DTE Energy Company (DTE) — Q4 2017 Earnings Call Transcript

Thank you, Alicia, and good morning everyone. Before we get started, I would like to remind everyone to read the Safe Harbor statement on page two of the presentation. Our presentation also includes references to operating earnings, which is a non-GAAP financial measure. Please refer to the reconciliation of GAAP earnings to operating earnings provided in the appendix of today's presentation. With us are Gerry Anderson, Chairman and CEO; Jerry Norcia, President and COO; and Peter Oleksiak, Senior Vice President and CFO. We also have members of the management team to call on during the Q&A. Now I'll turn the call over to Gerry.

All right. Well thank you, Barb, and good morning everyone. Thanks for joining us. So this morning, I am going to give you a quick recap of our performance in 2017, as well as an updated preview of our performance in 2018, updated versus EEI last year. I will also describe how tax reform impacts DTE and our customers, and then I will turn it over to Peter, who will review our financial highlights and provide a bit more detail on the impact of tax reform on our 2018 guidance, and then finally, Jerry Norcia will provide an update on our long-term growth plan, and he will wrap things up before Q&A. So we have a lot to be proud of, as we look back on 2017, not only financially, but on many other fronts as well; and as I think will become clear to you, my confidence is high that we are very well positioned for success in 2018. So I will start with a quick recap of our accomplishments in 2017, beginning on slide 5. I think that those of you who have talked with me over the years know that I strongly believe that the company's success is ultimately determined by the strength of its culture. Well, the culture at DTE is very healthy, and that bodes well for the future. In 2017, our employee engagement was in the top 4% of Gallup's worldwide database, and that's the highest employee engagement score we have ever achieved in our 20 years of tracking engagement here at the company through Gallup. Early in 2017, we earned our fifth consecutive Gallup Great Workplace Award. We remain the only utility ever to receive it, and we hope we are positioned to receive our sixth consecutive award early this year. We also hit one of the safest years in the company's history. We received the American Gas Association Safety Achievement Award for the second year in a row. Safety is a priority for obvious reasons, but it's also a great indicator of your employees' level of focus and their discipline. We produced some very strong results for our customers in 2017 as well. Both our Electric and Gas companies were ranked highest in customer satisfaction with business customers in the Midwest in JD Power's 2017 study. This is the first time in our history that we have held down two JD Power number one trophies simultaneously. Additionally, we ranked second in overall satisfaction with Electric and Gas residential customers in the Midwest, and our combined ranking of number one, one, two, two is the best overall customer satisfaction outcome in DTE's history. We continue to target improvements in these results, in the customer satisfaction results, and as we have said before, the biggest lever for achieving those improvements remains modernizing our grid and improving Electric reliability. And with that in mind, we have made significant investments in recent years, including last year, to improve reliability, and we really feel those investments are paying off. And during 2017, our grid reliability was tested by the most damaging windstorm in our history, with near hurricane-force winds gusting to 70 miles an hour, leaving nearly 40% of our Electric customers without Power. And during a massive restoration effort, we restored about 70% of our customers in two days and over 95% in four days, and that storm restoration effort earned us EEI's Emergency Recovery Award. And as I look back on last year, this storm restoration effort is one of the things of which I am proudest. I think you know that historic storms can bring companies in our industry to their knees and put them in the penalty box with regulators and customers, and we had the opposite experience last year. We achieved the highest customer satisfaction ratings in our history in the wake of this event, and that is the product of the tireless effort of our employees to restore our communities as quickly as possible. The storm was also a testament to our continuous improvement practices. We have put a lot of effort into revamping our storm restoration processes, and it made a difference. We are focusing those same CI disciplines on productivity and cost containment and efficiency, and the results of those efforts is our ability to have O&M growth that is among the lowest in the industry, which is helping to keep customer bills at levels that work. I'm also proud, moving on to slide 6, of our efforts to be a force for growth in the communities we serve. So these efforts earned us the number one ranking in the Midwest for corporate citizenship by JD Power, and we are making significant investments in Michigan. We spent $1.7 billion with Michigan-based companies in 2017, which exceeded our commitment to the Pure Michigan Business Connect local supplier initiative. You know, as I look back to 2010 when we started all of this, we were spending less than $0.5 billion a year with Michigan suppliers. So it has been a great effort, and our seven-year effort to increase spending with those suppliers has created nearly 16,000 jobs in our state. We also announced a broad sustainability initiative in 2017 that will reduce the company's carbon emissions by more than 80% by 2015, setting in the process, the long-term strategic direction for our Power generation fleet, and providing leadership on what I consider to be a vital public policy issue. But we have always said that if you serve your customers well and if you manage our costs and rates well, and if you are a positive force in your community, your odds of having constructive regulation are a lot higher, and Michigan's regulatory environment continues to be constructive. That said, I will say our commission has a lot on its plate right now. In 2017, Michigan began implementing the energy legislation that passed in 2016, which has significantly added to the workload of our commission. It has essentially added a second job on top of the many cases and issues that they normally work through, and our job is to keep working constructively with them to define group policy outcomes for Michigan. And in that vein, in 2018, we have a few key priorities on the regulatory front; the first is working through how our customers will get a break on their bills from tax reform, which will provide a significant boost to our efforts to maintain customer affordability, as we continue to invest heavily in modernizing ageing infrastructure. Those tax reductions to bills are priority one. The second is that we need to finalize the certificate and necessity for our 1,100 megawatt new combined cycle plant. So this plant, along with our renewable Power investments, is the way that we will backfill the retirement of three end-of-life coal plants, totaling over 2,000 megawatts, that will come offline in the early 2020s. And this Gas plant is also an essential step in the carbon reduction plan that I just mentioned a minute ago. And then finally, we need to achieve reasonable rate case outcomes. Outcomes that allow us to continue to upgrade and modernize our infrastructure, invest in the cleaner generation I have just described, and improve reliability for our customers. So I know you all follow our rate case proceedings closely, and as is often the case, there are other filed positions out there, but we do remain confident that we are in a position to get good constructive outcomes in these cases that are consistent with our plan. Now moving on to growth and value creation; as I already mentioned, we continued to invest in renewing our utility infrastructure in 2017, and that will continue this year. Our non-utility businesses had a number of big wins in 2017. So on our Gas, Storage, and Pipelines business, our Bluestone pipeline achieved a 1 BCF per day delivery milestone, with additional expansions on the horizon. We made significant progress on the Nexus pipeline and its construction, and we remain on track for in-service late in the third quarter this year. We also initiated three new projects in our Power and Industrial business, including a sizable energy service project with Ford Motor Company, where we will build on and operate a host of advanced energy systems to Power Ford's research and engineering center, helping them to achieve a nearly 50% energy use reduction. Power and Industrial also closed two RNG or renewable natural gas acquisitions in 2017, which will produce renewable gas to be used in vehicle fleets to meet carbon reduction goals. In 2018 at P&I, we have a number of promising initiatives underway, and the same is true for GSP and Jerry will touch on those a bit more later. So now let's turn over to slide 7 to talk about our 2017 financial results and our guidance for 2018. So operating earnings per share in 2017 were $5.59, marking the ninth consecutive year that we have exceeded our original guidance. And for the first time in company history, we exceeded $1 billion in operating earnings. In 2018, tax reform is allowing us to reduce customer rates, which I will detail a bit further in a minute. Tax reform will also benefit our shareholders. So we have increased our 2018 guidance by $0.10 per share versus the EPS guidance that we provided at the EEI conference last November. This increased guidance to $5.78 is also the new base for our 5% to 7% earnings per share growth projections, and it is a 9% increase from the original 2017 EPS guidance that we provided a year ago. So we will provide additional color on how the tax bills affect individual business units down the road. But that said, the $0.10 per share increase in our guidance is wholly tied to the non-utility businesses in the early years of the plan. The utilities will begin to contribute to the increase in the latter part of the five-year plan, as the rate base funding of the utilities transitions from deferred taxes to a higher mix of equity and debt. And so in the latter portion of our five-year plan, EPS accretion from tax reform actually grows to in the range of $0.13 per share. Then finally, as we mentioned at EEI, we will continue to target dividend increases of 7% through 2020, and the goal there is to get our payout ratio in line with our peer average, and then we will continue to grow dividends in line with earnings after that. So before I talk about the impacts of tax reform further, I want to highlight our efforts to maintain customer affordability, and I do that on slide 8. So as mentioned earlier, we are well positioned among our peers in our cost control efforts, and this is evidenced by our ability to continue to lower customer bills and business rates over the past five years. So average annual residential Electric bills have decreased by 5% over the last five years. Gas bills are down 9% over the same period. Industrial Electric rates have declined by 14% through 2017, while Gas rates have decreased by 17%. So we have used our CI disciplines to drive these productivity increases, but we are also increasingly doing this work through technology deployment and the modernization of aging infrastructure, and then add into those, declining Gas prices have certainly helped on the affordability front as well. So this focus, along with substantial savings from tax reform that will accrue to customers, will go a long way toward maintaining the customer affordability we want. And speaking of tax reform, I am going to move on to slide 9 to provide a little more color on that topic. So plain and simple, tax reform is good for our customers and good for our shareholders. So let me frame up how it affects each. First, this is a good thing for our utility customers. We plan to pass $190 million in savings on to our customers, tied to the reduction in current tax expense, and then additionally, we anticipate refunding on the order of $70 million annually, as a result of the remeasurement of deferred taxes at the two utilities in future rate proceedings. We are working closely with our regulators right now to determine how we will flow these tax savings back to our customers. So the second point I will make in tax reform is that it is good for our shareholders. As I mentioned earlier, it's $0.10 accretive, beginning immediately in 2018 and our 5% to 7% growth builds from this higher 2018 guidance. Operating earnings grow at our utilities over time. For our non-utility businesses, the tax benefit will accrue immediately to us on existing contracts, and I might mention that our existing contracts at GSP have very little exposure to lower FERC recourse rates, the exposure is on the order of $1 million, maybe $2 million. With respect to future non-utility business contracts, every project and every negotiation has its own dynamics and includes a lot of variables. And depending on the nature of the competition, the tax benefit may accrue to us if there is higher competition, may accrue to our customer, or as I expect, will often be the case we may share the upside the tax changes have created. With respect to the impact of tax reform on our balance sheet, we rolled out a plan at EEI last fall that called for an incremental $3 billion in capital, and that plan called for $500 million of equity over the next three years. So as a result of tax reform, we see the need for a modest additional $300 million, so when we put the two together, $800 million over the next three years. We are doing that because we are committed to maintaining balance sheet metrics that support our current credit ratings and maintaining balance sheet flexibility. That said, you know, we always look for ways to minimize equity issuances by strengthening cash flows, and we have often been successful in doing just that in the past. Now I am going to turn things over to Peter Oleksiak to talk a bit more about our financial results. Peter, over to you.

Thanks, Gerry. Looking at the financials, I want to mention my Detroit Tigers. There's really no off-season in baseball, and while there's snow on the ground here in Detroit, spring training is well underway in Florida, bringing hope for the Tigers to overcome the odds in 2018. Starting with slide 11, as Gerry noted, 2017 was strong with earnings of $1 billion or $5.59 per share. Our reported earnings were actually $1.1 billion or $6.32 per share, and you can find the detailed breakdown of the earnings by segment in the appendix, including a reconciliation to GAAP reported earnings. Overall, our growth segment's operating earnings were $981 million or $5.48 per share. Now, let me detail each segment, beginning with our Electric utility. DTE Electric's operating earnings for the year were $617 million, $5 million lower than in 2016, mainly due to cooler weather and higher storm expenses, which were offset by new rates. For a year-over-year earnings variance for the DTE Electric segment, refer to our appendix. DTE Gas operating earnings were $149 million, which is $11 million above 2016. This increase was mainly due to the implementation of new rates, although it was offset by higher depreciation costs and property taxes tied to capital. For our Gas, Storage and Pipeline business, operating earnings were $160 million, which is $2 million to $3 million higher than in 2016, thanks to a full year of earnings from Link pipeline and gathering growth. Operating earnings for the Power and Industrial businesses reached $124 million, which is $29 million above 2016, primarily due to additional REF sites and higher steel-related earnings in 2017. The corporate and other segment finished $10 million lower compared to 2016, mainly from increased interest expenses. Energy trading reported operating earnings of $20 million in 2017, down $5 million. Our trading company generated $29 million of economic income in 2017, aligning with target levels. You can find our standard energy trading reconciliations in the appendix, showing both economic and accounting performance. Overall, DTE earned $5.59 per share, which is $0.31 higher than 2016 EPS. Now moving on to 2018 guidance on slide 12; as Gerry mentioned, due to tax reform, we are raising our operating earnings guidance from our earlier outlook provided at EEI. There's no change in guidance for the two utilities in 2018. However, over time, adjustments in our capital structure will enhance earnings, as more utility rate bases incorporate equity instead of deferred taxes. Also, utility equity growth will outpace rate base growth. The EPS guidance range is now $5.57 to $5.99, up from $5.48 to $5.88. The increase of $0.10 per share from the initial outlook is mainly driven by our non-utility businesses. The GSP and P&I businesses will see immediate earnings benefits from the tax rate reduction from 35% to 21%, contributing an additional $30 million at GSP and $15 million at P&I. Corporate and other earnings will drop by $26 million due to the lower tax impact on interest expenses. Energy trading will also benefit from tax reform, but we are keeping the low end of guidance stable, as we plan conservatively for energy trading earnings. As Gerry mentioned earlier, the $0.10 EPS increase we anticipate in 2018 could grow to $0.13 by 2022, driven by utility earnings growth. For non-utilities, a $0.13 increase assumes tax benefits on existing contracts only; we may share some tax benefits on new deals that could support our long-term non-utility growth targets or offer potential upside. Our cash and capital guidance for 2018 is available in the appendix. Now, I want to move on to balance sheet metrics on slide 13; we've consistently prioritized maintaining a strong balance sheet over the years. As one of the companies in our sector that benefits from tax reform, we are able to deliver EPS growth while also ensuring robust balance sheet metrics. One aspect currently benefiting cash is how the AMT credits will operate, looking at a cash refund of $300 million over four years, which partially mitigates lower cash flows from the utilities. At EEI, we announced needing $500 million in equity through 2020 to support our increased investment plan. As Gerry outlined, because of tax reform, we will issue an extra $300 million over the next three years. For 2018, we plan to issue $300 million of equity using a trail mechanism. You can consider the extra $100 million due to tax reform as part of that $300 million. We are dedicated to maintaining a strong balance sheet and targeting an FFO to debt ratio of 18% to 19%, which aligns with the metrics necessary to sustain our credit ratings. Over the next several years, our pension will be fully funded, providing more flexibility in our FFO to debt targets and keeping us within the range of our current ratings. We will seek ways to limit the equity needed over the next three years, but overall, tax reform benefits both utility customers and shareholders. Now, I would like to hand it over to Jerry Norcia, who will discuss the long-term plan for achieving earnings and dividend growth.

Thank you, Peter. Those of you who have listened to our calls in the past heard us talk about the transformation of our utility assets over time. A transformation that aims to produce excellent customer outcomes, while also achieving substantially higher productivity levels. This will occur over the next 10 years and will be driven by significant investments in infrastructure for our customers. We are defining customer operational productivity goals to guide this transformation, and as Gerry mentioned earlier, we filed a Certificate of Necessity with the MPSC to build an 1,100 megawatt natural Gas fired Power plant. That plant along with renewable investments will backfill the retirement of the three coals in the early 2020s. The nearly $1 billion project is scheduled to break ground in 2019 and will create hundreds of Michigan jobs during construction. Natural Gas fired plans will be an important complement to our renewable Power investments in the decades ahead, as natural Gas offers an affordable, abundant, low-carbon, domestic fuel source, and is a reliable 24 by 7 Power source for our Electric customers. We are also planning to construct up to 4,000 megawatts of additional renewable energy capacity over time. The next major renewable investment for both wind farms will occur in 2018 and 2020. In fact, we have just finalized our plans for a $260 million wind investment this year. Our Electric company will also continue to invest heavily in grid hardening and grid automation. As the infrastructure ages, there is an ongoing need to invest in modernizing the system. As we invest in the distribution system, we will be very focused on ensuring affordability for our customers, and we will do this through substantial productivity increases over the next decade. At DTE Gas, we continue to focus on accelerating the replacement of our aging cast iron and unprotected steel pipe. In our last Gas rate case, we proposed accelerating from a 25-year main renewal cycle to a 15-year cycle. At the same time, we continue to work to automate our Gas meters and move them outside to reduce costs. Finally, we will continue to invest in pipeline integrity to harden the system and ensure a very high standard of public safety. Now I will move on to the non-utility businesses on slide 16. As Gerry mentioned, we had many accomplishments for our non-utility business last year. Our Gas Storage and Pipelines; much of our focus over the next few years will center on expanding our two newest growth platforms, Nexus and the Link pipeline. In 2017, we saw Nexus pipeline construction advancing and are on track for a late third quarter in-service date. We are progressing on pipe construction, right-of-way clearing, compressor station work and some horizontal directional drills this winter. In 2018, we are seeing continued progress of both Nexus and Link. Nexus is finalizing agreements to construct laterals to new large Industrial customers. We also told you late last year that we are in discussions with some of the producers about Nexus' capacity. The discussions continue to advance, and we are now exchanging proposals with producers to fill additional open capacity, giving us great confidence on our plan for this asset. We continue to be pleased with the interest in Nexus, as well as the construction milestones we are achieving. We have consistently said that the intensity of discussions among our remaining Nexus capacity ratcheted up as the pipe moved into construction, and that's what we are seeing play out. Since we are under strict confidentiality agreements on these deals, we won't be able to provide any additional details at this point, as the deals become final, we will provide more information. So moving on to our Linked asset, we recently doubled capacity with an existing customer at an attractive rate. At our Bluestone asset in Pennsylvania, we achieved a 1 BCF per day delivery capacity milestone in 2017. This is pretty exciting, given that this pipeline started with 0.3 BCF per day capacity. We are expanding by an additional 0.1 BCF per day in 2018. We also have a newly signed precedent agreement with APV Renaissance, the new lateral pipeline to connect to their Power plant. So all in all, I feel very good about the progress we have made at our GSP business, and I continue to feel we are on track to achieve our future goals. Now I will talk about progress at our Power and Industrial business, on slide 17; we have already talked about the new projects that we originated in 2017. In November at EEI, we told you that we needed to originate $45 million of new growth by 2022, and that was to achieve an income target of $65 million in 2022. $15 million or one-third of that growth was originated last year, including a state-of-the-art central energy plant and two renewable natural gas projects that Gerry mentioned. We also feel we have a good line of sight on the next $15 million in 2018, and we are well advanced with that, with projects in late-stage discussions. So we could have two-thirds of that 2022 growth target originated by the end of this year. Tax reform may also help with this P&I growth, given that we may share the benefit with our customers on future projects. Back in November, we also told you about five co-generation sites we are in advanced discussions with, as well as four renewable natural gas projects that we are pursuing. While I am pleased to tell you that we are finalizing negotiations along those new RNG projects, we are also firming up agreements for our new large scale energy project. Given this start to 2018 and the fact that we have additional projects, we feel good about how P&I is positioned for future growth. Now I will turn over to slide 18 to wrap up. Once again, our strong 2017 extended a track record of exceeding original guidance. We are one of the companies in our industry, for whom tax reform provides benefits for our customers, while also benefitting investors. We increased our 2018 operating EPS guidance by midpoint by $0.10 per share, which will serve as a new base for our 5% to 7% operating EPS growth target through 2022. The strength of our utilities and the growth of our non-utility businesses and a strong balance sheet, along with an annualized dividend growth target of 7%, gives me confidence that we will continue to deliver premium shareholder returns. And with that, I'd like to thank everyone for joining us this morning. So Alicia, you could open up the line for questions.

Good morning everyone. It's Josephine here. How are you all?

Good.

Just a few questions here this morning. First on the utilities side. As you were thinking about the upcoming IRP and the five-year distribution plan, are there any additional CapEx opportunities that could develop from that? And then secondly on either any regulatory mechanisms that you are looking for, under that plan, to ensure more concurrent recovery of the spend?

I will begin with the distribution plan. We are collaborating closely with the Public Service Commission staff currently. We are in the process of outlining the distribution system requirements for the next five years. This has been a productive and transparent process, which I believe will provide the rationale for the capital expenditures detailed in our plan. Regarding the Integrated Resource Plan, it aligns with our previous statements that we will retire two coal plants over the next five years. We require this Gas plant to replace them. We will continue to incorporate renewable sources up to 2021, when the state’s target is 15%, and beyond that as well. I fully anticipate that we will keep adding more renewable energy, especially as prices continue to decline, which our customers are requesting. In terms of additional capital expenditures, I believe the plan we have presented includes a substantial effort to renew our utility infrastructure, and that will be our primary focus moving forward.

This is Peter, Josephine, I think you are also asking about the recovery mechanism. This definitely will lay the potential groundwork for that, and that we are in early discussions with the staff and the commission on that.

Great. And then, on the P&I side, curious if you could just give a little bit more color on the guidance increase? Is that just tax reform, or does that also include volumetric and efficiency improvements?

That is just tax reforms.

Just tax reforms? Okay. Awesome. And then just one last question for GSP; as you are earning AFUDC on Nexus right now, and then the project moves into service, how are you thinking about the return profile on the project? Is there going to be any shift there in the earnings from Nexus?

The AFUDC is earned over time as you are doing your capital spend. So when you look at it year-over-year, there is not going to be material change between the two. And as we put it in service, it gets them to the negotiated rates we have, and it's a healthy targeted cost of capital we have on the project right now. But if anything, it really lays the groundwork for additional expansions and investments around that platform.

Awesome. That's all on my end. Thank you very much.

Hi, good morning.

Good morning, Michael.

Hey, could you just remind us, the extra equity, the $300 million of incremental equity in addition to the $500 million at EEI, what's the method for that? Is it a secondary, or is it ATM?

So we expect that this year, that it will be internal mechanisms. We have capacity for about $300 million in internal mechanisms. That varies year-by-year due to pension contributions and other things. But I think for the foreseeable future, we expect the vast majority would play out that way.

Even the incremental amount?

Yes.

Okay, got you. And on the P&I side, I think you said that it'd be two thirds by the end of this year, towards the goal?

That's what we are expecting.

How long do you think it will be before you actually finish completely?

Well our forecast is to originate the $45 million by 2022. So I would say we are well in progress, with having two thirds completed this year in. We will have to revisit our target at the end of this year to see if there is any potential upside to that.

Yeah, we have gotten a fast start on it. So we said last year, $45 million incremental needed. But we really think at the end of this year, it will be about $30 million into the $45 million, two years into the five years. And we will just keep evaluating, if the market keeps offering us opportunities at that pace as Jerry said, there could be some upside to what we talked about.

Could you share your current views on mergers and acquisitions? There seems to be significant activity and speculation in your region. How do you assess M&A and the overall industry at this moment, particularly with rising rates and the overall valuation of the Group?

I see it pretty much as we have in the past. We maintain a high standard for any potential opportunities we believe would enhance our strong existing plan. We look for characteristics that genuinely bring efficiency and cost reduction, although only a few might achieve that. However, we cannot pay excessively high premiums for those, as that would negate the benefits. If we were to find a great option for our customers that improves efficiency at a low premium, we might consider it. But we have set a high standard and currently do not see this as a key part of our strategy.

Okay. Thank you very much.

Thank you.

Good morning, Shahriar.

Good morning guys. How are you doing? So you guys have never been capital constrained? Rates have always sort of been the governor. A 3% reduction in rates from tax reform is somewhat material. So does this sort of provide an opportunity for you guys to accelerate some spending opportunities, or asked differently, many utilities seem to be submitting plans, to give back the tax savings through time and seem to be getting some preliminary support from the various commissioners, so why not retain some more of the savings and redeploy into sort of infrastructure needs, since you sort of have the opportunity to do so?

When you say retain some of the savings, what do you mean, Shahriar? Just so I am clear on the question you are asking?

Well, sort of subsidized additional opportunities to accelerate some of the infrastructure needs that you have?

I guess our reaction to this is that, we are actually very happy to have this reduction go back to customers, and to have it go back quickly. Because as you said, the thing that we worry most about, as we go through this, having an infrastructure renewal cycle, is keeping it affordable. I think the one thing that differentiates, and actually if you look back over time, companies that do well, as you go through a heavy investment cycle versus those that don't, is how they manage it for the customers, whether their customers and regulators remain supportive. And a lot of that is tied to how affordable it remains. And so when we saw this, our reaction was good; it helps us achieve our targets for rates and rate levels. Now I think what in the end that's going to do, is make feasible in a way that works for everybody, the capital plan that we have laid out here over the next five years, which we have been saying, that's some very heavy infrastructure investments embedded in it. So that's the way we are thinking about it, and when we generally get asked about upside as a result of this, we are trying to retain some of the tax savings for upside. That's not the way we are thinking about it; we are really thinking that it's a really helpful aid to the plan we have laid out in terms of keeping things affordable.

Got it. So supportive of the plan, but not anyway to accelerate the plan. Got it. And then just on Nexus, Gerry, appreciate the sensitivity of the discussions. But on sort of the conversations you are having on the demand pull and supply push sides. Can you at least sort of disclose if these opportunities are enough to finally fully subscribe the pipe?

They certainly are. The size of the volumes that we are discussing would fill the pipe.

Oversubscribe the pipe or just fill the pipe?

We will start with fill at first.

Thank you.

Good morning, Jonathan.

Good morning. You just addressed my initial question, so I would like to discuss some of the P&I tax uplifts. Could you explain the mechanics behind that a bit, considering the proportion of earnings that come from REFs and how we determine where the uplift originates?

Yes, Jonathan, this is Peter. A portion of our facilities we have there, we essentially have sold down from a partnership perspective. So we have current cash and earnings related to that; that's where the uplift is coming from. Now we mentioned, the $0.10 accretion here will go to $0.13 to essentially, that managed utility, and that REF will be replaced by utility accretion at the back end of the plan.

So it is effectively the incremental coming because you have to make up once the REF piece steps down?

There is a tax benefit from REF due to our partnerships with those facilities.

Okay. But that's what's driving the uplift in 2018, it's in the accounting in the partnership?

One way to think about it, by 2022, that is gone, but that will be replaced and then some by utilities.

So just to add there, obviously on the partnership positions, there are some tax savings. We also have other projects that aren't already up, where there's obviously tax benefits as well on current contracts. And then the point Peter is making is, you go through the transition Jerry Norcia was describing, we had R&D projects and Industrial projects and so forth. And current projects of that type, we have benefit on future projects. I expect it will be a shared benefit, where some of that goes through the customer and some of that comes to us.

Okay, great. Thank you. And then just another tax detail, I think you mentioned that you have assumed, it's $190 million upfront for the reduced tax charge, and then an assumption at $70 million a year on deferred excess flowing back. Can you just unpack that between protected and unprotected, and then what sort of timeframe you have assumed on each?

I will provide some broad context. There will be three different proceedings. One will focus on the current amount, which is the $190 million you mentioned, and it will involve discussions about how to return that to customers. Each utility may have a different approach based on their rate case cycles. There will also be a component that addresses the amount from January 1, and regarding the deferred amount, a separate proceeding will be held for the second half of the year. A significant portion of this is to safeguard against depreciation, with about two-thirds allocated for this purpose, while some will not be. We have established history and precedents that support normalizing all of this. We anticipate that these discussions will unfold in the latter half of this year.

And then, in your $70 million, what do you assume about the one-third that's not protected?

It will be normalized. Despite the $70 million, we have $1.4 billion roughly Electric company, $300 million at the Gas, so combined $1.7 billion that we are going to need to give back to customers over time, that includes both protected and unprotected.

A third of which is unprotected and for the time being, you are assuming that that has also normalized. Am I getting that right?

Yes. And there are precedents around that back in 1986, when we did this with the Commission.

Great. Okay. Thanks guys.

Thank you.

Good morning, Paul.

Good morning. I think you just answered my question, but the $0.13 is inclusive of the $0.10 at unregulated, is that correct?

Correct.

Okay.

Yeah, that's correct. Should we get an immediate $0.10 and then a slow build to $0.13, as we play through the five years.

Slow build from $0.10 to $0.13?

Correct.

Looking ahead to your first quarter earnings report, there will be no resolution on the tax issues at the commission. How should we approach the situation with the utilities, particularly regarding reserved revenues?

That is correct. It's a regulatory liability, from an accounting perspective. So we will be putting that on the balance sheet to get back to our customers through these various proceedings that I described earlier.

Congratulations on a solid year and rating guidance, and that's all I have. Thanks.

Thank you.

Hey Steve.

Good morning, Gerry and everyone. My first question is about clarifying the growth rate guidance. The 5% to 7% based on the 5.78 in 2018 obviously incorporates trading. I assume when you provide that figure, you're including trading throughout the entire period. If we want to exclude that, we simply remove it and refer to the 5% to 7%.

But we do include. So we are growing up the total number; trading for a couple of percent of our total.

Okay. So I guess it's a small thing, but in theory, you might not be considering that growth in the businesses excluding trading is actually growing a bit faster.

Could be, we might see a little growth in trading. I mean, when do you do the math, it's a few million dollars, so it just doesn't swing much in the growth.

Okay.

So we are looking at what they have done. It's $25 million to $30 million of cash a year that we can use to reduce equity, that's their role.

Okay. And then just to clarify, the bullet in the slide on tax on the improvement in the economics, future non-utility projects may be shared with customers. Is this mainly in the P&I segment?

I think it's both. If you think logically about it, every project has many variables that influence your return on capital. One of these is competitive dynamics and the number of opportunities they are competing for. With low competition, if you are the best fit to meet the need, you may capture a larger market share. Conversely, with high competition, the share could be smaller, and in many cases we experience, we will see a division at that value. Therefore, we aim to be conservative and refrain from incorporating a significant future tax value from upcoming projects into our projections. However, I believe we will see it, and it will aid us in our goals.

But you are not talking to an impact on kind of current non-utility projects, where you'd share some?

The ones that are already existing and are in hand with negotiated contracts in place, will obviously get the benefit of that.

Okay. And then can you just talk a little bit to the ALJ in your Electric case, and I think they came out with like a 9/6 ROE, which was not only down a decent amount from where you have been, but also lower than CMS. What is the explanation for that, and how are you feeling about the outcome?

We are in an active case, Steve, so I am probably going to leave most of our commentary for that venue. But that said, if you have watched our ROE proceedings and our rate proceedings over the year, it's not unusual to see positions out there that are lower than what we have or what we have filed for. But when you set back from all of that, I feel we are going to get a constructive set of outcomes in our Electric and Gas cases, and constructive on the ROE front that will support the plan we put out for the year.

Okay. And then last question, just in the Midstream business, just high level, maybe you could talk to trends that you are seeing? Obviously, we have a lot more Gas production, we have demand increasing, but bottlenecks starting to slowly get resolved. Just what are you thinking strategically next to the business? Are you worried about pricing and too much supply, or do you still see like a lot of opportunity to grow the business?

Certainly, with our current slate of assets tied to the Marcellus and the Utica, we kind of see a world-class resource connected to very proximal markets on the East Coast as well as Midwest, and markets in Midwest, which is what our Nexus pipeline is pointed to, you are going to see a fundamental shift from coal use to natural Gas use over time, as these plants age out, as you can see from our sort of plans for generation. So I see very strong supply growth as well as strong demand growth in the regions that we are going to serve with Nexus. And I think that will bode well for additional bolt-on projects for Nexus, as well as our Link asset, which is already connected to the Nexus. So I see a really strong story in our future. I think also, the evolution of the export market in the natural Gas industry, I think will be an outlet for what continues to be a growing supply of natural Gas in North America. So overall, I feel our Midstream business, with its suite of influence, if you will, in the Great Lakes region, is well positioned to capture that growth both supply and demand.

Steve, just to add on to that; you go there, our position in Pennsylvania, Bluestone and Millennium, we hit a record production level last year, and as we mentioned, we got pulled for more there, down on our Link assets. We just had a producer there double their position with us. And if you come up to Nexus, one of the interesting things there is to, I think in a region where output is growing rapidly, the producers are definitely scaling up operations there. Nexus is, for the next couple of years, likely to be the only path out with any capacity. We are working to make sure that capacity doesn't exist for very long, as we fill up the pipe. But we are in option, out of the region, or out of that zone right now, as it scales up production.

Okay. Thank you.

Thank you.

Thank you. I actually wanted to follow-up on Nexus. So I heard your explanations, thank you. Now the contracts with Industrial customers are for the facility existing capacity or for expansions of Nexus?

They will be both.

Can you provide insights on the type of industry that would be interested in signing contracts from Gas?

Angie, once we execute the agreements, I'd be happy to disclose that. But at this moment, we can't.

Okay. And separately for the drillers' demand for capacity on your pipe. It seems like Rover is still not fully subscribed, and again, it seems like Rover's pricing is a little bit lower than yours. So what would be the advantage for a driller to choose your pipe versus Rover?

Let me clarify, Rover's rates are not lower than ours. We've discussed this before, and I believe our rates are very competitive with Rover. We're confident in our market position. Additionally, we have significantly greater market access along the pipeline. We are currently building 13 interconnects that are linked to large demand centers, which are already influencing discussions with counterparties. Therefore, we are optimistic about filling this pipeline.

Okay. And then lastly, when you show us the net income range for 2018 for the GSP segment, does it account for the incremental long-term contract, or is basically the delta year-over-year largely filled by short-term contracts?

Nexus not materially, since it goes into service so late in the year. So it's really not relevant for 2018. And the other pipes do have growing positions. For example, we mentioned Link in a growing position there. Now that will take a little time to come into, but could contribute some, are going to be growing over Bluestone. So the projections we have for both 2018 and future years, are taking that sort of growth and those sorts of contracts into account. But the contracts on Nexus just aren't enough time in 2018 for those to really be material.

Okay. Thank you.

Good morning. I am assuming that, since I didn't hear any comments towards this, the timing of the REF phase-outs has not changed with tax reform?

It has not.

Okay, that is what I was assuming. And then second question on the P&I, getting to two-thirds of the way to your goal by the end of the year, did you say that's an expansion of the forward agreement or is that a new project you intend to announce?

We are very close to finalizing agreements on an R&D project, and we are also exploring other industrial energy projects in the region.

We have several co-generation projects underway. One of the discussions with an Industrial partner is at a very advanced stage of development. Therefore, the chances of moving forward are high. A year ago, we were already progressing with this project at this stage. Along with that, we have a renewable natural gas project that we believe is near completion, and there are more of these types of projects in the pipeline.

So there is a project in the mix, and there are still these projects coming out that are similar to Ford, where you build a co-generation facility for a big Industrial complex?

That's correct.

Okay. That's all I had. Thank you.

Thank you.

Well look, thanks very much for joining us this morning. Hope you feel that the way we wrapped up 2017 was positive, and as I said at the outset, I feel great about our position at 2018. I think we are lined up for another really good year this year, and we look forward to describing all of that to you in future discussions. Thanks for joining us.