CMS Energy - Q2 2024
July 25, 2024
Transcript
Operator (participant)
Good morning, everyone, and welcome to the CMS Energy 2024 second quarter results. The earnings news release issued earlier today and the presentation used in this webcast are available on CMS Energy's website in the Investor Relations section. This call is being recorded. After the presentation, we will conduct a question and answer session. Instructions will be provided at that time. If at any time during the conference you need to reach an operator, please press the star key followed by the digit zero. Just a reminder, 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 on CMS Energy's website in the Investor Relations section. At this time, I would like to turn the call over to Mr. Jason Shore, Treasurer and Vice President of Investor Relations.
Jason Shore (VP of Investor Relations)
Thank you, Harry. Good morning, everyone, and thank you for joining us today. With me are Garrick Rochow, President and Chief Executive Officer, and Rejji Hayes, Executive Vice President and Chief Financial Officer. This presentation contains forward-looking statements which are subject to risks and uncertainties. Please refer to our SEC filings for more information regarding the risks and other factors that could cause our actual results to differ materially. This presentation also includes non-GAAP measures. Reconciliations of these measures to the most directly comparable GAAP measures are included in the appendix and posted on our website. Now I'll turn the call over to Garrick.
Garrick Rochow (CEO)
Thank you, Jason, and thank you everyone for joining us today. Our proven investment thesis, which delivers 6%-8% adjusted earnings growth and affordable bills for our customers, has been durable for more than two decades because we focus on what matters. Today, I'm going to highlight two key areas of our thesis. First, Michigan's strong regulatory environment. Built on a solid, constructive framework, much of which is codified in Michigan law, 10-month forward-looking rate cases, important financial and fuel recovery mechanisms, and increased energy waste reduction incentives, just to name a few attributes. This robust framework supports Michigan's position as a top-tier regulatory environment and provides important supportive incentives for needed investments to make our electric and gas systems safer, more reliable and resilient, and cleaner. And second, our continued commitment to affordable bills for our customers. As I've said before, we work both sides of the equation. We make important investments, and we keep customer bills affordable. I consider our use of the CE Way, our lean operating system, one of the best in the industry. This approach limits upward pressure on customer bills and is critical in the delivery of our investment plan. We continue to see a long runway of cost-saving opportunities well into the future, delivering industry-leading results for all our stakeholders. From a regulatory perspective, we're off to a strong start for the year. As you can see on slide four, our regulatory calendar is mostly complete. We received a constructive order in our electric rate case in March, filed our new electric rate case in May, and settled our gas rate case earlier this month, the fourth consecutive settlement in our gas business. Four consecutive settlements in gas, yet another proof point highlighting the strong regulatory environment in Michigan. We're very pleased with our recently approved gas settlement, which calls for a $62.5 million of effective rate relief, a 9% or 9.9% ROE, and a 50% equity ratio. We plan to file our next gas rate case in December of this year. Outside of rate cases, our upcoming 20-year renewable energy plan or REP filing in November, is the only major remaining filing for the year. Let me pause there for a moment. Midway through the year, our financial-related regulatory outcomes are known. This is a great place to be. I also want to talk about our formula to deliver customer affordability as we make important investments. Long-term filings, like our renewable energy plan, detail the significant planned investments that support safe, reliable, clean, and affordable energy for our customers. As we've shared previously, we see more investment opportunities as we make the transition to renewables and clean energy. In addition to the $17 billion of needed customer investments in our five-year capital plan, our electric reliability roadmap and natural gas delivery plans highlight important investments well beyond what's in our financial plan. Now, that's a long way of saying we see a long runway of necessary and important customer investments. These investments must be balanced with a laser focus on customer affordability. We take seriously our ability to create capital headroom to make those investments through continued use of the CE Way, which provides over $50 million of annual customer savings. Renegotiating over-market PPAs and retiring our coal facilities, which together provide well over $200 million in savings as we transition toward cleaner resources. Capitalizing on economic development opportunities, particularly in manufacturing, which brings jobs and significant Michigan investments, spreading fixed costs over a larger customer base, benefiting all customers. Lastly, leveraging our best-in-class energy waste reduction programs to help customers reduce bills. This is a formula that works for everyone, continuing to strengthen the system with important investments while keeping customer bills affordable. Now, let's look at the results and outlook. For the first half, we reported adjusted earnings per share of $1.63, up 18 cents versus the first half of 2023, largely driven by the constructive outcomes in our electric and gas rate cases. We remain confident in this year's guidance and long-term outlook, and are reaffirming all our financial objectives. Our full-year guidance remains at $3.29-$3.35 per share, with continued confidence toward the high end. Longer term, we continue to guide toward the high end of our adjusted EPS growth range of 6%-8%, which implies and includes 7%-8%. With that, I'll hand the call over to Rejji.
Rejji Hayes (CFO)
Thank you, Garrick, and good morning, everyone. On slide seven, you'll see our standard waterfall chart, which illustrates the key drivers impacting our financial performance for the first six months of 2024, and our year-ago expectations. For clarification purposes, all of the variance analyses herein are in comparison to 2023, both on a year-to-date and a year-ago basis. In summary, through the first half of 2024, we delivered adjusted net income of $485 million, or $1.63 per share, which compares favorably to the comparable period in 2023, largely due to higher rate relief net of investment costs. While we have seen some glimpses of favorable weather, particularly in June, overall weather continues to be a headwind through the first half of the year, equating to $0.05 per share of negative variance. That figure includes the warm winter weather experienced in our service territory in the first quarter, which I'll remind you, had the second lowest number of heating degree days in the past 25 years. As mentioned, rate relief, net investment-related expenses, one of the key drivers of our first half performance, resulted in $0.13 per share of positive variance due to constructive outcomes achieved in our electric rate order received in March and last year's gas rate case settlement. From a cost perspective, our financial performance in the first half of the year was negatively impacted by heavy storm activity, including a notable weather system that impacted our service territory in late June, resulting in $0.03 per share of negative variance versus the comparable period in 2023. Rounding out the first six months of the year, you'll note the $0.13 per share of positive variance highlighted in the catch-all bucket in the middle of the chart. The primary sources of upside here were related to solid operational performance at NorthStar and higher weather-normalized electric sales. Looking ahead, as always, we plan for normal weather, which equates to $0.20 per share of positive variance for the remaining half of the year, given the mild temperatures experienced in the final six months of 2023. From a regulatory perspective, we'll realize $0.12 per share of positive variance, largely driven by the aforementioned electric rate order received from the commission earlier this year, and the constructive outcome achieved in our recently approved gas rate case settlement, which Garrick summarized earlier. Closing out the glide path for the remainder of the year, as noted during our Q1 call, we anticipate lower overall O&M expense at the utility, driven by the usual cost performance fueled by the CE Way, and the residual benefits from select sustainable cost reduction initiatives implemented in 2023, such as our voluntary separation plan, among others. Collectively, we expect these items to drive $0.09 per share of positive variance for the remaining six months of the year. Lastly, in the penultimate bar on the right-hand side, you'll note a significant negative variance, which largely consists of the absence of select one-time countermeasures from last year and the usual conservative assumptions around weather-normalized sales and non-utility performance, among other items. In aggregate, these assumptions equate to $0.35-$0.41 per share of negative variance. In summary, despite a challenging first half of the year, we're well positioned to deliver on our 2024 financial objectives to the benefit of customers and investors. Moving on to our financing plan, slide 8 offers more specificity on the balance of our planned funding needs in 2024, which at this point are limited to debt issuances at the utility. I'll bring to your attention a relatively modest increase to our 2024 planned financing of the utility. Specifically, we are now planning to issue approximately $675 million in the second half of the year versus the implied estimates in our original guidance of $500 million, to rebalance the rate-making capital structure at the utility in accordance with recent rate case outcomes. Although not highlighted in the table on the slide, I'm pleased to report that we have completed all of our planned tax credit sales for the year at levels favorable to our plan and ahead of schedule. I'll also reiterate that we have no planned long-term financings at the parent in 2024, but remain opportunistic should we see a cost-efficient opportunity to pull ahead some of our 2025 financing needs. As I've said before, our approach to our financing plan is similar to how we run the business. We plan conservatively and capitalize on opportunities as they arise. This approach has been tried and true year in and year out, and has enabled us to deliver on our operational and financial objectives, irrespective of the circumstances, to the benefit of our customers and investors, and this year is no different.With that, I'll hand it back to Garrick for his final remarks before the Q&A session.
Garrick Rochow (CEO)
Thank you, Rejji. CMS Energy, 21 years of consistent industry-leading financial performance. I have confidence in our strong outlook this year and beyond, as we continue to execute on our simple investment thesis and make the necessary and important investments in our system, while maintaining customer affordability. With that, Harry, please open the lines for Q&A.
Operator (participant)
Thank you very much, Garrick. The question and answer session will be conducted electronically. If you would like to ask a question, please do so by pressing the star key, followed by the digit one on your touchtone telephone. If you're using your speaker function, please make sure you pick up your headset. We'll proceed in the order you signal us, and we'll take as many questions as time permits. If you do find that your question has been answered, you may remove yourself by pressing the star key, followed by the digit two on your touchtone telephone. We'll now pause for just a second. Our first question today comes from the line of Jeremy Tonet of J.P. Morgan. Please go ahead. Your line is open.
Jeremy Tonet (Equity Research Analyst and Managing Director)
Hi, good morning.
Garrick Rochow (CEO)
Hey, good morning, Jeremy. How are you?
Jeremy Tonet (Equity Research Analyst and Managing Director)
Good. Good. Thanks. Just wanted to turn towards DIG for a little bit here, if we could, and just wanted to get updated thoughts with regards to recontracting overall and just, I guess, the outlook in this environment, given kind of trends in power prices.
Garrick Rochow (CEO)
I would suggest that, Jeremy, it's consistent with what we shared in the past. Energy and capacity markets, that upward pressure continues to be a ripe opportunity, and we continue to strike nice bilateral contracts to secure higher energy and capacity prices well above our plan. So again, it's a good opportunity to continue to do that, and as we've shared in the past, this just continues to strengthen and lengthen our financial performance.
Jeremy Tonet (Equity Research Analyst and Managing Director)
Got it. Thank you for that. And then it seems like halfway through the year, CMS is in a pretty good position overall. Just wondering, any thoughts you could share with regards to, I guess, how weather is looking and impacts for 3Q as it stands right now, and really getting towards, I guess, you know, cost management thoughts and whether, you know, you might be in a position to pull forward costs to further de-risk the future outlook and how you think about all that?
Rejji Hayes (CFO)
Yeah, Jeremy, it's Rejji. Appreciate the question. And I would say, weather outlook looks fairly good for Q3, but obviously early days. And I will just say, personally, I don't give a lot of credence to two- and three-month outlooks. I'm much more focused on the 10 days ahead, which appear to be a bit more accurate. And so we always remain paranoid about weather, and just based on year to date, weather has not been all that kind. And so, we'll continue to execute on cost performance-related initiatives. We've had some good success over the last several years in executing on cost management over the course of the year, and we'll continue to do that through Q3. As I mentioned in the first quarter call, it's still premature to start thinking about pull aheads for 2025. I'd say historically, even in the best of years, where weather was really helpful, in the first couple of quarters, we still didn't think about, flexing off or pull aheads or any of those types of de-risking mechanisms until we got deeper into Q3 and had a real good outlook on the fourth quarter. So hopefully more to talk about from a 2025 de-risking perspective next quarter, but at this point, it's too premature to get into that.
Garrick Rochow (CEO)
And if I could just add to that, Jeremy, you know, part of the call here, my prepared remarks, I talked about the confidence. The confidence comes from the fact that we're executing on the CE Way. We've done that historically. We've been at a runway to greater than $50 million on an annual basis. We see that continuing. There are a number of, you know, things that we did in 2023 in terms of, Rejji shared in his prepared remarks, voluntary separation, contract control. Those continue to yield benefit in the year. And also, we're applying a lot of digital solutions, everything from work in the field to automate work, all the way into the office, things like work management, that continue to provide additional cost savings in the year. So again, confident, as I shared in the call here earlier, in delivering guidance for the year.
Jeremy Tonet (Equity Research Analyst and Managing Director)
Got it. Appreciate that. And then if I could just wrap with, you know, thoughts on opportunities to service data centers going forward here, and I guess the interplay with regards to legislation in Michigan, whether that comes to fruition and how that might impact the pace of such type of development.
Garrick Rochow (CEO)
Jeremy, you know us well enough, the Hayes-Rochow team here. Well, we're pretty, we're pretty conservative in our approach to financials. And as I shared in the Q1 call, we want to make sure it's signed on the dotted line, you might say, before we talk about it, so we don't, we don't inflate our sales forecast. I would just say that there's a lot of interest in both manufacturing and data centers in the state. As I shared in the Q1 call, so I'm seeing a lot of manufacturing growth that continues into Q2. We saw data centers. We talked about one that we signed in Q1, 230 MW. There continues to be strong interest in the state, both the hyperscalers and also we're seeing some growth in what I call mid-scalers, from a data center perspective. Those continue to move forward regardless of legislation in the state. And so the sales and use tax piece will continue in the conversation in the legislature. But again, it's a bit of a cherry cherry on top of the sundae, you might say.
Jeremy Tonet (Equity Research Analyst and Managing Director)
Got it. Makes sense. Fair enough. I'll leave it there. Thanks.
Garrick Rochow (CEO)
Thank you, Jeremy.
Operator (participant)
Our next question today is from the line of Shahriar Pourreza of Guggenheim Partners. Please go ahead. Your line is now open.
Shahriar Pourreza (Senior Managing Director)
Hey, guys.
Garrick Rochow (CEO)
Hey, Shahriar.
Shahriar Pourreza (Senior Managing Director)
Good morning.
Garrick Rochow (CEO)
Good morning, Shaarya.
Shahriar Pourreza (Senior Managing Director)
So good morning, Rejji. So I know you guys noted previously that the, you know, the FCM mechanism could be incremental, sort of on the new generation, not in plan. As we're kind of getting closer to the November REP filing, any thoughts on where demand is headed and how maybe CMS would be positioned for upside there? So any thoughts on incremental CapEx versus the PPA options? Have you started to embed any, you know, higher load growth in your assumptions? Thanks.
Garrick Rochow (CEO)
Shaarya, I was really hoping for a rate design question. You, I mean, you're throwing curve balls.
Shahriar Pourreza (Senior Managing Director)
It's coming. It's coming. I would- Hang tight. That's my follow-up. Sorry about that.
Garrick Rochow (CEO)
Let's, let's talk about this. Let's talk about this. We see, we definitely see, as a part of this energy law, additional upside. That shows up in ownership of assets, it shows up in the Financial Compensation Mechanism. Both those are true. Let me talk about how they'll play out, though. We're going to file this, our Renewable Energy Plan, in November. It's a 10-month process, so we'll know in 2025, kind of latter half of the year, what that looks like. And so in our 2026 capital plan, you'll see what that means, our 2026 financials, both from an FCM perspective as well as what might the ownership mix look like, and so that's where it'll play out. In addition to that, that's probably a portion of the story, because in 2026, we'll also file our Integrated Resource Plan, which will talk about some of the reliability pieces and some of the work to deliver the capacity component of that. So between 2026, 2027, 2028, I think that's when you'll see the capital impact, as well as the Financial Compensation Mechanism play out in terms of our financials. Now, I will say this: We've seen some good economic growth in the state. That will show up in our Renewable Energy Plan. We're definitely seeing a greater need than was in our original 2021 IRP. So I'll leave it at that, and certainly, that will provide helpful additional upside opportunity in terms of capital growth, in addition to the energy law.
Shahriar Pourreza (Senior Managing Director)
Perfect. And then just a quick follow-up, and I obviously, I'll dedicate this to Garrick. Just on the rate case filing, on the electric side, it's obviously in the early, early innings. It's kind of more of a 25 event. The provisions and sort of the mechanisms like the IRM and DR remain unchanged. I guess, do you feel there would be sort of an opportunity for settlement after testimony, given this is kind of a less complex case? I guess, how are you sort of thinking about settlement paths versus the prior litigated path? And then is there anything, and I dedicate this to you, any of the rate design stuff in there that can cause some contention? Thanks.
Garrick Rochow (CEO)
I set myself up for that one, didn't I? I love sharing on these calls. I will always look for settlement opportunities. I'm also very confident in our team. We put a great case together, and we can go the full distance, just as we did this year in our March order. And so when I think about this electric rate case, there are some things that have to be figured out to really get some context around the opportunity for settlement. One, I think it's really important to understand that electric cases are more complex than gas cases. So for example, we had less than 10 interveners in our gas case. We have a little over 20 in our electric rate, electric case. That's not abnormal, it's just, it's a more complex case. There's more interested parties, so we'll have to navigate through that. I also think it's important to find where staff is and where the Attorney General are at in this case. That will come in September. Those are important points to know in the context of settlement opportunities. But understand this: I am very confident in this case. It is focused on electric reliability. That's well aligned with what our customers are asking for, what the commissioners and the staff are asking for, and what I've committed to do. And so this case has great capital investments, and undergrounding has important work, and hardening the system, and automated transfer reclosers, technology on the system. There's important work in O&M and tree trimming, our number one cause of outage, and other important maintenance work across the system. We're gonna leverage the Infrastructure Recovery Mechanism. We'll certainly. We're gonna wanna try another storm mechanism in this case as well. And so I feel confident in our ability to get the very constructive outcome, just given how well-aligned we are across the commission, staff, as well as our customers. So hopefully that gives you some context on the case. Now, on rate design, let me just talk a little about rate design. Specifically, data centers are not at our economic development rate. We had an ex parte filing that made an adjustment in that. That was approved. And so in the meantime, they are at an industrial rate. We call it our GPD rate. And what that does is a better balance of both capacity and energy costs, the cost to serve those customers. The commission, as well as the utility, has been looking and exploring at the opportunity to specific data center rate, but in the interest of time, the GPD is a good proxy for that in our mind. And so well-suited from a rate design perspective, from a data center perspective. I also said GDP. I think that's the wrong thing. I was hoping for something different there. Maybe that was a... But GPD is what I meant. GPD. Sorry about that, Sharon. I had my eyes on the economic-
Rejji Hayes (CFO)
Reporting as well.
Garrick Rochow (CEO)
You know what? It's election time. I have my mind on other things, like what's going to happen with our economy.
Shahriar Pourreza (Senior Managing Director)
There you go. I appreciate it, guys. I think you just set up the next caller to ask you about election question. I'll see you soon. Thank you, guys.
Rejji Hayes (CFO)
Thank you.
Operator (participant)
Our next question today is from the line of Michael Sullivan of Wolfe Research. Please go ahead. Your line is now open.
Garrick Rochow (CEO)
Hey, Michael.
Michael Sullivan (Director of Equity Research)
Hey, everyone. Good morning.
Garrick Rochow (CEO)
Good morning.
Michael Sullivan (Director of Equity Research)
Hey, Garrick. Morning, morning. Just wanted to go back to the, the data center legislation discussion. I think on the last call, you talked about a 230-megawatt data center coming in 2026. Was that contingent on the legislation or your understanding is still moving forward, and are there any other examples of that, or is everyone else kind of waiting completion?
Garrick Rochow (CEO)
It was not contingent. That one's still moving forward. That's the signed piece, and that's, I guess that's my point. What we hear from data centers, it's more important about how fast can you get transmission here, how fast can you build it, that conversion from transmission to distribution to substation, how fast can you get supply here? And we're able to do that. And so many of those mid scalers and hyperscalers continue to make forward steps, regardless of the progress on the sales and use tax. And just to give you a little context, at the end of the spring session, the legislature was focused on the state budget. In the words of our governor, "We got to fix the damn roads, and we got to fund schools." Right? And so those are important things, too. I don't want to. I don't want. We want smart kids in the state. So those are important things underway. That conversation on, on data centers and the sales tax will continue into the fall. Now, we're in election, so it'll be difficult for me to predict how, how fast that will move, or it could happen in lame duck. And so we'll continue that conversation in the state. But again, it is not, it's not stopping things from moving forward, Michael.
Michael Sullivan (Director of Equity Research)
Okay. Is that, like, a good proxy for how long it takes new load to come on to your system? About 2 years, with that one being 2026?
Garrick Rochow (CEO)
There's a number of variables there, Mike. So in the case of that data center, what we talked about is they're bringing on load by 2025, 2026, and where they're located on the system makes a big difference. And so we're able to accommodate that. Depending on where a data center locates, from a property perspective, makes a difference. Just as far as how far do we have to extend lines, you know, is this greenfield? Is this brown? There's all kinds of variables that go into it, but we're in that 2-3 years cycle. And again, even if you're at the tail end of that cycle, data centers are moving quickly, and that doesn't seem to be holding them up too much.
Michael Sullivan (Director of Equity Research)
Okay, great. And then separately, just kind of sticking with legislation, I think there were some comments a few months ago from the PSC chair about rate case timelines being a bit compressed these days. Are you hearing any chance of legislation coming up that would, you know, revert back to 12 months for a cycle from 10? And just a general sense for rate fatigue in this state in light of those comments?
Garrick Rochow (CEO)
The short answer is no. As you know, what makes Michigan great is much of the regulatory environment is set in law. So 10 months, forward-looking rate cases is in the law. Financial Compensation Mechanism, energy efficiency incentives are in the law, and we just went through that law. It was just open, and it was just signed here last November, and we're hearing nothing in terms of opening that law back up or looking at different provisions. Now, we continue to always have a constructive dialogue with the commission and the staff, and so I do think there are opportunities, right, in terms. So I'll give you one example, just one example of probably many you could think about.We have a great process for an integrated resource plan and a renewable energy plan that lay out an energy supply portfolio. So we get it preapproved, and then it flows into rate cases. It really streamlines rate cases. What if we could do the same thing on the distribution system? Wouldn't that be great? Let's build a five-year reliability roadmap. Wait, we've already done that. Let's do that. Let's approve that and then have that flow into rate cases. That could really streamline the process, and if done in the right way, you could potentially see a path where you could stay out for a period of time. Again, done in the right way. And so the kind of the nature of Michigan's constructive regulatory environment, let's explore that. Let's see if there's opportunities there to even further bolster Michigan's constructive nature.
Michael Sullivan (Director of Equity Research)
Okay. That's really helpful, caller. Thanks. Thanks a lot.
Garrick Rochow (CEO)
Thank you, Michael.
Operator (participant)
Our next question today is from the line of Andrew Weisel of Scotiabank. Please go ahead. Your line is now open.
Garrick Rochow (CEO)
Good morning, Andrew.
Andrew Weisel (Managing Director and Senior Equity Analyst)
Hi, Good morning.
Garrick Rochow (CEO)
Good morning.
Andrew Weisel (Managing Director and Senior Equity Analyst)
Just two quick ones. First, CNI weather-adjusted volumes were down in the quarter. It's a bit of a reversal from the first quarter. I know the first quarter was extremely mild weather, so those numbers are probably a little bit goofy, but any commentary on the underlying trends and the near-term outlook for the rest of this year, maybe early thoughts on 2025?
Rejji Hayes (CFO)
Sure, Andrew, this is Reggie. I'll take it, and appreciate the question as always. Yeah, we did see a little bit of a pullback in Q2 versus Q2 of last year for weather-normalized sales for electric. I will always caveat, and I think you alluded to it, that it's a very imperfect science, and the team does a really good job trying to pull these numbers together with real accuracy. But again, it's very difficult to get real precision here. Just so everybody's grounded, residential for the quarter versus a Q2 of 2023 was slightly up, about 0.1%. Commercial, down about 1%, industrial, down about 2%, excluding one large low-margin customer. And then all in, blended was down about 1%. So that is, to your comment, unfavorable from the trends we were seeing in the first quarter. But I would say on a year-to-date basis, the trend remains quite good, and we continue to be surprised to the upside, really across all customer classes, because our assumptions were incredibly conservative, as they always are, for the year. And so we are outperforming across every customer class, what our initial expectations were that were embedded in our original guidance, and so we are still seeing non-weather sales upside. I'll also note, as I've said before, that we had energy waste reduction incorporated into all of those numbers that you're seeing, and so you should always add 2% to each of those customer classes, because we're delivering the 2% reduction across every customer class year-over-year, and we've been doing that now really since the 2008 law or thereabouts. And so another way to think about those numbers I just quoted is that you should add or gross up 2% across each of those if you want to get the underlying economic conditions. So we still remain quite good, and then we still remain quite pleased, rather, with the results. And then when you think about it on a year-to-date basis, resi's up about a point, commercial's up over 1%, industrial down about a point, and all in is up about a little over 0.5%. So again, all things considered, particularly when you gross up for energy waste reduction, we think conditions in Michigan remain quite good, really across all customer classes. Was that helpful?
Andrew Weisel (Managing Director and Senior Equity Analyst)
Yes. Good reminder on the efficiency and yes, we all know that you're conservative. Next, an operational question. You noted there was some heavy storm activity in the quarter. What kind of score or grade would you give yourself in terms of restoration efforts? Reliability is obviously a big focus for you. You talked about that in your comments. What would you say went well, what could have gone better, and how does this fold into your efforts as part of the electric rate case and the audit?
Garrick Rochow (CEO)
So we're seeing a number of great improvements as a result of the investments we have made to date. More needs to be done along those lines, and so in fairness, I'd give ourselves a B. In this context, there's more needs to be done for our customers, and that's evident in the rate case filing that we're doing. Where we've worked a lot this year is reducing the size of the outage, and so we've put in a lot of fusing. So what I mean by that is you have less customers impacted when the tree comes on the line. That's an important work. We've more than doubled our tree trimming work over the last three years. That's also provided benefit. When we trim trees in there, we see a greater than 60% reduction in the number of outages. You may ask, "Why not 100%?" Because we still see trees outside the right of way that impacts our performance. But I would also put it in the context, Rejji talked about the last week of June, and there was a larger event in June, but there was a lot of more smaller events, which we would anticipate. We're trying to shrink the size, which makes restoration easier, but a lot of pockets throughout the state. We brought in a number of resources. We leveraged a lot of our existing union resources to be able to respond to that, and we had good response from that perspective. We measure in terms of restoring our customers within a 24-hour window. We want to have all customers restored within a 24-hour window, and last year, in 2023, we were at 90% within a 24-hour window. This year, we're upwards of 95%, and so that shows the directional improvement. Now, the year's not done. We've got a lot of work to do, and we'll continue to make some important investments throughout this year. And again, this electric rate case shows a path for more. So hopefully, gives that some context. Now, I know Reggie wants to add to it as well. Andrew, all I would add to Garrick's good comments on the operational side is really applying a financial lens. I would give us about a B plus, A minus on the financial side, because through utilization of the CE Way, we've done a really good job reducing unit costs in our actual service restoration, and we're seeing, at this point, over $40 million of avoided costs. Now, needless to say, I talked about negative variance attributable to overall service restoration costs versus last year. However, the cost would have been decidedly higher absent the problem-solving we've done throughout the year. So we're contracting third parties more efficiently, we're using more automation to reduce manual inspections, and definitely leveraging the tools of the CE Way to really execute on storm restoration much more efficiently than we have in the past. And so in addition to all the operational feats that Garrick highlighted, we're also applying a really thoughtful financial lens as well, to make sure that we're bringing customers back online as quickly as possibly, and as quickly as possible and as cost efficiently as possible. So I'd be remiss if I didn't add that as well.
Andrew Weisel (Managing Director and Senior Equity Analyst)
Certainly sounds better than years past. Thank you very much. Appreciate the details.
Garrick Rochow (CEO)
Thank you, Andrew.
Operator (participant)
Our next question today is from the line of Julien Dumoulin-Smith of Jefferies. Please go ahead. Your line is open.
Julien Dumoulin-Smith (Managing Director and Senior Equity Research Analyst)
Hey, good morning, team. Thank you, guys, very much. Appreciate it. Good to chat with you guys again.
Garrick Rochow (CEO)
Yeah, good to hear from you again.
Julien Dumoulin-Smith (Managing Director and Senior Equity Research Analyst)
Yeah, likewise. Garrick, what are you putting your hat - when are you putting yourself in the ring here for VP, given all the political conversation here, right? Now you want to fix the damn roads.
Garrick Rochow (CEO)
The Hayes-Rochow ticket. I don't know. I don't know if it has a ring to it. Well, I'll give it a try. I'll give it a try.
Julien Dumoulin-Smith (Managing Director and Senior Equity Research Analyst)
Love it. Anyway, I look, you guys are clearly, you got your front foot forward here for sure. Look, you, you favorably have pulled back on O&M savings here. You're talking about leaning in, being in a good position against near-term and longer-term targets. You've issued more debt. I think it was $675 versus the $500 to rebalance your equity ratio. You know, what's driving this level of outperformance? But I just want. I'm just gonna try to clarify, like, the, the debt signaling, as well as just overall the commentary, especially considering the O&M factor that, that you flag here. Like, typically, you lead with cost, but I'm wondering what other factors there are.
Rejji Hayes (CFO)
Yeah, Julian, it's Reggie. Appreciate the question, and, welcome back. Really good to hear your voice. Let me start with a few of the, just premises or working assumptions you, you offered up in the question. And so just let me start with the debt at the utility, just for factual purposes. And so, we are planning to issue about $675 million in the second half of the year at the utility as part of our financing plan. It was initially half a billion, and so we've slightly increased, and that's really just because of our rate case outcomes, which had modestly lower equity levels, and so we'll have more debt, at the operating company. And so I just wanted to make sure that that was abundantly clear, and, obviously, we'll look to execute on that financing as cost efficiently as possible, and we'll be thoughtful about, the maturity profile as well. The outperformance has been obviously, we always try to deliver on the cost performance side, but, as I mentioned in my prepared remarks, rate relief, net of investments has been helpful, getting constructive orders. The electric rate order in early March, the gas rate case last year, we're still seeing the residual benefits from that, and so that's really what's helped us in the first half of the year. And also, though it's, embedded in that catch-all bucket, as I noted in my prepared remarks, NorthStar has really outperformed. They had a really soft comp in the first half of 2023, just given last year's plan was a bit more back-end loaded, and there were also some outage-related issues at DIG, given a transformer issue. And so this year, they've really gotten out of the gate pretty strong. DIG is up about $0.05 year-over-year, and we're seeing the residual benefits from some solar projects that came in late last year. And so I'd say it's a combination of rate relief, net of investment, outperformance at NorthStar, as well as some cost performance, as you alluded to, offset by mild weather conditions, which have hurt the top line, as well as storms, as we talked about in the prior question.I'd say it's a combination of all of that, which gives us just good confidence going into the second half of the year.
Julien Dumoulin-Smith (Managing Director and Senior Equity Research Analyst)
Excellent. And Rejji, just to follow up on that real quick, you know, a lot of that dynamic with Northstar, some of it is true up there. You talk about outages year over year. You should. In theory, some of that should have been expected, the solar in service. I mean, I'm curious, the outperformance here, I mean, is this more of a true, or is there sort of a compounding effect across the, across the subsequent years? How do you think about-
Rejji Hayes (CFO)
No, I think NorthStar-
Julien Dumoulin-Smith (Managing Director and Senior Equity Research Analyst)
the leading indicator there?
Rejji Hayes (CFO)
Yeah, good question. Northstar on plan. We anticipated a front-end loaded year for all of the reasons you noted. So a good portion of Northstar's performance was on plan. But I will say DIG did surprise a little bit to the upside in the first quarter because operationally, not only are they executing very well, but they're also executing on a lower unit cost basis, which drives a little bit of additional margin. There also are opportunities for off-peak margin that the team has capitalized on. So I'd say it's a combination of being on plan because it was a front-end loaded plan at Northstar, but also so our operational efficiency, which we've seen. So that's really the thrust of it at Northstar.
Julien Dumoulin-Smith (Managing Director and Senior Equity Research Analyst)
Awesome. All right, guys. Chat soon. All right, thank you.
Rejji Hayes (CFO)
Good luck, Garrick.
Garrick Rochow (CEO)
See you.
Operator (participant)
Our next question today is from the line of Durgesh Chopra of Evercore. Please go ahead. Your line is now open.
Garrick Rochow (CEO)
Good morning, Durgesh.
Durgesh Chopra (Managing Director and Senior Equity Research Analyst)
Hey, good morning, Garrick. Thanks for taking my question. Just, all my other questions have been answered. I just wanted to see if there's an update on the performance-based rate making docket here, coming out of the legislation last year. Where do we stand there? Can you just update us on that, please?
Garrick Rochow (CEO)
Sure. That's been a very constructive dialogue. As I've shared in the past, it passed. It started really wide in the number of metrics, and then through good dialogue, it was narrowed down to nice four benchmarkable metrics. It's grown a little bit to accommodate some storm provisions. However, there's still a constructive dialogue underway here in July and August. There's filings to be able to navigate that. There's a few things we still want to work through and get, and get dot the I's and cross the T's on, you might say. And then I expect that this is going to play out over you know, over several rate cases. And so it's not going to be implemented here immediately, but I think it just speaks to the constructive dialogue we have in Michigan here. There's a lot of good intervenors and filings that go back and forth to really make sure it's going to be a productive ratemaking mechanism.
Durgesh Chopra (Managing Director and Senior Equity Research Analyst)
Got it. So just kind of the framework of this would be a potential earnings uplift, and then on the downside, a potential penalty on certain metrics. And then when did you say this could go into effect? This is a 2025 item, 2026? Just any thoughts there?
Garrick Rochow (CEO)
I would put it several rate cases away, so over maybe a year or two years out from an implementation perspective. Again, that's my view, just of what I see of the world. The intent is for it to be symmetric, and so there's upside opportunity and downside opportunity. The downside opportunity is marked at about $10 million in this context, which is manageable in the context of the year. That means the upside opportunity is roughly that same amount, and at least as it's proposed currently.
Durgesh Chopra (Managing Director and Senior Equity Research Analyst)
Thanks so much. Appreciate the time.
Operator (participant)
As a reminder, if you would like to ask a question, please dial star followed by one on your telephone keypad. Our next question is from the line of Travis Miller of Morningstar. Please go ahead. Your line is now open.
Garrick Rochow (CEO)
Hi, Travis.
Travis Miller (Senior Equity Analyst)
Thank you. Good morning, everyone.
Garrick Rochow (CEO)
Good morning.
Travis Miller (Senior Equity Analyst)
Hi, Travis. Very high level on electric demand. I wonder if you could elaborate on how it's trending versus your 2021 IRP and how, as you'd mentioned earlier in the call, how that would affect potentially the renewable energy plan filing here. Is it trending higher or lower, and how does that impact the REP?
Garrick Rochow (CEO)
Yeah, it's definitely trending higher based on all the economic development activity that is, again, not speculating on that, that is signed or, and we're out building transmission, not building transmission, substations and, there's transmission being built to serve, these customers. And so in our RE-- in our renewable energy plan filing, you should anticipate that there's additional, sales referenced there above and beyond our 2021 IRP.
Travis Miller (Senior Equity Analyst)
Is it fair to make the leap then, that you would need more renewable energy on that same percentage basis as what's in the law?
Garrick Rochow (CEO)
That's fair. Yes. Generally speaking, yes.
Travis Miller (Senior Equity Analyst)
Okay. Okay. And then also, obviously, a lot of talk about, in the media, about Palisades. From your perspective, is it accurate that you're seeing development moving forward on that plant? And then, if so, would you be interested in either implementing that in your plan in terms of the capacity and energy, and/or signing a PPA?
Garrick Rochow (CEO)
Palisades is making forward progress in the state. From a state budget perspective, another $150 million was allocated toward the forward direction of the facility. We're having public meetings that are going on right now on site. So again, forward steps in moving forward that plant. Now, I'll remind you that a PPA has already been struck for the offtake from the Palisades facility. That goes to a co-op in Michigan and a co-op in Indiana, so it's already spoken for. Now, it's good for Michigan that Palisades is returning, and we at CMS Energy do not see any adverse impact as a result of Palisades coming back.
Travis Miller (Senior Equity Analyst)
Okay, great. Thanks a lot. That's all I had.
Garrick Rochow (CEO)
Thank you.
Operator (participant)
Our next question today is from the line of Nick Campanella of Barclays. Please go ahead. Your line is open.
Nicholas Campanella (Senior Equity Research Analyst and Director)
Hey, thanks, and hope everyone's having a great summer. Just one from me today. So I know, Rejji, you know, you said you would be opportunistic in your prepared remarks around financing and, you know, potentially pulling things forward from 25. I'm just cognizant that you do have kind of, would you start to issue equity in 2025? And maybe you can just kind of give us some more color. Are you just kind of talking about pulling forward hybrid or debt, or is everything on the table? How we- how do we think about that? Thank you.
Rejji Hayes (CFO)
Yeah, I appreciate the question, Nick. I would say, in short, I wouldn't say everything is on the table, so you won't see us issuing equity in 2024. What we have done in the past, though, is we have executed on forwards opportunistically to at least take some of the price risk off the table. You know, I would say where the equity is today, I don't think that seems like the most likely trade. But I was speaking more towards parent debt financing needs. Certainly, our thinking is quite expansive. Everything from senior notes to hybrids and those types of securities, all of which we've done pretty opportunistically in the past. As you may recall, we've got about $250 million coming due at the holding co at the hold co next year, and so we're mindful of that, and we have, I'd say, modest new money needs on top of that. And so we will see if there's good pricing in the market, particularly if the speculation around potential dovish policy, dovish monetary policy from the Fed comes to fruition, but I have stopped wagering on that. So we'll see what happens, but if we start to see a correction in the yield curve that's favorable and it creates opportunities for hold co debt financings, we'll look to do that. And again, I'd say the equity needs still as is, up to $350 million, starting next year, and I don't see us pulling any of that forward.
Nicholas Campanella (Senior Equity Research Analyst and Director)
All right. That's super helpful. I really, I really appreciate it, and I'm looking forward to seeing you at the conference in September. Thanks.
Rejji Hayes (CFO)
See you then.
Operator (participant)
With no further questions in the queue at this time, I would like to hand the call back to Mr. Garrick Rochow for any closing remarks.
Garrick Rochow (CEO)
Thanks, Harry. I'd like to thank everyone for joining us today. I look forward to seeing you on the road soon. Take care and stay safe.
Operator (participant)
This concludes today's conference. We thank everyone for your participation.