CMS Energy Corporation (CMS) — Q4 2017 Earnings Call Transcript

Good morning and Happy Valentine's Day, everyone. With me are Patti Poppe, President and Chief Executive Officer; and Rejji Hayes, Executive Vice President and Chief Financial Officer. This presentation contains forward-looking statements, which are subject to risks and uncertainties. Please refer to our SEC filings for more information regarding the risks and other factors that could cause our actual results to differ materially. This presentation also includes non-GAAP measures. Reconciliations of these measures to the most directly comparable GAAP measures are included in the appendix and posted on our website. Now I will turn the call over to Patti.

Thank you, Sri and thank you everyone for joining us today. Rejji and I are excited to share our 2017 results with you and our 2018 goals. I've scrubbed all of our stories of the month and have selected our winning story of the year, which I will unveil today. Rejji will provide the financial results and an update on Federal Tax Reform and as always we look forward to your questions. We delivered a strong performance in 2017 adding another year to our consistent track record of 7% EPS growth without reset. Operationally we manage challenging weather and storms throughout the year and financially we were able to deliver the results you have come to expect. I'm pleased to report that our adjusted EPS was $2.17, a strong 7% above the prior year which excludes the one-time non-cash effects of Federal Tax Reform. As Rejji will discuss in more detail, tax reform will have a long-term positive impact on our business model. In the near term, given the significant savings provided, our customers will benefit from lower rates which leads to manageable operating cash flow reductions. In the longer term, the lower builds will provide headroom for necessary capital investments. In 2017, we continued to grow our operating cash flow well surpassing our target and yielding an FFO to debt ratio of approximately 20%, which provides plenty of cushion for the potential cash flow impacts of tax reform. For 2018, we are raising our guidance to a range of $2.30 to $2.34, which reflects 6% to 8% annual growth from our 2017 actual EPS. We are also increasing the dividend to $1.43 per share consistent with our expected earnings growth. Longer term, we are reaffirming our growth rate of 6% to 8% and we continue to be confident in our ability to deliver another year of consistent, industry-leading performance. As I stated in the past, we're highly confident in 7% annual growth as demonstrated in 2017, a year where we experienced atypical weather and a record level of storms in our service territory, yet we still delivered. As we think about our guidance range for 2018, we will focus on executing our capital plans and realizing cost savings to the CE Way. Admittedly, given the strength of our plan for 2018 and the reinvestments we've made in 2017, we would be quite disappointed if we didn't finish the year toward the high end of the range. Our commitment to people, planet, and profits—the triple bottom line—continues to serve us well, driving a year of record-setting milestones in safety, service, and customer satisfaction. In fact, our safety performance was our best ever and put us number one amongst our peers. Nothing is more important and it's a great demonstration of the quality of people here at CMS who are focused and safe every single day. We were ranked and awarded in a number of third-party surveys including being named the Best Place to Work and the Best Employer for Diversity in Michigan by Forbes Magazine, and the number one US utility by Sustainalytics for the second year in a row. It's no surprise that my coworkers and I love working for such a purpose-driven company that continues to demonstrate that financial performance and sustainability go hand-in-hand. Yet we're dissatisfied and committed to continuously improving our performance every day. For example, we told a year ago that we only fulfilled our customer commitments on time 9% at the time. Our goal was to reach 50% by the end of 2017, dramatic improvements. With the utilization of the CE Way, the team was able to deliver even better than planned. I'm happy to report that we finished the year at 60% commitments made on time and yet, we still have so much work to do. Each of these remaining missed appointments is a cost both to our customer and to our improved customer experience and cost savings that the CE Way unlocks. I applaud my coworkers and their relentless dedication to continuously improving our performance. You can count on us to leverage the CE Way to enable our triple bottom line of serving our customers and communities, protecting and improving the planet, and delivering strong and predictable financial results. Now as you know, I have a series of stories that I call my story of the month. There is nothing like an example to bring to life the power, the Consumers Energy way and its impact on our continued performance. I reviewed all of our stories last year and have selected the best of the best for my story of the year. As we have shared many times, our business model is fueled by needed infrastructure investments on our aging system, partially funded by cost reduction to protect customers from prices they can't afford. Our core competence of cost reduction is enabled by capital investment which often reduces Operations and Maintenance costs (O&M) through process improvement to the CE Way and effective technology deployment. My story of the year is an example of how the whole model works. Last year, we completed the installation of our smart meters, which was a multi-year capital program designed with customer benefits in mind from day one. Our smart meters have enabled a dramatic improvement in meter read rate and thereby improved billing accuracy while significantly reducing costs. When we don't read the meter rate the first time, we rely on estimated bills which are inevitably error-prone and create waste for both customer and the company. Utilizing smart meter technology and significant process improvement, we've been able to reduce invoice reversals by 90% since 2013, reduced calls to our call centers, and reduced truck rolls investigating perceived billing errors. As a result, this has saved well over $10 million for our customers and better yet, it freed up time to solve another problem. Customers struggling to keep up with their bills. The very same people who were spending time correcting bills were freed up and they designed and launched a new payment program called CARE which enables customers to pay on time and rewards them for doing so, by reducing their arrears as they go, creating a new pattern of payment and household stability? We've reduced shut-offs by 30%, while at the same time reducing our uncollected accounts by $34 million or over 50%. We were able to protect our most vulnerable customers and lower costs for everyone. We awarded our billing team our first Annual Purpose Award this year for their demonstration of world-class performance delivering hometown service. We're creating a culture of performance and celebrating our success. A 99% meter-read rate, a 90% reduction in invoice reversals, and a 50% reduction in uncollected accounts was definitely worthy of celebration. True waste elimination. By making smart investments, improving our processes enabled by the CE Way, and deploying technology, we’ve substantially reduced costs. Which we will return to our customers to fuel new investments which can add even more value for them. This model works, and there is a lot more steam in the boiler for the future. Stay tuned for more stories to come. We're celebrating on the run and have kicked off 2018 with gusto. Safety is always our number one priority, and we aim to make this year's safety performance even better than last year's record result. We have a strong regulatory model in Michigan that is time-bound, transparent, allows us to have forward-looking visibility as well as utilization of our investment recovery mechanism in gas. And as a result of the 2016 Energy Law, we have added an Integrated Resource Plan filing. In parallel, the Commission had ordered a five-year electric distribution plan as well. These long-term regulatory filings allow us to plan for the future, which reduces risk and provides for more predictable regulatory outcomes. As always, we plan to meet all of our financial objectives for the year and Rejji will take you through those along with tax details. We will continue to drive our triple bottom line delivering the consistent world-class results for our customers and you. Our model is simple, durable, and continues to deliver. We self-fund a large portion of our earnings growth. We look at our cost structure. We look at everything: O&M, fuel, Power Purchase Agreements (PPAs), interest expense, and yes, taxes. Tax reform is good for our customers and our model. We believe tax reform will fuel the economic momentum across the country and especially right here in Michigan and we plan to be a big part of that growth. I attended our State of the State Address in mid-January, and the optimism was palpable. The Governor even bragged a little bit, which is pretty uncharacteristic of Michigan's famed nerd. Governor Snyder shared that Michigan is the number one Great Lake State for inbound college-educated talent, has the sixth highest income growth in the nation, and has created the most manufacturing jobs in the country. The Governor reiterated his commitment to infrastructure in Michigan. All of this is good news for our customers and CMS Energy. As we've mentioned, we have a very large and aging system because we have so much needed infrastructure investment. Our internal teams literally compete with one another for project approvals. We have a rigorous prioritization and approval process for work that significantly improves the safety of our system, the reliability of our systems, and often reduces our costs, which is the trifecta for customers. We're the fourth largest gas utility in the nation in terms of miles of pipe; our system is going through a refresh over time. With nearly 1,700 miles of large transmission pipe and 27,000 miles of distribution mains, it will take decades to replace all of it. We plan to continue to align with our regulators on the prioritization and sequence of these necessary investments. Our electric distribution system is older than our peers. Our current plan calls for focus on poles, wires, and substations—nothing fancy, but the basic building blocks of a resilient system. Replacing mains and making every capital dollar count will allow us to deliver more value for customers and enable the long-term delivery of our financial objectives. In the latter half of our five-year distribution plan, we began to add smarter grid technology and modernization which can better optimize and utilize our infrastructure. And we're proud of the way we self-fund these necessary infrastructure investments through our commitment to cost reductions. When we look at the total cost structure, we realize the bulk of our costs are not just to operate and maintain the system. Fuel and purchase power costs are larger than O&M and these are pass-throughs than our regulatory construct here in Michigan, but they're still real expenses for our customers and add no value for our investors. We've reduced fuel prices by shifting from colder gas generation and that saves our customers money, but there is more work to be done. Our PPAs provide a significant opportunity in the very near future to reduce costs for our customers even more and fund necessary capital investments across our system at a lower cost. As we lower total costs, we can be more attractive to companies considering Michigan for their expansion or relocation because when Michigan wins, we win. When Michigan grows, so does our business. We are actively engaged in economic development and in fact, we were awarded the Deal of the Year for our work with locating the switch data center in Grand Rapids, the heart of our electric service territory. By providing energy-ready sites, we work closely with our communities and policy leaders to make it easier for new businesses to expand or move to Michigan. Last year alone, we attracted 69 additional megawatts of new load and there is more fish on the hook. In addition to growth, many of our new and expanding customers are looking for help to achieve their renewable energy goals. We're partnering with those companies for success with our recently announced Green Pricing package. Yet we still plan conservatively. We only add the load to our model and our sale forecast when it has actually materialized. The proof is in the pudding. We achieved almost 2% industrial load growth in 2017. Our regulatory calendar is on pace this year, especially with the continued implementation of the 2016 Energy Law and the new Federal Tax policy. We are working with our regulators to pass the tax savings onto our customers. We made a filing on January 19 indicating our preference, which as you'd expect, is to keep it simple and apply a credit on every bill and we are waiting for the Michigan Public Service Commission's order on this credit application. The new Energy Law requires us to file a long-term integrated resource plan. We anticipate filing that in June. Furthermore, to meet Michigan's new 15% renewable portfolio standard, we have filed a plan to build over 500 megawatts of new renewables and expect the commission order on that plan later this year. Our IRP will provide insight into our future generation mix and enable the commission to go on the record with their view of our plan. Again, the regulatory construct in Michigan is transparent, directed through statute, time-bound, and forward-looking. Therefore, it provides investment certainty ahead of our actual expenditures—no big bets and no surprises. Our rate cases remain on track to deliver cost savings and service improvements to our customers; we expect an order by the end of March on our electric rate case and we are still in the gas case, but expect a constructive outcome there as well. No matter the external factors, our business model has stood the test of time in changing environments. For us to deliver the consistent strong performance you come to expect, we work closely with everyone. Without counting on the weather or other recessions to EPS. Over the last 12 years, we have continued to pay a competitive dividend that has grown along with earnings. When we combine the two, our earnings and dividend growth yield a double-digit total shareholder return. Over the past 10 years, in fact, we've delivered TSR that is three times the performance of the UTY and more than twice the performance of the S&P 500. 2018 will be the 16th year of track record you've come to know and enjoy and we intend to keep it that way for many years to come. Now I will turn the call over to Rejji.

Thank you Patti and good morning, everyone. As always, we greatly appreciate your interest in our company. As we reported earlier this morning for 2017, we delivered adjusted earnings per diluted share of $2.17, which is toward the high end of our guidance and reflects another year of 7% annual growth. Our adjusted EPS in the fourth quarter excludes a $0.52 non-cash, non-recurring charge associated with Federal Tax reform. This charge is largely attributable to the remeasurement of deferred tax assets, which now reflect a reduction of the corporate federal income tax rate to 21% from 35%. We're quite pleased with our performance for the year, particularly in light of the $0.15 negative variance associated with mild temperatures and storms realized over the course of the year, which was more than offset by cost savings, rate increases, net investments, and outperformance at Dig among other factors. As always, we take the good with the bad and manage to work accordingly to meet our operational and financial objectives, to the benefit of our customers and investors. Slide 14 best illustrates the resilience of our business model during periods of unfavorable weather. We rely on our ability to flex operational and financial levers to meet our objectives. 2017 was no different as we experienced mild temperatures and heavy storm activity throughout most of the year and our team responded with cost performance and sound financial planning to deliver the consistent and predictable results you expect. Similar to our past practice, we continue to reinvest in the business during periods of favorable weather or upon realization of cost reductions in excess of plan. These reinvestments entail pulling ahead work such as forestry, refinancing high coupon bonds, and supporting our low income customers among other opportunities. In fact, over the past five years we've reinvested almost $500 million in aggregate due to favorable weather and strong cost performance. These reinvestments support our long-term goals and provide more certainty around our operational and financial objectives in the next year and for years to come. Rounding out our 2017 targets, Slide 15 lists all of our financial targets for the year, and as noted, we met or exceeded every single one of them, which adds another year to our long history of delivering transparent and consistent performance. The highlight is a couple of noteworthy items: in addition to achieving 7% annual EPS growth, we grew our dividend commensurately and generated over $1.7 billion of operating cash flow. Our steady cash generation over the years continues to fortify our balance sheet, as evidenced by our strong FFO to debt ratio, which was approximately 20% at year-end, exceeding both the 2017 target and our historical target range of 17% to 19%. Our conservatism in managing the balance sheet provides sufficient headroom to manage unforeseen headwinds and support strong investment-grade credit ratings, which enable us to fund our capital plan cost-efficiently for the benefit of customers and investors. Lastly, in accordance with our self-funding model, we kept annual price increases below 2% for both the gas and electric businesses, aligning with our target of maintaining annual price increases at or below inflation while investing a record level of capital of $1.9 billion at the utility. As you've grown accustomed, we usually take this time to adjust our EPS guidance based on actual results. As such, you'll note on Slide 16 that we're increasing both the bottom and top end of our 2018 adjusted EPS guidance to $2.30 to $2.34, which is a $0.01 above our initial guidance during our third quarter call and implies 6% to 8% annual growth off our 2017 actual results. As for the path to our 2018 EPS guidance range, as illustrated in our waterfall chart on Slide 17, we plan for normal weather, which in this case will contribute approximately $0.16 of positive year-over-year EPS variance, given the substandard weather experienced in 2017. However, needless to say, we believe we have sufficient risk mitigation in our plan in the event the weather does not cooperate. Additionally, we anticipate about $0.06 of EPS pick up associated with our pending electric and gas rate cases, net investment costs, and another $0.03 from cost savings, which implies a 2% year-over-year reduction in costs, which we believe is highly achievable given our track record. For our estimates, these sources of positive variance will be partially offset by select non-operating savings realized in 2017 that will either be passed onto customers through our pending cases or are one-time in nature. We also have embedded the usual conservatism in our utility sales and non-utility performance forecast. Moving onto Federal tax reform, like most large companies, the new tax law impacts our business in a variety of ways. As Patti mentioned, we believe tax reform will ultimately be accretive to our long-term plan. At the utility, we filed a recommendation on January 19 to the MPSC on how to reflect the new tax law in customer rates. As part of that filing, we proposed an estimated $165 million rate reduction for customers in 2018 and a separate proceeding to determine the treatment of deferred taxes. We are working closely with the Commission on this matter, and though the amount and the pace at which the tax savings will be provided to customers in 2018 have yet to be determined, we believe the rate reduction could be up to 4%, which clearly facilitates our self-funding strategy by creating meaningful headroom for future capital investments. As you know, we have significant investment requirements at the utility in the form of gas and electric infrastructure upgrades, PPA replacements, and renewable investments. The estimated cost savings associated with tax reform increase the likelihood of us incorporating more projects into our capital plan over the next five to 10 years to the benefit of customers and investors. In fact, every 1% reduction in customer rates equates to approximately $400 million of incremental capital investment capacity. On the non-utility side, tax reform impacts CMS in three ways. First, the new tax law establishes potential limitation on parent interest expense deductibility; however, we're uniquely positioned in this regard because our parent interest expense will be largely offset by the interest income generated by EnerBank, our industrial bank subsidiary. Second, our non-utility businesses would realize some upside given the lower federal income tax rate; although this will not have a material impact on our consolidated earnings since those businesses are relatively small. Third, as we've discussed in the past, the sum of non-utility operations produces an overall pre-tax loss due to our parent interest expense. In the past, the overall loss of our non-utility operations produced a larger tax benefit at a 35% tax rate than it will going forward at the 21% rate. This equates to about $0.02 of EPS drag in 2018 that is already baked into our guidance and fully mitigated. Lastly, the repeal of the alternative minimum tax provides us with the opportunity to monetize our substantial AMT credits over the next four years, to the tune of approximately $125 million in the first year, which partially offsets the likely near-term operating cash flow reduction at the utility. In summary, the effects of tax reform are manageable in the near term and create long-term opportunities which provide more certainty around our operational and financial objectives. To elaborate on the magnitude of the potential long-term opportunity. As Patti highlighted, we have a robust capital investment backlog at the utility due to our large and aging electric and gas systems which has historically been executed at a measured pace given customer affordability constraints. Given the substantial rate reduction opportunity presented by tax reform, in addition to the other aspects of our self-funding strategy, we're forecasting a five-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 toward improving our gas infrastructure as well as upgrading our electric distribution system and investing in more renewable generation. This level of investment will increase our utility rate base from approximately $15 billion from 2017 to $21 billion in 2022, which implies a 7% compound annual growth rate. This extension of our five-year capital plan will further improve the safety and reliability of our electric and gas systems, to the benefit of our customers, evolve our generation portfolio to the benefit of the planet, and extend the runway for EPS growth to the benefit of investors. Beyond the next five years, our capital investment needs are significant, likely in excess of $50 billion in the long run. As we discussed during our investor day in September and as evidenced in the circular chart on Slide 19, as you can imagine, over the next 10 years, our capital plan will be greater than our previously disclosed $18 billion plan out of the amount, and the composition of a revised 10-year plan will be dictated by the analyses being performed in our upcoming long-term electric distribution and integrated resource plan filings, as well as the commission decisions as to how they intend to address the new tax law. As such, our longer term estimates will evolve as our regulatory filings progress. From a liquidity perspective, while tax reform alleviates the customer affordability constraint, it does create manageable headwinds in regards to operating cash flow as I alluded to earlier. As a result of the potential reduction of customer rates due to tax reform, we anticipate a flat year-over-year operating cash flow trend from 2018 to 2019 at $1.65 billion but expect to resume our trend of $100 million per year increases by 2020. In aggregate, we're forecasted to generate approximately $9 billion of operating cash flow over the next five years—this will play a key role in the financing strategy of our five-year capital plan. In support of our liquidity planning, we also expect to continue to avoid paying substantial federal taxes until 2022. In sum, our forecasted operating cash flow generation coupled with our tax yield portfolio enables us to continue to finance our capital investment program in a cost-efficient manner. As a result of our solid cash flow generation and conservative financing strategy, which includes a modest ATM equity issuance program, our credit quality has improved significantly over the past 15 years, as evidenced by our strong credit metrics and numerous ratings upgrades. We've also opportunistically refinanced high coupon bonds, such as the partial redemption of our eight and three-quarter senior notes at the parent in the fourth quarter, which has reduced cost and mitigated refinancing risk. As of December 31, our fixed to floating ratio was approximately 95% with a weighted average bond tenure of 13 years, which largely insulates our income statements from the prospect of rising interest rates. This prudent balance sheet management has enabled us to absorb the effects of tax reform while extending our capital plan without issuing substantial amounts of equity. As you can see on the right-hand side of Slide 21, our FFO to debt ratio is projected to be approximately 18% by year end, which includes the effects of federal tax reform and assumes no change to the size of our ATM equity issuance program in 2018. On Slide 22, we have listed our financial targets for 2018 and beyond. In short, we anticipate another great year with 6% to 8% EPS growth—no big bets and robust risk mitigation. This model has and will continue to serve our customers well, as they realize lower gas and electric prices from our self-funding strategy, which is enhanced through tax reform, as well as our investors, who can continue to count on consistent, industry-leading financial performance. Few companies are able to deliver top-end earnings growth while improving value and service for customers, year after year after year, and we're pleased to have delivered another year of consistent, industry-leading performance in 2017, and expect to continue on this path in 2018. On Slide 23, we've refreshed our sensitivities for your modeling assumptions. As you'll note, with reasonable planning assumptions and robust risk mitigation, the probability of large variances from our plan is minimized. There will always be sources of volatility in this business, be it weather, fuel cost, regulatory outcomes or otherwise; and every year we view it as our mandate to do the warning for you and mitigate the risk accordingly. And with that, I'll hand it back to Patti for some closing remarks before Q&A.

Thank you, Rejji. With our unique self-funding model enhanced by tax reform, a constructive regulatory environment, and a large and aging system in need of fundamental capital investments, we feel that our investment thesis is quite compelling. Now Rocco, please open the line for Q&A.

So perhaps just first thing on the EPS growth you guys talk now about enterprises and tax planning. I know you talked broadly about it, but how do you reconcile against this 2% addition that you throw in there in terms of self-funding and then also, can you just be a little clear about the year-by-year equity contemplated in the current plan?

Yes, so with respect to enterprises Julien, as you know that has always been kind of one of several components of the self-funding strategy. Our self-funding strategy is largely predicated on cost cuts, as well as a little bit of sales growth, and then a combination of tax planning, unregulated or non-utility contributions, and other have allowed us to get to that sort of 75% of funding of the 6% to 8% growth, which again minimizes the annual rate relief request. Enterprise has always been part of that plan as EnerBank and their contribution is relatively modest but helpful. So that's effectively how we see that one. With respect to your second question on the equity issuance, it's historically our at-the-market equity dribble or equity issuance program was around $60 million to $70 million on a run rate basis and that's what we've been doing for some time. Based on the implications of tax reform, we don't see that changing in 2018, but longer term we expect a modest increase to call out to the tune of about $20 million to $30 million so we think, run rate it's probably around $110 million to $115 million but not much higher than that, so we still think we can comfortably fund that within the dribble program—it's well south of about 1.5% of our market cap, and we think again it's highly digestible.

Absolutely. Thank you. Perhaps turning to the CapEx side of the equation, perhaps two-fold here first. If I have this right, you increased the overall pie to $50 billion number now and just curious if there is anything to read into that, just in terms of the updates, it gives you that incremental confidence now. And then secondly more specifically, as we think about this upcoming filing on the distribution front and finalizing that here. Is there anything else from a regulatory perspective you all might be looking at to improve your ability to concurrently earn on that maybe thinking of trackers here on the distribution front, but you know curious?

So on the $50 billion, I think we were pretty clear at our Investor Day and we continue to be consistent in our message that our system is large and aging. The point of the $50 billion—and you'll see that it's at least or approximately—because the size of the opportunities is well more than our customers can afford. The constraint of customer affordability and a healthy balance sheet and our credit ratings and credit metrics is an important combination that we're always trying to work. The issue and what we're trying to reinforce is that there is no limit to how much work needs to be done; it's all about managing our cost and making sure that we can get more value for every single dollar that we invest all across the system so that our customers can have a better experience at a lower price. Capital availability is not the constraint, and that's the point of the $50 billion. On the distribution front, we're excited about this filing for a couple of reasons. Number one, it paints a nice five-year picture of investment potential, strategy, results, and outcomes that can be delivered from those investments. It also creates the framework for discussion with the commission. There is nothing embedded in that filing that changes the regulatory construct or modifies our approvals or implies long-term tracking mechanisms, but by having the open visibility, the opportunity to have a good rich discussion with both the staff and commission about investment priorities can provide more certainty to our regulatory outcomes and de-risk the financial plan in the long run.

Excellent. Thank you all.

First question on the electric rate case. Can you just remind us how to reconcile the ALJ proposed decision to your ask? I mean just the dollar amount. There’s a huge difference there. How are you looking at that in the context of how that fits into your financial plan?

The ALJ is just another step in the process. It's not a final Commission order just to be clear. The Commission speaks with their orders. There's a couple of big discrepancies. Number one is their ROE of 9.8—we look at the most recent gas order that the Commission issued and they reiterated that 9.8 is too low and 10.1 was an appropriate ROE at this time, and so that was not that long ago. We feel that's a difference, as well as they had two other what I would describe as distinct differences to traditional rate making that we've been doing, specifically around forecasting sales, around our energy efficiency, and including them or not including them. We've always included our forecasted energy efficiency sales reductions in forward-looking rate making and so the ALJ opted to eliminate that; that was about an $18 million difference as well as discount rate calculation. So there were very specific things that the ALJ pointed to that were very different than what has been traditional. Our final order is expected near the end of March and our Commission is very competent and capable and they'll weigh all of the inputs, and we expect a favorable outcome.

Ali, this is Rejji. The only thing I would add to Patti's good points is that as it pertains to ROE. If you look at the FAC pattern now versus where we were in not too distant past, when the commission gave the decision for the gas case at the end of July, the ten-year treasury was about 2.3%, and well I think we all know what has taken place since then; we've had about 55 to 60 basis points of ascension and then you've had tax reform that's taken place, which is obviously leading to inflationary pressure as well as the prospect of rates rising beyond where they are today. You couple that with what is realistic credit quality deterioration across a lot of utilities in the sector, and I think in light of how the FAC pattern has changed, to me again, I think ROEs and where they will ultimately end up will be difficult to make a case for something below 10% at this point. Ultimately, as Patti highlighted, the Commission will speak through their order, so we’ll see.

Right, and then second question, the weather normalized electric sales for the year ended up 0.4%, which was below your targeted range for the year. I’m just wondering if that changes your thinking going forward. I think you’ve been assuming like a 1% or similar kind of growth rate for sales going forward, just wondering how the 2017 outcome impacts your forward thinking there.

Yes, so Ali, I would actually beg to differ slightly with your position. Yes, we talked about electric sales forecast between call 0.5% to 1% beginning of the year, and that's obviously weather normalized in net of energy efficiency. But as we've said throughout 2017, we've actually been tickled pink with the mix of sales that we've seen throughout the year. So it's interesting as you look at that and at 40 basis points where we ended up and peeled the onion on that—some residential was roughly flat; our forecast beginning the year assumed about a 1.5% decline again net of energy efficiency, and weather normalized. So flat performance there was really above expectation and so that is higher-margin sales as you know, and so that was upside relative to plan. On the commercial side, that's really where we saw quite a bit of performance there, so we're just under 1% weather normalized net of energy efficiency, and our plan beginning of the year was about 1% down. So this implies where you saw a little bit underperformance was on the industrial side, but to end the year got it just under 2% weather normalized net of energy efficiency, again below our plan, but still that's a very nice mix and really suggests that we have a pretty good economic environment and pretty diversified service territory which is not nearly as cyclical as other parts of the state. So we were quite impressed with that and going forward we do not expect to see a modest degradation of that performance from a sales perspective going forward, but generally we do plan conservatively so we'll see. Again, I'm not disappointed at all with where we ended up.

I see. And last question, just to clarify if I heard the remarks right. As you look at your CapEx plans, and factored in the headroom from tax reform, did I hear it right that the next five-year CapEx plan we should not expect any changes in terms of the amounts to that but likely the 10-year plan amounts will likely go up? Did I hear that correctly?

No, no. So just to be clear, you have a couple of things that are moving in the five-year plan. So the prior five-year plan was 17 through 21, that was a $9 billion plan which presupposed about $1.8 billion per year. We've moved one year forward, so this is now an 18 to 22 plan, and so this plan, five years in aggregate, is about $10 billion, which implies about $2 billion of spend per year. You've seen a step-up there in terms of the aggregate spend, and where we have decided to err on the side of conservatism is we're not in a position at this point to provide more disclosure on the 10-year plan. Now, the only thing we've highlighted on the slide is that we fully expect it to be in excess of $18 billion, given that the prior 10-year plan pre-tax reform was $18 billion. If you assume with the likely significant customer rate reductions associated with tax reform, that gives us substantial headroom to increase the capital plan to the benefit of customers and investors. So hopefully that's clear now.

Yes, thank you.

I heard you mention the IRP is kind of the next catalyst to talk more about the expansion of the five and 10-year plan, but is the five-year distribution plan—which I think is coming up—the filing is coming up in March. Is that also another point where you might see more of that $50 billion talked about?

Yes, and this really—the timing of these in parallel is really productive to have the IRP and the electric distribution plans filed within a couple months of each other. The distribution plan does not result in an order per se, or financial approval, but the IRP does. I would say the IRP provides more financial certainty, but the distribution plan in concert with it will show—and will demonstrate the mix of electric spend for sure, as part of that five-year $10 billion plan.

So a couple things to think about there, so the charge was established in late November by the MPSC and I think they assumed about just over $300 per megawatt day for the charge that would potentially be levied to AES, our Alternative Electric Supplier who cannot demonstrate they have requisite capacity four years forward. That translates into about $9 per kilowatt month price in the capacity market and so we assume that anything above $3 per kilowatt month is upside for Dig. While we don't think that will create opportunities in the near term, certainly longer term, particularly if there is a local clearing requirement that's established beyond 2021, we definitely think there could be some opportunities for Dig to be competitive in that environment, but certainly we haven't baked in any of that into our plan because it's too premature for that.

Okay, great. Thank you very much.

Most of my questions have been answered, but I do have one with regard to the IRP at a very high level. 15-year plan. You still have a fairly significant amount of power generation coming from coal. You also have you know Palisades and MCV PPA is expiring in the mid-2020s. Should we expect to see sort of resource plan that talks about how we're going to replace those PPAs and sort of decarbonize the remaining fleet in the context of this IRP? How aggressive a tilt towards renewable might we see, given how much more economic they're becoming especially as we move out into that timeframe?

Great question Greg. Thanks for asking. The IRP plan will definitely reflect our clean and lean generation strategy that will have retirements of coal. It's actually a 20-year time horizon that you'll see, extend through 2040 in that plan, and our decarbonization of our generation fleet will be a big thing that you'll see. The economics of renewable continue to improve and we see that as an important part of our mix going forward in addition to energy waste reduction through peak reduction, through demand response, as well as our energy efficiency programs in total. We're excited to get that IRP out in public; that will really show our commitment to being a key part in a sustainable energy future. We're excited. I will just make one note, Greg, that we have retired seven of our 12 coal units. We've retired almost a gigawatt of coal, and so we're actually down dramatically in our generation fleet, with coal. We feel great about where we are; we've reduced our carbon intensity by 38% since 2008 levels. We definitely are leaders; that’s why Sustainalytics continues to choose us as the number one utility and Newsweek Magazine selected us as one of the greenest companies. Independent of industry, we are in the nation's top 10. We’re flanked by Apple and J&J in that top 10 ranking. Our commitment to carbon reduction is both in our actions and our forecasts.

When I look at Slide 15, while you give the target for 2018 financial targets, and then I think the green box is the 2017, but can you just talk about what you've assumed on tax reform in terms of the pace of refund to customers in that plan? Does that assume what you mentioned so that would be relatively quick? So is there some wiggle room around that, if it comes out slightly not so quick?

Yes, so we assumed we erred on the side of conservatism, I'll say. For 2018, we assumed an excess of about $165 million of operating cash flow reduction. Where there is a little bit of uncertainty is around how the commission might treat deferred tax liability. In the filing that we submitted on January 19, we highlighted that there was about $1.5 billion of deferred tax liabilities as of September 30, and we have proposed that matter should be adjudicated through a separate proceeding and as you know, through normalization that could be basically returned to customers, over the life of the assets at least with the property-related deferred taxes. But for the non-property, the new tax law is quite opaque and ambiguous around that. It remains to be seen exactly how the rest will be returned, but to answer your question, we're assuming I think something around $165 to $200 of degradation for 2018, but I could see wiggle room once there is a decision around deferred taxes going forward.

And as well as in that 18% FFO to debt.

That's exactly right, and so we have also assumed as I highlighted that there is a modest countermeasure in the form of the monetization of the alternative minimum tax credits. We have assumed that we will monetize about half of that, maybe $270 million on the sidelines, which amounts to about $125 million in the first year. So that’s a partial countermeasure, and we’ll do what we can do with cost reductions to offset one of that. But that's what we've theorized.

I understand rightly, Rejji. There's no doubt that you've got that in the lower—is that on the AMT?

Yes, could not be clearer about that. The only risk is if there is a government shutdown or something—that's a very low probability, but you never know these days.

All right, and don't you have $500 million of deferred tax assets as well as the $1.5 billion of liability or excess?

That's correct. We have, subject to impairment of course, as a result of the federal tax rate going from 35% to 21%. That’s the lion's share of that $0.52 non-recurring charge that we took in the fourth quarter, but we still have a pretty large balance. At the end of 2017, it was just under $900 million. Now that's the gross value; it's not the cash benefit, but we still have a significant amount. By 2018, we expect that to step down to just over $500 million again on a gross basis and the cash benefit is less than that, so we still expect to utilize a lot of that NOL (Net Operating Loss) balance going forward. And at the utility, there is about $500 million of deferred tax assets and again, it's pretty ambiguous as to how quickly that might be returned or recovered by us and that's subject to a separate proceeding that we proposed to the MPSC.

Okay, can you just? That was the bit I was asking about. What have you proposed in terms of timing on that part?

We have basically stated we—in our filing in 19 to the Commission that we would propose having that as part of the separate proceeding. In our modeling, we have not assumed that as resolved at any point soon—maybe a safe assumption is that it aligns with the normalization of the property and deferred taxes, but it all remains to be seen frankly.

Thank you, Rejji. With our unique self-funding model enhanced by tax reform, a constructive regulatory environment, and a large and aging system in need of fundamental capital investments, we feel that our investment thesis is quite compelling. Now Rocco, please open the line for Q&A.

So perhaps just first thing on the EPS growth you guys talk now about enterprises and tax planning. I know you talked broadly about it, but how do you reconcile against this 2% addition that you throw in there in terms of self-funding and then also, can you just be a little clear about the year-by-year equity contemplated in the current plan?