CMS能源 (CMS) 2014 Q4 法說會逐字稿

Good morning, everyone, and welcome to the CMS Energy 2014 year-end results and outlook call. This call is being recorded. After the presentation, we will conduct a question-and-answer session. Instructions will be provided at that time.

(Operator Instructions)

Just a reminder, there will be a rebroadcast of this conference called today beginning at 12:00 PM eastern time running through February 5. This presentation is also being webcast and is available on CMS Energy's website in the Investor Relation section. At this time, I would like to turn the call over to Mr. Glenn Barba, Vice President, Controller, and Chief Accounting Officer. Please go ahead.

Thank you. Good morning, and thank you for joining us today. With me are John Russell, President and Chief Executive Officer, and Tom Web, Executive Vice President and Chief Financial Officer. Our earnings news release issued earlier today and the presentation used in this webcast are available on our website.

This presentation contains forward-looking statements which are subject to risks and uncertainties. All forward-looking statements should be considered in the context of the risk and other factors detailed in our SEC filings. These factors could cause CMS Energy's and consumers' results to differ materially. This presentation all includes non-GAAP measures. A reconciliation of each of these measures to the most directly comparable GAAP measure is included in the appendix and posted in the Investor section of our website.

Now, I'd like to turn the call over to John.

Thanks, Glenn, and good morning, everyone. Thanks for joining us on our year-end earnings call. I'll begin the presentation with an overview of the year before I turn the call over to Tom to discuss the results and outlook. Then, we'll close with Q&A.

2014 adjusted earnings per share were $1.77 up 7% from prior-years actual result. For 2015, we are raising the low end of our guidance from $1.85 to $1.86 per share. The top end remains the same at $1.89. This reflects our plan to grow earnings per share by 5% to 7% off last year's actual performance. Last week, our Board approved a 7.4% dividend increase, the ninth consecutive increase in as many years. The new annual dividend of $1.16 per share results in a competitive payout ratio of 62%.

2014 was another successful year both financially and operationally. The settlement of the gas rate case was constructive at $45 million with a 10.3% return on equity. We achieved our 10% renewable energy target one year ahead of schedule with the completion of the 111-megawatt Cross Winds Energy Park. In addition to increasing customer satisfaction scores and moving towards a more competitive rate design, we invested a record $1.7 billion into utility in the areas of system reliability, environmental compliance, gas infrastructure, and technology. These projects add value to our customers and deliver financial results for our shareholders.

Our strategy is centered around breakthrough thinking over the long-term. We begin by focusing on operational excellence and maintaining our first-quartile cost performance. By the end of this year, we will have reduced O&M expense by $150 million since 2006, a 13% decrease on an absolute basis. We were able to grow organically with no big bets through our transparent 10-year, $15.5 billion capital investment plan.

This year, we anticipate comprehensive energy policy in Michigan. The updated law, as well as the predicted MISO capacity short fall next year could provide future opportunities. Last week, we received an 18-month air permit extension for a Thetford gas plant. This will provide us optionality to meet a capacity shortfall, but it is not in our plan. We are committed to providing our customers with exceptional value.

Our dedication to improving customer satisfaction has moved us from fourth quartile to second quartile for electric and gas business customers and to first quartile for residential customers, a significant improvement over the past four years. In 2016, we anticipate having all four segments in the first quartile as we continue to focus on customer satisfaction by delivering the quality service our customers expect. Customer satisfaction is an important element of our breakthrough thinking that leads to predictable financial results.

The reelection of Governor Snyder and the reappointments of Senator Mike Nofs and House Representative Aric Nesbitt as chairs of their respective energy committees adds stability in the political environment. The commission remains chaired by John Quackenbush and Greg White, who will be retiring mid-year. We look forward to working with these respected leaders to advance energy policy.

Energy policy is a priority for the governor, as he mentioned during his state-of-the-state address. He wants an energy policy that will be adaptable, affordable, reliable, and environmentally sound. The governor also announced that he is creating a new agency to better coordinate energy policy in the state. He is expected to offer more details when he delivers an energy message in March. The governor is focused on adaptability over the long-term as Michigan moves towards less coal and more natural gas generation and renewable energy sources. We look forward to working with the governor to support his goals.

Each year we build our growth off prior year's actual result. Our model had continued to produce predictable results that build on the high end of performance. And the Company's organic growth strategy continues to support the 5% to 7% long-term growth rate. For 2015, we expect more breakthrough performance. Operationally, we will continue to make safety our top priority for employees, customers, and the communities we serve. Our industry-leading cost performance puts us in a desirable position.

But we're not done. Again this year, we expect to take out more cost through increased productivity while maintaining a high level of employee engagement. By improving customer value and quality of service, we will continue to increase customer satisfaction. This year, we have an opportunity to work with policy-makers on a new energy law that will secure Michigan's energy future for the next decade and more. All of this and deliver the predictable financial performance as we have in the past.

Now, I'll turn the call over to Tom.

Well, thanks, John. And thank you, everyone, for joining us on the call today. As always, we deeply appreciate your interest in our Company and for spending time with us today.

I'll cover the 2014 results, 2015, our future plans, as well as upsides. As John mentioned, the full-year results at a $1.77 a share are up $0.11 or 7% from 2013. As you can see here in the left shaded circle, cost savings fully funded our capital investment in 2014. We avoided both gas and electric rate cases for 2014. We also put to work the substantial upside from better than planned cost performance and favorable weather in substantial O&M reinvestments. These approached $100 million in 2014 on top of a similar amount in 2013.

This slide, which I suspect is familiar now to almost all of you, shows how on top of large planned cost reductions of $150 million in 2014, we further reduced our cost by $21 million. This and the colder than normal weather in the earlier part of the year provided room for substantial O&M reinvestment, to improve reliability, generate incremental productivity and pre-fund parent net. This not only maintains a conservative risk profile, it makes it easier to continue improved performance for our customers and to deliver consistent high-end earnings per share growth. We achieved all of our financial targets for 2014, but please recall we had cautioned earlier in the year that we might fall short of our cash flow target.

We're delighted to report today that we were able to accomplish additional working capital improvements to achieve the operating cash flow objective of $1.45 billion. Now, looking ahead to 2015, you can see that the O&M reinvestments we made in 2014 already are bearing benefits. Much of our capital investment is self-funded by our own cost reductions. And half of the rate increases needed for 2015 already are in place. We've got a nice, fast start to the year. Earlier this month, we settled our 2015 gas rate case, our first since 2013 at $45 million. This included continuation of our return on equity at 10.3%. The 2015 electric rate case is well underway.

It has three distinct features. First, it provides us with the opportunity to put the purchase of the new Jackson Gas Plant in rate base when our customers need the capacity. And we're proud to do it at one of lowest purchase prices for a gas plant ever paid. Second, we'll be recovering the portion of our customer investments that we have not already self funded with cost reductions. And then last, this case includes a new rate design which permits residential customers to stay fully competitive and allows industrial customers to become more competitive.

Electric residential bills are below the national average. Industrial rates are above the midwest average, and we have a solid plan to improve. Driven by our own cost reductions, improved rate design, and the prospect that subsidies for ROE customers will disappear, industrial rates can be competitive too. ROE customers may return to bundled service because of policy changes or naturally as capacity prices normalize. This would end the existing subsidy worth about $150 million.

Here's our standard sensitivity stable to permit you to evaluate our outlook. Here's our report card for 2015. We continue consistent high-end earnings growth at $1.86 to $1.89, or up 5% to 7% from the high-end 2014 results. Operating cash flow should grow another $100 million to $1.55 billion and with no big bets. Last week we increased our dividend by 7.5% and plan to stay in the 60% to 70% payout range. Importantly, our total price changes for electric and gas customers will reflect reductions of 3%. Yes, reductions of 3%, further increasing competitive value for our customers. Our balance sheet and CapEx measures are strong. And we're able to self fund our organic CapEx programs with cost reductions and NOLs.

Shifting to the longer term, our future plan includes healthy levels of investment, O&M cost reductions, modest sales growth, and a continuation of the 2008 energy law. Both earnings per share and the dividend should grow 5% to 7% each year. Our mix of capital spending during the last ten years will shift and growth over the next ten years. We'll be putting more capital investment into gas infrastructure and electric reliability as we continue investment in other important parts of the business. Capital investment grows 45% with no big bets.

O&M cost net of increases continued to plummet, with reductions of 2% in 2012, 3% in 2013, 3% in 2014, and we project another 3% in 2015. Compared with our last call, cost reductions are even bigger. In 2014 and 2015, O&M costs are down 3% each year instead of the 2% we previously reported. This progress reflects our conservative planning, followed by better performance. Since 2006, we've reduced our cost by 7% through 2013, and with acceleration just discussed in 2014 and 2015, we've got a fast start at a cumulative cost reduction of 17% by 2018.

Weather-normalized sales growth in 2014 was stronger than forecast. 2015 looks stronger than we thought as well, with electric industrial sales up 3% and overall sales up 1%. We still intend to plan 2016 to 2019 conservatively with our estimate of industrial sales up 2% and overall sales up 0.5%. We plan to grow operating cash flow by another $100 million to $1.55 billion in 2015. That's up $500 million from five years ago, and we expect gross operating cash flow to rise to $2.4 billion by 2019, up another $500 million. Our operating cash flow levels already exceed peers. So here's a summary of what we have in our plan with consistent earnings growth at 5% to 7% a year and good dividend growth that reflects the same. Since 2007, we've raised our dividend every year, and on average, by 25% a year.

Now there are several areas, however, that are not reflected in our plan. These are meaningful upsides. Our capital spending could be substantially higher. Our sales growth and our cost reductions, also, could be better. In addition, our plan does not assume any changes to the energy laws, such as changes to retail open access, renewables or energy efficiency standards. These may all result in large upsides. Our capital investment plans over the next 10 years are $15.5 billion, as we mentioned, up 45% from the last 10 years. And there's an opportunity to increase that level by another 30%. We'll work to incorporate these opportunities without adding pressure to customer prices.

Now, here's a great example of that. One aspect that's still not included in our plan is new capacity investment. Should ROE customers return to bundled service, either in response to policy or market changes, we would need to add investment to provide another 800-megawatts of capacity. Later in the planning cycle, we'll need to replace expiring PPAs with more than 2,000-megawatts of capacity. And we believe we can do that without raising customer bills by a penny. These opportunities alone require 3,000-megawatts of new capacity at consumers. None of this is in our present plan.

On top of capacity needed at consumers, the 4GT, or alias Ferrari in the garage, is fired up. Capacity prices have begun to increase in the midwest, and there's an opportunity for our Dearborn Industrial Generation Plant to realize profit improvements of another $20 million to $40 million. We've already locked in $10 million, moving from $5 million to $15 million, with an opportunity to add further $20 million to $40 million, and that is not yet in our plans.

While we have an enviable organic growth plan, we have upsides. 30% more CapEx, new energy law improvements, higher sales, deeper cost reductions, and higher capacity prices. Our track record is pretty good. Our planned future is brighter than the past. And that's before any of these likely upsides.

We're committed to high-end earnings and dividend growth, continuing our track record of a dozen years. We're committed to rapidly improving customer satisfaction with better value and performance. We are committed to our customers and to you, our investors. We thank you for your interest and your continuing support.

We'd be delighted to take your question, so Lori, would you please open up the lines?

Thank you very much, Mr. Webb.

(Operator Instructions)

Your first question is from Julien Dumoulin-Smith of UBS. Your line is open.

Hi, good morning.

Hi, Julian.

So quick first question, perhaps as a clarification, if you will. You talk about the ROA and the potential for up to 800 megawatts. Can you, perhaps, talk about the configuration? What sites? How many combined cycles or peakers, or how you plan to meet that to the extent to which we get clarity on that in the next few months here?

Yes, let's talk about it. We've got 800 megawatts that are off on retail open access right now. If that does come back are plan to meet that -- and I don't expect it'll come back if the law changes or based on market conditions all at once.

But the options we have are buying from the market, increasing the production of some of our current units that we have. As you know, we've asked the public service commission to allow us to purchase the Jackson plant, which is another 540 megawatts.

Plus we have DIG, which Tom had talked about too. DIG has available capacity in the state that we can purchase. And on a long-term basis, I think Sedford is probably the plant that we'll go to where we did get the air permit extended.

Great. So it would just be Sedford in the long-term though, just to be clear?

Yes.

Okay, and then on the UP situation, is there any opportunity to be involved there? Obviously that's -- kind of wrap it up here, but is there anything you can do on your side?

No, I like where we're at right now.

Great. And then perhaps more broadly, as you look towards the energy legislation in the state, specifically on the RPS side, where does that stand right now? Where are your expectations for the RPS to be increased?

And secondly, to the extent which it is, what are your expectations around being able to rate base more than 50% as it stands? Perhaps, how are the conversations going at least initially, if you can?

Yes, let me give you the -- what was that last part? Rate base 50%? I didn't understand that.

How much of the potential spend could you rate base?

Yes. The energy policy, I think, is the key question for today. The governor was pretty clear in the state-of-the-state that he does want to move forward with energy policy.

I think the situation that has occurred in the upper peninsula, as you referred to, really highlights the need to do something here in Michigan to take care of our customers with the Michigan companies and not let MISO or the federal government step in to solve the issue that they were talking about before. Or what they did in the UP.

So I think the timing of changing it is good. As far as the renewable energy, energy efficiency, that will all be part of the mix.

I think it's important for us to look at balanced portfolio, which includes what we're doing by reducing our coal fleet, reducing the number of units in our coal fleet, increasing the gas. And I think the renewable energy standard will, in one way or another, continue to grow in the state of Michigan.

And I think that's good. I think it's good for our customers. But it'll be a healthy debate with the Republicans in the House, Senate, and the administration for the level that we choose.

As far as the 50% in the 2008 law, I don't expect -- I mean, one of the things that we've been able to do, which is a tribute to the team, is build the renewable energy cheaper than we have purchasing it from other people. And that's very clear in what we've done over the past several years in the 2008 energy law. So if the intent of the law is to increase renewable energy and do it for our customers and do it in a cost-effective fashion, we ought to be able to do it all ourselves.

So Julian, I'd just add, we haven't assumed any extra renewable investment in our capital investment plans. So remember when we talk about anything moving up from the 10% standard a little bit or a lot, whether it's 50% or all or none, none of that's in our plan.

So that's all upside. That's part of that $5 billion that's not in our capital investment program yet.

Great. And then, perhaps, lastly, what's the timing as you guys see the legislation proceeding?

I think the Governor, as I mentioned in March, he's coming out with an energy message. So I would expect that he's interested, knowing the governor, and I think for those of you that have followed him, he doesn't really wait long to get things done.

So I expect he will move on it. I think the importance of doing it is important in 2015. And I talked about this energy agency that he created.

One of the things that he sees, I expect, is the need for better coordination between the various departments in the state of Michigan, particularly as the state of Michigan develops its state implementation plan for -- to be able to comply with the clean power plan. So that really is an all-inclusive plan.

And I think his view is, let's get as many people around the table to do this right for Michigan. So I think he'll be anxious to move forward on this quickly.

Great, well, thank you very much all for the time.

Thank you.

Your next question is from Ali Agha of SunTrust. Your line is open.

Thank you, good morning.

Good morning.

Hey, John or Tom, this last dividend increase that you announced, and John you mentioned 7.4%, was that a signal of the kind of earnings growth power that you're seeing at least near term? Or was that more fine-tuning on the payout ratio? It's a pretty big hike, and I was wondering if there was a message behind that dividend hike.

Ali, I wouldn't look into it too much except for the fact that it really did show that the board was confident in our plan. We shared the five-year plan with them, and as we've told others that we continue to grow at 5% to 7%.

And you should expect the dividend growth to be in that range too. So I take it as sign of confidence for our plan.

Okay. And then, John also, you alluded to retail open access a couple of times. Just what's the latest that you are hearing as these things are getting firmed up, energy policy changes, et cetera? Where is the focus right now, legislative-wise on whether to get rid of retail open access, or what are you hearing?

I think that, you know, as I mentioned earlier, I think the most important thing that everybody is seeing -- so I'll use this as a generic -- is what's going on in the upper peninsula. You follow that, and I said, most of the people followed that. Wisconsin energy couldn't close down their plant because the federal government stepped in to ensure reliability for the customers in the UP.

The Michigan governor and administration and others stepped in again then to prevent that from happening and have their own solution, which I think really determined that the Michigan solution for Michigan customers is best. And the one thing I still don't know is what the impact to the upper peninsula customers will be when this is all said and done.

What we were able to determine before this deal was cut is that half of the customers up north would see a significant increase in rates on January 1. And that's been postponed. So the reality, the unintended consequence of full deregulation, which in essence is what happened in the upper peninsula because of the one company going to a different provider, really is playing out now in a way that is causing a lot of people to question this hybrid market that we have here in Michigan.

Ali, we have a lot of confidence that the legislature will do what's in the best interest of Michigan and all of our customers. And to eliminate a $150 million subsidy they're paying today is something that certainly gathers their attention.

I know. And then you, again, you folks have alluded a couple of times to stuff that's not in the plan, upside potential both on the regulated side and with DIG as well. Is that a scenario that you could see out there that, frankly, you come back to us and say, look, guys, all of these good things are coming together.

We told you 5% to 7%, but you know what? Realistically we're going to be north of 7% just looking at the visibility? Is that a realistic scenario that you could actually exceed 7% given all these upsides you've talked about?

I don't see that right now. I think that's a question we've had in the past. I like the plan we have today, 5% to 7% growth, that's consistent, transparent, and predictable.

What we've shown you, and Tom's slide does a nice job with the weather slide, that we reinvest and increase our expenses as we continue to have upside. And what that is, is it does a nice job balancing financial performance better than our peers while also having operational performance at or above our peers. And we still have some work to do on the operational side to get to be first quartile in all the areas that we're working on.

So I see the long term, at least in the near term, the five-year plan, continuing the progress that we've made, continue the 5% to 7% growth, make more investments, as Tom indicated, if they're necessary to utility. Or if DIG continues to do well, I think the opportunity we have is to make sure that we have best-in-class operations and best-in-class financial results. And that's what we're going to shoot for.

In other words. John if I better phrase that, if you are seeing yourselves running above, like you've done in the short term, you will spend more money to keep you within the range? That's the way we should think about it?

That's a good way to describe it. We've continued this approach now for three or four years, and I expect we'll continue it.

And I would just add to spend more money to make our customers better off, we still have a lot of things that we need to do and not leave you short at all. We will work hard to deliver on that high end while we take care of our customers.

Maybe 10 years out or 5 years out, there won't be good investments we can make on the O&M side. Maybe something will trickle through. But we've got a lot of work to do over the next two or three years.

Sure. Thank you.

Your next question comes from the line of Dan Eggers of Credit Suisse. Your line is open.

Good morning, guys.

Morning.

With the governor's speech in March, and the new energy committee coming, what do you guys see as a progression to see legislation move this year? How does the legislative calendar work for their ability to put something up and get it done? And what are realistic timelines for seeing a conclusion at the state?

I think the timeline, the reasonable timeline is sometime in 2015. You can go through -- the one slide that I think is important is the fact the governor's back and both the Senate and the House energy committees are being led by experienced leaders.

So the good news there is that they don't have to come up to speed. Most of the Senate energy committee has a lot of experience. Most of them had voted for the 2008 energy law.

So the good news is there won't be as much of a catch-up required for them. On the House, there's a lot of new members. So that may require a little more time on the House side of it.

But when you look at this, it's possible. I'd say anytime in 2015. I don't want to put a number on it, Dan, because anything can happen.

But the natural time that we've talked about before, natural sunset for the 2008 energy law is 2015. And I expect it'll be done by the end of the year.

And John, as you're feeling that it's important to have your EPA out on 111D so you have clarity on what those implications are for the state before they can try and formulate a bigger, grander plan?

Yes, that's a great question. From my standpoint, you know that we're well positioned to meet the clean power plan. Closing down the seven coal units, we can achieve the interim basis and on our path to achieve the long-term basis that they have.

What I was really pleased with, and we haven't seen all the details yet, is the governor looking at this as a comprehensive solution for Michigan. So when he looks at energy departments, the DOE, the department of environmental quality, he looks at the MPSC and having the environmental folks together talking about this.

I think it positions Michigan well for the future without surprises. I think the coordination of government can be an issue at times, and he's addressing it head-on.

And one of the bounding principles to your CapEx program is in managing customer bills and keeping that inflation below 2%. This year, again, you're below 1%, and you're finding better O&M savings than budgeted.

What is the outlook for billing placed over the next couple years? And does that create room or more flexibility to bump up the CapEx plan?

Yes, I think it does. When you look at that on a bill basis, we continue to -- natural gas business, we'll start there, is very solid because of the natural gas system that we have and being able to store natural gas with the prices of natural gas coming down. What you see on the electric slide, is that -- Tom highlighted a couple of his slides there -- you see a couple things.

We can continue to grow our capacity, build it, while customers come back from ROA. So retail open access customers return. We have $150 million of subsidies that go away that could be put into paying for the additional capital that we have.

Longer term, we have several long-term purchase power agreements that are higher than market. And I think one of the slides that Tom showed you there today is that as we terminate those contracts or they sunset that we're able to build capacity and save our customers money.

And the one thing I think everybody knows, but I'll just mention it again, one of the reasons we can continue our O&M reductions, and we don't see an end to this, is we've addressed the legacy issues. Which, I think we're one of the few companies that have done that across the board, including the union.

Those are the benefits that keep giving to us year over year over year as we turn over the workforce. The other issue, too, is we invest capital. We invest capital for several reasons, but two areas that are important to emphasize here.

We invest capital to reduce O&M, and we reduce capital to reduce our fuel cost. And there's several examples going into all of this that I want to give you.

You think about smart meters, we're installing smart meters. We're almost at 700,000 smart meters. We invest capital, improve customer satisfaction with the ability to read accurately all the time, to help our distribution operation, and to eliminate the O&M cost of reading the meters. And is this going to continue as we shut down the seven coal plants. We have a larger workforce compared to the same amount of megawatts and capacity out of our gas plants with much fewer associated costs.

So this future I see -- I think Tom referred to it as bright. I see it as bright. We scratched the surface now, and now we're starting to see some of the things that we did a few years ago pay dividends as we go forward in the future.

Great, thank you guys.

Thank, Dan.

Your next question comes from Mark Barnett of Morningstar. Your line is open.

Good morning, everyone.

Morning.

You touched on this subject a little bit already. But I wanted to maybe hear some of your comments on how you're going to deal with new-rate design in terms of the conversation with regulators that you've had so far.

And do you think that's going to be a fairly easy conversation, given where the governor stands on it and where probably some of the legislators stand on it? Maybe can you give a little more detail on how you expect that to change?

Yes. So you know that's well underway for both the major utilities in the state, and there's a lot of different views. No question. But through the working groups that led up to the legislature saying let's make these change, the commission now has a process underway to go ahead and execute these changes.

They will actually help our energy intensive customers reduce their rates by 16%, overall, our industrial customers by 10%, and then the offset that comes on the residential side, we cover that. We cover that by skipping rate cases, by being more productive, and when you look at the slide, number 17, about electric customer prices, that really shows how it works.

That shows we're able to keep our residential bills well below the national average and put rate design in place along with all the other things to do to take our industrial rates and bring them down close to or into the competitive area. So we anticipate there'll be lively discussion because when one goes up, one goes down. That's the way life is.

But we also expect that the policy makers and the regulators will look to do what's best. And I suspect this will get through.

Okay. And with the March speech, obviously, that's entirely in the governor's court, and his prerogative. But do you expect there to be harder details?

Obviously, there have been a lot of things in the conversation already, and he'll probably talk about this new agency as well. But I mean, you know, not necessarily specifics on renewables, but maybe some other areas that he's going to be targeting, do you really expect that to kind of come out in March? Or is it going to be as you said earlier, kind of a through 2015 process?

I think he's going to provide more details in March. For the governor to state that one of his priorities in the state-of-the-state was energy means he wants to get something done on energy.

He also indicated in that same state-of-the-state that March is going to have a presentation or discuss the details more. So I expect he's working on it now, and I expect we'll all see a lot more details in March.

Okay, thanks a lot for the commentary.

Thank, Mark.

Your next question comes from Greg Gordon of Evercore ISI. Your line is open.

Thanks, good morning, guys.

Good morning.

I know that you said that for now we should assume that you're going to plan within the 5% to 7% aspiration. But I just want to be clear that you also said something additional now in an answer to a subsequent question that, if there were further head room created in the business model by either your ability to reduce costs further or to take advantage of the reduction in subsidies, or to have to respond to the necessity of getting more capacity into rate base, those would constitute scenarios under which you might be able to exceed 7%?

Is that correct or incorrect? And then I have a follow-up.

No, no. 5% to 7% is our range. That's what we'll continue. Yes, I hope I didn't confuse anybody.

If there's capital opportunities in the future, I think the question that was asked of me is how will that affect your rates in keeping the bills competitive? And we have ways to invest capital and keep the bills competitive.

But, Greg, what I see happening is 5% to 7%. If we make any additional capital investments and we have better growth than the 5% to 7%, we will reinvestment expenses back into the business to get our operational performance to be best in class. And I see that happening for the next several years.

And then I may have misguided you as I said as you go out through many years there are is a point where if those reinvestments are not economical, they don't make sense to our customers, we're wasting their money, we're not going to do that. And there could be a little bit of flow-through into the guidance.

But that's out a few years. We've got plenty to do in the next two to three years. And even though we've got a 10-year plan, we're really focused on the next two to three years, making things work.

Well, I guess that's my point. There's so many potential capital investments that would be beneficial to the customer, to the Michigan economy, that -- under certain scenarios, obviously -- that if you could find more head room and keep rate increases at a minimum, I guess the inference would be that you could perhaps do better but -- (multiple speakers)

No, I think, Craig, you're right. We would theoretically. But remember last year, we reinvested about $100 million in the year before in 2013.

We did another $100 million, just short of that, this year, and we see that opportunity to do it again in 2015 and 2016, if the opportunity persists. There's a lot of examples. But we have a little bit of ice here in Michigan this morning, and even though our system is running really well, if we can do more tree-trimming, that's a big way to improve reliability.

So that's just one very simple example of what we can do. So we don't want to disappoint you, but 5% to 7%.

You're not disappointing anybody, believe me. (laughter) Follow-up question on the capacity price slide, just want to be clear when you say was, now, and future, is was what you -- the $5 million, what you earned in 2014. Is now $15 million what you expect to earn in 2015? And what's in the guidance? And --

Well, just for clarity, I will use that slide. We told you previously that we had about $5 million in the DIG numbers for capacity margins, if you will. That number is now $15 million because we have put in place a few of those contracts as we've been layering things in. So that impact is about $15 million. That's in our plan, we built that.

But there's still, we think, another upside of $20 million to $40 million as we layer in more capacity contracts. And again, we're not trying to wait for a peak. We're just, as they come up $0.50 or so, we layer in a few more long-term ones, as they come up, maybe another $0.50, layer in a few more. So it's a slow process.

But there's another $20 million to $40 million upside that's not in the plan. We're not comfortable with putting that in our numbers until we know we can elect those contracts.

And that's a business outside of the regulated utility construct, right? So that would be sort of -- if you were to see a scenario where you would get very quickly to the mid-point of that $20 million to $40 million, that could potentially provide an upside to the 7% then?

That's correct. But it also -- we connect all the dots -- allows us to have an opportunity to put a little bit more into the utility. Now, we haven't under earned in a long time, but we put a little bit more in there and let DIG help that.

So we do connect that up. It's not totally separate when we give you that 5% to 7% earnings growth. But I admit, at least it's in a different segment.

Okay, thank you, gentlemen.

Thank you.

Jonathan Arnold of Deutsche Bank. Your line is open.

Good morning, guys.

Good morning.

Can I just pick up first on something from Greg's question to be sure I understand the new nine-year contract at 406. Is that part of the transition to the future scenario? Or is that part of the now?

Yes, that nine-year contract is already baked in. That's included. So what I'm talking about -- and I'll give you a feel for this. This may help you a little bit.

We've layered in capacity contracts that cover the bulk of this year for 2015. But we could layer in almost another 500 megawatts in 2016, another 600 megawatts in 2017. So there's capacity there we've not locked up because we anticipate that capacity prices will rise a little more than they have today.

We're seeing that in bilateral discussions. So that's the opportunity that's not in.

So we should think of the contract as firming up your view of where prices are today, but it's part of that current plan?

Yes, exactly. So remember when you read that nine-year contract, read carefully, that's energy.

Yes.

And that was an update on that. The capacity side, you see a couple contracts that were done, in fact, with consumers that were recently approved.

But we've got a lot of space to move up. And we're just not -- you know us, we're so conservative. We're not going to put it in the plan until we're pretty certain that we can do it.

Okay. And then, Tom, another. Just could you give us a little insight into what types of specific items have enabled you to bring the O&M forecast from negative two to negative three for these two years

Yes, and I'm going to do that maybe a little bit differently. I'll get to your question this way to give you a better feel for what's ahead, 2015 compared to what we did in 2014.

We're going to get another 3% out, even though everyone's aware that most all companies have had to reflect the mortality tables. That cost us $35 million and the new discount rates. And for us, that cost us a little over $20 million.

So right there, there's $55 million of higher cost. We count it all. We don't adjust it out. We don't say oh, that's terrible, we won't count the bad stuff.

We've fully offset that with better pole top maintenance that we're doing. There's work in that area that will allow us to be more productive and efficient with what we're doing in O&M. There's $25 million to $30 million there.

Our productivity across the board, higher quality improvements is another $30 million. Here's a place where you're throwing money down the trash can. Our uncollectible accounts have caught up a little bit in the last year or two, and no customer is interested in that and neither are you.

So we're looking to get $20 million improvement in those uncollectible accounts. IT productivity gets us another $15 million. Remember the classic [seven] where we're getting prepared to go away, some of that cost begins to go away. There's about $7 million in there.

Overhead, I'm too expensive. One day they'll get rid of me, but not yet. But there's another $500 million of overhead that we have planned to go away this year.

So there were a mixture of things in what I just went through that are a little richer, a little better than what we had told you previously. So instead of being down 2%, you know we were already looking at all these items. We just didn't want to promise till we felt good about getting them.

We're now at 3%. And candidly, our internal numbers are a bigger reduction than that. But 3% is all we're willing to put on the table at this point for 2015.

Great, thank you for that.

Okay, thank you.

And then can I just ask one thing on the -- did I hear you say that your target dividend payout ratio is 60% to 70%? Or was it that it's just 62% for 2015?

No, it's 60% to 70% is the range we think we'll live in over time. That's us guessing where the other companies and our peers will be over time on average. Very precisely, the number is 62% today. But we've learned --

But you did say 60% to 70%. So my question is how should we think about the fact that you're at the lower end of that range currently and your comments about potential for incremental investment? Should we assume that if some of those don't play out that the dividend could really grow even faster? Or --

No I wouldn't think of it that way. But I'd think of it this way. The average of our peers is 62%, so that's why we're trying to be there.

If that peer -- and there are some companies that are higher. They, I think, have a little less opportunity to make capital investments. So this is a way to give some money back.

As that number goes up, that average goes up, we're going to look seriously at chasing that unless our 7% or high-end numbers don't get us there, right? So we just want you to know that we doubt the average will go higher than 70%. We doubt it will go lower than 60%.

So being at 62% is the average where we should be. But if anything, the bias would be to the higher side. And we'll watch that as we evaluate it each year with the board.

It'll be dependent on where the peers track, basically?

Exactly.

Yes, okay. Thank you very much.

Thank you.

Your next question is from Andrew Weisel of MacQuarie Capital.

Morning, I'm actually all set. I meant to withdraw my question. Thanks.

Good morning. Thanks for dialing in.

Your next question is from Brian Russo of Ladenburg Thalmann. Your line is open.

Hi, good morning.

Good morning, Brian.

Most of my questions have been asked and answered, but just a clarification on the $20 million to $40 million upside based on future capacity prices. Can you bookend over what time period that we might expect that?

Yes. We're guessing, right? And hopefully intelligent guesses.

But we suspect as MISO sees a shortfall of approaching as much as 3,000 megawatts in our zone 7, that as people get closer to 2016 when they predict that, they'll want to have the comfort that they're not going to have an issue. So more people will look for capacity. And there won't be a lot of it around.

And so the opportunities for those prices to naturally go up will occur, we think, in 2015 and maybe as late as in 2016. So I see us being able to execute contracts on some of this surplus capacity at dig that we just talked about -- you know in that 500 megawatt-plus zone -- in that period.

So it may all occur in 2016. But I get the sense that there may be a chance yet in 2015 as people try to protect themselves appropriately.

Okay, I'm all set. Thank you very much.

Thank you.

Your next question is from Paul Patterson of Glenrock. Your line is open.

Good morning.

Good morning.

Just on slide 23, just a few quick housekeeping items. The fuel savings of $25 million that you have in O&M, what's that about?

Think of that as mix of plants. So as we take our coal plants out and we replace them with renewables and gas plants, it takes fewer people to actually manage those operations, and therefore, that's productivity. That's a lot of people coming out. So --

Got you. Makes sense. Okay, and then with benefits going down $75 million, what's driving that?

So we've done a series of things over the years, as much as 9 and 10 years ago, we changed our pension plans both for salary and for hourly workers to a defined contribution program for new employees that come in. And we kept our promise for employees that had these defined benefit programs.

So as you can imagine, we have an attrition rate of about 400 people a year. And as new people come in to replace them, they're coming in on more attractive programs for them and for the Company. Same thing on healthcare and retiree healthcare.

A year ago, we actually changed our retiree healthcare sharing. So people that contribute to their healthcare today will continue to do so at a lesser amount. But they'll continue to do so in their retirement years.

And again, more and more people go into that. Our savings continue to compound as we go through the future. So this $75 million is a recognition on what's going to happen over the next five years.

Okay. I mean, just to clarify this. Sometimes when changes are happening to retiree benefits, et cetera, those expected reductions are showed up in the current period as a reflection of a lower obligation, effectively. And it impacts earnings in the near-term, if you follow me.

It sounds like this is something that you've done in the past. And you guys are actually predicting seeing the benefit in the future, do I have that correct?

You do. Let me just make sure you got it though. So we did recognize that good news for existing employees. That's history. And now we're going to recognize it or we're forecasting as we change our employee mix, we'll see more of it.

Okay. Okay, that makes sense. Okay, and then you mentioned working capital as being a benefit to operating cash flow in 2014. I'm just wondering if you could clarify a little bit, quantify that maybe, and what the nature of that was, and whether that's going to be ongoing, and if so, for how long, if you follow me?

Well, yes, it will be ongoing. But remember the nature of working capital. When you achieve the improvement, you need to repeat that to hold your level of cash flow.

Right.

So I don't want you to think that you can start compounding what I'm going to say. But we saved over $20 million at the end of this year by simply paying our suppliers when they're due, not before, and not late.

And we had in the past, when an invoice would come in, some of our folks would -- and it was due, say on January 10 -- they would just do one transaction, authorize that, and we'd pay it in December. What we do now is we put in the record that we're going to pay it in January. And we don't pay it in December. We pay it when it's due, not late and not early. So that was a good chunk.

We had some money out with other people on deposits that were due to come back to us in January and February. And our operational team was able to work with those folks and just say, could we get that cash back since everything that was needed to be complied with was done in 2014.

So we have lots of things like that, where every day -- it's all part of continuous improvement. How do we make our promise to make our customers better off, treat our suppliers just perfectly, take care of our employees, do all those things and be more product. And that's what was flowing through some of these working capital improvements.

Okay, and you guys expect those to continue.

Absolutely.

Okay, thanks so much.

Thank you.

Your next question is from Paul Ridzon of KeyBanc.

Good morning. Can you remind us how big DIG is, and how much energy and capacity is contracted out for the next few years and what's open?

Yes, so if you take DIG and a couple of small peakers that go with it, it's 852 megawatts of capacity. And in this year, there's not a lot left to contract. We're down to having about 50 megawatts open.

In 2016, we are presently at 477 megawatts available. And then in 2017, it's a little over 600 megawatts. Does that help you?

Very much so. So 470 in 2016, and 700 in 2017.

No, 600 in 2017.

Okay. And Tom, I'm not going to ask you if you're going to raise the growth rate, don't worry.

Thank you very much. (laughter) Bless your heart.

I guess the only question left is who do you like on Sunday? (laughter)

I'll leave that one to John.

No, no, no, no. Paul, we're going to leave that one go. Should be a good game. (laughter)

I'm going to cheer for the winner. (laughter)

Thanks, Paul. Yes, good.

You have no further questions at this time. I will turn the call back over to you.

All right, thank you. Well, first of all, let me thank everybody for joining us today on the call. We appreciate your interest in the company, your continued support of the company.

And we look forward to seeing you at one of the upcoming events. And we'll make sure that we keep working hard for you, for the customers, and you as the share holders. Thank you very much, appreciate it.

This concludes today's conference. We thank everyone for your participation.