CMS Energy Corporation

Good morning, everyone, and welcome to the CMS Energy third quarter 2021 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 star key followed by zero. Just a reminder, there will be a rebroadcast of this conference call beginning today at 12 p.m. Eastern Time, running through November 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 Matipati, Treasurer and Vice President of Finance and Investor Relations. Please go ahead.

Thank you, Rocco. Good morning, everyone, and thank you for joining us today. With me are Garrick Rochelle, President and Chief Executive Officer, and Reggie 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.

Thank you, Sri, and thank you, everyone, for joining us today. I'm pleased to share we've delivered another strong quarter and continue to be ahead of plan for the year. I'll walk through the specifics in a moment. But I couldn't be more pleased with the strong execution demonstrated by the team, both operationally and financially. We continue to deliver every day for our customers, coworkers, and for you, our investors. Earlier this month, we completed the sale of EnterBank, grossing over $1 billion in proceeds. I want to thank the entire team that brought this to close. The sale of the bank simplifies and focuses our business model squarely on energy, primarily the regulated utility, an important step as we continue to lead the clean energy transformation. The proceeds from this sale will fund key initiatives in our utility business related to safety, reliability, resiliency, and our clean energy transformation. As shared in previous calls, we have eliminated our equity needs from 2022 through 2024. Furthermore, Reggie will highlight in his prepared remarks how we have continued to reduce this year's equity needs as well. The key word there, continued. As we double down on the clean energy transformation, I am also pleased to share that we received approval for our voluntary green pricing program. which would add an additional 1,000 megawatts of owned renewable generation to our growing renewable portfolio. This program is in high demand and currently oversubscribed. And more importantly, it's what our customers are asking for, an important step in offering renewable energy solutions for our customers. As we prepare for the grid of the future, we have a highly visible and detailed capital plans outlined in our recently filed electric distribution infrastructure investment plan. This plan provides a five-year view of the projects down to the circuit level where we plan to invest to ensure the reliability and resiliency of our electric infrastructure and aligns with our operational and financial plans. As always, we balance these investments with customer affordability. Our prices remain competitive as the average residential customer pays about $2 a day to heat their home and $4 a day to keep the lights on. And because we know our most vulnerable customers still struggle, our team has mobilized resources at the state and federal levels to ensure their protection. In fact, As we approach the winter heating season, our 90-day arrears are back to pre-pandemic levels with an 80% reduction in our uncollectible accounts. Our commitment to identifying and eliminating waste means that we keep our prices affordable. This commitment is evident in our results. In the first nine months of this year, we surpassed our full-year cost reduction target of more than $40 million. The CE way is in our DNA, and we continue to deliver savings in the near term and well into the future. Speaking of the future, this year we grew our EV program with Power My Fleet. This is part of our long-term planning and collaboration with Michigan businesses, government and school systems looking to electrify their vehicle fleet. Within just a few months of the program introduction, we are working with nearly 20 different customers on their fleets and have another 50 who have indicated interest for the next launch, exceeding our expectations. This is an important contribution to our long-term sales growth. And finally, one of my favorites, which speaks to our culture, our coworkers, and our ability to attract the best talent. Our commitment to diversity, equity, and inclusion continues to be recognized nationwide, and most recently by Forbes, where we are ranked the number one utility in the U.S. for both America's best employers for women and number one for diversity. Delivering excellence every day continues to position the business for sustainable long-term growth. Strong execution leads to strong results. The two are linked. One drives the other. In early August, we experienced one of the worst storms in our company's history. Our team established an incident command structure to deploy resources and took decisive action to restore customers. We had a record number of crews on our system. The speed of our response led to the highest positive customer sentiment we have ever received during a major storm. I would be remiss if I didn't take a moment to thank all our coworkers who responded to the call. During this storm, we had more than 3,700 members of our team working around the clock to safely restore customers. Like we do every year, through storms, pandemics, and unseasonal weather, we continue to deliver. And when there's upside, we reinvest. This is the CMS model of responding to changing conditions that allows us to deliver consistently year after year. Year to date, we've delivered ahead of plan with adjusted earnings per share of $2.18 for continuing operations. Our strong performance, coupled with the completion of the interbank transaction and the financial flexibility that provides, gives us further confidence in our ability to meet our full year guidance, which we've raised to $2.63 to $2.65 from $2.61 to $2.65 for continuing operations. For 2022, we are reaffirming our adjusted full-year guidance of $2.85 to $2.87 per share, and our continued strong performance in 2021 builds momentum for 2022 and beyond. Longer term, We are committed to growing our adjusted EPS toward the high end of our 6% to 8% growth range, as we highlighted on our Q2 call. As previously stated, we are committed to growing the dividend in 2022 and beyond. It's what you expect, why you own us, and we know it's a big part of our value. As we move forward, we continue to see long-term dividend growth of 6% to 8%, with a targeted payout ratio of about 60% over time. Many of you have asked about gas prices and the impact on our business and, more importantly, our customers. Let me tell you about our gas business. We have one of the largest storage fields in the US and compression resources to match. That is a significant advantage. We started putting natural gas into our storage fields in April and continued throughout the summer when natural gas prices were low. Right now, our fields are full and ready to deliver for our customers' heating needs throughout the winter months. Most of the gas is already locked in at just under $3 per thousand cubic feet, which is well below current levels in the spot market and offers tremendous customer value. Given the operational certainty of storage, as well as the financial protection of a pass-through clause, our customers stay safe and warm all winter long and have affordable bills. Heat in Michigan is not an option, and we don't leave it up to the market. We buy, store, and deliver. That's what we do. Michigan's strong regulatory construct is known across the industry as one of the best. It includes the integrated resource plan process, which is a result of legislation designed to ensure timely recovery of the necessary investments to advance safe, reliable, and clean energy in our state. Michigan's forward-looking test years and three-year pre-approval structure of the IRP process gives visibility on our future growth. It enables the company and the commission to align on long-term generation supply planning and provide certainty as we invest in our clean energy transformation. Here's what I like about our recently filed IRP. There is a win in it for everyone. It is a remarkable plan that addresses many of the interests of our stakeholders and ensures supply reliability. It reduces costs. and it delivers industry-leading carbon emission reductions. It's clean. We continue to have constructive dialogue with the staff and other stakeholders, and we anticipate seeing their positions later today. And with that, I'll turn the call over to Reggie.

Thank you, Garrick, and good morning, everyone. I'm pleased to offer the details of another strong quarter of financial performance at CMS. as a result of solid execution across the company. As a brief reminder, throughout our materials, we report the financial performance of Interbank as discontinued operations, thereby removing it as a reportable segment and reporting our quarterly and year-to-date results from continuing operations in accordance with generally accepted accounting principles. Now on to the results. For the third quarter, we delivered adjusted net income of $156 million or 54 cents per share. The key drivers for the quarter were higher service restoration expenses attributable to the Argus storms that Garrick mentioned and planned increases in other operating and maintenance expenses in support of key customer and operational initiatives. These sources of negative variance for the quarter were partially offset by favorable weather, the continued recovery of commercial and industrial sales in our electric business, and higher rate relief net of investment-related expenses. Year-to-date, we've delivered adjusted net income of $628 million, or $2.18 per share, which is up 19 cents per share versus the first nine months of 2020, exclusive of EnterBank's financial performance. All in, we continue to trend ahead of plan and have substantial financial flexibility heading into the fourth quarter. The waterfall chart on slide eight provides more detail on the key year-to-date drivers of our financial performance versus 2020. For the first nine months of the year, rate relief continues to be the primary driver of our positive year-over-year variance to the tune of 45 cents per share, given the constructive regulatory outcomes achieved in the second half of 2020 for our electric and gas businesses. As a reminder, our rate relief figures are stated net of investment-related costs, such as depreciation and amortization, property taxes, and funding costs of the utility. This upside has been partially offset by the aforementioned storms in the quarter, which drove $0.16 per share of negative variance versus the third quarter of 2020, and $0.11 per share of downside on a year-to-date basis versus the comparable period in 2020. To round out the customer initiatives bucket, planned increases in our operating and maintenance expenses to fund safety, reliability, and decarbonization initiatives added the balance of spend for the first nine months of the year, which in addition to the August storm activity, added 35 cents per share of negative variance versus a comparable period in 2020. As a reminder, these cost categories are shown net of cost savings realized to date. which, as Garrick mentioned, have already exceeded our target for the year with more upside to come. To close out our year-to-date performance, we also benefited from favorable weather relative to 2020 in the amount of $0.07 per share and another $0.02 per share of upside largely driven by recovering commercial and industrial load. As we look ahead to the remainder of the year, we feel quite good about the glide path for delivering on our EPS guidance range, which has been revised upward to $2.63 to $2.65 per share, as Garrick noted. As we look ahead, we continue to plan for normal weather, which in this case translates to $0.06 per share of positive variance given the absence of the unfavorable weather experienced in the fourth quarter of 2020. We'll also continue to benefit from the residual impact of our 2020 rate orders, which equates to $0.07 per share and is not subject to any further MPSC actions. And we'll make steady progress on our operational and customer-related initiatives, which are forecast to have a financial impact of roughly $0.07 per share of negative variance versus the comparable period in 2020. Lastly, we'll assume the usual conservatism in our utility non-weather sales assumptions and our non-utility segment performance. All in, we are pleased with our strong execution to date in 2021 and are well-positioned for the remainder of the year. Turning to Slide 9, I'm pleased to highlight that this year's financing plan has been completed ahead of schedule. In the third quarter, we issued $300 million of first mortgage bonds at a coupon rate of 2.65 percent, one of the lowest rates ever achieved at Consumers Energy. We also remarketed $35 million of tax-exempt revenue bonds earlier this month at a rate of under 1 percent through 2026. Due to the strong execution implied by these record-setting issuances, Coupled with the interbank sale, which provided approximately $60 million of upside relative to the sale price announced at signing, we now have the flexibility to reduce our equity needs for the year even further, which will now be limited to the $57 million of equity forwards we have already contracted. And with that, I'll turn the call back to Garrick for some concluding remarks before we open it up for Q&A.

Thanks, Reggie. Our simple investment thesis has stood the test of time and continues to be our approach going forward. It's grounded in a balanced commitment to all our stakeholders and enables us to continue to deliver on our financial objectives. As we've highlighted today, we've executed on our commitment to the triple bottom line for the first nine months of the year. We're pleased to have delivered strong results. we're positioned well to continue that momentum into the last three months of the year as we move past the sale of the bank and continue progress through the IRP process. This is an exciting time at CMS Energy. With that, Rocco, please open the lines for Q&A.

Thank you very much, Gary. The question and answer session will be conducted electronically. If you'd like to ask a question, please do so by pressing the star key followed by the digit 1 on your touchtone telephone. If you're using a speaker function, please make sure you pick up your handset. 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 2 on your touchtone telephone. We'll pause for just a second. And today's first question comes from Char Perez with Guggenheim Partners. Please go ahead.

Hi. Good morning, team. It's actually Constantine here for Char, and congrats on a challenging but successful quarter. Thanks, Constantine. I have a quick question on the cadence of long-term growth that you reiterated today. So the 22 guidance implies a top-of-the-range performance, as you mentioned, and kind of you expect to execute at the high end. And one of the opportunities, obviously, the IRP, but that may take some time for approval, execution. Does the 8% growth imply some incremental capex of the prior plan or any kind of financing items? And is there any change to the glide path or timing of for the offset of kind of the near-term dilution from the business optimizations.

Well, let me tag-team this with Reggie, but here's what I'll offer, and here's what you should hear from this call. High confidence in 2021, and that momentum carries into 2022. And we reaffirmed our guidance for that time period at the 285 to 287. And as we've said in previous calls, when I look out at office 2022 base, it continues to be at this growth rate of 6% to 8%. And I would expect us to be toward the high end of that. Now, you know we plan conservatively. And in Q4, we'll provide our capital plan. We expect that capital plan to grow with the things you would be familiar with, the gas system, the electric system, and the supply system. However, the IRP and particularly the covert plant in 2023 and the dig assets in 2025 are upside to that plan. And once we have complete certainty on that IRP process, those provide the opportunity for upside to the plan. And so, I mean, that's the... There's a great deal of confidence that I have about our, you know, this five-year window. I want to look at from 2021 through 2025. But certainly, Reggie, jump in to add some additional context.

Yeah, well, Derek, I think you laid it out well. And Constantine, the only thing I would add, just to give you a bit more specifics around the numbers, so our current plan that we're executing on for five years, or 21 through 2025, is about $13.2 billion. We have not changed that, but we are assuming that we'll increase that by about a billion next year in the next vintage into Derek's comments. That does not presuppose any outcome for the IRP, and there's about $1.3 billion of additional capital investment opportunities that is on the outside looking in, which just gives us more confidence in the plan. We also are not planning to issue equity, and so there's a funding efficiency that will also be accretive to our financial performance as we see it. And what's also not in the plan from a capital investment perspective that Garrick offered in his prepared remarks is was a voluntary green pricing program that we got approval on, which offers about a gigawatt of capital investment opportunity, specifically renewable spend that we would own from 24 through 27. And so all of that's on the outside looking in. So you can see why we have great confidence in our ability to deliver towards that high end off of the 2022 base.

Perfect. I think that's very comprehensive. And maybe just shifting to the regulatory process for a bit. Just on the IRP, can you talk about how you're building some of the stakeholder comfort with the asset retirement and reg asset treatment and the mechanisms that you're proposing? Does any of the thinking change around the generation portfolio in light of the commodity shifts that we have seen?

Well, I'll offer this. One, and just credit to the team here at Consumers Energy and CMS Energy, there's been an extensive stakeholder process and engagement with staff, with interveners, with the public that's led up to the filing and has continued through the filing process. And so I feel really confident about the messages and the testimony are strong and solid and will yield really good outcomes. But You know, in my prepared remarks, I said there's a win in this for everyone, and I really believe that. When you look at this plan, you know, our 2018-2019 IRP was a great plan. This is even better. The resiliency and reliability of our electric supply, we've done the modeling. It's a more reliable plan than the past. It's more affordable, $650 million of savings in this plan over the previous plan. And we cut carbon emissions by 60% by 2025, well ahead of the Paris Accord, the equivalent of taking 12.5 million cars off the road. And from my standpoint here in the regulatory asset treatment, as I shared in the Q2 call, great testimony, and I think we're going to have a constructive dialogue and certainly a supportive dialogue we'll see this afternoon in the intervener comments. There is a win in here for everyone. And when there's a win in there for everyone, there's a great path to a great outcome. And I believe that. We saw that in 2018 and 2019. And so I'm looking forward to seeing staff and interveners' testimony this afternoon. It's going to be supportive. It'll be balanced. It'll be constructive. And where there are differences, we've done that before. Just look at our 2018-2019 IRP. I feel good about where we're at in the process.

Perfect. Thank you. That's very comprehensive, and I'll jump back in the queue. Congrats. Thank you.

And our next question today comes from Jeremy Toney with J.P. Morgan. Please go ahead.

Good morning, Jeremy. Good morning. I just want to pick up on the CapEx side here and just wanted to see how you're thinking about grid-hardening investments at this point. And specifically, do you think, you know, in reaction to the storms this summer, we could kind of see more movement on this side?

Let me offer this. As I shared in my prepared remarks, um we had a great response during the storm and i'll be really clear the fact pattern of storms has been different across the state we've had one major storm but if you stand back and look at the big picture and look forward from a strategy perspective there certainly is a call for greater resiliency and grid hardening and that's an opportunity opportunity from an investment perspective and an opportunity to create greater value for our customers and so i think there's a couple things driving that one We're seeing more severe weather, not just in Michigan, but across the U.S. And so that is certainly a driver in the equation. And then, too, when we think about this transition to electric vehicles and be able to support those vehicles, not only do we need the capacity out there to be able to do that, but also we want to ensure that when we do have an interruption in service, today it's just the refrigerator. Tomorrow it's the refrigerator and the EV and their ability to get to work. That's a whole new standard of performance. And so, again, big picture perspective, looking forward to the future, I see this as an opportunity and an inflection point where we spend more time on thinking about resiliency and grid hardening. I'll share one last point on this. I've had the opportunity post-storm to talk with the governor, to talk with the chair of Scripps. And I can't speak for them, but certainly a positive direction when we talk about how do we design the grid for the future with climate change and with severe weather in mind. And so, again, it's an opportunity for investors and an opportunity to create additional value for our customers.

Got it. That's very helpful. Thanks for that. And maybe just, you know, thinking about load as we exit the pandemic here, just wondering if you could provide thoughts, I guess, as far as, you know, trends by class and really, you know, on the residential side, how you're seeing, I guess, you know, stickiness there and just any thoughts that you could share on that side.

Yeah, Jeremy, this is Reggie. I can offer some color there. And we do have a slide in our appendix of the presentation, which is helpful, slide 13, I'll point you to also. The detailed 15-page digest also has some good content and load. But what I can say at a very high level is we continue to be encouraged by the residential weather normalized load we're seeing. So, you know, you probably saw year-to-date down roughly 2%, but that certainly compares favorable to plan where we assumed a more aggressive return to facilities for workers. And so we do think that this sort of hybrid format or mass teleworking trend should carry on and potentially be part of a new normal. And so in our budget, we had much more bearish expectations this year. We actually thought there'd be a quicker recovery, and you see this down 2%. That's an excessive plan, and so we see performance to the upside there. And then we also compare it to the pre-pandemic level, and relative to 2019, we're up about 2.5%. And so we do think there's a very nice bit of resiliency to the residential load. And, again, it offers a higher margin relative to the other customer classes, as you know.

Got it. That's very helpful. Thank you. Thank you.

And our next question today comes from Insu Him at Goldman Sachs. Please go ahead.

Hi, it's Rebecca Allen for INSU. Thanks for taking our questions. So for the ALJ decision on your rate case, it was roughly 25% of your requested revenue increase. So can you describe which items constitute the difference? And then if this gets adopted, would this impact your 22 and 23 growth trajectory?

Well, I'll offer this. I really view this PFD from the ALJ as a bookend. Michigan's constructive regulatory environment and this commission and previous commissions have really shown a balanced and constructive approach. And I can't speak for the commissioners, but my interaction with the commissioners would suggest this, that they believe and support healthy utilities, good outcomes from electric and gas rate cases. And when you have those and similar goals, it leads to good outcomes. And so I I view we're going to get an outcome in this electric order that's in December that's both constructive and balanced, good for Michigan's residents, our customers, and, frankly, good for CMS Energy. But, Reggie, if you want to just jump into some of the differences.

Yeah. Rebecca, thanks for the question. And so what I would add there is you do have a few sources or I'll say buckets of variants that lead to that delta between customers what we requested and where the PFD ended up. And so I would say cost of capital is a component. So we asked for 10.5% ROE. The ALJ was at nine spot seven. And so that makes up a good portion of the difference. Also, you see a difference in equity thickness. And so we were at 52% equity relative to debt. And the PFD was about a point lower than that. I'd call it 51 and change. And so those are the primary sources of difference. There also were differences in opinion on the capital required to really strengthen and harden the system. And so I think if memory serves me, there's about a quarter of a billion of capital investments that we were proposing for resiliency and reliability, which obviously we think is critically important, particularly on the heels of the August storm activity we saw. And we saw that also as a recommended disallowance of future spend. And so I'd say those are the major buckets there. And I think, you know, once you normalize for where the prevailing ROE and equity thickness are, you start to tighten that gap. But it's primarily those buckets.

Okay, thanks. And then for the EDIP, how much of that is in your five-year base plan, and would that be incremental to your rate base or earnings growth?

I'm sorry, I missed the first part. You said for your what?

The EDIP filing. Is that in your five-year base plan?

Yeah, so the $4 billion, that does a lot of capital, to be clear. The $4 billion of capital attributable to the EDIP And for everyone else out there, it's the Electric Distribution Infrastructure Investment Plan. That does align with the spend rate we've been on for some time. And so in our current five-year capital plan of $13.2 billion, about $5.5 billion of that is attributable to electric distribution. And so we're on this sort of run rate of over $1 billion per year of capital investment, and we think that's appropriate to balance resilience, reliability, as well as affordability. And so that's effectively what this EDIP proposes today.

Thanks so much.

Thank you.

And our next question today comes from Jonathan Arnold of Vertical Research. Please go ahead. Hey, good morning, guys.

Good morning.

Good morning. Could you just, Reggie, you mentioned that on the roll forward of the capital plan, you would probably be out a billion associated with that. Could you just... Is that the voluntary green pricing being rolled in? Is it something else? Is that-would the VGP be incremental? Maybe a little more color on that comment. David Morgan Yeah, sure, Jonathan.

So, to be clear, billion that we'll likely add to our next five-year plan from 2022 to 2026. That does not include the VGP and the opportunity there for that gigawatt of renewables, nor does it include any of the potential capital investment opportunity associated with the IRP. What it will likely entail is, as you may recall, we had, when we rolled out our 10-year plan and say the back half of 2019, if memory serves me. We said we had about $3 to $4 billion of upside capital investment opportunities, which were not part of that 10-year, $25 billion plan. And it largely had to do with electric and gas infrastructure modernization. And so those will be the likely components that are added to the capital plan going forward and represent that call it roughly billion dollars of upside. I also think we're going to obviously roll forward our IRP related solar investments that are part of just the existing IRP that we're executing on. So you'll probably see some of that come into the plan as well as we add another year to our five-year rolling capex plan. Is that helpful?

Yeah, very helpful, Reggie. So said another way, that three to four billion is still there, you know, despite the VGP and the IRP. That's exactly right. Okay. And then can I just, you mentioned that the BGP is already oversubscribed. Give us any flavor of sort of by how much and what's the pathway to potentially expanding that?

Well, I'd offer this one. Some of those are nondisclosure agreements, but just some public announcements. You know, on Earth Day of this year, I was with the governor and we were announced that we were supporting the state facilities and then moved to renewable energy. So that's an example. I'll share with you that I was with a large customer just yesterday, a global company, and they were looking at their large manufacturing facilities here in Michigan and looking at renewable-type options. And so we're seeing a definite direction in terms of sustainability among our large industrial customers, and this serves their needs. And so I'm not going to get into how much or how from an oversubscription standpoint. But hopefully those examples provide some color on the context of opportunity there.

And, Jonathan, the only thing I would add is if the spirit of your question is whether there will be sufficient demand for that gigawatt of opportunity, we certainly feel very confident that there will be requisite demand to meet the gigawatt of opportunity for the voluntary green program.

The spirit of the question was a bit more if you're oversubscribed. How are you, you know, don't you need to add to it in order to keep, yeah, having those conversations?

And as we see it, that's what the Voluntary Green Program would offer up, about a gigawatt of additional capacity that we would own in the form of most likely solar rebuild.

So at this point, I mean, to answer your question, Jonathan, at this point we don't need to add to it. There's some runway there and would look to construct that. these renewable assets in the 24 to 27 timeline. So it's oversubscribed from what we have right now, and this will make up a good portion of that 1,000 megawatts, but there's more room to grow there.

Okay, thank you.

Thank you. Our next question today comes from Michael Sullivan at Wolf Research. Please go ahead.

Yeah, hey, good morning, everyone. Sorry to put you on the spot a little bit here, but just seeing some of these filings start to come in on the IRP, it looks like some of the environmental parties pushing back on the gas plant additions, I guess. Is that surprising to you guys at all and ways to kind of come to some sort of agreement with them, path forward? Any thoughts there?

I would offer this. When I say there's a win in there for everyone, it's clear that the environmental community loves the fact that we're eliminating coal and would like natural gas not to be the substitute. But here's what we know, that the only way that you can deliver the resiliency and the supply side of the business and make sure we don't have an interruption in service, like was evident in Texas, is to have natural gas as part of the solution. And so... Like I said, the staff and other interveners are certainly mindful of the resiliency and the importance of natural gas within the state. So there's a lot of give and take within these. And I would just offer this. In 2018 and 2019, we had a lot of different points of view from an intervener perspective, and we settled that case. And so differences are expected, and we work through those, just like we have done, and we have a track record of doing that.

Makes sense. And, yeah, just sticking with the IRP, the other key focus area I think you touched on a little was the regulatory asset treatment. Any parties in particular you would expect to maybe push back on that initially as we start to see testimony?

Again, I would offer this, and I've said this on the Q2 call and in other settings, this is an integrated resource plan, and it's not a buffet. We've put together a great plan for Michigan. There's a win in it for everyone. And so, you know, we've been really clear about the need for recovery of and on the asset. And so Going forward, I mean, that's part of the plan. And we've got testimony to support that. And as I stated earlier, when there's a win in there for everyone, there's a path to a good order and a good outcome. And where there's differences, we've shown we have the ability to work with everyone. And so, again, I just see a nice positive outcome here next year in 2022. Great. Thanks a lot, Eric.

And our next question today comes from Julian Dumoulin-Smith with Michael America. Please go ahead.

Hey, good morning, team. Thanks for the time. Appreciate the opportunity to connect. Hey, good morning. So just in brief here, if we can talk about the supportive commentary you brought up a moment ago around the testimony here. Can you elaborate a little bit of specifically what your expectations are this afternoon? And perhaps more specifically, as you stated, supportive, I imagine that you see perhaps latitude towards the settlement here. I just want to make sure I'm equating one towards the other, right? I mean, in terms of what this translates to next in terms of order.

Well, I would offer this. I mean, I don't have a visibility into the testimony until it's published. And so, I mean, obviously we've had a great discussion with a number of the interveners. We know some of their points of view, where there might be good support and where there might be small differences. And so, again, I would reflect on it this way. Again, we've done this in the past many times, you know, rate cases and the like. and we've certainly done this with an IRP, where there's differences, we find a way to work through those. And, again, I think this afternoon we're going to see, and I look forward to reading it, I think we're going to see supportive comments in general. And so, again, when there's a win in there for everyone, there's a path to a successful outcome. Now, I don't know if it's going to go down the path of settlement or we'll take it to the full order. But, again, when there's a win there, there's an opportunity for success, and that's what I'm confident about.

Excellent. All right, and then just coming back to the Ray case a little bit here, you know, given the discrepancy between the ALJ and the staff, does that inform your strategy heading into your next filing here in Q1 at all? I mean, obviously there's some specific deltas there that you alluded to a moment ago, Reggie, but can you elaborate a little bit more on maybe how you move forward, especially in the next cases, if there's anything yet?

This is a constructive regulatory environment. Julian, you know that. I know that. And I really see this PFD as a bookend, as I stated earlier. And so, you know, the conversations that we have with staff, you know, outside of cases is really how do we continue to ensure a safe and reliable natural gas system. How do we ensure and bring clean energy to Michigan? How do we ensure the reliability and resiliency of electric grid? And so those are in line with our goals and what we want to do as well. And so, you know, we'll continue to be thoughtful about that process to make sure we balance customers' affordability with that. But I don't see any real change in plans as a result of a specific ALJ PFD at all.

Yeah, and Julian?

Yeah, no, I appreciate your – oh, go for it.

Yeah, Julian, this is Reggie. The only thing I would add is, you know, at the end of the day, it also speaks to just the benefit of the Michigan regulatory construct and the legislation in that in the event there is misalignment, because ultimately at the end of the day, the commission's order will dictate, you know, where we end up. But in the event there is a misalignment, there's a forward-looking test year. And so obviously we have not incurred the expenses on the capital or the O&M side. And so if we see misalignment in terms of where we'd like to go versus where the commission ends up, well, we can toggle the capital and spend program accordingly. So, again, it just speaks to the constructive nature, not just of decisions we've seen in the past, but also the rate construct and legislation itself.

Excellent. Yeah, I hear you. Bookend is the key word here. Excellent, guys. Best of luck. We'll speak soon. Thanks, Julian. Thank you.

And our next question today comes from Travis Miller at Morningstar. Please go ahead.

Good morning. Thank you.

Good morning, Travis.

Hi. I have two questions going back to the storms. First one is, in your discussions that you referenced with regulators, Governor, either within or outside of the rate cases, has there been any talk in addition to some of the public comments about fines or penalties or other kinds of pushback on the storm response? That's my first question. And then the second question was the $0.16 Can you kind of break that down in terms of how you offset that to stay on track with the guidance for this year?

Well, we'll two-part this one between Rob, Reggie, take the second question, and I'll take the first piece. I would offer this. One, again, conversation with the governor's office and with chair Scripps have been constructive. And again, I don't want to speak for the chair, but I would offer this, you know, the commission has been supportive of both our electric reliability spend as of recent, the capital investments, as well as increased forestry spend. We increased our forestry spend this year by a little over 60%. And that was supported through a rate case process by the commission. And, you know, The commissioners understand that we're in the first year of that. The number one cause for outages is tree trimming. And we have a very aggressive program now in place, which will benefit our customers. And so our commissioners, I believe, understand that we're in the early years of these larger investments and operational maintenance expense, which will help our customers. And so I think there's full recognition of that. I have not heard any talk at all, zero, from the governor's office or from the commission on any sort of penalties associated with the storms in August.

Okay, great. Yeah, and Travis, the only thing I would add is with respect to the 16 cents of negative variance that I noted in my prepared remarks for Q3 of this year versus Q3 of last year, It was in large part offset as a result of just good weather we saw throughout the quarter. It was quite warm in the month of August, and that offset a lot of the incremental service restoration costs that we incurred. And I also want to give credit where credit is due. I think the fact that we've already exceeded our expectations on cost savings across the organization was also quite helpful in offsetting some of the service restoration. And then lastly, again, as I mentioned, residential down 2%. year-to-date, roughly, versus year-to-date last year, but it's ahead of plan two, and so you've got a little favorable mix as well versus plan. So all of those factors have largely offset the service restoration expense that we saw in Q3.

Great. Yeah, thanks. And just a quick clarification on the $0.16. That was incremental to plan, or did that include typical storm-related expenses I assume you include in all of your plans?

Yeah, the $0.16 was incremental to Q3 of 2020. So it's just that's a historical comp, and that's what that estimate is predicated on. Versus plan, you know, a little higher than plan. But remember, in addition to having a decent amount of service restoration in our budget, we also utilize some regulatory mechanisms, both what we call a voluntary refund mechanism that we put in place at the end of 2020 that provided additional budgetary support. And then we also shared a gain on the sale of some assets related to our transmission assets in 2020 that offered additional, I'll say regulatory liability support that provided additional budgetary insulation for the service restoration expense this year.

Okay. Great. Thanks so much. I really appreciate the details. Thank you.

And our next question comes from Ryan Levine at Citi. Please go ahead. Good morning.

Good morning. One on financing proposal or in your plan, it looks like you reduced your equity needs for this year by about $43 million. Can you walk us through what's the driver of that and how much has really contributed to the purchase price adjustment for the recent asset sale? And if there's any other factors that are driving that number, if there's some conservatism baked in there.

Hey, Ryan. Thanks for the question. So the interbank sale – gross proceeds and the upside associated therewith was the key driver that enabled us to reduce our equity financing needs for the year. And the way it works, and it's a little nuanced, I've been doing M&A for almost 20 years, but for FinCos or financial service companies, you have your traditional adjustments from sign to close on the working capital side, but for financial service companies, you also get credit if the book equity of the business increases from sign to close. And we saw that with EnterBank's outperformance over those handful of months. And so that led to about $60 million of upside from the gross proceeds we announced at signing, which was $960 million, to the amount that we ultimately saw at closing, which was over a billion, call it just under $1.2 billion. And so that's what gave us the upside in financial flexibility to reduce the equity needs. And so it's really a function of just that really strong performance at the bank that accreted their book equity that gave us more proceeds at close.

That's a bigger number than the amount of equity you reduced. Is there some conservative baked into your reduction in equity needs, or is this effectively a few million dollars worth of pre-funding of future equity needs or future capital needs?

Yeah. So remember, we have about 57 million of equity forwards that we've already put in place. And, you know, we have been putting those in place even before, you know, we announced the sale of the bank. And so that gives you effectively a four for how low you're going to go, because at some point we will settle that. And so that's why we stopped at that sort of $57 million. It's because of the existing equity forwards we already have in place.

Okay, great. So I guess that helps you for future years for capital needs. That's right. Appreciate it. That's all I have. Thanks.

Ladies and gentlemen, this concludes our question and answer session. I'd like to turn the conference back over to Gary Groeschel for closing remarks.

Thanks, Rocco. And I'd like to thank you all again for joining us today. We're looking forward to seeing you at EEI in the near future here. And take care and stay safe.

Thank you, sir. This concludes today's conference call. We thank you all for attending today's presentation. You may disconnect your lines and have a wonderful day.