CMS Energy Corp
NYSE:CMS
If you don’t study any companies, you have the same success buying stocks as you do in a poker game if you bet without looking at your cards.
Utilize notes to systematically review your investment decisions. By reflecting on past outcomes, you can discern effective strategies and identify those that underperformed. This continuous feedback loop enables you to adapt and refine your approach, optimizing for future success.
Each note serves as a learning point, offering insights into your decision-making processes. Over time, you'll accumulate a personalized database of knowledge, enhancing your ability to make informed decisions quickly and effectively.
With a comprehensive record of your investment history at your fingertips, you can compare current opportunities against past experiences. This not only bolsters your confidence but also ensures that each decision is grounded in a well-documented rationale.
Do you really want to delete this note?
This action cannot be undone.
| 52 Week Range |
55.61
72.1
|
| Price Target |
|
We'll email you a reminder when the closing price reaches USD.
Choose the stock you wish to monitor with a price alert.
This alert will be permanently deleted.
CMS Energy Corp
You don't have any saved screeners yet
Good morning, everyone, and welcome to the CMS Energy 2017 Year End Results and Outlook Call. The 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. [Operator Instructions] Just a reminder, there will be a rebroadcast of this conference call beginning today at 12:00 pm Eastern time, running through February 21st. 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 Maddipati, Vice President of Treasury and Investor Relations.
Good morning and Happy Valentine's Day, everyone. With me are Patti Poppe, President and Chief Executive Officer; and Rejji Hayes, Executive Vice President and Chief Financial Officer. This presentation contains forward-looking statements, which are subject to risks and uncertainties. Please refer to our SEC filings for more information regarding the risks and other factors that could cause our actual results to differ materially. This presentation also includes non-GAAP measures. Reconciliations of these measures to the most directly comparable GAAP measures are included in the appendix and posted on our website.
Now I will turn the call over to Patti.
Thank you, Sri and thank you everyone for joining us today. Rejji and I are excited to share our 2017 results with you and our 2018 goals. I've scrubbed all of our stories of the month and have selected our wining story of the year, which I will unveil today. Rejji will provide the financial results and an update on Federal Tax Reform and as always we look forward to your questions.
We delivered a strong performance in 2017 adding another year to our consistent track record of 7% EPS growth without reset. Operationally we manage challenging weather and storms throughout the year and financially we were able to deliver the results you have come to expect. I'm pleased to report that our adjusted EPS was $2.17 a strong 7% above the prior year which excludes the one-time non-cash effects of Federal Tax Reform.
As Rejji will discuss in more detail tax reform will have a long-term positive impact on our business model. In the near term given the significant savings provided our customers will benefit from lower rates which leads to manageable operating cash flow reductions in longer term the lower builds will provide headroom for necessary capital investments. In 2017, we continued to grow our operating cash flow well surpassing our target and yielding an FFO to debt ratio of approximately 20%, which provides plenty of cushion for the potential cash flow impacts of tax reform.
For 2018, we are raising our guidance to a range of $2.30 to $2.34 which reflects 6% to 8% annual growth from our 2017 actual EPS. We are also increasing the dividend to $1.43 per share consistent with our expected earnings growth. Longer term we are reaffirming our growth rate of 6% to 8% and we continued to be confident in our ability to deliver another year of consistent industry-leading performance. As I stated in the past, we're highly confident in 7% annual growth has demonstrated in 2017, a year where we experience atypical weather and a record level of storms in our service territory, yet we still delivered.
As we think about our guidance range for 2018, we will focus on executing our capital plans and realizing cost savings to the CE Way. Admittedly given the strength of our plan for 2018 and the reinvestments we've made in 2017, we'd be pretty disappointed if we didn't finish the year toward the high end of the range. Our commitment to people, planet and profits are tripled bottom line continues to serve us well driving a year of record setting milestones in safety, service and customer satisfaction. In fact, our safety performance was our best ever and put us number one amongst our peers. Nothing is more important and it's a great demonstration of the quality of people here at CMS that are focused and safe every single day.
We were ranked and awarded a number of third party surveys including being named the Best place to work and the Best Employer for Diversity in Michigan by Forbes Magazine and the number US utility by Sustainalytics for the second-year in a year. It's no surprise that my co-workers and I love working for such a purpose driven company that continues to demonstrate the financial performance and sustainability go hand-in-hand. Yet we're dissatisfied and committed to continuously improving our performance every day. For example, we told a year ago that we only fulfilled our customer commitments on time 9% at the time. Our goal was to reach 50% by the end of 2017, dramatic improvements.
With the utilization of the CE Way, the team was able to deliver even better than planned. I'm happy to report that we finished the year at 60% commitments made on time and yet, we still have so much work to do. Each of these remaining missed appointments is a cost both to our customer and to our [audio gap] proved customer experience and cost savings that the CE Way unlocks. I applaud my co-workers and their relentless dedication to continuously improving our performance. You can count on us to leverage the CE Way to enable our triple bottom line of serving our customer and communities, protecting and improving the planet and delivering strong and predictable financial results.
Now as you know, I've a series of stories that I call my story of the month. There is nothing like an example to bring to life the power, the consumer's energy way and its impact on our continued performance. I reviewed all of our stories last year and have selected the best of the best for my story of the year. As we shared many times, our business model is fueled by needed infrastructure investments on our aging system partially funded by cost reduction to protect customers from prices they can't afford. Our core competence of cost reduction is enabled by capital investment which often reduce O&M. our process improvement to the CE Way and effective technology deployment.
My story of the year is an example of how the whole model works. Last year, we completed the installation of our smart meters which was a multi-year capital program designed with customer benefits in mind from day one. Our smart meters have enabled a dramatic improvement in meter read rate and thereby improved billing accuracy while significantly reducing costs. When we don't read the meter rate the first time, we rely on estimated bills which are inevitably error-prone and create waste for both customer and the company. Utilizing smart meter technology and significant process improvement we've been able to reduce invoice reversals by 90% since 2013, reduced calls to our call centers and reduced truck rolls investigating perceived billing errors. As a result this has saved well over $10 million for our customers and better yet, it freed up time to solve another problem.
Customer's struggling to keep up with their bills. The very same people who were spending time correcting bills were freed up and they designed and launched a new payment program called CARE. Which enables customers to pay on time and rewards them for doing so, by reducing their arrears adjust as they go creating a new pattern of payment and household stability? We've reduced shut-offs by 30%, while at the same time reducing our uncollected accounts by $34 million or over 50%.
We were able to protect our most vulnerable customer and lower cost for everyone. We awarded our billing team our first Annual Purpose Award this year for their demonstration of world-class performance delivering hometown service. We're creating a culture of performance and celebrating our success. And 99% meter-read rate, a 90% reduction in invoice reversals and a 50% reduction in uncollected accounts was definitely worthy of celebration. True waste elimination. By making smart investments, improving our processes enabled by the CE Way and deploying technology we've substantially reduced cost. Which we will return to our customers to fuel new investments which can add even more value for them. This model works and there is lot more steam in the boiler for the future. Stay tuned for more stories to come.
We're celebrating on the run and have kicked off 2018 with gusto. Safety is always our number one priority and we aim to make this year's safety performance even better than last year's record result. We have a strong regulatory model in Michigan that is time bound, transparent, allows us to have forward-looking visibility as well as utilization of our investment recovery mechanism in gas. And as a result of the 2016 Energy Law have added an IRP filing. In parallel the Commission had ordered a five-year electric distribution plan as well. These long-term regulatory filings allow us to plan for the future, which reduces risk and provides for more predictable regulatory outcome.
As always we plan to meet all of our financial objectives for the year and Rejji will take you through those along with tax details. We will continue to drive our triple bottom line delivering the consistent world-class results for our customers and you. Our model is simple, durable and continues to deliver. The self-fund a large portion of our earnings growth. We look at our cost structure. We look at everything. O&M, fuel, PPAs, interest expense and yes, taxes. Tax reform is good for our customers and our model.
We believe tax reform will fuel the economic momentum across the country and especially right here in Michigan and we plan to be a bit part of that growth. I attended our State of the State Address in mid-January and the optimism was palpable. The Governor even bragged a little bit which is pretty uncharacteristic of Michigan's famed nerd. Governor Snyder shared that Michigan is the number one Great Lake State for inbound college educated talent. Has the sixth highest income growth in the nation and has created the most manufacturing jobs in the country. The Governor reiterated his commitment to infrastructure in Michigan. All of this is good news for our customers and CMS Energy.
As we've mentioned. We have a very large and aging system because we have so much needed infrastructure investment. Our internal teams literally compete with one another for project approvals. We have a rigorous prioritization and approval process for work that significantly improves the safety of our system, the reliability of our systems and often reduces our cost, which is the trifecta for customers. We're the fourth largest gas utility in the nation in terms of miles of pipe and that system is going through a refresh overtime. With nearly 1,700 miles of large transmission pipe and 27,000 miles of distribution mains. It will take decades to replace all of it. We plan to continue to align with our regulators on the prioritization and sequence of these needed investments.
Our electric distribution system is older than our peers. Our current plan calls for focus on poles, wires and substation nothing fancy, but the basic building blocks of a resilient system. Finding mains and making every capital dollar count. We can deliver more value for customers and enable the long-term delivery of our financial objective. In the latter half of our five-year distribution plan, we began to add smarter grid technology and modernization which can better optimize and utilize our infrastructure. And we're proud of the way, we self-fund these necessary infrastructure investments through our commitment to cost reductions. When we look at the total cost structure we realized the bulk of our cost are not just to operate and maintain the system. Fuel and purchase power costs are larger than O&M and these are pass-throughs than our regulatory construct here in Michigan, but they're still real expenses for our customers and add no value for our investors.
We've reduced fuel prices by shifting from colder gas generation and that saves our customers money, but there is more work to be done. Our PPAs provide a significant opportunity in the very near future to reduce cost for our customers even more and fund necessary capital investments across our system at a lower cost. As we lower total cost, we can be more attractive to companies considering Michigan for their expansion or relocation because when Michigan wins, we win. When Michigan grows, so does our business. We are actively engaged in economic development and in fact we're awarded the Deal of the Year for our work with the locating of switch data center in Grand Rapids, the heart of our electric service territory. By providing energy ready sites we work closely with our communities and policy leaders to make it easier for new businesses to expand or move to Michigan.
Last year alone we attracted 69 additional megawatts of new load and there is more fish on the hook. In addition to growth, many of our new and expanding customers are looking for help to achieve their renewable energy goal. We're partnering with those companies for success with our recently announced Green Pricing package. Yet we still plan conservatively. We only add the load to our model and our sale forecast when it has actually materialized. The proof is in the pudding. We achieved almost 2% industrial load growth in 2017.
Our regulatory calendar is on pace this year, especially with the continued implementation of the 2016 Energy Law and the new Federal Tax policy. We are working with our regulators to pass the tax savings onto our customers. We made a filing on January 19 indicating our preference which as you'd expect, is to keep it simple and apply a credit on every bill and we are waiting the MPSC's order on [indiscernible] like this credit applied.
The new Energy Law requires us to file a long-term integrated resource plan. We anticipate filing that in June. Furthermore, to meet Michigan's new 15% renewable portfolio standard we have filed a plan to build over 500 megawatts of new renewables and expect the commission order on that plan later this year. Our IRP will provide insight to our future generation mix and enable the commission to go on the record with their view of our plan. Again the regulatory construct in Michigan is transparent, directed through statue, time bound and forward-looking. Therefore provides investment certainty ahead of our actual expenditures no big bets and no surprises.
Our rate cases remain on track to deliver cost savings and service improvements to our customers, we expect an order by the end of March on our electric rate case and we're still in the gas case, but expect a constructive outcome there as well. No matter the external factors, our business model has stood the test of time in changing environments. For us to deliver the consistent strong performance you come to expect. We work closely with everyone. Without counting on the weather or other recess [ph] to EPS. Over the last 12 years, we have continued to pay a competitive dividend that has grown along with earning. When we combine the two, our earnings and dividend growth, we yield a double-digit total shareholder return. Over the past 10 years in fact, we've delivered TSR that's three times the performance of the UTY and more than twice the performance of the S&P 500. 2018 will be the 16th year of track record you've come to know and enjoy and we intend to keep it that way for many years to come.
Now I will turn the call over to Rejji.
Thank you Patti and good morning, everyone. As always we greatly appreciate your interest in our company. As we reported earlier this morning for 2017 we delivered adjusted earnings per diluted share of $2.17 which is toward the high end of our guidance and reflects at another year of 7% annual growth. Our adjusted EPS in the fourth quarter excludes $0.52 non-cash, non-recurring charge associated with Federal Tax reform. This charge is largely attributable to the remeasurement of deferred tax asset, which now reflect a reduction of the corporate federal income tax rate to 21% and 35%.
We're quite pleased with our performance for the year particular in light of the $0.15 of negative variance associated with mild temperatures and storms realized over the course of the year, which more than offset by cost savings, rate increases, net investments and outperformance at dig among other factors. As always, we take the good with the bad and manage to work accordingly to meet our operational and financial objectives, the benefit of our customers and investors.
Slide 14 best illustrates the resilience of our business model, during periods of unfavorable weather. We rely on our ability to flex operational and financial levers to meet our objectives. 2017 was no different as we experienced mild temperatures and heavy storm activity throughout most of the year and our team responded with cost performance and sound financial planning to deliver the consistent and predictable results you expect.
Similar to our past practice, we continue to reinvest in the business during periods of favorable weather or upon realization of cost reductions in access of plan. These reinvestments entail pulling ahead work such as forestry, refinancing high coupon bonds and supporting our low income customers among other opportunities. In fact over the past five years we've reinvested almost $500 million in aggregate due to favorable weather and strong cost performance. These reinvestments support our long-term goals and provide more certainty around our operational and financial objectives in the next year and for years to come.
Rounding our 2017 Slide 15 lists all of our financial targets for the year and as noted, we met or exceeded every single one of them which adds another year to our long history of delivering transparent and consistent performance.
The highlight of couple of noteworthy items in addition to achieving 7% annual EPS growth, we grew our dividend commensurately and generated over $1.7 billion of operating cash flow. Our steady cash for generation over the years continuous to fortify our balance sheet as evidenced by our strong FFO to debt ratio which had approximately 20% at yearend exceeds both the 2017 target and our historical target range of 17% to 19%. Our conservative of the balance sheet provides sufficient headroom to manage unforeseen headwinds and support strong investment grade credit ratings which enable us to fund our capital plan cost efficiently to the benefit of customers and investors.
Lastly, in accordance with our self-funding model we kept annual price increases below 2% for both the gas and electric businesses which align with our target of keeping annual price increases at or below inflation. All well investing a record level capital investment of $1.9 billion at the utility. As you've grown accustomed, we usually take this time to adjust our EPS guidance based on actual results as such you'll note on Slide 16 that we're increasing both the bottom and top end of our 2018 adjusted EPS guidance to $2.30 to $2.34 which is a $0.01 above our initial guidance during our third quarter call and imply 6% to 8% annual growth off our 2017 actual results.
As for the path to our 2018 EPS guidance range as illustrated in our waterfall chart on Slide 17. We plan for normal weather, which in this case will contribute approximately $0.16 of positive year-over-year EPS variance given the substandard weather experience in 2017, however needless to say we believe we have sufficient risk mitigation in our plan in the event the weather does not corporate. Additionally, we anticipate about $0.06 of EPS pick up associated with our pending electric and gas rate cases, net investment cost and another $0.03 from cost savings which implies a 2% year-over-year reduction in costs which we believe is highly achievable given our track record.
For our estimates, these sources of positive variance will be partially offset by select non-operating savings realized in 2017 that will either be passed onto customers through our pending cases or one-time in nature. We also have embedded the usual conservatism in our utility sales and non-utility performance forecast. Moving onto Federal tax reform like most large companies the new tax law impacts our business in a variety of ways. And as Patti mentioned, we believe tax reform will ultimately be accretive to our long-term plan.
At the utility, we filed a recommendation on January 19 to the MPSC on how to reflect the new tax law in customer rates. As part of that filing we proposed an estimated $165 million rate reduction for customers in 2018 and a separate proceeding to determine the treatment of deferred taxes. We were working closely with the Commission on this matter and though the amount and the pace at which the tax savings will be provided to customers in 2018 have yet to be determined, we believe the rate reduction could be up to 4% which clearly facilitates our self-funding strategy by creating meaningful headroom for future capital investments.
As you know, we have significant investment requirements at the utility in the form of gas and electric infrastructure upgrades, PPA replacements and renewable investments. And the estimated cost savings associated with tax reform increase the likelihood of us incorporate more projects into our capital plan over the next five to 10 years to the benefit of customers and investors.
In fact every 1% reduction in customer rates equates to approximately $400 million of incremental capital investment capacity. On the non-utility side tax reform impacts CMS in three ways. First, the new tax law establishes potential limitation on parent interest expense deductibility however we're uniquely positioned in this regard because our parent interest expense will be largely offset by the interest income generated by EnerBank, our industrial bank subsidiary. Second, our non-utility businesses would realize some upside given the lower federal income tax rate although this will not have a material impact on our consolidated earnings since those businesses are relatively small. And third as we've discussed in the past, the sum of non-utility operations produces an overall pre-tax loss due to our parent interest expense. In the past the overall loss of our non-utility operations produced a larger tax benefit at 35% tax rate than it will going forward at 21% rate. This equates to about $0.02 of EPS drag in 2018 that is already baked into our guidance and fully mitigated.
Lastly the repeal of the alternative minimum tax provides us with the opportunity to monetize our substantial AMT credits over the next four years to the tune of approximately $125 million in the first year which partially offsets the likely near term operating cash flow reduction at the utility. In summary, the effects of tax reform manageable in the near term and create long-term opportunities which provide more certainty around our operational and financial objectives.
To elaborate on the magnitude of the potential long-term opportunity. As Patti highlighted we have a robust capital investment backlog at the utility due to our large and aging electric and gas systems which has historically been executed at a measured pace given customer affordability constraint. Given the substantial rate reduction opportunity presented by tax reform in addition to the other aspects of our self-funding strategy we're forecasting a five-year capital investment program of approximately $10 billion which extends our runway for growth without comprising our annual price increase target of at or below inflation.
The expected composition of this plan will be waited toward improving our gas infrastructure as well as upgrading our electric distribution system and investing in more renewable generation. This level of investment will increase our utility rate base from approximately $15 billion from 2017 to $21 billion in 2022 which implies a 7% compound annual growth rate. This extension of our five-year capital plan will further improve the safety and reliability of our electric and gas systems, the benefit of our customers, evolve our generation portfolio to the benefit of the planet and extend the runway for EPS growth to the benefit of investors.
Beyond the next five years our capital investment needs are significant likely in excess of $50 billion in the long run. As we discussed during our investor day in September and as evidenced in the circular chart on Slide 19. As you can imagine over the next 10 years our capital plan will be greater than our previously disclosed $18 billion plan out of the amount and composition of a revised 10-year plan. Will be dictated by the analyses being performed in our upcoming long-term electric distribution and integrated resource planned filings as well as the commission decisions as to how they intend to address the new tax law. As such our longer term estimates will evolve as our regulatory filings progress.
From a liquidity perspective while tax reform alleviates the customer affordability constraint, it does create manageable headwinds in regards to operating cash flow as I alluded to earlier. As a result of the potential reduction of customer rates due to tax reform we anticipate a flat year-over-year operating cash flow trend from 2018 to 2019 at $1.65 billion but expect to resume our trend of $100 million per year increases by 2020. In aggregate we're forecasted to generate approximately $9 billion of operating cash flow over the next five years which will play a key role in the financing strategy of our five-year capital plan.
In support of our liquidity planning, we also expect to continue to avoid paying substantial federal taxes until 2022. In sum, our forecasted OCF generation coupled with our tax yield portfolio enables us to continue to finance our capital investment program in a cost efficient manner. As result of our solid cash flow generation and conservative financing strategy which includes a modest ATM equity issuance program, our credit quality has improved significantly over the past 15 years as evidenced by our strong credit metrics and numerous ratings upgrades.
We've also opportunistically refinanced high coupon bonds such as the partial redemption of our eight and three quarter senior notes at the parent in the fourth quarter which has reduced cost and mitigated refinancing risk. As of December 31, our fixed to floating ratio was approximately 95% with a weighted average bond tenure of 13 years. Which largely insulates our income statements in the prospect of rising interest rates? This prudent balance sheet management has enabled us to absorb the effects of tax reform while extending our capital plan without issuing substantial amounts of equity.
As you can see on the right-hand side of Slide 21 our FFO to debt ratio is projected to be approximately 18% by year end which includes the effects of federal tax reform and assumes no change to the size of our ATM equity issuance program in 2018. On Slide 22, we have listed our financial targets for 2018 and beyond. In short we anticipate another great year with 6% to 8% EPS growth, no big bets and robust risk mitigation. This model has and will continue to serve our customers well they realize lower gas and electric prices from our self-funding strategy which is enhanced through tax reform as well as our investors who can continue to count on consistent industry leading financial performance.
Few companies are able to deliver top end earnings growth while improving value and service for customers year after, year after, year and we're pleased to have delivered another year consistent industry leading performance in 2017 and expect to continue on this path in 2018. On Slide 23, we've refreshed our sensitivities for your modeling assumptions. As you'll note with reasonable planning assumptions and robust risk mitigation the probability of large variances from our plan are minimized. There will always be sources of volatility in this business be it weather, fuel cost, regulatory outcomes or otherwise and every year we view it as our mandate to do the warning for you and mitigate the risk accordingly.
And with that I'll hand it back to Patti for some closing remarks before Q&A.
Thank you Rejji. With our unique self-funding model enhanced by tax reform, a constructive regulatory environment and a large and aging system in need of fundamental capital investments. We feel that our investment thesis is quite compelling. Now Rocco, please open the line for Q&A.
Thank you very much Patti. [Operator Instructions] our first question comes from Julien Dumoulin-Smith - Bank of America Merrill Lynch. Please go ahead.
So perhaps just first thing on the EPS growth you guys talk now about enterprises and tax planning. I know you talked broadly about it, but how do you reconcile against this 2% addition that you throw in there in terms of self-funding and then also, can you just be a little clear about the year-by-year equity contemplated in the current plan?
Yes, so with respect to enterprises Julien as you know that has always been kind of one of several components of the self-funding strategy and so our self-funding strategy is largely predicated on the cost cuts as well as little bit of sales growth and then a combination of tax planning unregulated or non-utility contribution and other have allowed us to get to that sort of 75% of funding of the 6% to 8% growth which again minimizes the annual rate relief request. And so enterprise has always been part of that plan as EnerBank and their contribution is relatively modest but helpful. So that's effectively how we see that one.
With respect to your second question on the equity issuance, it's historically our at-the-market equity dribble or equity issuance program was around $60 million to $70 million on a run rate basis and that's what we've been doing for some time and so foresee based on the implications of tax reform we don't see that changing in 2018 but longer term we expect the modest increase of that, to call out the tune of about $20 million to $30 million and so we think, run rate it's probably around $110 million to $115 million but not much higher than that, so we still think we can comfortably fund that within the dribble program it's well south of about 1.5% of our market cap and we think again highly digestible. Is that helpful?
Absolutely. Thank you. Perhaps turning to the CapEx side of the equation, perhaps two-fold here first. If I have this right, you increased the overall pie to $50 billion number now and just curious if there is anything to read into that, just in terms of the updates, it give you that incremental confidence now. And then secondly more specifically, as we think about this upcoming filing on the distribution front and finalizing that here. Is there anything else from a regulatory perspective you all might be looking at to improve your ability to concurrently earn on that maybe thinking of trackers here on the distribution front, but you know curious?
So on the $50 billion, I think we were pretty clear at our Investor day and we continue to be consistent in our message that our system is large and aging and so the point of the $50 billion and you'll see that it's a - at least or approximately because the size of the opportunities is well more than our customers can afford and so this constraint of customer affordability and a healthy balance sheet and our credit ratings and credit metrics is an important combination that we're always trying to work, so the issue and what we're trying to reinforce is that there is no limit to how much work needs to be done, it's all about managing our cost and making sure that we can get more value for every single dollar that we invest all across the system and so that our customers can have a better experience at a lower price and so - capital is not the - availability of capital opportunities is not the constraint and that's the point of the $50 billion.
On the distribution front, we're excited about this filing for a couple of reasons. Number one, its paints a nice five-year picture of the investment potential and strategy and results and outcomes that can be delivered from those investments. It also creates the framework for discussion with the commission. There is nothing embedded in that filing that changes the regulatory construct or modifies our approvals or implies long-term tracking mechanisms but I do think that, by having the open visibility the opportunity to have a good rich discussion with both the staff and commission about the investment priorities. We can provide more certainty to our regulatory outcomes and de-risk the financial plan in the long run.
Excellent. Thank you all.
And our next question today comes from Ali Agha of SunTrust. Please go ahead.
First question on the electric rate case, can you just remind us how to reconcile the ALJ proposed decision to your ask? I mean just the dollar amount there's a huge difference there. How are you looking at that in the context of how that fits into your financial plan?
The ALJ is just another step in the process. It's not a file Commission order just to be clear. The Commission speaks with their orders. There's a couple big discrepancy, number one is their ROE of 9.8. we look at the most recent gas order that the Commission issued and they reiterated that 9.8 is too low and 10.1 wasn't appropriate ROE at this time and so that was not that long ago and so we feel that's a difference as well as, they had two other what I would describe as distinct differences to traditional rate making that we've been doing specifically around forecasting sales, around our energy efficiency and including them or not including them. We've always included our forecasted energy efficiency sales reductions in forward-looking rate making and so the ALJ opted to eliminate that, that was about $18 million difference as well as discount rate calculation. So there was very specific things that the ALJ pointed to that were very different than what has been traditional. So our final order is expected near the end of March and our commission is very competent and capable and they'll weigh all of the inputs and we expect a favorable outcome.
Ali this is Rejji. The only thing I would add to Patti's good points is that, as it pertains to ROE. If you look at the fac [ph] pattern now versus where we were in not too distant past, when the commission gave the decision for the gas case at the end of July. The tenure treasury was about 2.3% and well I think we all know what has taken place since then, we've had about 55 to 60 basis points of ascension and then you've had tax reform which has taken place, which is obviously leading to inflationary pressure as well as the prospect of rates rising beyond where they are today, you couple that with what is realistic credit quality deterioration across lot of utilities in the sector and so I think in light of how the fac [ph] pattern is changed to me again. I think ROEs and where they will ultimately end up. I think it's very difficult to make a case for something below 10% at this point, but ultimately as Patti highlighted the Commission will speak through their order, so we'll see.
Right and then second question, the weather normalized electric sales for the year ended up 0.4% which was below your targeted range for the year. I'm just wondering if that changes your thinking going forward. I think you've been assuming like a 1% or similar kind of growth rate for sales going forward, just wondering how the 2017 outcome impacts your forward thinking there.
Yes, so Ali I would actually beg to differ slightly with your position, yes we talked about electric sales forecast between call 0.5% to 1% beginning of the year and that's obviously weather normalize in net of energy efficiency, but as we've said throughout 2017 we've actually been tickled pink with the mix of sales that we've seen throughout the year, so it's interesting as you look at that and 40 basis points where we ended up and peeled the onion on that some residential was roughly flat, our forecast beginning the year assumed about 1.5% decline again net of energy efficiency and weather normalized and so flat performance there was really above expectation and so that is higher margin sales as you know and so that was upside relative to plan.
And then on the commercial side that's really where we saw a quite a bit of performance there and so we're just under 1% weather normalized net of energy efficiency and our plan beginning of the year was about 1% down and so and that implies where you saw a little bit underperformance was on the industrial side, but to end the year got it just under 2% weather normalized net of energy efficiency again below our plan, but still that's a very nice mix and really suggest that we have a pretty good economic environment and pretty diversified service territory which is not nearly as cyclical as other parts of the state and so we were quite impressed with that and going forward we do not expect to see a modest degradation of that performance from a sales perspective going forward, but generally we do plan conservatively so we'll see, but again not disappointed at all with where we ended up.
I see and last question, just to clarify if I heard the remarks right. As you look about your CapEx plans and factored in the headroom from tax reform. Did I hear it right the next five-year CapEx plan we should not expect any changes in terms of the amounts to that but likely the 10-year plan amounts will likely go up? Did I hear that correctly?
No, no so just to be clear. You have a couple of things that are moving in the five-year plan. So the prior five-year plan was 17 through 21 that was $9 billion plan which presuppose about $1.8 billion per year, we've moved one-year forward, so this is now 18 to 22 plan and so this plan five years in aggregate is about $10 billion, that implies about $2 billion of spend per year, so you've seen a step up there in terms of the aggregate spend and where we have decided to err in the side conservatism is we're not in a position at this point to provide more disclosure on the 10-year plan. Now the only thing we've highlighted on the slide is that, we fully expect it to be an excess of $18 billion given that the prior 10-year plan pre-tax reform was $18 billion and so if you assume with the likely significant customer rate reductions associate with tax reform, that gives us substantial headroom to increase the capital plan to the benefit of customers and investors. So hopefully that's clear now.
Yes, thank you.
And our next question today comes from Michael Weinstein of Credit Suisse. Please go ahead.
I heard you mentioned the IRP is kind of the next catalyst to talk more about - expansion of the five and 10-year plan, but is the five-year distribution plan which I think is coming up, the filing is coming up in March. Is that also another point where you might see more of that $50 billion talked about?
Yes. And this really - the timing of these in parallel is really productive to have the IRP and the electric distribution plans filed within a couple months of each other. The distribution plan does not result in an order per se, financial approval, but the IRP does and so I would say the IRP provides more financial certainty but the distribution plan in concert with it does show and will demonstrate than the mix of electric spend for sure as part of that five-year $10 billion plan.
Great that makes sense. Maybe you could just highlight a little bit of the possible upside for dig as it results of the state and liability mechanism which just was recently set?
Michael this is Rejji. So couple things to think about there, so the charge was established in late November by the MPSC and I think they assumed about just over $300 per megawatt day for the charge that would potentially be levied to AES, is our Alternative Electric Supplier who cannot demonstrate they have requisite capacity four years forward. That translates into about $9 per kilowatt month price in the capacity market and so we assume that anything above $3 per kilowatt month is upside dig and so while we don't think that will create opportunities in the near term certainly longer term particularly if there is a local clearing requirement that's established beyond 2021. We definitely think there could be some opportunities for dig to be competitive in that environment, but certainly we haven't baked in any of that into our plan because it's too premature for that.
Okay, great. Thank you very much.
Our next question today comes from Greg Gordon of Evercore ISI. Please go ahead.
Most of my questions have been answered, but I do have one with regard to the IRP at a very high level. 15-year plan. You still have a fairly significant amount of power generation coming from coal. You also have you know Palisades and MCV PPA is expiring in the mid 2020s. So should we expect to see sort of resource plan that talks about how we're going to replace those PPAs and sort of decarbonize the remaining fleet in the context of this IRP. How aggressive a tilt towards renewable might we see given how much more economic they're becoming especially as we move out into that timeframe?
Great question Greg. Thanks for asking. The IRP plan will definitely reflect our clean and lean generation strategy that will have retirements of coal and it's actually a 20-year time horizon that you'll see, you'll see through 2040 in that plan and our decarbonization of our generation fleet will be a big thing that you'll see, the economics of renewable continues to improve and we see that as an important part of our mix going forward in addition to energy waste, reduction through peak reduction through demand response as well as our energy efficiency programs in total. So we're excited to get that IRP out in public that will really show our commitment to being a key part in sustainable energy future. We're excited. I will just make one note Greg that we have retired seven of our 12 coal units. We've retired almost a gigawatt of coal and so we're actually down dramatically in our generation fleet, with coal. And so we feel great about where we are, we've reduced our carbon intensity by 38% since 2008 levels. We definitely are leaders that's why Sustainalytics I think continues to choose us as the number one utility and Newsweek Magazine selected us one of the greenest companies. Independent of industry and the nation top 10. We're flanked by Apple and J&J in that top 10 ranking. Our commitment to carbon reduction is both in our actions and our forecasts.
Thank you, Patti.
And our next question today comes from Jonathan Arnold with Deutsche Bank. Please go ahead.
When I look at Slide 15 while you give the target for 2018 financial targets and then I think the greenbox is the 2017, but can you just talk about what you've assumed on tax reform in terms of the pace of refund to customers in that plan. Does that assume what you mentioned so that would be relatively quick? So is that sort of some wiggle room around that, if it comes out slightly not so quick.
Yes, so we assumed we erred on the side of conservatism I'll say and so Jonathan for 2018, we assumed an excess of about $165 million of operating cash flow reduction. Where there is a little bit of I'll say uncertainty is around how the commission might treat deferred tax liability. So in the filing that we submitted on January 19, we highlighted that there was about $1.5 billion of deferred tax liabilities as of September 30 and we have proposed that matter should be adjudicated through separate proceeding and so as you know through normalization that could be basically returned to customers, over the life of the assets at least with the property related deferred taxes, but for the non-property it's, the new tax law is quite opaque and ambiguous around that. so it remains to be seen exactly how the rest to be returned, but to answer your question we're assuming I think something around 165 to 200 of degradation on 2018, but I could [indiscernible] once there is a decision around deferred tax is going forward.
And as well as in that 18% FFO to debt.
That's exactly right and so we also have assumed as I highlighted that there is a modest countermeasure in the form of the monetization of the alternative minimum tax credits and so we have assumed that we will monetize about half of that, maybe $270 million on the sidelines and so we're getting about half of that. There's a little bit of sequestration around 7% so that equates to about $125 million. So that's a partial countermeasure and we'll do what we can do with cost reductions to offset one of that. But that's what [indiscernible].
I understand rightly Rejji. There's no doubt that you've got that in the lower, is that or on the AMT?
Yes - could not be more clear about that. The only risk is if there is a government shutdown or something that's very low probability, but you never know these days.
All right and don't you have $500 million of deferred tax assets as well as the $1.5 billion of liability or excess?
That's correct, so we have it was subject to impairment of course as a result of the federal tax rate going from 35% to 21% and that's the lion share of that $0.52 non-recurring charge that we stomached in the fourth quarter, but still have a pretty large balance. And so at the end of 2017 it was just under $900 million now that's the gross value, it's not the cash benefit, but we still have a significant amount. By 2018, we expect that to step down to just over $500 million again on a gross basis and the cash benefit is less than that and so we still expect to utilize a lot of that NOL balance going forward. And at the utility there is about $500 million of deferred tax assets and again it's pretty ambiguous as to how quickly that might be returned or recovered by us and that's subject to separate proceeding that we proposed to the MPSC.
Okay, can you just? That was the bit I was asking about. What have you proposed in terms of timing on that part?
We have basically said we - in our filing in 19 to the Commission that we would propose having that as part of the separate proceeding and so in our modeling we have not assumed that has resolved in any point soon, maybe a safe assumption is that, it aligns with the normalization of the property of deferred taxes but it all remains to be seen quite frankly.
Okay, thank you. And then just can I clarify one other thing. I think if I heard you right, you said at various point that you thought that the tax reform will ultimately be accretive to the long-term plan and I think you said that you have about 4%, you anticipate having about 4% headroom and that each percentage point would give you capacity for another $400 million of investment. So if I can do that math that's sort of $1.6 billion potential incremental rate base. I know you've touched around this but what sort of timeframe should we think about partly extending the runway or is it bringing things forward and when you say accretive, are we talking earnings as well as whatever else?
Jonathan what I would say, it's a tailwind to our model. It is consistent with our methodology of offsetting cost of capital by reducing cost for customers and enabling our long-term commitment to 6% to 8% EPS growth and so I would best at the highest level characterize it as extending the runway de-risking the plan further, making us to continue to sleep at night stock. It just enables us to continue to do what we do so well Jonathan. In fact you could probably sleep through the call if you want because there is no news, no surprises here.
So if it's a tailwind does it by extension become something that makes it more likely that you'll execute above the 7% number or not.
We've been very, very consistent. I appreciate the push Jonathan, but we're very confident around 7% and I know you're very happy with our 7.4% performance this year. We're shooting for that 6% to 8% range and certainly we'll be disappointed again as I mentioned in 2018, if we didn't hit near the top end of that guidance and we're just going to continue to work that direction and everything positive that helps, is exactly that. It's a tailwind.
Well tailwinds are good. All right. Thank you.
And our next question today comes from Greg [indiscernible] of UBS. Please go ahead.
In the slide deck you had equity infusion to consumers of about $300 million in 2018, $450 million in 2017 just wanted to understand how you think about that and sort of going forward?
So specifically Greg are speaking how we might fund that, is that the direction question?
Really do you expect should we be thinking about what level of annual contributions to consumers going forward, if there is a way to think about how to model that?
Yes, so we can certainly spend some more time offline on that, but I'd say the quick answer is that we do expect obviously because of the elimination of bonus depreciation that you'll certainly get a bit more equitization from the parent down into the utility and so $300 million, I think it's a pretty good run rate from a financing perspective as to what you might expect going into the utility. And then we would also anticipate roughly a flat to maybe modestly declining equity ratio at the utility. But again we'd assume that 300 or so really of infusion is probably a pretty healthy and appropriate run rate of dollars that would go down into the [indiscernible].
Okay, thank you.
And our next question today comes from Paul Ridzon of KeyBanc. Please go ahead.
I've question relative to before tax reform. What is maybe looking five years out, what delta do you have in your rate base, absent any investment changes?
So you're saying absent tax reform and what specifically is the elimination, bonus depreciation and what that might do for rate base? Is that what you're implying just to make sure?
Yes.
Yes, so it's interesting. We have a fairly different rate construct in other and some rate constructs across the country. You'll see basically the deferred tax liability served as a deduct from rate base and so when you take reform obviously that's skinny [ph] and so you get a net increase in your rate base. As you may know in our rate construct deferred tax liability is a component of the rate making capital structure. And so it doesn't necessarily lead to a direct increase in rate base, but at the same time the economic effect is comparable because as you skinny [ph] that deferred tax liability in your rate making capital structure you'll offset it presumably with debt in equity. And so you have the effect of potential equity thickness overtime which leads to comparable economics, but don't view the elimination of bonus depreciation again in the context our rate construct as a net increase in rate base. But obviously because of the headroom created by tax reform it's going to create more headroom for capital investments and so we're increasing our five-year plan by about $1 billion so that will lead to higher rate base growth and what we initially pre-supposed.
Thank you and then switching to Slide 28, the dig slide. Just want to make sure I'm looking at this properly. It looks like there is a step down in 2018 is that just a hole to be filled. Is that the right way to look at that?
No, I just - I think what you saw in 2017 because we had as we see it some non-recurring benefits at dig. So obviously we have the layering strategy there that has gone well for us in the past and so we had nice capacity prices as well. We've been contracted for the long run on the energy side for a good while. But what we also saw and this is what I think with somewhat atypical because we had pretty good off peak margins merchant sales and so we do not expect that to resume going forward. Now in interest of full transparency and the context of Palisades transaction we did have about just over 400 megawatts of capacity sold to the utility as part of that transaction on a near term basis and so that did impact our layering strategy a little bit and so we're little open. So [indiscernible] about 30% for calendar year 2018 so there's a little bit of softness there, but at the end of the day I think most of that outperformance that you saw in 2017 versus what we're expecting in 2018 is really attributable to off-peak merchant sales which we don't expect recur.
In that 35 assumes a typical market price at that 30 [indiscernible].
Well remember most of the portfolio is already sold, so we got 70% and we view as upside to plan as anything above $3 per kilowatt month and so you can assume that, good portion of the portfolio is already sold in excess of that and then we're assuming little bit softness on the amount, where we're open.
Got it.
And as we look forward Paul, dig as always serves its role as the Tesla in the garage and as the state reliability mechanism and the local clearing requirement determinations are made by the commission that could be provide in the out years certainly dig as one of the few remaining sources of excess power available in the state, some real upside in the out years. So it has a lot of value to us, right where it sits.
That car just keeps changing, doesn't it.
It's all electric baby, you can count on that.
And then lastly I think you're trying to do some upgrades to dig, can you just refresh us where that process stands?
So we had at one point contemplated some potential upgrades to dig and I would say, it wasn't in the near term it was more sort of beyond 2020, we've since reconsidered that and so we don't have any capital investments associated with that - baked into our plan and so you shouldn't assume that there is upside there.
Okay, thank you very much.
This concludes our question-and-answer session. I'd like to turn the call back over to Patti for any closing remarks.
Excellent and thanks for joining us everybody. Happy Valentine's Day. I hope you felt the love. We can't think of a better way to spend our time than with all of you. Rejji and I will be on the road in the coming weeks and month and I look forward to seeing you then.
Thank you. This concludes today's conference. We thank everyone for your participation.