CMS Energy - Earnings Call - Q4 2016
February 2, 2017
Transcript
Speaker 0
Good morning, everyone, and welcome to the CMS earnings news release issued earlier today and the presentation used in this webcast are available on CMS Energy's website in the Investor Relations section. This call is being recorded. After the presentation, we will conduct a question and answer session. Instructions will be provided at that time. Just a reminder, there will be a rebroadcast of this conference call today beginning at 1PM Eastern Time running through February 9.
This presentation is also being webcast and is available on CMS Energy's website in the Investor Relations section. At this time, I would like to turn the call over to Mr. Sri Madipati, Vice President of Treasury and Investor Relations.
Speaker 1
Good morning and thank you for joining us today. With me are Patti Poppe, President and Chief Executive Officer and Tom Webb, Executive Vice President and Chief Financial Officer. This presentation contains forward looking statements, which are subject to risks and uncertainties. Please refer to our SEC filings for more information regarding the risks 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 Patty.
Speaker 2
Thank you, Sri. Welcome and good morning. Welcome to our twenty sixteen year end earnings call. We had another great year and we look forward to sharing the highlights with you today. I'll review our 2016 results and 2017 focus and priorities and Tom will cover the financial results and outlook.
As you know, we released this morning that we again hit our top end of guidance at 7% year over year adjusted EPS growth at $2.2 That makes fourteen years in a row of consistent performance at the top end. Based on our 2016 actual performance, we're raising our 2017 full year guidance to the range of $2.14 to $2.18 or 6 percent to 8% adjusted EPS growth. As our earnings are growing among the best, we match that with equally strong dividend growth. Therefore, we've once again increased our dividend 7% in line with our EPS growth. As you've come to expect, our financial performance is not an accident.
Our financial performance is supported by our operational strength. We are proud to share that we had our safest year on record, which is a 20% improvement over last year's previous best. We also had the best generation reliability on record. We delivered this performance while at the same time we retired seven of our 12 coal fueled generation units. During operational success like this delivering operational success like this while at the same time transitioning our fleet so significantly requires a disciplined team focused on results.
We once again delivered best in class cost reductions as well. In fact, O and M is down 6.5% year over year. This fuels our ten year investment plan, up $2,500,000,000 from our projection last year. Lots of people ask, so I'll definitely provide more details about how we continue to do this. We are well underway for another great year with emphasis on the new energy law, our clean and lean capacity replacement strategy and the Consumers Energy Way.
Let's start by reviewing the energy law highlights. The Michigan legislature and governor in concert with the Michigan Agency for Energy and the MPSV have delivered solid policy for our state. At the highest level, this new law addresses the retail open access cross subsidy enabling more competitive prices and eliminates the risk of energy shortfalls in Michigan. We're reminding everyone that Michigan is open for business. This new law creates a framework for our clean and lean generation strategy led by improved energy efficiency and demand response incentives, a 15% RPS standard and a very constructive net metering framework that removes the subsidy for the future producers of private solar.
Also, there's an integrated resource planning process that will allow for longer term planning as well as upfront prudency review of our supply and demand strategy, which will result in a modern, reliable, and affordable energy supply for Michigan. Let me take a minute to share a bit more about what we mean when we refer to clean and lean. Our recent Palisades PPA termination application is a great example. We have long said that an inflexible above market PPA is not a cost effective option for our customers and provides no long term value for our investors. At the same time, we want to assure that we have sufficient resources to serve the load in Michigan.
The traditional approach would be to replace the PPA with a megawatt per megawatt central power plant. Instead, we believe we can use this change as an opportunity to build out a cleaner and leaner resource mix that assures reliability at the lowest cost possible that is a win for both customers and investors. By cleaner, we mean replacing Palisades with more energy efficiency, demand response, additional coal to gas switching, and renewable energy as called for in our new law. By leaner, we may we mean when replacing Palisades, we can reduce demand on the peaks and fully utilize our existing gas assets. This saves our customers both energy and money.
We're rightsizing our assets to match demand, thereby eliminating waste and still assuring reliability. We can derisk our entire capital plan by freeing up dollars that would be traditionally captive in a single Big Bet capital project for many smaller options that meet more of our customers' needs with less risk and less waste. And as we often remind you, we have plenty of that work that needs to be done. We are confident that we have a solid capacity replacement plan for Palisades that will ensure reliability and increasingly clean and affordable supply for the people of Michigan for years to come. I hope you're picking up on our continued theme of lean thinking.
It's lean thinking that underpins not only our generation strategy, but it is the heart of our CE Way. Lean is not just low cost, it's about waste elimination that improves value for our customers at the lowest cost. Our business model is based on this lean way of thinking. We're deploying our CE Way in all areas of our business. We are far from perfect, and we can find areas for continuous improvement and waste elimination in every aspect of our work.
We can then deploy the value created in waste elimination to drive sustainable growth. By teaching our entire team to see and eliminate waste, we will provide a safe and reliable system for our customers at the lowest cost possible and grow our business. It may seem simple, but it's not easy. This lean way of thinking is how we will deliver world class business results and why we can promise many years of further improvement. The CUA really is a sustainable way of running our business where we don't make trade off between key constituents, but rather we intend to focus on our triple bottom line, people, planet and profit underpinned by our unwavering commitment to world class performance.
In fact, we are selected by Sustainalytics as the number one utility in America for sustainable business practices in 2016. Our simple but powerful business model is the manifestation of our commitment to people, planet and profit. Our system needs improvements and without the hard work that our team does to reduce absolute cost year over year over year, our investment requirements would be too expensive for our customers. We insist on both serving our customers and doing it at the lowest cost possible. We're not chasing profits or cost cuts at the expense of safety or reliability of our system.
Rather, we're delivering consistent profits and performance because we are focused on the heart of our business, our customers. Our ten year capital investment plan reflects our lean thinking and our growth strategy. As a reminder, we announced in December that we've increased our ten year capital plan to $18,000,000,000 Our new law increased our renewable portfolio standard by 15% by 2021 and so we have added more renewable generation to our plan in line with our clean and lean approach. We've also added an additional $500,000,000 in our large gas system to continue to reduce costs and improve safety and deliverability over the next ten years. The Governor's Infrastructure Commission's report was published at the 2016 and he reinforced in his State of the State address that investment in infrastructure in Michigan is a top priority.
The report found that our existing regulatory model works well to provide the funding and oversight needed for critical infrastructure investments in electricity and gas. Michigan's regulatory model, which was improved by the 2016 energy law, is the ultimate public private partnership in service of the people of Michigan. This is not a blank check-in our mind. We're always self constrained by our customers' ability to pay, which is why our ongoing cost reduction performance serves both investors and customers. As we reduce costs over time, we can grow our business, do more CapEx for areas like grid modernization, more gas infrastructure and PPA replacements in the future without unduly burdening our customers.
High quality, safe and reliable service at the lowest cost possible. This is lean thinking. One thing I've learned over the passing of time is that performance is power. When our performance is strong, when our processes are in control and our promises are kept, we can be flexible and adapt as the weather, the economy, policymakers and policies evolve. Our business model has and will continue to stand the test of time in a changing environment when it is backed by world class performance delivered in a hometown way.
That's the CE Way.
Speaker 3
Thanks, Patty. And thank you everyone for joining us today. As you can see here, 2016 earnings at $2.2 a share grew by $0.13 or 7%, no surprise. Our GAAP earnings at $1.98 a share were up $09 or 5%. This included the voluntary separation program we announced last summer and tentative settlement of some oil gas reporting cases.
All of our businesses improved year to year. This is our standard look at our earnings per share outlook for 2016 throughout 2016. Early on, we offset abnormal storms and a warmer winter. Later, we put to work upside from another strong year of cost performance in a warm summer. If we had not reinvested, our earnings per share could have been up 15%.
Our reinvestment in O and M however was big. It included improvements in reliability and service. We also prefunded parent debt and made meaningful contributions to low income funds as well as our foundation. In total, our O and M cost was down 6.5% for 2016 compared with 2015. Yep, 6.5% lower after all the ups and downs.
Our 2016 performance adds one more year in a long track record of adjusted earnings per share growth at 7%. And imagine, during the last four years, we reinvested one third of $1,000,000,000 for our customers. Half of this was made possible by favorable weather, half by cost reduction. Cost reductions much better than planned. We achieved all of our financial targets for 2016.
These included strong capital investment, healthy balance sheet ratios, competitive customer price improvements, robust operating cash flow growth, earnings per share growth at the top end of guidance, and as announced last week another 7% increase in our dividend. The increase keeps pace with our high end EPS growth, which of course is at the high end of peers. For 2017, we're pleased to have raised our guidance to reflect adjusted 6% to 8% growth on top of 2016 results, which were at the top end of our guidance. So we continue to build success upon success, no resets here. As shown here, our rate cases primarily reflect capital investment.
They also permit us to flow through productivity improvements to our customers. We expect to reduce O and M cost another 2% this year and perhaps that's a little conservative based on after our top being at the top end for the decade and annual cost reductions of around 3%. This keeps our base rate increases at or below the level of inflation. On a real basis, this reduces rate. This level of cost reduction is not easy to do as Patti mentioned.
New utilities can do it. This enables our rapidly growing customer investment. Looking ahead now, we should have an order on our electric rate case next month. We expect an ROE in the 10.1% to 10.3% range. This would mirror recent orders at DTE.
We're in the middle of the process of our pending gas case. While the self implementation is lower than expected, we have no reservations about working with the commission to complete a satisfactory result. Here's our cost reduction track record. You know we're proud of it, but what's important is our commitment to continue for a long time. This comes from good business decisions that permit productivity gains as the workforce turns over, the shift from coal to gas generation, the introduction of smart meters and the elimination of waste.
As we improve customer quality through better work processes, we'll see an overtime cost save as well as temporary workers saved by doing it the right the first time. We already are seeing evidence of our consumers' energy way process improvements. These drive up quality and they drive down cost. We work to improve customer service and we eliminate waste. Now for 2014, 2015 and 2016, we reduced our costs by more than 3% a year and we plan conservatively to reduce cost a further 2% in each of the next three years.
This helps fund that growing investment for customers. For the last dozen years, our gross operating cash flow has been growing by more than $100,000,000 a year. Since 02/2004, it's increased from $353,000,000 to $2,100,000,000 last year. Over the next five years, it will grow about $800,000,000 to 2,900,000,000.0 Our NOLs, bonus depreciation and AMT credits help us provide and avoid the need for block equity. If tax reform occurs, we expect that we'll still have a chance to use our NOLs, although at a lower rate.
We also would expect to access our AMT credits early, but let's talk about that more in just a few minutes. So this is our sensitivity slide and we give this to you each quarter to help you assess our prospects. You can see that with reasonable planning assumptions and with robust risk mitigation, the probability of large variances from our plan are minimized. There are always ups and downs. Already this year, certain property taxes are expected to be lower, improving EPS by about zero three dollars and energy efficiency incentives increase under the new energy law helping maybe by about $02 But please keep in mind, if the electric rate case ROE comes in at 10.1% next month, that would hurt by about $03 We may have an opportunity to invest even more with anticipated tax reform.
We're all trying to shed useful light on this complicated subject. None of us really knows what tax reform will include or if it will occur. Here's one set of assumptions. Corporate tax rates could drop to 15%. We could lose deductibility of interest expenses and state income taxes, and 100% asset expensing might occur.
Now we hope you'll find it helpful by seeing how this impacts each of our businesses, our utility, enterprises and the parent. At the utility, we're fortunate to have substantial organic investment not yet included in our plan, investment for gas infrastructure, PPA replacements and more renewables. Utilities in this situation will appreciate asset expensing to help fund new investment growth. At Consumers, it would take only $100,000,000 of new investment a year to backfill the 100% asset expensing. We've essentially already done that by raising our capital investment guidance from $17,000,000,000 to $18,000,000,000 last December, So happy face for the utility.
Our non utility business enterprises will be impacted like normal non utilities. Tax reform would help, but for us it's a small business. The profit improvement would be a little under $10,000,000 a year. Here's the great news. Interest income may be used to offset interest expense.
Our parent debt interest expense may be offset by our interbank interest income. And this assumes that none of the old debt is grandfathered. We still have to see how that turns out. So again, as you can see on the right, with forecasted interest income at Interbank at about $130,000,000 we can offset parent debt interest expense. Even if none of the legacy interest expense is granted well, it's a happy face for the parent too.
Again, none of us really know how the tax reform will end up. So on the left here, we have shown some alternatives to help you see different impacts. This shows the amount of CapEx backfill needed to offset 100 asset expensing at various tax rates. At 15%, we'd add $100,000,000 each year. That would rise to $300,000,000 each year at 25%.
Recall, we have investment opportunities of at least $3,000,000,000 Our customers will enjoy reductions until we reach about a 25% tax rate. As we approach a 25% tax rate with all the other assumptions being equal, we expect that our customers and investors would lose. And of course, minor changes in tax reform could make all of this very different. In each alternative, we still are able to use our NOLs, although remember the benefit will be smaller. We also hope to accelerate use of our AMT credits to improve cash.
We have not factored the use of the AMT credits in our planning yet, so there may be a little more upside there. Excluding tax reform, here's our new report card for 2017 and beyond. We anticipate another great year this year. With no big bets and robust risk mitigation, our model serves serves you and our customers well. Few companies are able to deliver top end earnings growth while improving value and service for customers year after year after year.
We're pleased to have another outstanding consistent performance in 2016 and we expect to do the same in 2017. With another consistent strong year ahead, fifteen years in a row, we're able to continue to deliver robust adjusted earnings per share growth. With our capital investment already raised from 17,000,000,000 to $18,000,000,000 over the next ten years, we expect to grow earnings 6% to 8% each year. Our approach to funding capital investment both for customers and for investors makes our earnings per share and cash flow growth sustainable for the decade ahead. So thank you again for joining our call today.
This is my fifty eighth in a row still humming along. Operator, we'd be pleased if you open up to take questions. Thank you.
Speaker 0
Thank you very much, Mr. Webb. The question and answer session will be conducted electronically. Our first question comes from the line of Travis Miller of Morningstar. Your line is open.
Speaker 4
Good morning. Thank you.
Speaker 2
Good morning.
Speaker 5
I was wondering with the new law, the RPS and then your investment plan, by the time you guys get to the end of your renewables investment, how would you stand relative to the RPS?
Speaker 2
Well, so because of the energy law and because of our $18,000,000,000 CapEx plan, we did add additional renewable investments that will take us to 15%. That's approximately about an extra $1,000,000,000 of investment in our total $18,000,000,000 for the 500 megawatts required to get to 15%. But we actually believe even beyond the RPS that our customers, particularly many of our large international customers who and national brands want more renewables from us. So we're working with them and we don't expect that 15% will be the ultimate ceiling, but that is what the RPS standard will be.
Speaker 5
Okay. And then you anticipated my question a bit, but follow-up there was how much demand are you getting and how much could you add just from C and I mandate or required or wanted types of renewable investment?
Speaker 2
Yes, I would just say that's a moving target. We don't we'll plan for the 15% RPS and that will fulfill some of our customers' needs. And we think that demand will continue to evolve. And because of our clean and lean strategy, we'll take small bets and continue to add. We found ourselves to be very cost competitive in the renewable building and development process.
And so we'll expect to continue to be building our own renewables to serve our commercial and industrial customers.
Speaker 4
Okay, great. I appreciate that. Thank you.
Speaker 3
Yes. Thank you.
Speaker 0
Your next question comes from the line of Jeremiah Buram of UBS. Your line is open.
Speaker 6
Hi, morning.
Speaker 7
Good morning,
Speaker 6
just wanted to follow-up on the renewables side. Just wondering on the cadence of your investment, it looks pretty back half weighted into the 2022 to 2026 timeframe. And given the PTC step down and what we've seen from other companies taking advantage of safe harboring, what's the rationale for the cadence there?
Speaker 2
Well, I would say that we actually have some active renewable development happening right now that we're able to take advantage of the PTC. We're expanding our crosswinds as we speak. And so I expect that to be a pretty steady flow actually across our planning horizon.
Speaker 6
Okay. And is there any opportunity to sort of engage in the sort of deal for fuel argument we've heard from Xcel in terms of being able offset customer rates purely from whether it's wind or anything else?
Speaker 2
Yes. We definitely see that as a potential both in the short and the long run. It's our version is clean and lean because we also include low cost gas in our mix. But we think that there's an opportunity particularly when some of our large particularly our one very large PPA comes off in the latter part of our ten year planning cycle that that allows for that transition to renewables, lower fuel costs and therefore lower total costs with higher earnings potential. We think that that model works here as well.
Speaker 6
Thanks very much.
Speaker 3
Yes. Thank you.
Speaker 0
Your next question comes from the line of Michael Weinstein of Credit Suisse. Your line is open.
Speaker 8
Hi, guys. Michael.
Speaker 5
Good job. Yes, very impressive work on cost cutting. And I'm wondering if you could just discuss maybe a little more detail around how cost cutting might progress as we move into the 2020s and beyond?
Speaker 2
Well, we definitely see a combination of factors, but specifically our implementation of the CE Way. I carry around a story of the month and my story this month is on our meter read rate and our meter reading improvements where we've increased from an average of about 89% meter read rate up to 98% meter read rate. So improving the the quality of our work and at the same time reducing the cost of overtime, reducing the cost of repeat visits on homes that we couldn't get in, re improving our route optimization. So we deploy these lean process improvements, root cause analysis, visual management, and optimization exercises to fundamentally reduce the cost to deliver a higher value outcome for customers. And so that sort of work, we are just getting started across all of our operations and implementing those kinds of skills in our leadership team as well as our frontline employees.
As I travel the state and work with our crews and see the work that we're doing around all of our customers, it's just incredible to me the potential that exists in getting our work done right the first time and doing it at the lowest cost possible. Lots of O and M wrapped up in that. So you can figure that to be that's what will deliver our consistent 2% to 3% operating expense reductions. That's what gives us confidence to continue to build our business model around that way of thinking.
Speaker 5
How far out do you see being able to deliver 2% to 3% a year on average?
Speaker 2
know, I see in our five ten year time horizon that is very, very doable. I see no concerns in that. You spend a couple
Speaker 8
of days with
Speaker 2
me in a truck and our cruise, you'll see there's lots to be done. There's lots of potential.
Speaker 3
All right.
Speaker 5
I'll come out there
Speaker 6
so much. No problem.
Speaker 2
Good. We'll have you. Come on out.
Speaker 0
Your next question comes from the line of Ali Agha of SunTrust. Your line is open.
Speaker 6
Thank you. Good morning.
Speaker 2
Good morning, Ali.
Speaker 9
Good morning, Barry. First question, can you remind us the $18,000,000,000 CapEx over the next ten years, what does that equate to in terms of a rate base CAGR for you guys?
Speaker 3
It's the same 6% to 8%. So, you know, it depends on how you time it out. But it's the driving force that drives up rate base that then drives up our investment that's required, which drives up our earnings and drives up our cash flow. So we vary a little bit because then we're going to work our cost reductions to fund a lot of that so we don't have to pass that through in prices and keep our price increases down around 2%.
Speaker 9
Okay. Tom, just to be clear, single because, you know, it's a single point number, right? So does it fall right in the middle, 7%? Is that the way to think
Speaker 4
about it?
Speaker 3
Exactly. I know you want the single point number and I know the math would tell you you could do it that way. But remember in December we raised our CapEx guidance from 17,000,000,000 to $18,000,000,000 We did not raise our 6% to 8%, right? We will be doing other things. Some of that will drive cost reduction.
Some of it would just be for regulatory purposes or whatever. So it gets right in the zone and you can figure out that it's probably a touch over 7%.
Speaker 9
Okay. Second question, weather normalized electric sales were negative in the fourth quarter. I think overall for the year came in slightly below what you had budgeted. Any trend to look at there? And remind us again what the 2017 budget is for weather normalized electric sales?
Speaker 3
Yep, happy to do. We're still looking at a plan that's about 1% next year and that's driven by industrial again. So as you look at 2017, when I say next year, this year, we expect the industrial side to be up about 5% and then we expect our residential and commercial will be down and be down around 1%, something like that. And that nets out all the energy efficiencies. So we've been having great success on energy efficiencies.
And don't forget, we are fortunate in our state to be able to earn incentives around that work. And that's been about $17,000,000 $18,000,000 a year, which is on top of our authorized ROE. The new law will permit us to almost double that when we get a full year effect. So we're really happy with what how that plays out. Now for this year, we ended up the year, the fourth quarter with residential down a touch, commercial flat and industrial up.
And so industrial was up about 1.5%. And so we ended up the year about roughly 05% up. We've seen a mixture of things going on out there in this last quarter and I'll try to give you just a little bit of a feel about it. In the industrial side, on plastics, we saw good growth, fabricated steel, good growth, better than planned. On the auto side, that growth has continued.
Cautionary tail though because we're seeing the actual sales flatten out a little bit for auto at probably record levels for many of them, but still in terms of growth flattening out. We saw similar utilities that we serve doing really well. And then in food, that was mixed. So we saw some of our companies and customers doing really well and some backing off just a little bit. And then on chemicals, we saw things ease off.
So we have quite a mix on the industrial side. Here's what we're reading. We see apprehension. First excitement, if you don't think the stock market, think about our customers and what they're doing in their businesses. We saw a lot of excitement and then the fourth quarter kind of eased off on some uncertainty.
I think this first quarter is going to be an important one to watch because we're going to see what confidence is out there on the consumer side and we're going to see what our businesses do. And I wouldn't be surprised if some of them hold back a little bit trying to get a better feel for tax reform, money they may bring in from overseas and what they're going to do with their investment programs. But what I will tell you, when we go talk to our major customers face to face, even though there's a little trepidation, they're pretty upbeat. So I think we're in for a good year and a 1% growth is probably a very reasonable place to be.
Speaker 9
Got it. Last question, Tom. Just looking at your 2017 guidance by the various segments, you remind us why the electric utility results in 'seventeen will be down versus what you earned in 'sixteen?
Speaker 3
Well, I think that is I'll oversimplify it and just say on the electric side, we had good weather. So we had a lot of good help in the summer. And so the comp is probably a little bit tougher when you're looking at just the bottom lines. On the gas side, it was a bit the reverse. We had a very mild start, if you remember, last year and then an okay ending to the year.
So the comps are a little bit easier. So when you're just looking at the bottom lines that's what you see. When you look inside the business on weather adjusted basis both businesses are doing quite well.
Speaker 6
Got it. Thank you.
Speaker 4
Yes.
Speaker 0
Your next question comes from the line of Paul Ridzon of KeyBanc. Your line is open.
Speaker 8
Have you started the conversation with the commission yet about maybe accelerating some capital?
Speaker 3
No. Not for this. Is it
Speaker 8
just too early for that? Because we don't
Speaker 3
It's just it's too early. I, you know, I laud our peers for getting out there and trying very hard to describe what this will mean. And we've been equally trying hard to describe what could happen because it's important. But the challenge is I think we're six months away before you even begin to get traction on what's going to be in here and how it will affect our industry. So for us at this stage to say we know enough, let's go start work with the commission, I think that's premature.
Now we will work with them and tell them all about what we do know and try to keep them on board with how normalization might work and all these important things. But it's too soon for us to suggest to them, okay, now we ought to start timing more CapEx in because we may get some funding from the federal government. I think that will come about six months from now.
Speaker 2
The thing I would add Paul is you've nailed the intent here. For us because we have a deep well of high value CapEx, small bets that we can make that continue to incrementally improve our system, it doesn't concern us. We look at this as a it is a potential opportunity that plays right into our business model. So we're hopeful that this creates more opportunity for us.
Speaker 8
But am I kind of reading the sentiment of the commission right that they they know you're underinvested and, you know, are supportive of of all the investment you're doing?
Speaker 2
What I would say is it's been very clear. Both the commission has been clear with us as well as the governor's focus on infrastructure investment in Michigan. And as they're looking at things like roads and water, I think they're relieved to know that there's a good system for electric infrastructure and gas, natural gas infrastructure where there's visibility, transparency, good regulation, a good funding mechanism. This is a good model that we get a lot of support for the kind of investments that are required on our system. We have I mean, we definitely are committed to having a safe natural gas deliverable system, That's probably some of our highest risk assets.
The idea that we've got support from the governor and the commission to do investment in those areas is very important to us.
Speaker 8
And then just switching gears, any incremental contracting activity at DIG?
Speaker 3
Well, for DIG, we're right in the middle of all this work on the Palisades PPA early termination and replacement. And what's near and dear to us as it is to our commission is getting the capacity side right so there's no mistake and then flowing through all these wonderful rate reductions. I mean, it's hard to get rate reductions of this magnitude, so we are just tickled about all of that. So when you look at DIG, we are still in the thinking stage. Is it better if we put DIG in the utility both for accretion and for certainty on capacity?
Or is it better that we keep it outside providing that sort of emergency backup if it was needed in a fashion as well as the business that we know? There's good interest. The upsides at DIG still look attractive. People are still interested in doing more capacity contracts with us, but we're not doing those right now because we're making sure that that backup plan is available to us. Certainty of delivering power is critical to us, and then right behind that is the big customer savings that we get.
So I'm giving you an awfully mushy answer. I normally don't do that because we haven't made the decision. But I would tell you either inside of the utility or outside of the utility, there's some upside available from date.
Speaker 8
And what what are you seeing you're obviously being approached. What are you seeing as as far as offers?
Speaker 3
I would tell you that they're in
Speaker 4
a big capacity.
Speaker 3
I'd say the low the low $4 levels for contracts that might go out over several years. So I think that's a pretty good place to be in. So in other words, there's good demand, but we're not rushed in any way.
Speaker 2
Well, and Paul, what I would add is that we're in the process with the commission. They issued an order on January 20. And we're building out and aligning around what is the backfill plan for Palisades. And that's important. DIG is an important piece of that puzzle.
And so obviously overall reliability for the state of Michigan is both ours and the commission's number one priority. And so we're going to be working together over the next several months to agree upon that backfill plan. And we'll be doing tests on a variety of options that we're recommending with more demand response, more energy efficiency, potentially some additional coal to gas switching, but also then looking at DIG as a major part of our backfill plan for Palisades. We've always said that was our Ferrari in the garage. It is, still, and it's revving up.
And so it's got a job to do here, to make sure that Michigan has adequate resource and supply, going forward with the retirement, and early termination of our agreement with Entergy and Palisade.
Speaker 3
So we're just being a little quiet because it's actually a Tesla and you can hardly hear those things.
Speaker 2
She's getting charged
Speaker 8
Tommy stole the words right out of my mouth.
Speaker 5
I was
Speaker 8
about to make a Tesla comment.
Speaker 6
Should have let
Speaker 8
you go right ahead.
Speaker 0
Your next question comes from the line of Greg Gordon of Evercore ISI. Your line is open.
Speaker 4
Morning, Greg. Thanks. Good morning.
Speaker 2
Hi, Greg.
Speaker 4
Couple of questions. First, just to review what you said on coming out of the gate here going into the year on earnings. Did you say that you were sort of zero three dollars ahead of where you would have expected because of property tax? And that the passage of the energy law gave you an opportunity for an incremental $02 from energy efficiency incentives. And then baselining that off of the potential for a 10.1% ROE, you'd sort of subtract zero three from that, so you'd be
Speaker 5
net $00 Yes.
Speaker 3
You took really good notes.
Speaker 2
Yes, he did say that. All of that
Speaker 4
was I just wanted to
Speaker 3
be sure I didn't miss
Speaker 4
it, get them backwards or miss it or No,
Speaker 3
you got it exactly right. But what I was doing there was just trying to illustrate the, candidly, the ups and downs that we face all the time. There's nothing unusual in those. But also, to be fair, I was trying to foreshadow a little bit what if the ROA ROE comes in at about ten one. Would that be a big problem for us?
No. That's the point.
Speaker 4
No. I understand. You guys manage the business extremely well as always. On the tax, thing, you're I hear you that there's a ton of uncertainty and we're all trying to model this and it's all fraught with error. Looking at your tax slide and then sort of just corroborating that by looking at the earnings guidance slide on Page 16.
I mean, I'm a little bit confused about the I mean, I know theoretically if we had elimination of interest deductibility, but then the law said you could net interest income against interest expense, that would clearly insulate you from an impact. But if all that happened was we said the federal income tax rate goes down by, let's say, 15% from 35% to 20%, and I look at enterprises currently expected to earn $09 I mean, pro form a, that's $0.11 And if I think the parent and other overheads are a $0.25 drag, then I would just sort of gross that up for a 15% reduction in your tax shield, right? So that's theoretically another scenario amongst 1,000,000 other scenarios? Or am I not thinking about that correctly?
Speaker 3
Yes. And I just want to make sure you got the pieces because in the parent and other line, when you're looking at that, is about a dime around Interbank. So it's small. It's like 5% of our earnings roughly. But you need to do what you just did mentally to that part of the business as well because inside of that dime is the $130,000,000 of what we think of as more like revenue, but it is interest income.
That's how banks get their revenue.
Speaker 4
Okay. I got it. So the $09 is enterprise and then there's another $05 that's EnerBank.
Speaker 3
No, no. Really your percent. 10%. Sorry. Yes, no problem.
Speaker 4
So your non regulated businesses that would benefit from a higher from a lower federal income tax rate are really generating like $0.19 And the interest expense at the parent is 15, not 20 or sorry, dollars $3.05, not 25. Then Okay. I understand. I'll follow-up with you offline, Tom, because some of this is complex, and I don't wanna take up too much time on
Speaker 3
call. I appreciate read your I read your report this morning, so I'll be happy to follow-up.
Speaker 4
Yeah. And I already realized I I might have overstated the impact on CMS, but it's like you said, it's extremely complex. One other
Speaker 2
thing
Speaker 4
that I wanted to ask, because you mentioned it and you're the only utility so far to mention it, that's another nuance of the tax question, is the cash flow issue with the NOLs. So if your federal income tax collections go down at the utility level, that's obviously incredibly constructive for customers. It creates more than ample headroom for you to increase your capital expenditures to offset the impact of bonus depreciation, should that also occur? But you rightly pointed out, it would also reduce your parent cash flows, right? You mentioned that you might be able to accelerate AMT credits to offset that.
If you can't offset it, doesn't that mean you have to go to the next highest sort of next lowest cost of capital option on the balance sheet, which would mean issuing more debt or some equity to fill the hole?
Speaker 3
Right. No question.
Speaker 4
I just you're the first honestly, you're the first CFO on any of the calls to even bring it up. And so thank you for that.
Speaker 3
Well, let's just elaborate so that we're all clear. At the end of last year, there's about $1,000,000,000 of NOLs. And when you have a 35% tax shield like we do today, that's worth more than if we had pick your number, 20% tax shield. Right? So what we'll all have to do is take noncash hit, whoever has NOLs and credits.
Right? In year one of the tax reform, we'll have to drive a non cash hit to reflect whatever that is, that difference right through the income statement. I assume everybody will want to adjust that out. But what's useful for us on the NOLs is that we have a long enough life and we're positioned well enough that we're not going to lose the use of them. So we'll still get them, but they're only worth 20¢ on the dollar instead of 35% on the dollar.
And on the AMTs presently, we plan to use those toward the end of our tax planning. But in this scenario, and again who knows what it will be, but I'm guessing in this scenario we could lose access to those AMT credits. And for us there's roughly $300,000,000 Well, rather than do that, we'll reconstruct how much we use bonus depreciation this year and last year for tax reporting. And we'll work in the AMT credits so we don't lose that $300,000,000 but we'll do it in a way so our customers at the utility are whole. We wouldn't ask them to take any penalty in this process.
So we feel pretty good about what we can do, gosh, we've to figure out what it really, really is first before we can adjust our tax planning. So we've got six months, I think, of Washington, D. C. Work before something settles out.
Speaker 2
Hey, Greg?
Speaker 4
No question. Thank you for being so clear.
Speaker 2
Greg, here's what's also pretty clear, 6% to 8% after all that. So we know, you know that that's a worry.
Speaker 4
If there's any company that's positioned to figure out how to continue to execute and meet their plan, it's probably you guys. But we still got to figure out how you get there. Appreciate it. Thank you.
Speaker 3
Thank you.
Speaker 0
Our next question comes from the line of Joe Zhou of Avan Capital Advisors. Your line is open.
Speaker 4
Hi, it's Andy Levy. I'm all set. Thank you.
Speaker 3
Hey, Andy. Nice to hear your voice. Thank you.
Speaker 0
Your next question comes from the line of Jonathan Arnold of Deutsche Bank. Your line is open.
Speaker 4
Good morning, Good morning, Jonathan.
Speaker 7
So I have my first on could I just ask about the Palisades regulatory process at the MPSC? And it seems they've asked for more information a couple of times now. And can you just talk about what you think is going on there? When do you anticipate making the actual securitization filing?
Speaker 2
You bet. They asked in December. They basically told us in December in their December 20 order that they were going to be asking. And then on January 20, they did ask and set a timetable for information that they were looking for. As you can imagine, their biggest concern, and it's our concern too, is to assure that we have resource adequacy in Michigan.
We do have a nice securitization law in Michigan that makes a proceeding like this limited in the amount of appeals. And so there's some real advantages to making sure that we ask and answer all these questions so that when the commission approves the securitization application, they really understand what are the customer benefits and savings and that we have adequate resource. And so the commission has asked for basically additional time through the August to go through that entire proceeding. But it's all under the umbrella of the securitization. So by the August, we expect an order outlining the agreements.
Speaker 7
Great. Thank you, Patti. And then if I may just on tax, Tom, I want to just make sure I understand one aspect of your Slide 22. So the I presume the backfill is less at a lower tax rate because in that scenario, you have more of a refund of the excess deferred tax balance and therefore less of an offset to rate base. Is that correct?
Speaker 3
Exactly right. So you do your asset expensing, but at that different tax benefit level, you had it perfect.
Speaker 7
Okay. So then just following up on that, could you can you would you share with us what your excess deferred income tax balance is today? And what your assumption is around the likely timing of it being normalized, if that's the right word?
Speaker 3
Yes. No, I don't have that number in front of me, but I can tell you, I don't pay too much attention to it for this reason. Whatever that number turns out to be at the time, so that will depend on what the law says for how it changes, we're assuming normalization and approximately a thirty year recovery period. This all has to happen too. Federal government has to say we're going to continue the normalization process.
Then we assume it would follow for utilities, you know, your plant type depreciation levels. So whatever the number is, it would be I have a number here, but I think it would be kind of meaningless. That goes over a thirty year period. The only reason I say it's meaningless is so different in every single scenario we look at.
Speaker 7
All right. Well, thank you for that. And thanks for the call and all the extra color.
Speaker 2
Thanks, Jonathan.
Speaker 0
Your next question comes from the line of Steve Fleishman of Wolfe. Your line is open.
Speaker 4
I'm good. Thank you.
Speaker 3
Steve. Thanks, Steve.
Speaker 0
Our next question comes from the line of Larry Liu of JPMorgan. Your line is open.
Speaker 4
Hi, thanks for taking my question. Thanks for all the information on tax reform. Just wondering, can you just give us high level what is the cash flow impact of all your assumptions, tax rate, etcetera? I do. Directionally or any way really.
Speaker 3
Yeah, yeah, yeah. I do it like this. I'm going to break it into the businesses again. Okay? So at the utility, we're assuming backfill for whatever is opened up with the federal government.
So if you just think of that in a big picture as neutral cash flow because we'll need to do it soon. We have to do it early on in the process. Now go over to a little business like enterprises, the nonutility business. We'll see the pickup in terms of benefit just like every nonutility would see, which would be pretty normal. But since we already aren't in a position of paying taxes, then you're not going to see a tax cash flow change, if you're with me on that, right?
We already are in a position where we don't pay taxes. And then on interbank, that will actually see a kick up because now instead of losing the instead of paying taxes on the profit that we would make there inside of that business unit, we'll see that that gets offset with the netting with parent interest. So they'll get good news. But then when we consolidate it up to the company, we already assume we're not paying any taxes. So I'm trying to tell you that there's not going to be much of a cash hurt or help.
The big write offs we do around the NOLs that was asked about earlier in AMT credits, assuming that's how that works, it's a noncash thing. But we'll turn around on the AMT credits and we'll try to get advantage of those upfront. And so everyone might conclude, great, dollars 300,000,000 of better cash flow. Depends on what you compare to. This is just substituting for bonus depreciation, so there's really no change to cash flow.
Not a lot of change early on is my answer, and I made it complicated because it really is complicated and then you compare it to where you are today where you don't pay taxes, which we love by the way. We think this is a great country.
Speaker 4
Yes, definitely. That's great. Thank you for all the color.
Speaker 3
Any other questions?
Speaker 0
There are no further questions at Okay. This
Speaker 2
Great. Thank you, Jody. Thanks everyone for joining us today.
Speaker 0
This concludes today's conference. We thank everyone for your participation.