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CMS Energy Corp
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Good morning, everyone, and welcome to the CMS Energy 2022 Second Quarter Results. The earnings news release issued earlier today and the presentation used in this webcast are available on CMS Energy's website in the Investor Relations section. This call is being recorded. After the presentation, we will conduct question-and-answer session. Instructions will be provided at the time. [Operator Instructions] Just as a reminder there will be a rebroadcast of this conference call today beginning at 12:00 PM Eastern Time running through August 4th. This presentation is also being webcast and is available on CMS Energy's website in the Investor Relations section.
At this time, I would like to turn the call over to Mr. Sri Maddipati, Treasurer and Vice President of Finance and Investor Relations.
Thank you Elliot. Good morning, everyone, and thank you for joining us today. With me are Garrick Rochow, President and Chief Executive Officer; and Rejji Hayes, Executive Vice President and Chief Financial Officer.
This presentation contains forward-looking statements, which are subject to risks and uncertainties. Please refer to our SEC filings for more information regarding the risks and other factors that could cause our actual results to differ materially. This presentation also includes non-GAAP measures. Reconciliations of these measures to the most directly comparable GAAP measures are included in the appendix and posted on our website.
Now I'll turn the call over to Garrick.
Thanks Sri and thank you everyone for joining us today. I'm excited to share another strong quarter at CMS Energy and a great first half of the year bolstered by favorable weather and higher weather normalized sales at the utility, great tailwinds. And over the course of the quarter two outstanding regulatory outcomes, which provide further evidence of the top-tier regulatory jurisdiction in Michigan and give us continued confidence in our plan.
First our integrated resource plan. If I could open this up for just a moment, 18 months of sophisticated supply modeling, thousands of pages of testimony, 10-month schedule, alignment across dozens of stakeholders from interveners, the attorney, general business stakeholders and the commission staff to reach a settlement with close to 20 parties. This plan approved at the end of June, solidly positions us to lead the clean energy transformation. Outstanding.
Next our gas rate case. Important investments to ensure a safe, reliable, affordable and clean natural gas system, settled with many of the same parties and approved on July 7th, a $170 million increase. Over 95% of our customer investment approved. Excellent. Both outcomes demonstrate the quality of our regulatory environment in Michigan increase our confidence in delivering the rest of the year and our long-term plan.
I want to emphasize why we continue to be confident in our plan. Delivering is not new for us. We have nearly two decades of commitments made and kept for all our stakeholders including you our investors.
A key element in our performance is strong energy law in Michigan. We have a productive and solid energy law passed in 2008, which was enhanced and updated in 2016 both with bipartisan support. This allows for timely recovery of investment, which we've outlined through long-term plans such as our IRP, as well as our electric and natural gas distribution plans, which we filed in our rate cases. This coupled with separate mechanisms allow us timely recovery of fuel and power supply costs, as well as attractive economics on renewable energy investments and energy waste reduction programs and uniquely positioned Michigan as one of the safest places to invest capital.
But let me be clear, we don't take this for granted. We continue to improve our processes for stakeholder alignment, testimony development and business cases so we are confident that our proposed customer investments deliver measurable benefit while keeping this affordable.
At CMS we deliver, our productive and supportive environment and our deliberate approach ensures that will matter the condition. We are positioned to deliver industry-leading results.
We remain committed to leading the clean energy transformation. On the solid foundation of strong energy law, we delivered and settled our IRP. This makes us one of the first utilities in the country to completely exit coal. As of the end of second quarter, we have nearly eliminated our long-term economic exposure to coal which is now less than 2% of property, plant and equipment. Not only have we reduced our long-term financial risk, but we've significantly mitigated our operational risk as well. The acquisition of simpler, more flexible natural gas units means fewer people to operate a better heat rate and less maintenance. The ability to quickly ramp up and down the dispatch of these units will allow us to flex with changing market conditions and to better support the intermittent nature of renewables.
The acquisition of Covert combined with the RFP for 700 megawatts of capacity through PPAs the build-out of 8 gigawatts of solar in our ongoing energy efficiency and demand response programs ensure that we have sufficient capacity to meet the needs of our customers. This plan improves reliability and limits our customers' exposure to potentially volatile, capacity and energy prices. The IRP strengthens and lengthens our financial plan, eliminates our exposure to coal, improves reliability and is a solid win for everyone.
Strong execution and constructive regulatory outcomes lead to strong financial results, and I couldn't be more pleased with the first half of 2022. As I stated in my opening remarks, a strong quarter and a great first half of the year, where we delivered adjusted earnings per share of $0.53 for the quarter. We remain confident in delivering full year adjusted earnings per share of $2.85 to $2.89, and we continue to guide for the high end of our long-term adjusted EPS growth range of 6% to 8%, which as I noted is strengthened and lengthened by our IRP.
We continue to guide toward long-term dividend growth of 6% to 8% with a targeted payout ratio of about 60% over time and we'll update our current $14.3 billion five-year customer investment plan on our year-end call to include the anticipated upside from the approval of our IRP. We are strongly positioned to deliver in the remainder of the year.
With that, I'll turn the call over to Rejji, who'll offer additional detail.
Thank you Garrick, and good morning everyone. As Garrick noted, we had a strong first half of the year are ahead of plan and are well positioned to achieve our financial objectives over the next six months and longer-term.
To elaborate for the first half of 2022, we delivered adjusted net income of $499 million, or $1.73 per share, up $0.09 per share versus our 2021 first half results largely driven by favorable weather and economic conditions in the state. The waterfall chart on Slide 7 provides more detail on the key year-to-date drivers of our financial performance versus 2021.
As noted, favorable sales have been the primary driver of our positive year-over-year variance to the tune of $0.16 per share driven by weather. From an economic standpoint, we've continued to see strong commercial and industrial load in our electric business, while weather-normalized residential load continues to exceed our plan assumptions and pre-pandemic levels.
Rate relief net of investment-related expenses contributed $0.03 per share of upside, as we continue to benefit from our prior gas and electric rate cases. These sources of upside were partially offset by increased operating and maintenance or O&M expenses largely driven by customer initiatives, embedded in rates to improve safety, reliability and our rate of decarbonization, which equated to $0.07 per share of negative variance versus the first half of 2021.
We also note the $0.03 per share of negative variance in the final year-to-date bucket, which is primarily driven by investment costs related to the 2019 rate compressor station incident for which we are not seeking recovery at this time, as per our recent gas rate case settlement agreement, and the company's recent commitment to donate $5 million in support of income based bill assistance for our electric customers as per our IRP settlement agreement. These sources of negative variances are partially offset by the aforementioned strong non-weather sales performance in the first half of the year.
As we look to the second half 2022, we feel quite good about the glide path to achieve our EPS guidance range. As Garrick mentioned, we had a constructive outcome in our gas rate case.
The approved settlement agreement at $170 million significantly de-risked our financial plan, and when coupled with our December 2021 electric rate order provides $0.10 per share positive variance versus the second half of 2021. The forecasted rate relief net of investment-related costs in the second half of the year more than offsets our estimated impact of normal weather, which we assume will provide $0.01 per share a negative variance versus the comparable period in 2021.
Moving on to cost savings. We continue to anticipate lower O&M expenses of the utility driven by the expectation of a more normalized level of storm activity this year versus the atypical levels experienced in 2021, which I'll remind you equated to $0.16 per share of downside in the third quarter of 2021 versus our financial plan. We also expect the usual solid cost performance driven by the CE Way as well as other cost reduction initiatives in motion.
To close out our assumptions for the second half of the year, we assume normal operating conditions at enterprises given the outage at DIG in the fourth quarter of 2021 and the usual conservative assumptions for weather-normalized load at utility.
Lastly, it's worth noting that we have accrued a healthy level of contingency given our strong year-to-date performance as illustrated in the $0.24 to $0.28 of negative variance highlighted and the penultimate bar of the chart, which increases our confidence in delivering for you our investors.
Moving on to the balance sheet. On slide 8, we highlight our recently reaffirmed credit ratings from all three rating agencies. As you know we continue to target mid-teens FFO to debt over our planning period. As always, we remain focused on maintaining our strong financial position, which coupled with the supportive regulatory construct and predictable operating capital growth supports our solid investment-grade ratings to the benefit of customers and investors.
Turning to our 2022 plan financings on slide 9, we continue to plan for $800 million of debt issuances at the utility. And while our plan does not call for any financing at the parent this year we are currently assessing funding options for the acquisition of the Covert natural gas facility in the first half of 2023 as per our approved IRP.
As a reminder, the current financing plan for Covert assumes the issuance of hybrid securities. However, we're evaluating alternatives including using our existing ATM equity issuance program given the relative costs in the current environment. It's worth noting that this would be accretive to the previously provided $0.03 or $0.04 per share of EPS accretion attributable to the purchase of Covert and further strengthened our 6% to 8% long-term adjusted EPS growth outlook.
Lastly, we have preserved a strong liquidity position, which supplements our use of commercial paper over the coming months.
And with that, I'll turn the call back to Garrick for some concluding remarks before Q&A.
Thanks, Rejji. I'll leave you with this. Nearly two decades of industry-leading financial performance for you -- our investors regardless of conditions, administrations, political parties, economic environments even a pandemic, we deliver. Our strong legislative and regulatory construct, a robust capital runway, industry-leading cost management, conservative planning and our commitment to deliver across the triple bottom-line all of this makes for a strong investment thesis and makes us an investment you can count on.
With that, Elliot please open the lines for Q&A.
Thank you very much, Garrick. [Operator Instructions] Our first question comes from Shar Pourreza from Guggenheim Partners. Your line is open. Please go ahead.
Hey, Shar.
Hey, guys. Good morning. Garrick pretty clear-cut print here. But just given sort of the regulatory outcomes that are now secured like the IRP, the gas settlements, looks like the electric rate case is on track. As we're kind of thinking about maybe the cadence of updates is the plan to still update CapEx and financing in the fourth quarter? I guess just given the visibility we have why not provide a full guidance and capital update sometime in the third quarter or EEI time frame? I guess in other words given the regulatory execution that you've clearly highlighted today, could you provide early indication on growth 2023 numbers out of schedule?
Well first of all Shar thanks for the compliments. We are executing well and I'm pleased with the first half of the year. But we're still on plan for our Q4 call for our capital update. And let me offer a little color and context around that. Big reason for our execution and our ability to deliver year-after-year is one of the things we worked through with that capital plan. And that's from the bottom up. We're looking at every one of those capital investments to make sure it's going to offer the affordability and benefits to our customers. And so they'll stack on one another.
We want to make sure that we're also able to execute on those. So that's a matter of understanding our workforce, the work lined up in a year and so that we're sure that we can deliver on that capital plan. And then you add that IRP yes, there's Covert, which is great visibility. But one of the other portions of that settlement was bringing in storage, battery storage 75 megawatts in the period of 2024 to 2027. So we've got to make sure that that's constructed and built into this five-year plan as well as – we've spoken in the past about Voluntary Green Pricing programs is additional renewables for some of our largest customers. And so that's materializing as well. And so that's another factor that's going in that plan. So we want to make sure that we can deliver on it. That leads to the success of our execution. And so that's why we're going to be putting out in Q4 – our Q4 call.
Okay got it. And then just obviously, looking at the results year-to-date how 2022 is shaping up, July looks like a strong weather month. And obviously, you guys are – as you highlighted, you have normal weather planned for the remainder of the year. Does a strong third quarter weather push you ahead of guidance? And maybe what are sort of some of the offsets and moving pieces there that we should be thinking about because just looking at the results to date, it seems like you're well ahead of your numbers but...
Again, Shar we feel good about where we're at here at the first half of the year. But as you know, and as I said in my prepared remarks, we plan conservatively. Here's what I know in 2021, during the third quarter we lost $0.16 due to storms. We still delivered on 2021, but again, there's a lot of year left. And so we're prudent as we move forward.
The other thing we look at is where are the opportunities to reinvest, provide benefit for our customers and investors as we move toward the end of the year. That helps to de-risk future years and again continues to strengthen and lengthen that long-term EPS growth rate of 6% to 8% toward the high end.
Okay. Terrific. Thanks, guys. Appreciate it. Thanks for the details.
Our next question comes from Jeremy Tonet from JPMorgan. Your line is open.
Good morning, Jeremy.
Hi, god morning. Just wanted to pick up a little bit I guess with the strong results here and it did seem like load performance was just better than expected. I'm wondering if you could provide a bit more commentary on that? And I guess do you see any of that abating or just kind of things in general from a load even absent weather a load growth perspective is going to continue at this pace, or do you see something stopping?
Hey, good morning, Jeremy, it's Rejji. I appreciate the question. Obviously, we feel quite good about the load trends we're seeing in our service territory and I'll just remind folks on some of the specifics. And so we had residential down a little over 0.5%. So that's year-to-date versus year-to-date 2021 commercial and industrial. And as always our industrial excludes one large low-margin customer, up about 3% and then all in up about 1.5 points.
And so we feel quite good about that. And particularly with respect to residential, we continue to see that good stickiness with the hybrid workforce, which likely will be a trend that continues on. And obviously that's a high-margin segment. And so relative to 2019 residential is up about a little over 2%. And so again that stickiness just really carries on. We continue to see from an economic development perspective, just good activity in the service territory. And obviously, with some of the news in D.C. yesterday, I would think that the CHIPS Act and some of the other legislative items that may be coming down the pipe could lead to more economic development opportunities or increase the probability of some of the stuff that is coming in Michigan's way or is in the prospects for Michigan.
So very encouraged with the load trends and anecdotal again, we're hearing from our customers that they continue to feel good about the economic environment. So I feel quite good about the road ahead. And going forward again we continue to anticipate that you'll start to head back to those pre-pandemic levels. And so we would anticipate that from a residential perspective, but we continue to be surprised to the upside and commercial and industrial continue to trend very well. So that's our take on load at the moment.
And if I could just add, just a macro factor here and this is from the Governor's office. This year-to-date, $11.8 billion of investment opportunities announced in Michigan. Those are projects that have agreed to locate expand. There's actually 30 companies in all and 15,000 new jobs. And so that's from the governor's office here mid-July. And so still looks very robust here in Michigan we looked at from a macro perspective.
Got it. That's very helpful there. And then I just wanted to pivot a bit towards MISO. We've seen some capacity constraints there and that's led to some delays in equivalent retirements. Just wondering should we be thinking about any implications to CMS here or anything else that you want to share on this front?
I love our energy law. I really do. I'm not joking there. The 2016 energy law was here in Michigan was solid on the supply and demand side. And so when we go through an integrated resource plan, we've got to do all the modeling all the analysis to show that the supply and demand is going to meet and have some reserve margin on that. That's a requirement of a load-serving entity which we are. So I feel good about where Michigan is headed within MISO. And I can't speak for all of MISO, but I feel good about where Michigan is at. And I'll remind people -- remind all the people on this call that part of this IRP is to bring Covert in. Covert right now is in the PJM market and we're moving it over to the MISO market. That's 1.2 gigawatts of additional supply that's being brought into MISO and brought here to serve our customers. And so that's why we feel good about it. Our IRP we're still on pace and plan for retirement of all coal to be out of coal by 2025.
Got it. That's very helpful. Last one if I could hot off the press climate BBB package. Climate package being supported by management here. Any preliminary thoughts at this point?
Jeremy, you've given like what 12 hours to digest it all. Here's what I would say -- here's what I would say on it, because we've done some preliminary review and we're still digesting a lot of facts on it. Solar PTC is a big win in there and that's something we've been advocating for in Washington. We've been advocating the industry. Hats off to Rejji. Rejji has been making the calls with CFOs 1.5 years ago when it was first being talked about. And so we're excited about that portion of it what that means for 8 gigawatts. So it's going to be lower cost for our customers, as we build out more solar and it will provide -- put us on par with developers. So we like that. We know there's a storage ITC as well that will come into play in 2024 to 2027 as we build out 75 megawatts of storage.
There's a lot of upside for the industry one of the birthplace of the automobile. I talked about the $11.8 billion. Most of that is in the automotive space. There's opportunities for load growth in the automotive business to grow as they make their transition. There's incentives in there for solar production in the US. In Michigan, one of our largest customers is the largest -- one of the world's largest producers of polysilicon crystals which go into solar panels and technology electronics. And so that's another -- and we see that as an upside. There's a big tailwind on EVs. EVs are a nice part of load growth. It's not in our forecast, but there's the continuing credits for purchase of EVs. And so there's a lot of good stuff in here. We're still digesting all the specifics but feeling good. Feeling good with coming out of the Senate. And of course, there's negotiations with the house in front of us.
Great. That’s helpful. I'll leave it there. Thanks.
Our next question comes from Michael Sullivan from Wolfe Research. Your line is open. Please go ahead.
Hey, everyone. Good morning.
Hello, Michael.
Hey, Garrick. Rejji, I wanted to go over to you on just the latest commentary on the potential looking at common equity for financing Covert. I think that was an $815 million project. Any sense of how much the equity could be and how materially the $0.03 to $0.04 accretion could change?
Yeah. I appreciate the question, Michael. I would say, we're obviously still evaluating options. You have the purchase price of Covert spot on at $815 million. And so as you know, our rate construct we would fund about half of that debt at the utilities to call it roughly $400 million, and the balance would be parent financing. And mathematically, that gets you to about $400 million, but we'll still consider what the alternatives might be. And obviously, we've got quite a bit of time to fund it. And so we'll look at our dribbling our ATM equity issuance program, whether that will be the full $400 million remains to be seen. And so we'll see how the price of other alternatives like those hybrid securities which for the past six to seven months or so have really priced quite competitively.
And so if that changes over time, we may tranche it a little bit. And so I'd say, it's still early days, but we could go up to about $400 million. We've got that much on the shelf but we'll see how the pricing trends over the next handful of months. And then with respect to the accretion at this point, I'd say, it's a little premature to offer precisely how accretive it would be to the $0.03 to $0.04 that we initially provided because clearly that would depend on the price at which we issue equity, if we do choose to dribble.
And so I'd say, more variables at this point to provide any prescriptive point of view, but it would be directionally accretive to based on the relative cost right now of our equity versus other securities.
Okay super helpful color. And then last question, what do you guys think about making it three for three with settlements this year with the pending Electric case?
We'll, see. I mean I think betting at 670 still gets you into Cooperstown. So we've been encouraged with the IRP and the gas rate settlement, electric obviously, many more stakeholders many more variables. And we've been successful there before. So we're cautiously optimistic but early days, and we'll look and see where the staff is in about a month and we'll go from there. But I would say, early days to make any prediction at this point.
Great. Thanks a lot.
Thank you.
Our next question comes from Julien Dumoulin-Smith from Bank of America. Your line is open.
Hi, good morning. You guys really do execute. Always, always, so let me follow-up on this legislative angle, just one nuance here. AMT is just going to get a lot of attention to speak I imagine for all the utilities here. What are you guys saying on that? I know, we asked you for your hot takes a second ago, but just can rehash as best you understood your probably assessment of this last year if you will?
Yeah. So Julien just to be clear you're talking about the alternative minimum tax with respect to last night's –
Yes exactly. The 15%.
Okay. Yeah, with respect to climate bill. So, again as Garrick noted we're still digesting. I think it's about 700 pages, and our folks in federal affairs and on the tax side are really, really good at what they do and their fast readers, but 700 pages is a lot to digest in 12 hours. But I'd say, basically, what we've done so far as I understand it the structure that's contemplated is consistent with what we were talking about around EEI several months ago, where there's a three-year average on pre-tax operating income around $1 billion.
And if you're below that threshold, you're not subject to the minimum tax. And so from our perspective given our size we would likely not chin that bar for some time. Now needless to say, we aspire to at some point because we're a growing company. But in the short term, I think, we'd be perhaps not subject to it initially. And we're still looking at -- again, if it's structured how it was when we were talking about this at EEI, you could apply tax credits through up to 75% of the tax liability.
And again, we're still looking to see whether that's in the bill but that's how it was structured initially. And so I'd say, there's a bit more work to be done on our side before we can speak to it. But I'd say, to cut through it in the short term we don't think there's a significant impact on us again given our size. And if they apply that three-year average of $1 billion of pre-tax operating income we just wouldn't chin that bar for a little while.
Yeah, no that makes sense. Thank you for the hot takes there. Appreciate it. OPEB contribution to the quarter here, et cetera. Just curious, if you can comment here. Obviously, that subject has got some attention late broadly.
Yeah. From a pension perspective, again, our story has been quite good for some time now. As you may recall, we have been very active in making discretionary contributions to our pension plan over the year particularly in years in which we were pretty flush from an OCF perspective. And so we're well overfunded. At this point, we're -- we have two pension plans and both are over 120% funded. Clearly asset experience is tough for most, but we have relatively low equity content in our pension plans.
And I would say based on how our pension is structured at this point we're a bit more levered to interest rate movement. And with discount rates effectively going up year-over-year, we actually see it in the short term as a net benefit. And so we actually are seeing actually, a little bit of upside particularly since we recently remeasured our plan. So from our perspective, it's actually net positive at the moment and we feel quite good about the level of funding for the plan.
Totally. All right. So no material OPEB impact here in the quarter?
No. No.
Thanks a lot. And then last one just a quick clarification from earlier on Solar TTC [ph] I mean clearly, benefits customers from an NPV perspective, but also I think implicitly also helps utilities participate from a rate base perspective as well, I take it?
Yes. So obviously, our rate construct is a little nuanced but it would help us as well because obviously it would allow us potentially, if you think about the 8 gigawatts of solar that we're going to be executing on over the next 15 to 20 years we're currently structured to at a minimum own about half of that. And if we can be more competitive, because of that benefit with the – obviously, the elimination of normalization then we could potentially pencil the own projects in a manner that's comparable with the PPA or contracted portion. And that would make a case for owning more than 50% over time. And so obviously, that could add to rate base opportunities. So we feel quite good about, what we've read today. But again, obviously more to digest.
Yes. Clearly, clearly. Okay. Thank you, guys speaking for him [ph]
Thank you
Our next question comes from Andrew Weisel from Scotiabank. Your line is open.
Hi, Andrew.
Hi, good morning, guys. Two clarifying questions. First, is for 2022 did you say that the entire $0.24 to $0.28 negative red bar is conservatism? I know you said you're trending well and you've affirmed guidance. But did I hear you right, is that all conservatism? And second part of that question is, you mentioned the potential to accelerate O&M expenses through 2023. Have you started that yet, or are you waiting to get through the summer and the storm season? How flexible can you be to do that late in the year in other words?
Yes. Andrew, thanks for the question. I would say starting with that $0.24 to $0.28 a negative variance in the six months to go bucket of that waterfall chart on Page 7, that is a combination of conservative planning. And so that's really a catch-all bucket. And so we've got in their non-weather sales assumption year to go. We've got a little enterprises performance and so -- and some parent expenses. So there's conservatism, as it pertains to those variables, but the vast majority of that is just contingency that we've accrued, just based on the performance in the first half of the year.
And so obviously, weather was -- has been a big help. It's offered upside to plan. We've seen a little cost performance as well and a little bit of non-weather upside. So sales have been strong as well as cost performance and that's, what's driving a good portion of that bucket. So it's really just where we've parked the contingency, which gives us a lot of flexibility which kind of segues into the second part of your question about what we're doing with respect to pull ahead. And so I would say, at this point because we still have six months ago, we really tried not to do a whole lot because we still have to get through storm season and see where Q3 is which not just from a store perspective, but also in terms of earnings contribution that's usually where we have the vast majority of our EPS contribution.
So we've been cautious. We've done a little bit more with respect to forestry and we've done a little bit more reliability work. Obviously, we made some commitments as part of the IRP and gas settlements with respect to low income support. And so those are things we like to do, and we'll continue to evaluate opportunities for pull-aheads to de-risk 2023, some more going into the second half of the year. It's also important to remember, we also put in place a really nice regulatory mechanism a few years ago our voluntary refund mechanism, which effectively allows us to make decisions late in the year from an operational pull-ahead perspective get effectively the accounting benefit, in the current year and then a commitment to do work in the subsequent year.
And so that gives us even more flexibility, as we head into the Q4 and deep into Q4, if we're seeing upside that's in excess of plan. It just gives us a bit more flexibility to commit to more work and again see the sort of accounting benefits of that in the current year. So a lot of flexibility going forward. We've made some moves to date from an O&M, pull ahead perspective. But again we're obviously, cautious at this point because we've got a lot of Q3 left and we're waiting to see what happens with storms and weather.
Great. Yes, that's definitely a helpful mechanism you have. And then the other question, I just wanted to clarify on equity. So I guess first question is, when would you decide how to finance Covert and could that be something like an equity forward to de-risked? And then just to be very clear, beyond financing that acquisition, are you still affirming no plans for equity in the general business financing?
Yes. To answer the last question first, if you put aside the potential funding of Covert as we mentioned on the call today with potentially considering equity, there is no plan to issue equity beyond that until 2025, as per our initial guidance when we rolled out our $14.3 billion five-year plan in Q1 of this year. So we're still committed to not issuing equity through 2024 or more specifically until 2025, but for the funding of Covert.
And in terms of how we'll time that and how we'll think through that obviously we'll look at the valuation of the stock versus the relative cost of other hybrid securities and we'll look to be opportunistic from time to time. And we've seen just great pricing in the past with those dribble programs. And so, we'll look to utilize some of that. But again, I think we've got a lot of flexibility because we're not scheduled to acquire Covert until May of next year. So quite a bit of time to evaluate and we'll be opportunistic and dribble out so likely over the coming months.
Thank you very much. That’s helpful.
Thank you.
Our next question comes from David Arcaro from Morgan Stanley. Your line is open. Please go ahead.
Good morning, thanks so much for taking my question. Good morning. I was wondering if you could just comment on how you see the equity ratio at the utilities trending over time after we saw it tick down a little bit in the gas rate case?
Yes. David thanks for the question. Obviously, we would love to see equity ratios if not stabilize go the other way and go up because we do believe that we have yet to see a remediation from tax reform when it was enacted in 2017, which led to a 200-basis point degradation in our FFO to debt overnight, as well as cash flow degradation. And so, we're going to continue to make the case. In our cases that we filed that equity thickness should go up. And again, we'll make the case going forward.
And what I would mention is obviously in the case of the gas rate case settlement there were a number of stakeholders involved in that process we thought given the circumstances and all the other constructive aspects of the settlement. We were comfortable with the equity thickness where it was. But again, we still think it should be higher than that.
I think it's also important to note that we still have deferred tax flowbacks from tax reform where again we're giving back deferred taxes to customers. And that has the effect of skinning-in [ph] or reducing the 0 cost of capital component in our rate making capital structure which offset some of that reduction in the authorized equity thickness.
And so to be very specific here, our equity thickness in this gas settlement went down from a little over 52% to about 50.75%. So roughly 130 basis points of reduction. However, about 50 basis points of that was offset in our ratemaking equity thickness because of the 0 – the reduction of that 0 cost of capital layer. And so, again we'll continue to make the case. We still think equity thickness should continue to go up or should start to go up. And again, the onus is on us to make the case.
Got it. Thanks. That’s helpful color. And the other topic I was curious about was on the CGP. And could you talk about your progress there? And if you see a case for seeing momentum kind of accelerate in customer interest?
Yes. We certainly see a lot of customer interest. We've seen some additional contracts over the quarter. Due to nondisclosure agreements, I can't talk about all of them. One of my pen-share [ph] is, the state of Michigan signed a contract over the quarter. And so, recall that's 1,000 megawatts of renewable build incremental to our plan. And so, we're starting to layer in those contracts as we move forward and have those customers secured.
In addition we look at -- went out to RFP to look at what would cost to construct that 1,000 megawatts. And again. I want to put it as a 1,000 it's going to come very module. It's going to come in little tranches as we build out for our customers, but still good interest -- really good interest and we continue to lap contracts to support that build. Is that helpful?
Okay Garrick. Yes. No that's helpful. Thanks. Maybe one more just quick one, to the extent out Rejji you were to do common equity or something with kind of 100% equity content here for Covert. Does that offset potential equity needs later in the plan just given the initial thinking was something with lower equity content 50% or so?
So I'm just going to go back to what we committed to when we rolled out our five-year plan again, before the IRP and before Covert. So just so everyone's granted. So we said $14.3 billion of capital and we would not need to issue equity until 2025 and 2026 of the outer years of the plan.
And at that point we would do about $250 million per year in 2025 and 2026. So now with Covert, we said, we may dribble a portion of that. And I would say the funding of Covert, that's not going to eliminate those outer-year needs if that's specifically the question.
So the $250 million we said we'd issue in 2025 and 2026, because we're issuing equity to fund Covert. Where we sit today we don't think that obviates the need to do that equity in those outer years.
But we'll see I mean obviously we'll see what happens with respect to economic performance, load, EPS how much earnings we retain and so on. But again, from where we sit today this does not eliminate need for equity in those outer years.
Okay, great. Thanks. Yeah was get met. Much appreciate it.
Thank you.
Thanks.
Our next question comes from Ryan Levine from Citi. Your line is open.
Good morning.
Good morning, Ryan.
Good morning. Hoping to follow-up on residential load patterns, it looks like your year-over-year residential load on a weather-normalized basis is a little bit softer than some of your peers in the neighboring jurisdictions. Curious, if there's any color you could share around the drivers of what you're seeing in your service territory?
Yeah. So our residential load to be clear Ryan, are you speaking about it you said year-to-date 2022?
Year-to-date and for the -- it seems like second quarter was a little bit better than first quarter, but curious what you're seeing.
Yeah. So year-to-date, yeah, like I said about a little over 0.5% down versus year-to-date 2021 and then on a quarterly basis Q2 was a little about up about 25 basis points versus Q2 of 2021. And so as we said in the past, we've actually been quite pleased with what we've seen -- we've been quite pleased with what we've seen so far in terms of residential load.
It exceeds our expectations. We assumed a much more aggressive sort of return to work or return facilities type of work environment in 2022. And we're still seeing pretty good stickiness in that hybrid work environment and still seeing pretty good load in the residential segment which obviously is higher margin.
So it's exceeded our expectations of performance. I can't speak to the performance of others but we've been quite pleased with what we've seen being down only about 0.5% year-to-date. And again, I'll remind you, we're up over 2% versus where we were pre-pandemic.
So the stickiness and resilience is still there and that's obviously offering favorable mix. I think it's also worth noting that we plan. And we'll continue to plan incredibly conservatively Ryan. And so when we see performance like that even though it's slightly down it's still offering upside relative to plan.
I just want to add on to this too, in both 2020 and 2021 we saw record interconnections service line connections with residential homes. And so record from a company perspective an annual perspective. And so Again, I can't compare that to what other utilities are seeing. But for us it's really nice residential load performance across our service territory.
I appreciate that. And then a follow-up on some of the kind of potential pull forward of 2023 costs into 2022 you highlighted forestry and a few other items. Curious, if you're seeing anything on the labor front may -- to combat some of the inflationary pressures and competition for labor that may lead to some elevated costs in the back half of the year?
Well, remember one of the -- just -- roughly 40% of our workforce is unionized and we have a union contract for those and those were signed in 2020. And that contract is a five-year contract that goes to 2025. And so there's some normal escalation. But you go back to 2020 when that contract was signed again we didn't see quite dis-inflationary pressure. And so again it's measured it's budgeted it's planned for. And so I'm not seeing much change there.
Across our non-unionized workforce we've had roughly -- our retention rate -- we haven't seen the Great Resignation at all. And we've seen solid retention across the pandemic period. And so again we haven't had to go out and do a lot of hiring over the time period. And so that's been helpful too from a cost perspective labor perspective.
I appreciate the color. Thank you.
We have no further questions. I'll now hand back to Mr. Garrick Rochow, for closing remarks.
Thanks Elliot. And thank you everyone for joining us today. Take care. And stay safe.
This concludes today's conference. We thank everyone for your participation.