CMS能源 (CMS) 2016 Q4 法說會逐字稿

Good morning, everyone, and welcome to the CMS (technical difficulty)the earnings news release issued earlier today and the presentation used in this webcast are available on in the CMS Energy's website in the investor relations section.

This call is being recorded.

(Operator Instructions)

Just a reminder, there will be a rebroadcast of this conference call today beginning at 1 PM Eastern time running through February 9. 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.

Good morning and thank you for joining us today.

With me are Patti Poppe, President and Chief Executive Officer, and Tom Webb, 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 than 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.

Thank you, Sri.

Welcome and good morning.

Welcome to our 2016 year-end earnings call.

We had another great year and we look forward to sharing the highlights with you today.

I'll review our 2016 results and 2017 focus on priorities and Tom will cover the financial results and outlook.

As you know, we released this morning that we again hit our top end of guidance at 7% year-over-year adjusted EPS growth at $2.02.

That makes 14 years in a row of consistent performance at the top end.

Based on our 2016 actual performance, we are raising our 2017 full-year guidance to the range of $2.14 to $2.18, or 6% to 8% adjusted EPS growth.

As our earnings are growing among the best, we match that with equally strong dividend growth.

Therefore, we once again increased our dividend 7% in line with our EPS growth.

As you've come to expect, our financial performance is not an accident.

Our financial performance is supported by our operational strength.

We are proud to share that we had our safest year on record which is a 20% improvement over last year's previous best.

We also had the best generation reliability on record.

We delivered this performance while, at the same time, we retired seven of our 12 coal fuel generation units.

During operational success like this -- delivering operational success like this, while at the same time transitioning our fleet so significantly, requires a disciplined team focused on results.

We once again delivered best-in-class cost reductions as well.

In fact O&M is down 6.5% year-over-year.

This fuels our 10 year investment plan of $2.5 billion from our projection last year.

Lots of people ask, so I'll definitely provide more details about how we continue to do this.

We are well underway for another great year with emphasis on the new energy law, our clean and lean capacity replacement strategy and the consumers energy way.

Let's start by reviewing the energy law highlights.

The Michigan legislature and governor, in concert with the Michigan Agency for Energy and the MPSC, have delivered solid policy for our state.

At the highest level this new law addresses the retail open access cross subsidy enabling more competitive prices and eliminates the risk of energy shortfalls in Michigan.

We're reminding everyone that Michigan is open for business.

This new law creates a framework for our clean and lean generation strategy led by improved energy efficiency and demand response incentives, a 15% RPS standard and a very constructive net metering framework that removes the subsidy for the future producers of private solar.

Also, there's an integrated resource planning process that will allow for longer term planning as well as upfront prudency review of our supply and demand strategy which will result in a modern, reliable and affordable energy supply for Michigan.

Let me take a minute to share a bit more about what we mean when we refer to clean and lean.

Our recent Palisades PPA termination application is a great example.

We have long said that an inflexible, above-market PPA is not a cost-effective option for our customers and provides no long-term value for investors.

At the same time, we want to assure that we have sufficient resources to serve the load in Michigan.

The traditional approach would be to replace the PPA with a megawatt per megawatt central station power plant.

Instead, we believe we can use this change as an opportunity to build out a cleaner and leaner resource mix that assures reliability at the lowest cost possible that is a win for both customers and investors.

By cleaner we mean replacing Palisades with more energy efficiency, demand response, additional coal-to-gas switching and renewable energy as called for in our new law.

By leaner we mean when replacing Palisades we can reduce demand on the peaks and fully utilize our existing gas assets.

This saves our customers both energy and money.

We are right sizing our assets to match demand, thereby eliminating waste and still assuring reliability.

We can derisk our entire capital plan by freeing up dollars that would be traditionally captive in a single big-backed capital project for many smaller options that meet more of our customers needs with less risk and last waste.

And as we often remind you, we have plenty of that work that needs to be done.

We are confident that we have a solid capacity replacement plan for Palisades that will ensure reliability and increasingly clean and affordable supply for the people of Michigan for years to come.

I hope you're picking up on our continued theme of lean thinking.

It's lean thinking that underpins not only our generation strategy but it is the heart of our CE Way.

Lean is not just low-cost, it's about waste elimination that improves value for our customers at the lowest-cost.

Our business model is based on this lean way of thinking.

We are deploying our CE Way in all areas of our business.

We are far from perfect and we can find areas for continuous improvement in waste elimination in every aspect of our work.

We can then deploy the value created in waste elimination to drive sustainable growth.

By teaching our entire team to see and eliminate waste, we will provide a safe and reliable system for customers at the lowest cost possible and grow our business.

It may seem simple but it's not easy.

This lean way of thinking is how we will deliver world-class business results and why we can promise many years of further improvement.

The CE Way really is a sustainable way of running our business where we don't make trade-offs between key constituents but rather we intend to focus on our triple bottom line: people, planet and profit, underpinned by our unwavering commitment to world-class performance.

In fact, we are selected by Sustainalytics as the number one utility in America for sustainable business practices in 2016.

Our simple but powerful business model is the manifestation of our commitment to people, planet and profit.

Our system needs improvements and without the hard work that our team does to reduce absolute cost year-over-year-over-year, our investment requirements would be too expensive for our customers.

We insist on both serving our customers and doing it at the lowest cost possible.

We are not chasing profits or cost cuts at the expense of safety reliability of our system.

Rather we are delivering consistent profits and performance because we are focused on the heart of our business, our customers.

Our 10 year capital investment plan reflects our lean thinking and our growth strategy.

As a reminder, we announced in December that we've increased our 10 year capital plan to $18 billion.

Our new law increased our renewable portfolio standard by 15% by 2021 and so we have added more renewable generation to our plan in line with our clean and lean approach.

We've also added an additional $500 million in our large gas system to continue to reduce costs and improve safety and deliverability over the next 10 years.

The Governor's infrastructure commissions report was published at the end of 2016.

And he reinforced in his State of the State address that investment in infrastructure in Michigan is a top priority.

The report found that our existing regulatory model works well to provide the funding and oversight needed for critical infrastructure investments in electricity and gas.

Michigan's regulatory model, which was improved by the 2016 energy law, is the ultimate public/private partnership in service of the people of Michigan.

This is not a blank check in our mind.

We are always self constrained by our customers' ability to pay which is why our ongoing cost reduction performance serves both investors and customers.

As we reduce cost over time, we can grow our business through more CapEx for areas like grid modernization, more gas infrastructure and PPA replacements in the future without unduly burdening our customers.

High-quality, safe and reliable service at the lowest cost possible -- this is lean thinking.

One thing I've learned over the passing of time is that performance is power.

When our performance is strong, when our processes are in control and our promises are kept, we can be flexible and adapt as the weather, the economy, policymakers and policies evolved.

Our business model has and will continue to stand the test of time in a changing environment when it is backed by world-class performance delivered in a hometown way.

That's the CE Way.

Thanks, Patti, and thank you, everyone, for joining us today.

As you can see here, adjusted 2016 earnings at $2.02 a share grew by $0.13, or 7% -- no surprise.

Our GAAP earnings at $1.98 a share were up $0.09, or 5%.

This included the voluntary separation program we announced last summer and tentative settlement of some old gas reporting cases.

All of our businesses improved year-to-year.

This is our standard look at our earnings per share outlook for 2016 throughout 2016.

Early on, we offset abnormal storms in a warmer winter.

Later we put to work upside from another strong year of cost performance and a warm summer.

If we had not reinvested, our earnings per share could have been up 15%.

Our reinvestment in O&M, however, was big.

It included improvements in reliability and service.

We also prefunded parent debt and made meaningful contributions to low income funds as well as our foundation.

In total, our O&M cost was down 6.5% for 2016 compared with 2015.

Yes, 6.5% lower after all the ups and downs.

Our 2016 performance adds one more year in a long track record of adjusted earnings per share growth at 7%.

And imagine, during the last four years we reinvested one-third of the $1 billion for our customers.

Half of this was made possible by favorable weather, half by cost reductions -- cost reductions much better than planned.

We achieved all of our financial targets for 2016.

These included strong capital investment, healthy balance sheet ratios, competitive customer price improvements, robust operating cash flow growth, earnings per share growth at the top end of guidance and, as announced last week, another 7% increase in our dividend.

The increase keeps pace with our high-end EPS growth which, of course, is at the high end of peers.

For 2017 we're pleased to have raised our guidance to reflect adjusted 6% to 8% growth on top of 2016 results which were at the top end of our guidance.

So we continue to build success upon success -- no resets here.

As shown here, our rate cases primarily reflect capital investment.

They also permit us to flow through productivity improvements to our customers.

We expect to reduce O&M cost another 2% this year.

And perhaps that's a little conservative based on -- after being at the top end for the decade and annual cost reductions of around 3%.

This keeps our base rate increases at or below the level of inflation.

On a real basis, this reduces rate.

This level of cost reduction is not easy to do, as Patti mentioned.

Few utilities can do it.

This enables our rapidly growing customer investment.

Looking ahead now, we should have an order on our electric rate case next month.

We expect an ROE in the 10.1% to 10.3% range.

This would mirror recent orders of DTE.

We are in the middle of the process of our pending gas case.

While the self implementation is lower-than-expected, we have no reservations about working with the commission to complete a satisfactory result.

Here's our cost reduction track record.

You know we are proud of it but what's important is our commitment to continue for a long time.

This comes from good business decisions that permit productivity gains as the workforce turns over, a shift from coal to gas generation, the introduction of smart meters and the elimination of waste.

As we improve customer quality through better work processes, we will see an overtime cost save as well as temporary workers saved by doing it right the first time.

We already are seeing evidence of our consumer's energy way process improvement.

These drive up quality and they drive down cost.

We work to improve customer service and we eliminate waste.

Now for 2014, 2015 and 2016 we reduced our costs by more than 3% a year and we plan conservatively to reduce cost a further 2% in each of the next three years.

This helps fund that growing investment for customers.

For the last dozen years our gross operating cash flow has been growing by more than $100 million a year.

Since 2004 it's increased from $353 million to $2.1 billion last year.

Over the next five years it will grow about $800 million to $2.9 billion.

Our NOLs, bonus depreciation and AMT credits help us provide and avoid the need for a block equity.

If tax reform occurs, we expect that we will still have a chance to use our NOLs, although at a lower rate.

We also would expect to access AMT credits early but let's talk about that more in just a few minutes.

So this is our sensitivities slide.

We give this to you each quarter to help you assess our prospects.

You can see that with reasonable planning assumptions and with robust risk mitigation, the probability of large variances from our plan are minimized.

There are always ups and downs.

Already this year certain property taxes are expected to be lower, improving EPS by about $0.03 and energy efficiency incentives increased under the new energy law helping maybe by about $0.02.

But please keep in mind, if the electric rate case ROE comes in at 10.1% next month, that would hurt by about $0.03.

We may have an opportunity to invest even more with anticipated tax reform.

We are all trying to shed useful light on this complicated subject.

None of us really knows what tax reform will include or if it will occur.

Here's one set of assumptions.

Corporate tax rates could drop to 15%.

We could lose deductibility of interest expenses and state income taxes and 100% asset expensing might occur.

Now we hope you'll find it helpful by seeing how this impacts each of our businesses, our utility enterprises and the parent.

At the utility, we are fortunate to have substantial organic investment not yet included in our plan -- investment for gas infrastructure, PPA replacements and more renewables.

Utilities in this situation will appreciate asset expensing to help fund new investment growth.

At consumers, it would take only $100 million of new investment a year to backfill the 100% asset expensing.

We've essentially already done that by raising our capital investment guidance from $17 billion to $18 billion last December -- so happy face for the utility.

Our non-utility business enterprises will be impacted like normal non-utility's.

Tax reform would help, but for us it's a small business.

The profit improvement would be a little under $10 million a year.

Here's the great news, interest income may be used to offset interest expense.

Our parent debt interest expense may be offset by our EnerBank interest income.

And this assumes that none of the old debt is grandfathered.

We still have to see how that turns out.

So again, as you can see on the right, with forecasted interest income at EnerBank at about $130 million, we can offset parent debt interest expense.

Even if none of the legacy interest expense is grant -- well it's a happy face for the parent too.

Again, none of us really know how the tax reform will end up so on the left here we have shown some alternatives to help you see different impacts.

This shows the amount of CapEx backfill needed to offset 100% asset expensing at various tax rates.

At 15% we'd add $100 million each year.

That would rise to $300 million each year at 25%.

Recall, we have investment opportunities of that at least $3 billion.

Our customers will enjoy rate reductions until we reach about a 25% tax rate.

As we approach a 25% tax rate, with all the other assumptions being equal, we expect that our customer's investors would lose.

And of course, minor changes in tax reform could make all of this very different.

In each alternative, we still are able to use our NOLs although, remember, the benefit will be smaller.

We also hope to accelerate use of our AMT credits to improve cash.

We have not factored the use of the AMT credits in are planning yet so there may be a little more upside there.

Excluding tax reform, here's our new report card for 2017 and beyond.

We anticipate another great year this year.

With no big bets and robust risk mitigation our model serves us -- or serves you and our customers well.

Few companies are able to deliver top-end earnings growth while improving value and service for customers year-after-year-after-year.

We are pleased to have another outstanding consistent performance in 2016 and we expect to do the same in 2017.

With another consistent strong year ahead, 15 years in a row, we are able to continue to deliver robust adjusted earnings per share growth.

With our capital investment already raised from $17 billion to $18 billion over the next 10 years, we expect to grow earnings 6% to 8% each year.

Our approach to funding capital investment, both for customers and for investors, makes our earnings per share and cash flow growth sustainable for the decade ahead.

Thank you, again, for joining our call today.

This is my 58th in a row -- still humming along.

Operator, we'd be pleased if you open up to take questions.

Thank you.

(Operator Instructions)

Travis Miller, Morningstar.

Good morning.

Thank you.

Good morning.

I was wondering with the new law, the RPS and then your investment plan, by the time you guys get to the end of your renewables investment, how would you stand relative to the RPS?

Because of the energy law and because of our $18 billion CapEx plan, we did add additional renewable investments that will take us to 15%.

That's approximately about an extra $1 billion of investment in our total $18 billion for the 500 megawatts required to get to 15%.

But we actually believe, even beyond the RPS, that our customers, particularly many of our large international customers and national brands, want more renewables from us.

So we are working with them and we don't expect that 15% will be the ultimate ceiling, but that is what the RPS standard will be.

Okay.

And then you anticipated my question a bit but the follow-up there was how much demand are you getting and how much could you add just from CNI mandate or required or wanted types of renewable investment?

I would just say that's a moving target.

We don't -- we will plan for the 15% RPS and that will fulfill some of our customers needs and we think that will -- that demand will continue to evolve.

And because of our clean and lean strategy, we will take small bets and continue to add.

We found ourselves to be very cost competitive in the renewable building and development process and so we will expect to continue to be building our own renewables to serve our commercial industrial customers.

Okay great.

I appreciate it.

Thank you.

Thank you.

[Jeremiah Forim] of UBS.

Good morning.

Good morning.

I wanted to follow up on the renewables side.

Just wondering on the cadence of your investment -- looks pretty back-half weighted into the 2022 to 2026 timeframe.

And given the PTC step down and what we've seen from other companies taking advantage of safe harboring, what's the rationale for the cadence there?

I would say that we actually have some active renewable development happening right now that we are able to take advantage of the PTC.

We are expanding our cross winds as we speak and so I expect that to be a pretty steady flow actually across our planning horizon.

Okay.

And is there any opportunity to engage in the deal for fuel argument we've heard from Xcel in terms of being able to offset customer rates purely from whether it's wind or anything else?

Yes, we definitely see that as a potential, both in the short in the long run.

Our version is clean and lean because we also included low-cost gas in our mix.

But we think that there's an opportunity particularly when some of our large -- particularly are one very large PPA comes off in the latter part of our 10 year planning cycle that that allows for that transition to renewables, lower fuel cost and, therefore, lower total cost with higher earnings potential.

We think that model works here as well.

Thanks very much.

Thank you.

Michael Winston of Credit Suisse.

Hi, guys.

Good job -- very impressive work on cost-cutting.

And I'm wondering if you could just discuss a little more detail around how cost-cutting might progress as we move into the 2020s and beyond.

We definitely see a combination of factors but, specifically, our implementation of the CE Way.

I carry around a story-of-the-month and my story this month is on our meter read rate and our meter reading improvements where we've increased from an average of about 89% meter read rate up to 98% meter read rate.

So improving the quality of our work and at the same time reducing the cost of over time, reducing the cost of repeat visits on homes that we couldn't get in, improving our route optimization.

So we deploy these lean process improvements, root cause analysis, visual management and optimization exercises to fundamentally reduce the cost to deliver a higher value outcome for customers.

And so that sort of work -- we are just getting started across all of our operations and implementing those kinds of skills in our leadership team as well as our front-line employees.

As I travel the state and work with our crews and see the work that we are doing around all of our customers, it's just incredible to me the potential that exists in getting our work done right the first time and doing it at the lowest cost possible.

Lots of O&M wrapped up in that.

So you can figure that to be -- that's what we will deliver our consistent 2% to 3% operating expense reductions.

That's what gives us confidence to continue to build our business model around that way of thinking.

How far out do you see being able to deliver 2% to 3% a year on average?

I see in our 5 to 10 year time horizon that is very, very doable.

I see no concerns in that.

You spend a couple days with me in a truck with our crews, you'll see there's lots to be done.

There's lots of potential.

(laughter)

I'll come out there tomorrow.

Okay.

Good.

We will have you.

Come on out.

Ali Agha of SunTrust.

Thank you.

Good morning.

Good morning, Ali.

First question, can you remind us the $18 billion CapEx over the next 10 years -- what does that equate to in terms of a rate base CAGR are for you guys?

It's the same 6% a percent.

So it depends on how you time it out.

But it's the driving force that drives up rate base, that then drives up our investment that's required which drives up our earnings and drives up our cash flow.

So we vary a little bit because then we are going to work our cost reductions to fund a lot of that so we don't have to past that through in prices and keep our price increases down around 2%.

Okay.

But because what -- it's a single point number.

Right?

So does it fall right in the middle of 7%?

Is that the way to think about it?

Not exactly.

I know you want the single point number and I know the math would tell you, you can do it that way.

But remember in December we raised our CapEx guidance from $17 billion to $18 billion.

We did not raise our 6% to 8%.

Because we will be doing other things, some of that will drive cost reduction, some of it would just be for regulatory purposes or whatever.

So it gets right in the zone and you can figure out that it's probably a touch over 7%.

Okay.

Second question, weather normalized electric sales were negative in the fourth quarter.

I think overall for the year it came in slightly below what you had budgeted.

Any plan to look at there and remind us again what the 2017 budget is for weather normalized electric sales?

Yes, happy to do.

We are still looking at a plan that's about 1% next year and that's driven by industrial again.

So as you look at 2017 -- when I say next year, this year -- we expect the industrial side to be up about 5% and then we expect our residential and commercial will be down in be down around 1% -- something like that and that nets out all the energy efficiencies.

So we've been having great success on energy efficiencies.

And don't forget we are fortunate in our state to be able to earn incentives around that work and that's been about $17 million, $18 million a year which is on top of our authorized ROE.

The new law will permit us to almost double that when we get a full-year effect.

So we are really happy with how that plays out.

Now for this year, we ended up the year, the fourth quarter, with residential down a touch, commercial flat and industrial up and so industrial was up about 1.5% and so we ended up the year about roughly 0.5% up.

We've seen a mixture of things going on out there in this last quarter.

And I'll try to give you just a little bit of a feel about it.

In the industrial side on plastics we saw good growth, fabricated steel, good growth, better than planned.

On the auto side that growth has continued -- cautionary tale though because we are seeing the actual sales flatten out a little bit for auto at probably record levels for many of them.

But still, in terms of growth, flattening out.

We saw similar utilities that we serve doing really well.

And then in food that was mixed, so we saw some of our companies and customers doing really well and some backing off just a little bit.

And then on chemicals we saw things ease off.

So we have quite a mix on the industrial side.

Here's what we are reading.

We see apprehension.

First excitement -- and don't think the stock market, think about our customers and what they are doing in their businesses.

We saw a lot of excitement and then the fourth quarter kind of eased off on some uncertainty.

I think this first quarter is going to be important one to watch because we are going to see what confidence is out there on the consumer side and we are going to see what our businesses do.

And I wouldn't be surprised of some of them hold back a little bit, trying to get a better feel for tax reform, money they may bring in from overseas and what they are going to do with their investment programs.

But what I will tell you, when we go to talk to our major customers face-to-face, even though there's a little trepidation, they are pretty upbeat.

So I think we are in for a good year and a 1% growth is probably a very reasonable place to be.

Got it.

Last question, Tom, just looking at your 2017 guidance by the various segment, can you remind us why the electric utility results and 2017 will be down versus what you earned in 2016?

I think that is oversimplified and I will just say on the electric side we had good weather.

So we had a lot of good help in the summer.

And so the comp is probably a little bit tougher when you are looking at just the bottom lines.

On the gas side it was a bit the reverse.

We had a very mild start, if you remember, last year and then an okay ending to the year.

So the comps are little bit easier.

So when you are just looking at the bottom lines, that's what you see.

When you look inside the business on weather adjusted basis, both businesses are doing quite well.

Got it.

Thank you.

Yes.

Paul Ridzon of KeyBanc.

Good morning.

Good morning, Paul.

The tax slide -- there's a scenario where you have significant headroom in customer bills.

Have you started the conversation with the commission yet about maybe accelerating some capital?

No, not for this.

Is it just too early?

It's too early.

I laud our peers for getting out there and trying very hard to describe what this will mean.

And we've been equally trying hard to describe what could happen because it's important.

But the challenge is, I think we are six months away before you even begin to get traction on what's going to be in here and how it will affect our industry.

So for us, at this stage to say we know enough, let's go start work with the commission, I think that's premature.

Now we will work with them and tell them all about what we do know and try to keep them on board with how normalization might work and all these important things.

But it's too soon for us to suggest to them, okay now we ought to start timing more CapEx in because we may get some funding from the federal government.

I think that will come about six months from now.

The thing I would add, Paul, is you've nailed the intent here.

For us, because we have a deep well of high-value CapEx, small bets that we can make to continue to incrementally improve our system, it doesn't concern us.

We look at this as it is a potential opportunity that plays right into our business model.

So we are hopeful that this creates more opportunity for us.

Am I kind of reading the sentiment of the commission right that they know you are under invested and are supportive of all the investment you are doing?

What I would say is it's been very clear -- both the commission has been clear with us as well as the governors focus on infrastructure investment in Michigan.

And as they are looking at things like roads and water, I think they are relieved to know that there's a good system for electric infrastructure and gas -- natural gas infrastructure where there's visibility, transparency, good regulation, a good funding mechanism.

This is a good model that we get a lot of support for the kind of investments that are required on our system.

We definitely are committed to having a safe, natural gas deliverable system.

And that's probably some of our highest risk assets -- the idea that we've got support from the governor and the commission to do investment in those areas is very important to us.

And then just switching gears, any incremental contracting activity at DIG?

For DIG, we are right in the middle of all this work on the Palisades PPA, early termination and replacement.

And what's near and dear to us as it is to our commission is getting the capacity side right so there's no mistake and then flowing through all these wonderful rate reductions.

It's hard to get rate reductions of this magnitude.

So we are just tickled about all of that.

So when you look at DIG, we are still in the thinking stage.

Is it better if we put DIG in the utility, both for accretion and for certainty on capacity?

Or is it better that we keep it outside, providing that emergency backup if it was needed in a fashion as well as the business that we know?

There's good interest.

The upsides of DIG still look attractive.

People are still interested in doing more capacity contracts with us.

But we are not doing those right now because we are making sure that backup plan is available to us.

Certainty of delivering power is critical to us and then right behind that is the big customer savings that we get.

So I'm giving you an awful mushy answer.

I normally don't do that because we haven't made the decision.

But I would tell you either inside of the utility or outside of the utility, there's some upside available from DIG.

What are you seeing -- you're obviously being approached -- what are you seeing as far as offers?

I would tell you that they are in the low $4 levels for contracts that might go out over several years.

So I think that's a pretty good place to be in.

So in other words, there is good demand but we are not rushed in any way.

And, Paul, what I would add is we are in the process with the commission.

They issued an order on January 20 and we are building out and aligning around what is the backfill plan for Palisades.

And that is important.

DIG is an important piece of that puzzle and so obviously overall reliability for the state of Michigan is both ours and the commission's number one priority.

And so we are going to be working together over the next several months to agree upon that backfill plan.

And we will be doing tests on a variety of options that we are recommending with more demand response, more energy efficiency, some potentially some additional coal to gas switching but also then looking at DIG as a major part of our backfill plan for Palisades.

We've always said that was our Ferrari in the garage.

It is still and it's revving up and so it's got a job to do here to make sure that Michigan has adequate resource and supply going forward with the retirement and early termination of our agreement with Entergy and Palisades.

So we are just being a little quiet because it's actually a Tesla and you can hardly hear those things.

(laughter)

She's getting charged up.

Tom, you stole the words right out of my mouth.

I was about to make a Tesla comment.

Thank you very much.

Greg Gordon, Evercore ISI.

Good morning, Greg.

Good morning.

Couple questions, first, just review what you said on coming out of the gate here, going into the year on earnings.

Did you say that you are sort of $0.03 ahead of where you would expected because of property tax and that the passage of the energy law gave you an opportunity for an incremental $0.02 from energy efficiency incentives.

And then baselining that off of the potential for a 10.1% ROE, you sort of subtract three from that so you'd be not two?

Yes.

You took really good notes.

Yes he did say that.

(laughter)

I just wanted to be sure I didn't get them backwards or miss it.

No, you got it exactly right.

But what I was doing there was just trying to illustrate the -- candidly the ups and downs that we face all the time.

There's nothing unusual in those.

But also, to be fair, I was trying to foreshadow a little bit what if the ROE comes in at about 10.1%.

Would that be a big problem for us?

No.

That's the point.

I understand.

You guys manage the business extremely well, as always.

On the tax thing, I hear you that there's a ton of uncertainty and we are all trying to model this and it's all fraught with error.

Looking at your tax slide and then corroborating that by looking at the earnings guidance line on page 16, I'm a little bit confused about -- I know theoretically if we had an elimination of interest deductibility but then the law said you could not interest income against interest expense that would clearly insulate you from an impact.

But if all that happened was we said the federal income tax rate goes down by let's say 15% from 35% to 20% and I look at enterprises currently expected to earn $0.09, pro forma that's $0.11.

And if I think the parent and other overheads are $0.25 drag then I would just sort of gross that up for 15% reduction in your tax yield.

Right?

So that's theoretically another scenario amongst 1 million other scenarios or am I not thinking about that correctly?

Yes, and just I want to make sure you got the pieces.

Because in the parent and other line, when you are looking at that, it's about $0.10 around EnerBank.

So it's small.

It's like 5% of our earnings roughly.

But you need to do what you just did mentally for that part of the business as well because inside of that $0.10 is the $130 million of what we think of is more like revenue but it is interest income.

That's how banks get their revenue.

Okay.

I got it.

So the $0.09 of enterprise and there's another $0.05 that's EnerBank.

No 5%.

I'm sorry.

No problem.

So your non-regulated businesses that would benefit from a higher -- from a lower federal income tax rate are really generating like $0.19.

And the interest expense at the parent is 15% not 20% -- or sorry 35% not 25%.

Right.

You're on the right track.

Okay.

I'll follow-up with you offline, Tom, because some of this is complex and I don't want to take up too much time.

It is complex.

And I read your report this morning so I'd be happy to follow up.

And I already realize I probably overstated the impact on CMS.

But like you said, it's extremely complex.

The one other thing that I wanted to ask because you mentioned it and you are the only utility so far to mention it, that's another nuance of the tax question, is the cash flow issue with the NOLs.

So if your federal income tax collections go down at the utility level, that's obviously incredibly constructive for customers.

It creates more than ample headroom for you to increase your capital expenditures to offset the impact of bonus distribution, should that also cure.

But you rightly point out it would also reduce your parent cash flows.

Right?

So you mentioned that you might be able to accelerate AMT credits to offset that.

But if you can't offset it, doesn't that mean you have to go to the next highest -- next lowest cost of capital option on the balance sheet which would mean issuing more debt or some equity to fill the whole?

Right.

No question.

Okay.

You're the first -- honestly, you're the first CFO on any of the calls to even bring it up.

And so thank you for that.

Well let's just elaborate so that we are all clear.

At the end of last year there is about $1 billion of NOLs and when you have a 35% tax shield like we do today, that's worth more than if we had pick your number -- 20% tax shield.

Right?

So what we will all have to do is take non-cash hit -- whoever has NOLs and credits.

Right?

In year one of the tax reform we will have to drive a non-cash hit to reflect whatever that is -- that difference -- right through the income statement.

I assume everybody will want to adjust that out.

But what is useful for us on the NOLs is that we have a long enough life and we are positioned well enough that we are not going to lose the use of them.

So we will still get them but they are only worth $0.20 on the dollar instead of 35% (sic --$0.35) on the dollar.

And on the AMTs, presently we plan to use those toward the end of our tax planning.

But in this scenario, and again, who knows what it will be, but I'm guessing in this scenario we could lose access to those AMT credits and for us there's roughly $300 million.

Well rather than do that, we will reconstruct how much we use bonus depreciation this year and last year for tax reporting.

And we will work in the AMT credits so we don't lose that $300 million but we will do it in a way so our customers at the utility are whole.

We wouldn't ask them to take any penalty in this process.

So we feel pretty good about what we can do.

But gosh, we have got to figure out what it really, really is first before we can adjust our tax planning.

So we've got six months, I think, of Washington DC work before something settles out.

Greg --

No question.

Thank you for being so clear.

Greg, here's what's also pretty clear.

6% to 8% After all that.

So we know you know that's what we're always (multiple speakers).

If there's any company that's positioned to figure out how to continue to execute and meet their plan, it's probably you guys.

But we still got to figure out how you get there.

I appreciate it.

Thank you.

Thank you.

Joe Zu of Avon Capital Advisors.

Hi.

It's Andy Levi.

I'm all set.

Thank you.

Hi, Andy.

Thanks.

Nice to hear your voice though.

Thank you.

Jonathan Arnold of Deutsche Bank.

Good morning, guys.

Good morning, Jonathan.

I have -- can I just ask about the Palisades regulatory process at the MPSC?

It seems they've asked for more information a couple of times now.

And can you just talk about what you think is going on there and when do you anticipate making the actual securitization filing?

You bet.

They asked in December.

They basically told us in December in their December 20 order that they were going to be asking.

And then on January 20 they did ask and set a timetable for information that they were looking for.

As you can imagine, their biggest concern, and it's our concern too, is to assure that we have resource adequacy in Michigan.

We do have a nice securitization law in Michigan that makes a proceeding like this limited in the amount of appeals.

And so there's some real advantages to making sure that we ask and answer all these questions so that when the commission approves the securitization application, they really understand what are the customer benefits and savings and that we have adequate resource.

And so the commission has asked for basically additional time through the end of August to go through that entire proceeding.

But it's all under the umbrella of the securitization.

So by the end of August, we expect in order outlining the agreements.

Thank you, Patti.

And then if I may just on tax, Tom, I want to just make sure I understand one aspect of your slide 22.

So I presume the backfill is less at a lower tax rate because in that scenario you have more of a refund of the excess deferred tax balance and, therefore, less of an offset to rate base.

Is that correct?

Exactly right.

So you do your asset expensing but at that different tax benefit level.

You had it perfect

Okay.

So then just following up on that, can you -- would you share with us what your excess deferred income tax balance is today and what your assumption is around the likely timing of it being normalized, if that's the right word?

I don't have that number in front of me.

But I can tell you I don't pay too much attention to it for this reason.

Whatever that number turns out to be at the time, so that will depend on what the law says for how it changes, we are assuming normalization and approximately a 30 year recovery period.

This all has to happen too.

The federal government has to say we are going to continue the normalization process.

And then we assume it would follow for utilities -- your plant-type depreciation levels.

So whatever the number is it would be -- I have a number here but I think it would be meaningless -- that goes over a 30 year period.

The only reason I say it's meaningless, it's so different in every single scenario we look at.

All right.

Well thank you for that, and thanks for the call and all the extra color.

Thanks, Jonathan.

Steve Fleishman of Wolfe.

I'm good.

Thank you.

Thanks, Steve.

Larry Lu, JPMorgan.

Thanks for taking my question.

Thanks for all the information on tax reform.

Just wondering, can you give us high level -- what is the cash flow impact of all your assumptions, tax rate et cetera?

Directionally or anyway, really.

Yes, I do it like this.

I am going to break it into the businesses again.

Okay?

So at the utility, we are assuming backfill for whatever is opened up with the federal government.

So if you just think of that in a big picture as neutral cash flow.

Because we will need to do it soon.

We have to do it early on in the process.

Now go over to a little business like enterprises, the non-utility business, we will see the pickup in terms of benefit just like every non-utility would see, which will be pretty normal.

But since we already are not in a position of paying taxes, then you're not going to see a tax cash flow change.

If you're with me on that.

Right?

Because we are already in a position where we don't pay taxes.

And then on EnerBank, that will actually see a kick up because now instead of losing the -- instead of paying taxes on the profit that we would make there inside of that business unit, we will see that gets offset with a netting with the parent interest.

So they will get good news but then when we consolidate it up through the Company, we are already assume we are not paying any taxes.

So I'm trying to tell you that there's not going to be much of a cash hurt or help.

The big write-offs we do around the NOLs that was asked about earlier and AMT credits, assuming that's how that works, it's a non-cash thing.

But we will turn around on the AMT credits and we will try to get advantage of those upfront and so everyone might conclude, great, $300 million of better cash flow.

It depends on what you compare to.

This is just substituting for bonus depreciation.

So there's really no change to cash flow.

So not a lot of change early on is my answer.

And I made it complicated because it really is complicated and then you compare it to where you are today where you don't pay taxes.

Which we love, by the way.

I think this is a great country.

Definitely.

That's great.

Thank you for all the color.

Any other questions?

There are no further questions at this time.

Okay great.

Thank you, Jodi.

Thanks, everyone, for joining us today.

This concludes today's conference.

We thank everyone for your participation.