Good morning, everyone, and welcome to the CMS Energy 2019 Second Quarter results. The earnings news release issued earlier today, and the presentation used in this webcast are available on CMS Energy's website in the Investor Relations section. This call is being recorded.

After the presentation, we will conduct a question-and-answer session, instructions will be provided at that time. [Operator Instructions] Just a reminder that there will be a rebroadcast of this conference call today beginning at 12:00 PM Eastern Time, running through August 1st.

This presentation is also being webcast and is available on CMS Energy's website in the Investor Relations section. At this time, I would like to turn the call over to Mr. Sri Maddipati, Vice President of Treasury and Investor Relations..

Thank you, Rocco. Good morning everyone and thank you for joining us today. With me are Patti Poppe, President and Chief Executive Officer; and Rejji Hayes, Executive Vice President and Chief Financial Officer. This presentation contains forward-looking statements, which are subject to risks and uncertainties.

Please refer to our SEC filings for more information regarding the risks and other factors that could cause our actual results to differ materially. This presentation also includes non-GAAP measures. Reconciliations of these measures to the most directly comparable GAAP measures are included in the appendix, and posted on our website.

Now I'll turn the call over to Patti..

Thanks, Sri. And thank you everyone for joining us on our second quarter earnings call. This morning I'll share our first half financial results and outlook, and I'll also review our approved IRP settlement that lays the groundwork for our clean energy future. Rejji will add more details on our financial results and review the model.

And as always, we'll close with Q&A. The first half of this year was challenging, but manageable given our unique capabilities and our conservative planning. Despite unfavorable weather and significant storm activity, we remain on track through the first half of the year with earnings of $1.08 per share.

As a result, we are reaffirming our full year guidance range of $2.47 to $2.51 per share with a bias to the midpoint, and we'll continue to manage the work as we adapt to changing conditions through the remainder of the year to achieve the results you expect. While every year is different, the blueprint to the CMS model is simple and repeatable.

We plan conservatively to deliver the consistent results that you can count on year in and year out. Our actions to reinvest positive weather in 2018, benefited customers last year and have positioned us well to meet our financial objectives this year, which Rejji will describe in more detail.

This model, where we ride the roller coaster, so you can enjoy a smooth and predictable outcome, has served us well over the last decade plus. And we'll continue to utilize it going forward to achieve our 6% to 8% growth. The major highlight for the second quarter was the MPSC's approval of our Integrated Resource Plan settlement.

As clean energy leaders, we take pride in our long-term IRP, that is the map for our clean and lean energy future. We had broad support for our plan including, the Attorney General, the MPSC staff, residential and business customer groups, and environmental advocates.

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

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

Half of the projects will be owned and included in rate base, and the other half will be contracted through PPAs on which we will earn our new financial incentive mechanism.

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

Longer term, the IRP calls for a total of 6,000 megawatts of solar to replace the expiration of the MCV contract and the retirement of our remaining three coal plants. There was once a time when we had to make a sucker's choice, between clean and expensive energy, or the cheap and dirty stuff, that just isn't true anymore.

And our plan along with the broad support we have gained for it demonstrates that. There is not a trade-off here, only a trade up- affordable bills, a cleaner environment, and a higher quality mix of earnings.

Our Michigan legislators understood this important balance when they passed the 2016 Energy Law, which included an increase in our renewable portfolio standard, and incentives for demand side resources and PPAs. As we look to the future, we'll also begin incorporating more storage as costs continue to decline.

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

1969 was the year we began construction with our partners at DTE at the Ludington Pumped Storage facility. Those of you who heard the music while waiting for our call might have noticed it was all from 1969. No detail left unattended at CMS.

There on that bluff overlooking Lake Michigan, we built what was at the time, the world's largest battery that has served our customers for over 50 years. We recently renewed its license with FERC for another 50.

While initially built to utilize excess power produced by nuclear power plants at night, now Ludington is a key asset in our portfolio as we integrate more renewables. We began an upgrade of the facility in 2011, which will be completed next year.

This upgrade creates about 420 megawatts of additional capacity, making Ludington Pumped Storage the fourth largest pumped storage facility in the world. In fact, we have the six largest motors in the world, each at 500,000 horsepower of clean energy production. Now that's the muscle car after my own heart.

The upgrade will improve the efficiency of the facility, while also reducing the time it takes to refill the pond. In other words recharge the battery by five hours. For our estimates, Ludington offers an annual value to our customers of about $60 million through the energy and capacity it provides.

For over 50 years, we've integrated storage in our daily generation strategy including pricing it into the day ahead in real-time MISO markets. As a result, we've had plenty of time to familiarize ourselves with how batteries work on our system. In fact, we consider ourselves storage experts.

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

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

Commissioner Philips is a Democrat, and formerly served as Director of the Cincinnati 2030 district, a project focused on sustainable energies. He also worked in Governor Granholm's Administration on Michigan related energy policy.

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

It's worth reminding you that our model allows us to perform consistently regardless of changes at the commission, unfavorable weather conditions, the economy, or other external factors. Our track record demonstrates our ability to deliver consistent premium results year, after year, after year, and this year, you can expect the same.

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

Thank you, Patti, and good morning everyone. For the second quarter, we reported net income of $93 million, which translates into $0.33 of earnings per share. Our second quarter results were $0.15 below our Q2 2018 results, largely due to mild weather, which impacted our electric volumetric sales.

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

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

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

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

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

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

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

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

As always, we plan for normal weather, and you can see the benefits of last year's cost pull aheads which provided 20% of expected positive variance versus the second half of 2018 more than offset the absence of favorable weather in 2018.

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

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

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

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

And so the top line, we anticipate weather normalized sales to be flat for the year versus 2018, which reflects the usual conservatism, and we have been encouraged by the favorable mix that we have seen over the past several months, as our higher margin residential and commercial customer segments have exceeded expectations.

So we're forecasting about $0.06 to $0.08 of EPS pickup there. As for enterprises for our initial guidance, enterprise earnings are expected to be back-end weighted, as lower capacity sales are being attributable to the residual effects of the 2018 MISO planning resource auction roll-off.

So we'll begin to see the positive variance versus 2018 in the second half of the year as our fully contracted 2019-2020 plan year capacity contracts commence. Closing out the 2019 war, the weather has largely been a headwind of the electric business in the first 6 months of the year.

We have been encouraged by the volumetric sales trends we have seen in July with cooling degree days approximately 10% above normal on electric service territory to date. We've estimated about $0.04 potential upside to our plan attributable to the July weather, but needless to say we never plan for weather to drive our financial performance.

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

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

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

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

As such, we are confident that we can continue to improve customer experience through capital investments while meeting our affordability and environmental targets for many years to come. Digging into the core elements of our business model was announced earlier in the year.

We have a capital investment plan of over $11 billion over the next 5 years, which focuses on the safety and reliability of our gas and electric systems, as well added renewable generation as depicted on slide 14. Our capital investment needs remain significant beyond the five-year period.

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

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

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

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

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

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

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

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

These efforts will provide a sustainable funding strategy for our capital plan which will keep customer bills low on an absolute basis and relative to other household staples in Michigan as depicted in the chart on the right hand side of Slide 50.

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

As highlighted in Q1, we're targeting 100 megawatts of new load in 2019 and continue to trend on plan with 50 megawatts secured through the first half of the year. We also continue to see attractive levels in diversity in our new load, which is reflective of our electric service territory.

As you'll note in the pie chart on the right-hand side of the page, in 2018 approximately 2% of our customer contributions came from the auto industry. As we continue to invest capital and manage customer prices, we are also dedicated to maintaining a healthy balance sheet and robust access to capital markets.

On slide 17, we have a snapshot of our credit ratings at the utility, and the parent and I'm pleased to report that the positive trend continues. Moody's recently reaffirmed their ratings, the utility secured bonds, and the parent company's senior unsecured bonds at Aa3 and Baa1 respectively.

It's also recently reaffirmed their strong ratings for the utility secured bonds at 8+. And S&P sits nicely with a single A for the utility secured bonds and a triple B rating the parent senior unsecured bonds.

These ratings are reflective of our strong balance sheet and operating cash flow generation, which reduces cost for our customers and fund our capital plan efficiently to the benefit of investors. And with that, I'll pass it back to Patti for some concluding remarks before Q&A..

Thanks. Reggie. We believe we have a compelling investment thesis that will serve our customers and investors for years to come. And with that, Rocco please open the lines for Q&A..

Thank you very much, Patti. [Operator Instructions] Our first question comes from Michael Sullivan of Wolfe Research. Please go ahead..

Hey, everyone. Good morning..

Good morning, Michael..

Good morning, Michael..

Hey, so just first I think in Q1, you guys described, the year is tracking, I think, $0.01 better relative to plan and now in Q2, it seems like pretty much on plan even with some of these headwinds in Q1 and then the tailwinds in Q2.

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

Sure, Michael. So, very good question.

And as always, I would just start by saying, whenever we prepare a financial plan for any given year, we make sure that first and foremost, we plan conservative, but also our plan has sufficient contingency across a number of working assumption to make sure that in the event weather is sub-optimal, in the event there is a sub-optimal regulatory outcome that we have enough cushion to provide for again any downside case.

And so again, as we always say, we do that we're the investment community and that's where our plan reflects. And so as you think about the first couple of quarters that we've had, we're $0.01 ahead, and we feel like we're on plan at this point even with, I'll say mild weather in June as well as a strong activity in Q1.

And so, we have managed the cost as we always have, and that includes a number of, I'll say, opportunities that we execute on over the course of the year. So we've been very advantageous on the non-operating side. So we've done refinancings that have provided cost savings in excess of plan.

And so we did take our bond in Q2 that provided savings that we hadn't anticipated. We've also found some tax planning opportunities that have created additional upside. And then the operating side, we continue to look at opportunities through deferral potential spend opportunities for stretch goals and things of that nature.

So there are always flex down opportunities that we look out over the course of the year that we will execute on, if we see downside..

And Michael, I'll add that we really have ramped up our waste elimination work. It is our play of the year for the CUA, and it's the power of the CUA.

We've been -- we're in really our third full year of implementation, and we are feeling the benefits of being able to deploy a new capability quickly across the organization, and that's what's important about running a lean operation, and a lean operation you can adapt to changing conditions.

So the conditions this year are able to benefit from the great work that we did in '18 to pull ahead expenses. And so as Reggie described, pulling ahead maintenance in 2018 has allowed us to defer other maintenance that might have otherwise been done in this 12-month period because we did it early.

But more importantly, I would say the capability we are building around waste elimination, and just imagine our thousands of employees all across the state, learning how to see and eliminate waste. Simple things like how we stuff the bills at the billing and mailing center for our bills.

When we do construction projects, a contractor picks up their equipment. Rental fees on the equipment, when we don't in a timely basis, get them to come pick up their equipment can pile up. So, we've improved our process simply to make sure that the rental equipment gets off our property, and off our books, and off our ledger as quickly as possible.

So it's little things all across the state that add up and allow us to be more nimble as conditions like this change and I would even offer in this most recent storm that we just experienced here in Michigan. Our storm response was extraordinary.

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

So all those little things add up and create this nimbleness and provide the confidence that we have that this back-end loaded part of our plan leverages last year's favorable unplanned conditions, to deal with unplanned negative conditions that occur this year that are outside of our control.

What we can control is how we respond and we're doing that extraordinarily well..

Great, and thanks for the color there.

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

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

The impact of the storm for our preliminary estimates is about $8 million of O&M, and I'd say that's about a couple of cents and so our $0.04 of upside for the July weather did not take that into account.

But again, going back to my initial comments, we do plan for contingency for a number of our, I'll say, cost buckets including storms and so we do have contingency in our service restoration cost assumptions for the year, which will absorb the cost of that storm. So we still feel good about the July upside that I articulated..

Okay, great.

And then one final one, just flipping over to the regulatory side, I think you've got an ALJ decision due in the gas rate case next week, I was just curious how you're feeling about that and potential for settlement given it seemed parties weren't too far apart? And then just kind of going forward, I see you're going to file again shortly thereafter, and just how you're thinking about maybe being able to space out the cadence of rate cases over the long-term going forward?.

Yeah, one thing that became abundantly clear -- is abundantly clear through the staff's position on this gas rate case, Michael, is that there is a strong support for gas investment. The safety of our system, the age of our system warrants strong and diligent attention.

And so that's why I think you would see that in that staff position, we were very close. In fact the rate base that they recommended and we requested, was the same at $6.5 billion. So we feel good about that. Sometimes, it's good to let a final order go all the way, let a case go all the way to a final order.

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

But we think going potentially to a final order in this case would not be a risky outcome given our mutual commitment for gas investment. We do anticipate filing our next case in the fourth quarter of this year, and that's simply because we have so much work to do on the gas system to make it safe.

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

So our unit costs for all of the work that we do continue to decline as we implement the CE Way, and we're able to do more work for less dollars, get more value-added for customers, and that's important because of the volume of work that the system really does require these days.

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

Great, thanks a lot..

Yeah. Thanks, Michael..

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

Hey, good morning..

Good morning, Greg..

Good morning, Greg..

So I know you specifically -- Rejji you specifically address this in part on the call when you talked about sales growth for the year, that you're seeing reasonably good strength and higher margin residential sales, but have you seen lag on commercial and industrial sales relative to what your plan was.

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

Yeah, good question, Greg. So I would say, first, let me start with the commercial side. We actually have been quite encouraged with the commercial activity we've seen relative to plan and so when we talk about favorable mix it's not just residential, but also commercial.

And so commercial actuals to date, still exceed our expectation along with residential. And so I'll point you to the numbers that we have in our disclosure. But we're about 0.5% down in the weather not normalized basis year-to-date versus 2018.

As we've said in the past, that's net of our energy efficiency programs so obviously when you gross up the 1.5% reduction in customer uses that we work to achieve every year. We're actually up about a point on commercial, and so the customer accounts really would go to on the commercial side.

We're up about 1% on a rolling LTM basis, and so customer counts are for commercial and residential. And then for industrial while we've seen a little bit of softness there down about 2% with energy efficiency included in that about 0.5% growth, so taking out energy efficiency.

We're actually seeing a pretty good story from our smaller industrial customers, because if you take out basically one large low margin customer were basically flat net of energy efficiency, and so if you think about that again excluding energy efficiency, up about 1.5%.

So we continue to be encouraged by the trends we're seeing across all of our customer classes. I do think there is a little bit of a slowdown we're seeing at least for the first part of year, for some of our larger industrial customers and whether that has to do with trade wars or broader economic effects, I think remains to be seen.

We always highlight in the upper left hand corner of that sales slide that we're continuing to see very good trends economically and Grand Rapids, which is in the heart of our service territory. And so whether it's GDP, whether it's unemployment, population growth, building permits, all of that continues to trend quite well.

So we still think it's a very nice economic story in our service territory, and I think it's too early to tell whether there are any broader macro themes taking place nationally or globally..

Great, thank you. Clear..

Thank you..

And our next question today comes from Eric Lee of Bank of America Merrill Lynch, please go ahead..

Hi, good morning..

Good morning, Eric..

Hey, so just shifting gears a little bit in terms of thinking about the longer term opportunity ahead.

Could you speak a bit to renewable prospects beyond the initial 1.1 gigawatts laid out in IRP approval as well as just maybe the PPA earning aspects in regard to that, I think, the longer-term mix for rate base and PPA there?.

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

And so as we look at our 6,000 megawatt path, it was important that we build the plan to pre-build that solar before the big PPA at MCV and the remaining coal plants come offline. We need to make sure that that solar is installed, working as plan, that we've learned how to optimize and dispatch that much solar across our system.

And so we have a pretty methodical plan, as we go across actually the years. In the neighborhood of 300 to 500 megawatts of solar beginning in 2021 and going all the way to 2030, we end at 600 megawatts of solar by 2030 per year.

So that ends up then when you add all of that up, that 6,000 megawatts total of solar by the end of our 2040 IRP time horizon. So you can see it's pretty systemic.

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

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

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

So we think it's very good on many fronts and most importantly sets a level playing field here in Michigan for the implementation of new solar that's to the benefit of both the planet, and our customers, and therefore then our investors through both the financial compensation mechanism in the fact that we will be rate basing half of that..

Got it. And just quickly in regards to that.

Is there a potential for perhaps beyond the initial 1.1 more rate base or even maybe say a higher FCM?.

We re-file the IRP anywhere from every -- we're required by law to file it within five years. We agreed in our settlement to file another IRP in three years. And I can't predict what will come out of that settlement or another IRP.

Rather we'll obviously always look to adapt and change as conditions change, as the market changes to the benefit of customers and investors. And so each filing that we do will of course have opportunities to improve the framework..

Got it. And when should we think about storage spend kicking in more meaningfully? I know you've spent some time on that earlier..

Yeah, right now we have it at the latter part. We have 450MW at the latter part of the IRP and personally your guess is as good as mine, but I would be shocked if sometime in the next 20 years, there is some breakthrough in storage, given the commitment of automakers to electric vehicles does create a marketplace for technology, and R&D, and storage.

We are so closely linked to that our US automakers here in Michigan and our partnership with GM, and Ford, and Chrysler has been very strong. And so we will, I think, be in a position to take advantage of smart storage a sooner than later. We have a pilot. We're running this summer with residential storage application.

We've got a couple of batteries installed at some commercial locations. We're doing a lot of learning and I forecast that as we filed subsequent IRPs will be able to model additional reductions in costs on storage going forward.

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

Great. Good to hear. And one last question and I'll shift back to the queue.

What do you think about the potential for maybe accelerated coal retirements and your renewable development given potential appetite at the MPSC?.

We did a lot of studying in our plan about the right timeline for our current -- our remaining coal plant retirements. Of course, again every IRP will consider. But here something really important to remember with the coal plant retirements. I have co-workers there who have dedicated their lives to delivering energy for the people of Michigan.

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

It's important that we stick to the plan that we published, so that they don't feel like we're taking advantage of them. And so when we talk about our triple-bottom line of serving people, the planet, and profit.

This people aspect of the transformation of our energy system is equally important to serving the planet, and then delivering earnings for our investors. So that is a key component of driving the timeline.

And frankly, we also have to build out all the solar and make sure it works as intended, and make sure that we have the capacity that we need when we retire those plants. So those two factors really do drive our current timing. And we feel good about the current timing.

We think it's well ahead of -- much of the country will end up with an 80% carbon reduction by 2030, and 90% -- over 90% carbon reduction by 2040 that's a decade ahead of the peer’s climate core, that's a decade ahead of most -- many of our peers.

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

Eric, the only thing I would add an additional to all Patti's good remarks around the resource adequacy operational employee, I'd say implications of an accelerated call shutdown.

There also is a consideration from a balance sheet perspective, and so you still have Moody's, which continues to include securitizations in their credit metric calculation.

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

So while, do you still have that constraint in place, I think it really does hamper any accelerated coal retirement case. And so that's also keeping strength worth noting..

I appreciate your time..

Thanks, Eric..

And our next question comes from Michael Weinstein of Credit Suisse. Please go ahead..

Hi guys, good morning..

Hey, Michael..

Hey, Michael..

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

I'm just wondering at what point do you anticipate at this time rolling that into the long-term plan, the 10-year plan -- and can you -- what can you say about it now in advance of the official rolling out of those numbers?.

Yeah, Michael. I would say, as from our prepared remarks, we anticipate at some point in the 4th quarter will provide color on a new 10-year plan. So I would say it would either be on our Q3 call which takes place in the 4th quarter or potentially EEI, but it will be one of those two scenarios, most likely.

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

And so, we'll be in excess of that given the opportunities afforded by the IRP, but we also have a significant capital investment backlog as we've talked about in the past on our wires and pipes. So both of the electric and gas distribution systems.

And so we do think there are incremental capital investment opportunities, and the key constraint will be customer affordability, as well as balance sheet, and workforce constraints. And so we have to make sure that all of that works out.

So we're going through the math for the front end of our planning cycle, the IRP was a gating item which is now behind us. But we have to go through all of those machinations and things that our customers can afford, as well as our investors and employees. Well, we can get from an operational perspective.

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

I mean, as you --- and your thought process on the 6% to 8% growth rate is that would be unchanged even with a higher plan.

Right?.

No, we don't provide EPS guidance beyond a five-year period. So the current five-year plan of $11 billion, that from our perspective can deliver 6% to 8% EPS growth. And I wouldn't even suggest that when we rollout a 10-year plan we'll provide 10-year EPS guidance. Because I think that maybe unprecedented, we are fortune 500 company.

So we'll see where we end up, but we are planning of a five-year plan in Q1 of next year that will likely have some estimate around EPS growth and for 10-year plan that will just be on the capital side, but not much color beyond that..

All right, thanks. You guys are -- have always been trend setters.

So you never know, right?.

Well said, Michael..

Nice, Michael. Nice quote, we hear you..

All right. Thanks a lot..

All right. Thank you..

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

Hi guys..

Hi, Praful. Hey, Praful..

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

How should we think about going forward from a profile perspective? Given -- if you have in a reduced cost in 2019, does that mean that we should think about that going up back again in 2020? Just from a profile perspective, how do we think about those costs?.

No. I think, Praful, really 2018 should not be viewed as any sort of comp for future years. And that's why it's difficult. When you think about the way in which we manage the business, the way in which we manage the work, 2018 obviously we had almost $100 million of weather driven upside.

And so we really ramped up the operating and non-operating pull-aheads of the course that year, which is why we're I think just under a billion in one of O&M costs, and this year we expect to be well below that.

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

And as we think about just in general, our cost structure, there really are kind of two approaches for how we think about our financial planning. There are planned cost savings that incorporated into our budget. So we look at non-operating and operating opportunities like waste elimination as Patti highlighted.

We've talked about attrition management in the past tax planning revise. And then we have planned initiatives during the year. So we're doing a lot of work in the supply chain to take advantage of economies of scale, IT solutions adding more automation across the organization to realize cost.

Those are planned opportunities that we incorporate in the budget. And then in to a year, as we get into a year, we see, I'll say, unforeseen sources of upside or downside then we flex. And so a year like this year, where we've seen historical levels of service restoration cost attributable to storms, as well as mild weather.

That's when we start looking at things like, okay should we defer some ambitious plans we have that are strategic or operational in nature that we will not need to be done this year; do we look at things around non-compliance opportunities on the training side. So, that's when we start to look at into a year opportunity.

But generally the baseline is usually what has been planned for in the current year and then we try to take 2% to 3% off of that. So 2018 really isn't a proxy for what a run rate O&M is for us.

Is that helpful?.

Yeah, that's very helpful. Thanks Rejji. Good detailed color, which always is helpful. And then maybe secondly on the credit side. And you talked Rejji, a little bit about the securitization. Also I think the PTAs could get imputed as debt from a rating agency perspective.

So how should we think about the credit and the equity needs going forward? You've clearly benefited from some of the tax pieces that you've got in terms of AMT credits.

But going forward, how should we think about that in the 150 a year in terms of equity, is that still kind of the plan, or do you see that moving around a little bit?.

Yeah. We will want to see. I mean obviously we've just commenced our five-year planning cycle, and so we're not going to roll-out a new five-year plan until Q1 of next year. That will incorporate, I'll say, some of the implications around the IRP, and Karn, and some of the puts and takes.

I still generally believe that our five-year plan will look very similar to the current plan, we were maybe a little over $11 billion. But will have I'll say relatively modest amount of equity issuances per year. That allow us to keep the credit metric range of, call it 17% to 18% FFO to debt.

So remember we have managed the balance sheet, very conservatively for the last several years, when we do have really hospitable capital markets. We didn't go on M&A binge, we didn't do any levered repos, we just chipped away at our balance sheet with equity issuances to fund our capital plans and grew the business organically.

And so even post-tax reform, that's given us a lot of latitude to continue to modestly fund the business with equity. And we think even if there is a Karn, or when there is a Karn retirement in the securitization besides of that, it shouldn't really balloon out our equity needs.

And remember with the PPAs, even though there will be a levering effect of that, the financial compensation mechanism does partially offset that, because we will get earnings on those PPAs and that's in fact part of the reason why we structured it that way.

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

Got you. Again, super helpful with the detail.

But so we should think about it in the range of the same 150, is that still fair?.

I think, directionally that's correct. But I will be more precise clearly when we roll out the plan next year..

Got it. Thanks so much guys..

Thank you..

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

Good morning. Thank you..

Good morning, Travis..

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

Yeah, nothing new on EnerBank, yes, we've repeated the last couple of calls. No new news there. They continue to be a part of our portfolio, a very small part that is relatively essentially self-funded, and so no changes there.

Enterprises, you'll have noticed that they've done a couple of new renewable projects, very small, very targeted, customer driven. They've been driven by customers approaching us that we have starved, and either our enterprises business or our utility business outside of our regulated service area.

And so we've been able to meet the needs of say, Lansing Board of Water & Light with a 24 megawatt solar installation there, 105 megawatts of wind in Ohio for General Motors. But those are more opportunistic in nature and we do feel well positioned. We like to say we're big enough to matter, but small enough to care.

And for example in Lansing -- Lansing Board of Water & Light is right here in Michigan, and they had multiple developers go out of business in their attempt to install and build out this wind -- this solar project. And so we have the capability of doing those projects, but we don't show up in our private jets.

We drive our load truck over from across the street, and help them do their work. And that's a good positioning for us and for enterprises. And so where we do have additional projects, we want enterprises to grow as the utility growth and -- but don't be confused, our utility business is the primary driver of earnings and our plans for growth..

Okay, great. And then just two quick on Enterprises based on what you said there.

One is, what do you think that market is large, do you think that market is for customers coming to you presumably wanting the renewables in the future? And then also, would enterprises be eligible to apply for some of those or participate in the RFPs on the utility side?.

Yeah. Your second question first, our affiliate is not allowed to compete for the renewable projects.

But I would also offer -- we don't have an eye on the specific market size because again, as I mentioned, we're really opportunistic as these projects come to us and more so, what I can tell you, though is there a lot of our utility customers, large industrial brands that you would recognize that we made commitments to 100% renewable energy.

And we've been able to provide a large customer tariff with the utility, so they don't have to rely on our non-utility business. But in other states we have opportunities to serve those very same customers. But again, we don't have -- it's not -- we're not in hunt of that, it really does come to us opportunistically..

Okay, great. I appreciate it..

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

Good morning..

Morning, Paul.

Morning, Paul..

I'm going to ask you to just go over again sort of Greg Gordon's question on sales growth, I was a little bit, I just want to make sure I fully understand it.

Could you once again just sort of go through what your weather-adjusted sales growth has been and how much energy efficiencies impacting it? And, I guess, how much energy efficiency that you guys, your programs, your utility sponsored programs are responsible for?.

Absolutely. And let me point here as well Paul, to the materials that came out with the press release, Slide of Page 13 and 14 that has or weather-normalized electric utility statistics--.

Right. I have been looking at them..

--you can also look at that those for reference. But I'll reiterate. So, what we've seen year-to-date relative to the first half of 2018, for residential were down 0.5%, commercial down 0.5%, and industrial were down just under 2% at 1.9%. And those numbers again are weather normalized.

They also take into account the reduction of customer usage favorable to our energy efficiency programs. And so, by design, we look to reduce electric power from the prior year by 1.5%, and we get economic incentives to do so. And so, very effective, really going back to 2008 law, and executing on those plans.

And so, I always try to highlight that the reduction in customer usage is incorporated into those numbers. And so it acts that how for back, the effects of those programs out you can really add 1.5% to the numbers, you will see on that page.

And so, think about that financial down 0.5% on a gross basis, excluding the energy efficiency programs are up a point, same for commercial, and then industrial down about 0.5%, again grossed up for the effects of energy efficiency. And so that's how we think about it, not on a blended basis, we're down about a little under 1%.

And so again, grossing that up, you're a little over 0.5% when you exclude the energy efficiency. So that's what we think about it.

And we also look at the customer accounts just to make sure that what we believe is segment place across residential, commercial does reflect those grossed up numbers and so we've seen customer counts go up for residential down 0.5%. On a rolling latest 12 months basis, we've seen commercial up about a percent.

And so we're seeing very nice trends there. And the other point I have made in the past and I'll make it again, is that weather normalization math is a very complicated and imperfect science.

And so if you take into account some of the, I'll say, weather extremes we saw last year and tried to back that out as hard as our folks work to get that math right, it's still quite complicated. And so that's why while we state these numbers and report them, they are not always as perfect or precise as we'd like them to be.

And then for industrial the only other point I'd make, there is that we continue to see good performance from our small industrial customers. And so we have seen, if you carve out one large low-margin customer, and you can actually effectively add about 1% to our blended electric weather normalized sales performance.

So like I said, we're down about a little less than 1% weather normalized, and when you take out that one large low-margin customer we're basically flat in our industrial or as much as that is a little below 2%, you take out that one large customer were up over a percent.

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

Is that helpful Paul?.

Yeah, that is helpful. And I didn't want to belabor it, I just want to make sure that I understood that that 1.5% is based on your utility energy efficiency efforts..

That's exactly right..

Okay. Okay. And now, just one sort of quick follow-up on that. on the gas side, I know it's a small quarter for gas usage, but it did seem to grow pretty rapidly I think that's on Page 14 or I have to agree -- let me find it. But if you follow what I'm saying, the residential grew like 14.3% and 8.3% for commercial.

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

Yeah. So I'll first go again point to the weather normalized math and the imperfections. But we've actually seen pretty good customer accounts across gas as well. And so we do think that part due to what I will say that a positive spillover effects when you have good industrial activity.

And so you start with decent industrial activity, that leads to residential increases, and then you get commercial activity, and so there is a very nice spillover effect taking place in gas and I think that's what we're seeing in these numbers. But again, I want to temper expectations both on the downside and the upside.

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

I follow you. It just sort of jumped out of me. Okay. I understand to take it with a grain of thought I guess to a certain degree. But, okay. Thanks so much guys. All my other questions were answered, and have a great one..

Thanks Paul..

Thanks, Paul. See you..

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

Hi, guys. Good morning..

Hey, David..

Hey, David..

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

Yes, you should. We're working on that as we speak, which is another reason why we're going to wait till the latter half of the year to publish the 10-year plan. I can't promise that it will result in an IRM. But I do think that it will paint a nice clear picture.

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

And frankly, they can't hold us accountable even if it's not a formal program to doing what we said we're going to do, and we're up for that kind of scrutiny because we're pretty good at planning, and we want to be able to be trusted in our ability to execute. So we've been working on a long-term gas plan.

We know how important the safety of the system is for the state of Michigan. And so, we'll look forward to sharing that more publicly over the next year or so..

Okay.

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

Some of it might be published with our long-term CapEx plan. It definitely is the key driver for it. But we may wait until early 2020 to formally publish it..

That makes sense. And then one quick housekeeping item. Just on the year-over-year drivers slide, I think you added a more explicit $0.08 of enterprises benefit. I just wanted to make sure I knew all the drivers, that's mostly because the MISO capacity rolls off into better negotiate capacity contracts.

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

Yeah. So you have a few pieces there. I think you highlighted, the largest driver. And so as you roll off of the MISO planning resource auction of 2018, and its implications in the back half of the year, you start to see capacity sales tick up. I can't give you the earnings per share.

But it's a vast majority of that pick up and then you have two other components. So you rightfully noted some of the effects of Northwest, Ohio. It's interesting that our wind project was fun.

The implication there is that their production tax credits that we expected to realize resulting from that project earlier in the year, but because we had a slow start for enterprises, we didn't actually realize the effects of the production tax credits at enterprises in the first half year. So we'll pick that up.

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

And so the absence of that write-off, we spent $3.5 million pre-tax. That's about a penny. And then you've got, I think the vast majority of the capacity sales as well as the realization of production tax credit. So it's those three things that largely get you back our planned EPS contribution of $0.14 from enterprises for the year..

Okay, that's great color. And yeah, those are my questions. Congrats again on a great first half..

Thank you..

Thanks, David..

This concludes the question-and-answer session. I would like to turn the conference back over to Ms. Poppe for any closing remarks..

Thanks everyone, for joining us again this morning. And certainly, we look forward to seeing you out and about at upcoming events..