CMS能源 (CMS) 2018 Q1 法說會逐字稿

Good morning, everyone, and welcome to the CMS Energy 2018 First Quarter Results.

The earnings news release issued earlier today and the presentation used in this webcast are available on 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 12:00 p.m.

Eastern Time, running through May 3. 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 conference over to Mr. Sri Maddipati, Vice President of Treasury and Investor Relations.

Please go ahead.

Thank you, Francesca.

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 refers 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 for our first quarter earnings call.

This morning, I'll share our strong first quarter financial and operating results and review our regulatory calendar.

Rejji will add more details on our financial results and outlook, and then we'll close with Q&A.

We picked up right where we left off.

At the end of last year, we're at -- we are now delivering solid first quarter earnings of $0.86 per share, up 21% year-over-year or up 5% on a weather-normalized basis.

The year-over-year comparison was largely driven by weather, given the unusually warm first quarter in 2017 as well as cost savings achieved already this year.

Our solid start to the year gives us confidence in our ability to deliver the results you've come to expect, regardless of weather or other changing conditions around us.

Our strength is our agility and ability to flex.

While it's early in the year, we continue to reaffirm our year-end guidance of 6% to 8% off of last year's actual results.

And we reiterate that we'd be disappointed not to be towards the high end of our range again this year.

Our focus and commitment to our triple bottom line, people, planet and profit, underpinned by financial and operating performance is a low risk and sustainable business approach, and it continues to deliver.

My story for this month starts at our Campbell generating station.

I was able to join my coworkers as we celebrated a record run on Unit 3 prior to entering our planned periodic maintenance outage.

We're proud of the maintenance work we've done and the environmental upgrades made over the years to protect the land, air and water for Michigan residents.

We were excited to celebrate this record run, knowing that the power we generate at the Campbell plant, is not only more reliable, but it's also cleaner than it's ever been.

Yet, we are still dissatisfied.

Longer term, we know that to reach our Clean Energy Breakthrough Goal that we announced in February, there will come a time when these plants will need to be retired.

Some of these plants have served our customers for over 60 years.

This decision has a real impact on the lives of the people and the community surrounding our remaining plants and my coworkers who are employed there.

For that reason, like our handling of the Classic 7 retirements in 2016, we plan to work with these communities and our coworkers to ensure a smooth transition.

Our previous coal retirements involve partnerships with developers to decommission these plants and then redevelop them for the good of the local community, which was all done at a lower cost for customers and perfectly exemplifies our triple bottom line.

I'm excited to share some of the details of our Clean Energy Breakthrough Goal that we announced in February.

As you know, we've already taken the leadership position in the sector by reducing our carbon emissions by 38% from 2005 with the closure of approximately 1-gigawatt of coal at our Classic 7 plants in 2016, which exceeds the requirements outlined by the Clean Power Plan.

We've committed to cutting our carbon emissions by 80% and retiring all of our coal plants by 2040, which is a decade ahead of the targets in the Paris climate accord.

In that time frame, we anticipate that more than 40% of our energy will come from clean sources, such as wind and solar and from energy storage.

Our goal doesn't end there.

Over the next 5 years, we plan to save 1 billion gallons of water, reduce waste going to landfills by 35% and protect 5,000 acres of land in Michigan.

These industry-leading results and commitments, along with our social and governance practices, have made us the #1 U.S. utility in the annual Sustainalytics rankings for the second year in a row, all while continuing to deliver top-tier financial results.

On the regulatory front, you may recall that we filed our 5-year electric distribution plan in the first quarter.

We believe the 5-year plan will provide a visible road map of our electric investments on needed infrastructure, and our upcoming electric rate filing in the second quarter will align nicely with that 5-year plan.

We received an order in our electric rate case in late March, which authorized a 10% ROE and a $66 million in revenue.

We view this outcome as constructive and a confirmation of the robust design of Michigan's regulatory statute.

We have one additional rate case yet to be determined this year.

We expect an order in our gas rate case at the end of August.

As a reminder, we initially requested $178 million of rate relief and a 10.5% ROE, which excluded the impacts of tax reform.

Just to walk you through the math.

we've revised our request down by $33 million, largely related to cost savings already achieved, such as benefit savings as well as capital and other O&M that were pushed beyond the test year.

We're reducing our request even further by including the impact of tax reform, which results in a revised request of $83 million and reflects a 10.75% ROE, given the implications of tax reform and current economic conditions.

Given tax reforms and low commodity prices, this is a great opportunity to make significant safety and infrastructure upgrades to our system, while still protecting customers from bills they can't afford.

Finally, in June, we plan to file our long-awaited IRP.

The new energy law requires us to file the IRP, which will provide more insight to where our future-generation mix is heading and allows the commission to go on the record with their view of our plan.

The IRP will also provide investment certainty ahead of capital expenditures and will align with our clean and lean philosophy.

We are at a unique moment in time.

As we are retiring our traditional coal assets and out-of-market PPAs, we have choices about how to replace that energy and capacity.

We're opting to leverage this moment.

And we don't plan to replace that capacity on a megawatt per megawatt basis right away.

Instead, we'll primarily use a modular build-out of renewable sources of power, coupled with energy waste reduction through energy efficiency and demand response.

Our incentive mechanism for energy efficiency and investment in renewables make these choices good for customers and for investors.

This is the essence of our clean and lean investment philosophy, which allows us to eliminate energy waste, rightsize our energy supply and distribution system, and minimize exposure to high-priced PPAs, fuel, O&M and future stranded costs through big bets.

We can then deploy that capital into renewable investments in other areas of the business that provide additional benefits to our customers, including electric distribution and gas infrastructure, which improve safety and reliability while executing on our commitment to the planet.

As we focus on the road ahead, it's important to note that we continue to deliver, regardless of weather or any other external factors.

Just look at our track record.

We provide consistent results supported by strong operations performance and no resets.

Our agility and conservative planning are our strength.

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

Thank you, Patti, and good morning, everyone.

As Patti highlighted, we're pleased to report we kicked off 2018 with a strong first quarter, achieving earnings per share of $0.86, up $0.15 from the first quarter of 2017, implies 21% period-over-period growth, largely driven by weather and cost savings.

Weather-normalized earnings were up 5% from the prior year, which reflects colder winter weather to the benefit of the gas business and a lack of significant storm activity relative to Q1 of 2017.

As a result of this strong start, we're ahead of plan, which is always helpful prior to storms.

That said, it is still early in the year, so we'll continue to plan conservatively and manage the business with a focus on executing on our capital plan, and identifying cost savings to mitigate future risk to the plan and to perpetuate our self-funding strategy to the benefit of customers and investors.

On Slide 10, on the left-hand side of the waterfall chart, you can see the favorable comparison of first quarter 2018 results versus Q1 of 2017.

Favorable weather provided $0.14 of positive variance and cost savings, including reduced benefits, expenses and minimal storm activity, contributed $0.07.

Also, rate relief, net of investments, provided a $0.01 of EPS upside relative to the comparable period in 2017.

These sources of positive variants were partially offset by lower nonweather sales, largely due to our energy efficiency program.

As we look ahead to the remainder of 2018, we are encouraged by the path required to achieve our 2018 EPS guidance range, which includes modest pickup later in the year from our already approved electric rate increase, constructive outcome in our pending gas case and normal weather.

However, as mentioned before, we'll continue to plan conservatively, [keeping a] keen eye on risk mitigation in the inherent variability that we've experienced in our business over the years.

To that end, Slide 11 best illustrates said variability, but more important highlights the resilience of our business model.

During periods of unfavorable weather or other sources of downside, we rely on our ability to flex operating and nonoperating leverage to meet our financial objects without compromising customer service.

During strong periods, we focus on reinvestment into the business to achieve longer-term benefits for customers and investors.

Every year is different, but we always expect to meet our financial and operational objectives year in and year out.

On Slide 12, we highlight, as a reminder, the model that facilitates our ability to deliver consistent industry-leading financial performance.

With our extensive backlog of capital investments, which drives earnings growth, significant cost reduction opportunities and a diverse economy in our service territory, we are confident that we can maintain our success for many years to come.

The multifaceted nature of the self-funding strategy, which is comprised of cost reductions, tax planning, sales and nonutility earnings contribution, facilitates risk mitigation.

In fact, our ability to self-fund the vast majority of our capital investments enables us to meet our financial and operational targets, while minimizing the customer price impact

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To elaborate on the magnitude of our organic growth opportunity, as noted on Slide 13, that we have an extensive inventory of capital investment projects at the utility through our large and aging electric

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As we've historically invested in our system -- I'm sorry, excuse me, and we have historically invested in our system at a measured pace given customer affordability

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As highlighted on our fourth quarter call, given the substantial rate reduction opportunity presented by tax reform in addition to the other aspects of our self-funding strategy, we have forecasted a 5-year capital investment program of approximately $10 billion, which extends our runway for growth without compromising our annual price increase target of at or below inflation.

The expected composition of this plan will be weighted towards improving our gas infrastructure as well as upgrading our electric distribution system and investing in more

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This level investment further improves the safety and reliability of our electric and gas systems to the benefit of customers, evolves our generation portfolio to the benefit of the planet and extends the runway for EPS growth

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Our capital investment needs remain significant beyond the 5-year period as evidenced in the circular chart on the left.

As we work through the aforementioned regulatory proceedings and our ordinary course financial planning cycle, we expect that the longer-term capital mix will continue to evolve, and we look forward to providing an update on our 10-year capital plan

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As mentioned, our model is successful because we largely self-fund our capital plans through cost savings to minimize customer

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impact.

And historically, we have emphasized our substantial focus and achievements on reducing operation and maintenance expense.

And rightfully I might add, since we have reduced those costs by 11% since 2013.

We also foresee sustainable process improvements through waste elimination of lean principles embodied by the CE Way, which can lead to future savings within and beyond O&M.

To that end, it is important to note that we do not discriminate when it comes to cost savings, and we view literally every component of our cost structure as an opportunity.

In fact, the non-O&M portion of our cost structure represents a pool of approximately $4.5 billion, which is roughly 80% of our costs.

Needless to say that pool won't go to 0, but it offers a significant cost savings opportunity, which creates headroom to invest capital to improve the safety and reliability of our gas and electric systems, while minimizing customer bills.

The expiration of our large PPAs will create substantial cost reduction opportunities in the future, and in the interim, we will continue our efforts to reduce fuel and power supply cost, interest expense, and property and income taxes.

As for the latter, over the course of the next several months, we'll provide bill credits to customers through a 3-step process, which will ultimately equate to a rate reduction of up to 4%.

I'll refer you to Slide 21 in the appendix of our presentation for additional detail.

And as noted in the past, every 1% reduction in customer rates equates to $400 million of incremental capital investment.

The benefits of our cost-reduction efforts and financial discipline over the years are illustrated on the right-hand side of the slide.

As you'll note, residential electric and gas bills have declined relative to inflation over the past 5 years, despite the fact that we have invested approximately $8.5 billion in aggregate into those systems over that period.

And we expect that trend of maintaining customer bills at or below inflation while continuing to make substantial investments into the system continue for the foreseeable future.

Our capital investment program and self-funding strategy is complemented by an investment grade balance sheet, which is underpinned by solid cash flow generation and a conservative financing strategy.

Our financial discipline has led to strong credit metrics in numerous ratings upgrades over the years as highlighted on Slide 15.

This prudent balance sheet management had enabled us to absorb the effects of tax reform, while extending our capital plan without issuing substantial amounts of equity.

As a reminder, our FFO to debt ratio is projected to be approximately 18% by year-end, which includes the effects of federal tax reform and is in line with our targeted range.

On slide 16, we've provided the sensitivities to our plan for your modeling assumptions.

As you'll note, upon receipt of the electric rate case order in March, with no further electric orders scheduled in 2018, we've struck that sensitivity for the balance of the year.

Suffice it to say, with reasonable planning assumptions and robust risk mitigation, the probability of large variances from our plan are minimized.

So we feel quite good about our ability to meet our financial targets this year.

Slide 17 summarizes the low-risk nature of our business mix, with significant utility earnings contribution coupled with largely contracted nonutility growth and prudent financial planning, we believe our historical success can be perpetuated in the long term with no big bets.

And with that, I would like to thank you, again, on behalf of CMS for joining us this morning.

And I'll hand it back to Patti for some closing remarks.

Thanks, Rejji.

With our unique self-funding model, enhanced by the Consumers Energy Way and tax reform, a constructive regulatory statute, a large and aging system in need of capital investments and a healthy balance sheet to fund our plan cost effectively, we believe our financial performance is sustainable over the long term.

With that, Francesca, please open the lines for Q&A.

(Operator Instructions) The first question is from Julien Dumoulin-Smith of Bank of America Merrill Lynch.

So perhaps just -- first quick question here.

With some preliminary guidance out of IRS on interest deductibility, how are you thinking about your relationship with EnerBank ultimately?

I'll leave it broad here.

Well, I'll just start with -- as we've always said, EnerBank is a small part of the big picture.

It certainly provides a nice buffer in light of tax reform.

Given that, however, we still think that in the long run EnerBank might have more value to someone else.

And so we'll keep our eyes open, but while it's still in the family, we're going to definitely leverage it for its full potential.

But again, it's a small part of the total picture.

But Rejji might want to touch on some of the tax benefits of EnerBank more specifically.

Yes, I'd echo that, Julien.

I mean, we have said for some time, clearly, it's a noncore business.

But historically, it has not provided any sort of drag on the consolidated return on equity of the business, nor has it offered up a drag with respect to growth and the business has been largely self-sufficient for some time now, and so we haven't equitize it for a while.

So provided it continues to do that, we view it as a nice contributor to the total pie.

And as mentioned in the context of tax reform, it does provide a shield, and we still believe that it does in light of the new bill.

And so we'll keep an eye on the IRS guidance, but at the end of the day, we're fiduciaries, and at the right valuation, we're certainly obligated to take a look at it as a potential disposition.

But for now, we'll continue to leave it chugging along, and we'll continue to enjoy the tax shield that it creates.

Excellent.

And just moving on to the latest MISO auction, if I'm reading between the lines a little bit, it seems like you're saying for DIG on 2018 guidance below 3 versus kind of roughly 3 before?

I mean, is that kind of an appropriate sort of teasing apart of your updated guidance here?

Yes.

I think that's fair, Julien.

So we have -- as mentioned on the Q4 call, we had over 400 megawatts of capacity held up, effectively in escrow as part of the Palisades transaction.

Because one of the, I'll say, interim or short-term buyer replacement plans as part of the transaction was to sell a capacity to the utility.

And so while that 400-or-so megawatts was held in advance, we missed a pretty good opportunity to sell down that capacity as we often like to do in advance.

So we were left with a significant amount of open capacity in 2018.

The economic impact is de minimis, and we were able to offload a good portion of that in the auction.

But obviously at $0.30 a kilowatt month, which is where the auction ended up, that wasn't in line with our plan.

So there was a little bit of downside associated with that, but again, the impact on 2018 is de minimis.

And I'll just add that we had made some upgrades at the plants at DIG, and that has turned out to be a nice offset.

We're actually getting a couple additional megawatts that's above plan, and so that's been a nice offset.

So all in all, enterprises are in line with plan for the year.

Yes.

And the other point I would add is that obviously, given it's unregulated status, the tax savings associated with federal tax reform, they get to keep on that side of the business.

Right.

But ultimately, you wouldn't necessarily say that it's -- that bilateral pricing has come off meaningfully as we kind of think beyond 2018 here?

No, I don't think the market has softened all that much.

And in fact, we've said in the past in the context of the state reliability mechanism process and the charge that was established by the commission last year, I think we'll get visibility probably in the next few months as to whether or not there'll be a local clearing requirement beyond 2021.

And so that, to me, should materially tighten the bilateral market in which case there could be significant opportunities in the capacity side for DIG.

Excellent.

And then lastly, the 60 -- basically, the cost savings year-to-date, I think, it's like $0.62, it's basically to say that you've got some room in the plan to hit the numbers, basically, is that kind of fair way to describe that, as you think about that waterfall through the year?

Yes.

That's right.

I mean, that last column or that last component of the chart has always effectively been the plug.

And if you look at the opportunities we have within our plan, if you look at some of the activities that we've move forward on in Q4, some of the reinvestment opportunities, the bond tender, those what I'll call discretionary activities, needless to say, we don't need to move forward on those this year.

So we feel like we have lot of optionality going into the last 3 quarters of the year.

Your next question is from Michael Weinstein of Crédit Suisse.

Can you discuss the -- how the state reliability mechanism is kicking in at this point?

And what impact that might have or might be having already on collection of revenues for future capacity?

So right now, we had to declare what our ability to serve our own load was, which we did back in December of '16.

And then, in February, the AESs had to indicate their ability to serve.

And at this time, it looks like they are able to serve their load, and so the state reliability mechanism is fulfilled.

Sorry, we -- in 2017, we declared our ability to serve our load.

But bottom line, the AESs have demonstrated that they can serve their load.

And we have a capacity charge then that is assigned to customers, only in the event that they cannot.

And so that's not yet materialized.

But we expect that given the local clearing requirement that will be established later this year, that would be what forces, I think, more transparency about local load being provided to serve AES customers.

And Michael, this is Rejji.

Just to be clear here, I think you may have described it as a revenue opportunity, if I heard you correctly.

Needless to say, in the event, you do have a situation, in which this alternative electric suppliers and the choice customers that they have do not demonstrate that they have the requisite capacity going forward, and they are, in fact, levy to charge that they would pay back to us, that would go directly to customers.

So that's really -- we don't view it as an upside opportunity [indiscernible] per se, but obviously, it's a cost savings-related opportunity which can create headroom.

Yes.

We think of it as more accurately reflecting cost of service and cost allocation, if you will, to the appropriate parties who are utilizing the energy should be paying for.

And so it's a cost savings for customers.

But as Rejji articulated, it's not a definitely revenue upside, if you will.

I see.

Those revenues really are just -- it's the pressures on the customers to go ahead and do something about choosing some kind of capacity requirements, right, or capacity contract?

Correct.

Not really.

Yes.

And just one last question.

Just to clarify on EnerBank, you're still offsetting the parent interest expense, right, with the interest income there.

Are you saying that, that's -- it might not be necessary and that's why it's being considered for possible disposition at this point?

No, no.

There's certainly value that we ascribe to that tax shield.

But we're just saying as a noncore asset and as fiduciaries if there is a third party that has an interest in buying the property, we would have to evaluate it.

And so I believe that, that tax shield is certainly of great value, and it does provide a nice shield for the interest expense to the parent.

But as a fiduciary, if somebody comes along with the right price, we have to have a discussion.

So it's probably fair to say that its value did increase, given its role that it plays for the company.

And so certainly, we'll leverage that until there's a better offer.

Okay.

Are you -- it's fair to say that you're getting inbound calls from it or -- at this point?

We don't discuss M&A opportunity.

The next question is from Shar Pourreza of Guggenheim Partners.

Can we just real quick touch on stakeholder feedback so far that you're getting around the 5-year distribution plan.

How's dialogue going?

But really more importantly, could we touch on the timing and scope for a rider or tracker request?

Sure.

A couple of things.

First of all, on stakeholder engagement, we had, I would say, a great amount of discussions.

And it's been really good for us to have conversations with key environmental interveners, customer groups, customer types as well as policymakers on both our distribution and our integrated resource plan.

That involvement from stakeholders, I think, goes a long way to having positive outcomes of regulatory filings.

Now keep in mind the distribution plans actually it doesn't result in any kind of order, if you will, accepting the plan, it just creates transparency to the plan.

And so the stakeholder involvement, I think, just bodes well to say that we thought of everything, and we're considering all the appropriate alternatives for our investments in the distribution systems as well as the IRP.

And the IRP, we're excited to publish that.

We'll publish that in June.

It's -- I think, it will provide a great integrated look between the electric distribution and the supply plan.

And so we look forward to getting those documents public and that will then provide an opportunity -- a window into really what the capital plan is more specifically on the distribution side.

One other clarification on the IRP itself.

It's going to be a 20-year look, but the first 3 years of it are really what provide some of the economic certainty for investments in the first 3 years of the IRP.

So it's obviously been a busy regulatory season for our regulators and their staff, a nod to them for all the hard work they've been doing to implement the 2016 Energy Law.

It's been a heavy lift.

But I think what we're putting in place then provides the framework for potentially tracking mechanisms because you've got multiple years of look of an investment strategy.

But even without tracking mechanisms, I think, it provides some more visibility and alignment around the infrastructure investment upgrades required in Michigan.

I'll just add one last thought here that the amount of investment magnitude is driven by our aging system.

And so as we've reiterated multiple times, it's not a shortage of investments, it's just deciding the best investment.

So these proceedings really do provide an opportunity to align and have more regulatory certainty going into the filing.

Got it.

And is there any specific timing we should think about as far as the tracker request?

What would be the right...

Yes.

It would be part of any of our rate case filings.

So we have one tracking mechanism in our gas -- in the -- in our gas system right now for enhanced infrastructure replacement program.

That's our mains and our service lines.

We're looking at increasing that.

We've got a current gas rate case, it's under review right now, that expands it even further.

We received an expansion of that tracking mechanism in our last order.

So we think we're developing a good track record of doing what we say we're going to do that.

And that's important when establishing a pattern for approval for these tracking mechanisms.

So in a gas case, we'd look for additional components to be included in that.

Specific tracking mechanisms or a parallel one, for example, on vintage services.

And then on the electric system.

We would expect in our electric rate case to file for tracking mechanism that would align, for example, with that 5-year electric distribution plan, and that would be resolved through a final order on that rate case.

So we plan to file that rate case in second quarter.

So that's 10 months from the filing date.

Okay, perfect.

And then just one last question.

I'm just thinking more long term on the back end of your 10-year plan and potential upside around capital program from the IRP and replacing above-market PPAs.

How should we sort of think about more specifically around renewables?

Mainly, are you seeing sort of the same strong wind economics as one of your Michigan peers?

Is there any sort of opportunities to pull forward more of that spend, maybe because of incremental customer demand for it?

Yes, you bet.

In fact, we've already done some of that.

We actually have the green renewable tariff approved and fully subscribed for our largest customers to have access to additional renewables.

Our Cross Winds wind park, one of our expansions was dedicated to that tariff and serving load beyond our renewable portfolio standard.

We are obviously also working to achieve the 15% renewable portfolio standard that was part of the 2016 energy loss and that will be about 500 additional megawatts.

We have about $700 million in our plan to achieve that additional renewables.

And then any of the incremental renewables, either to fulfill our IRP or to serve additional C&I, specifically the industrial customers who have renewable energy targets, will be incremental to that.

And so, again, our IRP that we're going to file in June will be very reflective of what we see as that plan going forward.

And renewable energy plays a very, very important part of our future.

And Shar, this is Rejji.

Just to provide some additional context around the magnitude of the potential, I'd say a supply replacement opportunity.

We have -- as we've highlighted, about 4 gigawatts of power coming offline over the decade.

So if you look at 2040, you got Palisades; in the next decade, you got MCV, those 2 alone are 2 gigawatts, if you look at.

The coal units, that's another 2 gigawatts up to 2040.

And so as we rolled out our Clean Energy Breakthrough Goal, we did highlight that if you did backfill a good portion of that energy and capacity with renewable, it could be up to about 40% of our fleet over time.

So you think about the magnitude and size of that potential opportunity, it really is quite robust, and we're seeing -- continue to see attractive capacity factors, we talked about the opportunities we've got in the context of RFP, and we're seeing capacity factors in the high-30s, which implies kind of mid-40s on a megawatt-hour basis.

And so we think Michigan and renewable opportunities here will continue to be competitive, and we think the cost curve will continue to trend in the right way.

Yes, particularly as we look at the 10-, 15-year plan, solar will play an increasing role.

Because we expect prices to continue to drop for solar just as technology advances plus its capacity factor at peak is like 50%.

And so it can play a really important role in planning for capacity for the future.

So again, our IRP, I think, will be very reflective of the plan, and so we look forward to making that public in June.

The next question comes from Praful Mehta of Citigroup.

So just staying on the EnerBank theme for a minute.

You've talked about noncore asset, but wanted to understand if there is an opportunity to sell, is there a tax basis or tax leakage that you see on this kind of transaction?

Would this be like a cash sale?

And if it were a cash sale, what kind of tax leakage do you see in such a transaction?

It's just a function, as I see it, Praful, as the timing of a transaction.

So we've owned the business for some time.

So you can assume the basis is low.

But remember, we're not scheduled to be a federal taxpayer until the early '20s.

And so in the event, it was for sale -- if the sale or disposition were to take place in the near term, you can assume you get a deferral on that gain for a few years, if there's -- if it's to take place, say, 5, 6 years from now, you can assume there will be economic leakage.

But needless to say, we would take all that into account in the context of a potential transaction.

And I don't want to set expectations too much.

I mean, we're going to be thoughtful about this, the business contributes quite a bit and obviously, it has an enhanced strategic value in the context of tax reform.

So we will take all of that into account if any imbalance were to recur and, again, we won't talk about whether there are any M&A opportunities in play.

Fair enough.

That's helpful.

And then Slide 17 is [full, too].

Just wanted to understand on that, the parent growth rate where you have plus to minus 1%, I guess.

Just wanted to understand what are the factors that could drive it, both upwards and downwards from the midpoint?

Yes, so embedded in that, I'll call it, just corporate bucket because you have EnerBank within that.

And so EnerBank is a component of that.

You've got interest expense of the parent, which is nonrecoverable.

And so in the event, you get economic refinancing opportunities that could drive some potential upside there.

And so it's a combination of EnerBank, interest expense, savings.

Those are really the core drivers as I see it.

Got you.

And then finally just -- I know you didn't want to talk M&A, but just broader corporate M&A.

I don't know if you want to touch on that.

Given your strong financial position right now, is there more activity you see in terms of conversations around broad corporate M&A?

And how would you see yourselves both as buyers and sellers right now?

Our plan has so much organic potential.

We really are not looking at M&A as a necessary part of our planning.

We feel great about our plan.

And if somebody -- again, as fiduciaries, if a great offer came to us, it would have to be a great offer because our plan is solid.

And we feel good about the direction that we're taking.

So certainly not on the front page of any of our planning is -- M&A does not play a front-page role of any of our planning.

And Praful, this is Rejji.

Just to circle back to your prior question about opportunities or the key drivers within the sort of corporate bucket, I would be remiss, particularly as I spend lot of time with our Head of Tax to not mention the good work we've done on tax planning side over the years, and so that also is a key driver of the corporate business.

So I would say tax planning, interest expense as well as the EnerBank contribution, those are all material drivers of the performance of that segment.

The next question is from Travis Miller of Morningstar.

Just a quick clarification.

On that cost savings, that $0.07, was that more pull forward or was that more overachieving or achieving in line?

Could you just clarify that cost savings number relative to the rest of the year?

Yes, I would say a small portion of it it's a pull forward.

So we did a bond or partial bond take out in Q4 of last year.

We had some 8.75% senior notes, where it's a $300 million tranche, we took out 2/3 of it.

And so that lead to some savings.

Obviously, you can do a little better than 8.75% in this market.

So that was a small source of savings.

The biggest component of it that was relative -- or was related, I should say to benefits-related savings.

And that was due to changes we made in both our OPEB and pension plans, which led to real cash and significant pension-related savings that we were delighted to pass on to customers in our pending gas case.

And so that's really the primary sources.

It's a combination of benefits and interest expense savings.

Okay.

And those were part of your plan?

So they were not embedded in the plan at least in terms of the interest expense savings, so that created some upside.

And then the pension, I would say, yes, largely that was accounted for.

So don't believe that that's going to be a significant tailwind for what we deliver at the end of the year, if that's what you're thinking.

And keep in mind, our model is all about deploying cost savings, finding them, implementing them, achieving them and then redeploying operating and maintenance dollars back into the business to prepare for next year.

So when we're doing planning, we are looking at execution this year for sure.

But we're also looking about execution in 2019 and building a plan and reinvesting those O&M dollars back into the business for the benefit of more predictable outcomes at the end of this year and next year, which is what really is our strength.

Our ability to flex throughout the year, put to work those cost savings to the benefits of -- to the benefit of customers and investors.

That's what makes us so predictable year after year after year after year.

And Travis, sorry, just to clarify, so both the interest expense savings as well as the benefit savings were embedded in our '18 plan.

But I was thinking about it in the context of relative to the comp of Q1 of '17 positive variance -- '17.

So I just want to be perfectly clear about that.

Okay.

Great.

And then one longer term, where does energy storage play a role, either in what we'll see in IRP or just in your plan already?

Yes, we -- I think, you'll see energy storage also as a part of our IRP.

We've been doing work to learn more.

We've got some demonstration pilots.

We had an opportunity to visit with Tesla and Stem out in California on a benchmarking and learning trip, if you will.

We see the opportunity for storage to fit into the plan nicely.

Now it's not in -- economic today, but we think that those cost curves will continue to occur.

And we think there are places both on the grid side and in residential applications for storage to play an important piece in maximizing the dispatchability of renewables as well as providing more control and options on the grid.

So we're excited about that technology, but like all things, we're not making any big bets.

We're not going along in new, untested technologies.

We'll do our homework and apply it appropriately.

The next question is from Paul Ridzon of KeyBanc.

Slide 10 on the waterfall, just the first quarter negative $0.07, one of the drivers there is cited as economy.

Can you just touch on that?

Yes, sure.

It's interesting.

On the surface, if you look at the supporting slides or pages that we provided publicly, you'll see across electric, we saw a little bit of softness, at least in the data around residential, commercial and industrial sales trends.

And so just to give some specifics on that, residential was down between 1% to 1.5%, commercial down 1% to 1.5%, and this is on a weather-normalized basis and net of energy efficiency.

And then industrial was down about 3%.

And so all of that was, again, on the surface a bit surprising because we still see very good economic conditions within the state, particularly in the heart of our service territory.

So we're probing that.

But I think over time, if you look back at our history, if past is prologue, we never get too excited good or bad about Q1 because it certainly is not indicative of the full year.

So just to go back to recent memory last year, in Q1 of '17, we started out of the gate at about 1% to 1.5% up.

We ended the year just under 0.5%.

2016, we started the year out flat and then ended up at about 0.5%.

And so Q1 does not a year make.

But I'll also just point you to the EPS curve that we've highlighted in the past.

It just shows the inherent variability in the business.

And so we never rely upon one driver to help us deliver our financial performance.

And so sales is sort of one small component of the self-funding strategy.

And we usually overachieve on the cost side as well as some of the other drivers or levers to manage the work and make sure we deliver.

The only other thing I'd mention, again, because it's to me a little surprising, we did really peel the onion on just these data points I highlighted around commercial, residential and industrial performance, and cycle billed sales and our service territory for the quarter were actually up quite a bit.

And so I'll just quote for you a couple of sectors that we dug into.

As you know, our service territory is pretty well diversified.

And so we saw chemicals up 6%, fabricated metal products up 2%, we saw also transportation equipment up 5% and then food manufacturing up 13%, and this is Q1 of '18 versus Q1 of '17.

We have, again, many sectors within our service territory, but I'm not cherrypicking here, those are the most energy-intensive sectors within our service territory.

And so we actually think that suggests that there's actually pretty good underlying economic story within our service territory.

And the last 2 transportation equipment as well as food manufacturing are actually pretty good leading indicators because that suggest both for transportation and equipment that the industrial side of the state is doing pretty well.

And then with respect to food manufacturing that usually suggests a commercial, a retail activity, diners, restaurants, grocery stores are all still humming along.

Again, I don't think it really tells the full story.

But that's the data that we have at the moment.

As I recall -- I mean, you had an extremely mild quarter last year and you showed outsized strength on the economy.

Is this just the weather-norm model breaking down on extremes?

Yes.

So that's an imperfect science, as you know.

And so given that, it was an incredibly mild winter from a weather perspective in Q1 of '17.

I also -- we're going to have to dig in a bit more into that Q1 '17 comp because I do think the weather normalization trends may also be leading to a little bit of the vagaries in the math we're seeing right now.

I do not believe that the statistics that I read off around residential, commercial, industrial performance in Q1 are indicative of what we're seeing again economically in the state.

And then, obviously Governor Snyder is termed out, any candidates out there leaning towards energy as a policy to platform on?

Yes, Paul.

I don't see them leaning towards energy as a key issue, because of the law that was passed in 2016.

I think a lot of the -- all of the candidates are aware and were in some cases involved in the passage of the law.

And so I think there's a lot of people who with a strong point of view that it's a good construct, it's a good statute that was passed with bipartisan support.

And so to tackle that again would be a big issue.

But I will say all the leading candidates have good track records.

And we, as you know, have always worked with whoever is in office to make sure that we're serving Michigan well.

And so no worry be it on the election front.

The next question is from Angie Storozynski of Macquarie.

So I hate to go back to the bank question.

But -- so is the bank a big contributor to your operating cash flows?

I mean, I understand the earnings impact.

But given the tax reform, I would have thought that this is actually a pretty important asset because it's likely supporting your cash flows now?

Not a material one.

So we generally get a run rate of about, call it, $45 million, $50 million pretax.

That business is tax effect, that gives you pretty good proxy for the cash flow generation.

We did a $1.7 billion operating cash flow last year.

The target this year is $1.65 billion.

So it's not a material contributor from an OCF perspective.

And again, it's a self-funding model.

And so we're not equitizing that business.

We're not getting dividends out of that business.

And so at the end of the day, we don't rely on it for any of our liquidity needs.

Was that helpful?

And remember, it's an industrial loan corporation, so it doesn't have deposits, if you will.

It does loans for home improvements.

Okay.

Changing topics to the renewables and growing investments in renewables.

So I mean, initially to be honest, I thought that if you continue to add, especially wind, to your systems, then you will run your coal plants or gas plants less, and that will actually help your O&M expenses.

But the more we're looking at it, it seems like the cycling of the conventional power assets actually increases O&M expenses, at least initially unless the addition of the wind farm coincides with over time another coal plant.

Is this a fair assessment?

And also that you've always managed to beat all of your expectations regarding O&M efficiencies, but does it make it more difficult for you to hit your O&M target as you increase your renewable power penetration?

I think, it's a great question.

The coal plants, in particular, were not designed for cycling.

So the things that you observe are true.

But there's an interesting asset in our Ludington Pumped Storage, which is basically the fourth largest battery in the world, it's a pump storage that allows for dispatching at peak times.

And so it serves as a great complement to our renewable assets.

And so that configuration for us combined at consumers are gas plants, really do, I'd say perform very well in concert with renewables.

And therefore, the O&M expenses associated with the gas plant and the Ludington Pumped Storage Plant combined with renewables is actually quite favorable for our operating system.

Now I will -- I agree that coal is harder to cycle like that, which is why we retired 1 gigawatt of coal, and is good economically and good for the planet.

So that definitely improves our operating expense profile with the transition to more renewables in that way.

This concludes our question-and-answer session.

I'd like to turn the conference back over to Patti Poppe before any closing remarks.

Well, thank you, everybody.

Great questions today.

It was good to be with you.

We look forward to seeing you at our upcoming events.

And for those of you who will be at AGA, we'll be happy to see you there as well.

Thanks so much.

This concludes today's conference.

We thank everyone for your participation.