We are so closely linked to the -- our U.S. automakers here in Michigan.

And our partnership with GM and Ford and Chrysler has been very strong.

And so we will, I think, be in a position to take advantage of smart storage sooner than later.

We have a pilot that we're running this summer with residential storage application.

We've got a couple of batteries installed at some commercial locations.

We're doing a lot of learning.

And I forecast that as we file subsequent IRPs, we'll be able to model additional reductions in cost on storage going forward.

We're hopeful for that because we think it will be a better way to balance the system over time with renewable energy as a primary energy source.

Great.

Good to hear it.

And one last question, and I'll shift back to the queue.

What do you think about the potential for maybe accelerated co-retirements in renewable development given potential appetite at the MPSC?

We did a lot of studying in our plan about the right time line for our current -- our remaining coal plant retirements.

Of course, again, every IRP we'll consider, but here's something really important to remember with the coal plant retirements.

I have coworkers there who have dedicated their lives to delivering energy for the people of Michigan.

And so both for our coworkers and the communities where those plants are an important tax base, it's important that we recognize that giving them an accurate date of closure, so they can plan their lives, so those communities can plan for redevelopment.

It's important that we stick to the plan that we published so that they don't feel like we're taking advantage of them.

And so when we talk about our triple bottom line of serving people, the planet and profit, this people aspect of the transformation of our energy system is equally important to serving the planet and in delivering earnings for investors.

So that is a key component of driving the time line.

And frankly, we also have to build out all the solar and make sure it works as intended and make sure that we have the capacity that we need when we retire those plants.

So those 2 factors really do drive our current timing, and we feel good about the current timing.

We think it's well ahead of much of the country.

We'll end up with an 80% carbon reduction by 2030 and 90% -- over 90% carbon reduction by 2040.

That's a decade ahead of Paris climate accord.

That's a decade ahead of most -- many of our peers.

And so we do feel like our aggressive actions that we've been taken to date, retiring 1 gigawatt of coal already does reiterate our commitment to the planet, but we also think the triple bottom line is important in the execution.

Aric, the only thing I would add in addition to Patti's good remarks around the resource adequacy, operational and employee, I'd say, implications of an accelerated coal shutdown is there also is consideration from a balance sheet perspective.

And so you still have Moody's, which continues to include securitizations in their credit metric calculations.

And so you could definitely anticipate a scenario, which you had an accelerated coal retirement plan that led to a significant levering on the balance sheet because, remember, when you securitized these assets, they effectively get 100% funded by debt.

So while you still have that constraint in place, I think it really does hamper any accelerated coal retirement case.

And so that's also even strength worth noting.

And our next question comes from Michael Weinstein of Crédit Suisse.

My question is about the long-term capital plan in light of the -- with the IRP approved.

Just wondering at what point do you anticipate at this time rolling that into the long-term plan, the 10-year plan.

And can you -- what can you say about it now in advance of the official rolling out of those numbers?

Yes.

Michael, I would say, as per my prepared remarks, we anticipate at some point in the fourth quarter we'll provide color on a new 10-year plan.

So I would say, it would either be on our Q3 call, which takes place in the fourth quarter or potentially the -- it will be one of those 2 scenarios most likely.

And as we said in the past, our expectations are at least quite high that it will be an excess of the prior 10-year plan that was rolled out in September '17 at about $18 billion or reaffirmed during that Investor Day.

And so it will be in excess on that given the opportunity supported by the IRP.

But we also have a significant capital investment backlog, as we've talked about in the past, on our wires and pipes, so both at the electric and gas distribution systems.

And so we do think there are incremental capital investment opportunities.

And the key constraint will be customer affordability as well as balance sheet and workforce and strength.

And so we have to make sure that all of that works out.

So we're going through the math.

We're at the front end of our planning cycles.

The IRP was a gating item, which is now behind us.

But there -- we have to go through all of those machinations and think through what our customers can afford as well as our investors and employees, what we can get that from an operational perspective.

So those are all the key things we're thinking through.

And Rejji, your thought process on the 6% to 8% growth rate is -- that, that would be unchanged even with higher plan, right?

No, we don't provide EPS guidance beyond a 5-year period.

So the current 5-year plan of $11 billion, that, from our perspective, can deliver 6% to 8% EPS growth.

And I wouldn't even suggest that when we roll out a 10-year plan, we'll provide 10-year EPS guidance.

That may be unprecedented in the history of Fortune 500 companies.

So we'll see where we end up, but we plan to give a 5-year plan in Q1 of next year.

That will likely have some estimate around EPS growth.

And for 10-year plan, that will just be on the capital side, but not much color beyond that.

You guys have always been trendsetters, so you never know, right?

Nice, Michael.

Nice plug.

We hear you.

And our next question today comes from Praful Mehta of Citigroup.

So maybe firstly, on the cost part and the O&M, because, clearly, in 2019, you're benefiting from some of the stuff that you did in 2018 to push cost around.

How should we think about going forward from a profile perspective?

Given if you kind of have reduced cost in 2019, does that mean that we should think about that kind of going up back again in 2020?

Just from a profile perspective, how do we think about those costs?

No.

I think, Praful, really, 2018 should not be viewed as any sort of comp for future years.

And that's why it's difficult when you think about the way in which we manage the business, the way in which we manage the work, 2018, obviously, we had almost $100 million of weather-driven upside.

And so we really ramped up the operating and nonoperating pull-aheads over the course of that year, which is why we're, I think, just under $1.1 billion of O&M cost.

And this year, we expect to be well below that.

And so when we think about a baseline, we'll look at what we budgeted for 2019 and we'll try to take 2% to 3% off of that, as we often do, at a debt basis and that will dictate where we end up for the 2020 plan and beyond.

And as we think about that, just in general, our cost structure, there really are kind of 2 approaches for how we think about our financial planning.

There are planned cost savings that are incorporated in our budgets.

And so we look at nonoperating and operating opportunities, like waste elimination as Patti highlighted.

We've talked about attrition management in the past, tax planning, refis.

And then we have planned initiatives during the year, so we're doing a lot of work in the supply chain to take advantage of economies of scale, IT solutions, adding more automation across the organization to realize cost.

So those are planned opportunities that we incorporate in the budget.

And then intra-year, as we get into a year, we see, I'll say, unforeseen sources of upside or downside.

Then we've flexed.

And so a year like this year, where we've seen historical levels of service restoration cost attributable to storms as well as mild weather, that's when we start looking at things like, "Okay.

Should we defer some ambitious plans we have that are strategic or operational in nature that will not need to be done this year?

Do we look at things around noncompliance opportunities on the training side?" So that's when we start to look at intra-year opportunities.

But generally, the baseline is usually what has been planned for in a current year and then we try to take 2% to 3% off of that.

So 2018 really isn't a proxy for what our run rate O&M for us.

Is that helpful?

Yes, yes.

That's very helpful.

Good detail color, which always is helpful.

And then maybe secondly on the credit side.

And you talked, Rejji, a little bit about the securitization.

Also I think the PPAs could get imputed as debt from a rating agency perspective.

So how should we think about the credit and the equity needs going forward?

You've clearly benefited from some of the tax pieces that you've got in terms of AMT credits.

But going forward, how should we think about that and the 1 50 a year in terms of equity?

Is that still kind of the plan?

Or do you see that moving around a little bit?

Yes, we'll have to see.

I mean obviously we've just commenced our 5-year planning cycle.

And so we're not going to roll out a new 5-year plan until Q1 of next year.

That will incorporate, I'll say, some of the implications around the IRP and Karn and some of the puts and takes.

I still generally believe that our 5-year plan will be very similar to the current plan.

We're maybe a little over $11 billion, but we'll have, I'll say, a relatively modest amount of equity issuances per year that allow us to keep the credit metric range and call a 17% to 18% FFO to debt.

And so remember, we have managed the balance sheet very conservatively for the last several years when we did have really hospitable capital markets.

We didn't go on an M&A binge.

We didn't do any levered repos.

We just chipped away at our balance sheet with equity issuances to fund our capital plans and grew the business organically.

And so even post tax reform, that's given us a lot of latitude to continue to modestly fund the business with equity.

And we think, even if there is a Karn -- or when there is a Karn retirement and the securitization associated with that, it shouldn't really balloon out our equity needs.

And remember with the PPAs, even though there will be a levering effect of that, the financial compensation mechanism does partially offset that because we will get earnings on those PPAs.

And that's, in fact, part of the reason why we've structured it that way.

So we feel very good about the balance sheet going forward, but it's premature to talk about exactly what the equity needs will be until we roll out a new 5-year plan in Q1 of next year.

Got you.

Again, super helpful with the detail.

But -- so we should think about it in the range of the same 1 50.

Is that still fair?

I think directionally, that's correct.

But I will be more precise clearly when we roll out the plan next year.

And our next question today comes from Travis Miller of Morningstar.

I was wondering if outside the utility now if you could update strategic direction thoughts there for enterprises and then also if anything has changed with EnerBank.

Yes.

Nothing new on EnerBank, as we've repeated the last couple of calls.

No new news there.

They continue to be a part of our portfolio, a very small part that is relatively essentially self-funded, and so no changes there.

Enterprises, you'll have noticed that they've done a couple new renewable projects.

Very small, very targeted customer-driven.

They've been driven by customers approaching us that we have served in either our enterprises business or our utility business outside of our regulated service area.

And so we've been able to meet the needs of the Lansing Board of Water and Light with a 24-megawatt solar insulation there, 105 megawatts of wind in Ohio for General Motors.

But those are more opportunistic in nature.

And we do feel well positioned.

We like to say we're big enough to matter, but small enough to care.

And for example, in Lansing, those -- Lansing Board of Water and Light is right here in Michigan.

And they had multiple developers go out of business in their attempt to install and build out this wind -- or the solar project.

And so we have the capability of doing those projects, but we don't show up on our private jets.

We drive our little truck over from across the street and help them do their work.

And that's a good positioning for us and for enterprises.

And so where we do have additional projects, we want enterprises to grow as the utility grows and -- but don't be confused.

Our utility business is the primary driver of earnings and our plans for growth.

Okay.

Great.

And then just 2 quick on enterprises based on what you've said there.

One is, so do you think that market is -- how large do you think that market is for customers coming to you presumably wanting renewables in the future?

And then also would enterprises be eligible to apply for some of those who participate in the RFPs from the utility side?

Yes.

Your second question first.

Our affiliate is not allowed to compete for the renewable projects.

But I would also offer, we don't have an eye on the specific market size because, again, as I've mentioned, we're really opportunistic as these projects come to us.

And so -- more so, what I can tell you though is there are lot of our utility customers, large industrials, brands that you would recognize that made commitments to 100% renewable energy.

And we've been able to provide a large customer tariff with the utility, so they don't have to rely on our nonutility business.

But in other states, we have opportunities to serve those very same customers.

But again, we don't have -- it's not a -- we're not in hunt of that.

It really does come to us opportunistically.

And our next question today comes from Paul Patterson of Glenrock Associates.

I'm going to ask you to just go over again sort of -- on Greg Gordon's question on sales growth.

I was a little bit -- I just want to make sure I fully understand it.

Could you once again just sort of go through what your weather-adjusted sales growth has been?

And how much energy efficiency is impacting it?

And I guess how much energy efficiency that you guys -- your programs, your utility sponsor programs are responsible for?

Absolutely.

And let me point you as well, Paul, to the materials that came out of the press release, Slide -- or Page 13 or 14.

That has a weather-normalized electric utility statistics.

Right.

I've been looking at them.

So look at that for reference, but I'll reiterate.

So what we've seen year-to-date relative to the first half of 2018 for residential, we're down 0.5%; commercial, down 0.5%; and industrial were down just under 2% at 1.9%.

And those numbers again are weather-normalized.

They also take into account the reduction of customer usage attributable to our energy efficiency programs.

And so by design, we look to reduce electric power from the prior year by 1.5%, and we get economic incentives to do so.

And so very effective really going back to the 2008 law in executing on those plans.

And so I always try to highlight that the reduction in customer usage is incorporated into those numbers.

And so it act that out or back the effects of those programs out.

You can really add 1.5% to the numbers you'll see on that page.

And so when you think about residential, down 0.5% on a gross basis.

Excluding the energy efficiency programs, they're up 1 point.

Same for commercial.

And then industrial is down about 0.5%.

Again, grossed up for the effects of energy efficiency.

And so that's how we think about that.

Then on a blended basis, we're down about a little under 1%.

And so again, grossing that up, you're a little over 0.5% when you exclude the energy efficiencies.

So that's how we think about it.

And we also look at the customer counts just to make sure that what we believe is taking place across residential, commercial.

Those reflect those grossed up numbers.

And so we've seen customer counts go up for residential about 0.5%.

On a rolling latest 12-month basis, we've seen commercial up about 1%.

And so we're seeing very nice trends there.

And the other point I've made in the past, I'll make it again, is that weather normalization math is a very complicated and imperfect science.

And so if you take into account some of the, I'll say, weather extremes we saw last year and try to back that out, as hard as our folks were to get that math right, it's still quite complicated.

And so that's why, while we state these numbers and report them, they are not always as perfect or precise as we'd like them to be.

And then for industrial, the only other point I'd make there is that we continue to see good performance from our small industrial customers.

And so we have seen, if you carve out one large high -- low-margin customer, you can actually effectively add about 1% to our blended electric weather-normalized sales performance.

So like I said, we're down about a little less than 1% weather normalized.

And when you take out that one large low-margin customer, we're basically flat.

And our industrial customers, that is a little below 2%.

You take out that one large customer, we're up over 1%.

And so we have seen just very good performance across our customer classes and, particularly, when you exclude the effects of our energy efficiency program, which are designed to reduce customer usage.

Is that helpful, Paul?

No, that is helpful.

And I didn't want to belabor.

I just want to make sure that I understood that, that 1.5% is based on your utility energy efficiency efforts.

That's exactly right.

Okay, okay.

And now just one through -- a quick follow-up on that.

On the gas side, I know it's a small quarter for gas usage, but it did seem to grow pretty rapidly.

I think that's on Page 14 or I have -- let me find it.

But if you follow what I'm saying, the residential grew, like, 14.3% and 8.3% for commercial.

I was just wondering, is there anything going on there that, I mean, it just seem like a relatively high number on a weather-normalized basis.

Yes.

So I'll first, again, point to the weather-normalized math and the imperfections.

But we've actually seen pretty good customer counts across gas as well.

And so we do think that part due to, what I'll say, a positive spillover effect when you have good industrial activity.

And so you start with decent industrial activity, that leads to residential increases and then you get commercial activity.

And so there's a very nice spillover effect taking place in gas.

And I think that's what we're seeing in these numbers.

But again, I want to temper expectations, both from the downside and the upside.

It's a very difficult piece of math to employ.

And our next question comes from David Fishman of Goldman Sachs.

Just going back to little bit of a long-term CapEx guidance that we might receive, should we expect to see a gas distribution investment plan sort of similar to what we saw with the EDIIP for electric that potentially outlines long-term opportunities there kind of with an expanded IRM in mind?

Yes, you should.

We're working on that, as we speak, which is another reason why we're going to wait until the latter half of the year to publish the 10-year plan.

I can't promise that it will result to an IRM, but I do think that it will paint a nice clear picture.

And I think our commission has done a really good job of soliciting these plans -- these multiyear plans, so that as they're making an annual determination during a rate case, they have a better perspective of where it fits into longer-term plan.

And frankly, they can hold us accountable, even if it's not a formal program, to doing what we said we're going to do.

And we're up for that kind of scrutiny because we're pretty good at planning.

And we want to be able to be trusted in our ability to execute.

So we've been working on the long-term gas plan.

We know how important the safety of the system is for the state of Michigan.

And so we look forward to sharing that more publicly over the next year or so.

Okay.

So that's something for over the next year or so, not necessarily alongside the long-term CapEx plan.

Some of it might be published with our long-term CapEx plan.

It definitely is a key driver for it, but we may wait until early 2020 to formally publish it.

That makes sense.

And then one quick housekeeping item.

Just on the year-over-year driver slide, I think you added a more explicit $0.08 of enterprises benefit.

I just want to make sure I knew all the drivers.

That's mostly because the MISO capacity rolls off into better negotiated capacity contracts.

And then how much of that proportionally is about energy -- the new energy contracts versus maybe the incremental Ohio wind farm?

Yes.

So you have a few pieces there.

I think you highlighted the largest driver.

And so as you roll off of the MISO planning resource option of 2018 and its implications in the back half of the year, you start to see capacity sales tick up.

I can't give you exact pennies per share, but it's a vast majority of that tick-up.

And then you have 2 other components.

So you rightfully noted some of the effects of Northwest Ohio.

It's interesting that a wind project, which -- the implication there is that there are production tax credits that we expect to be realized resulting from that project earlier in the year.

But because we had a slow start for enterprises, we didn't actually realize the effects of the production tax credits at enterprises in the first half of the year.

So we'll pick that up also on the second half of the year.

And the last thing I'll note is if you think about the comp relative to 2018, we did have a write-off in the second half of the year of about $3.5 million attributable to Filer City because we were no longer planning to convert that plant from coal to natural gas.

And so the absence of that write-off is about $3.5 million pretax, that's about $0.01.

And then you've got, I think, the vast majority from capacity sales as well as the realization of production tax credits.

So it's those 3 things that largely get you back to our planned EPS contribution of $0.14 from enterprises for the year.

This concludes the question-and-answer session.

I'd like to turn the conference back over to Ms. Poppe for any closing remarks.

Thanks, everyone, for joining us again this morning.

And certainly, we look forward to seeing you out and about at upcoming events.

This concludes today's conference.

We thank everyone for your participation, have a great day.