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Edited Transcript of CMS earnings conference call or presentation 14-Feb-18 2:00pm GMT

Q4 2017 CMS Energy Corp Earnings Call

Jackson Feb 15, 2018 (Thomson StreetEvents) -- Edited Transcript of CMS Energy Corp earnings conference call or presentation Wednesday, February 14, 2018 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Patricia Kessler Poppe

CMS Energy Corporation - President, CEO & Director

* Rejji P. Hayes

CMS Energy Corporation - Executive VP & CFO

* Srikanth Maddipati

CMS Energy Corporation - VP of IR & Treasurer

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Conference Call Participants

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* Ali Agha

SunTrust Robinson Humphrey, Inc., Research Division - MD

* Gregg Gillander Orrill

UBS Investment Bank, Research Division - Executive Director & Equity Research Analyst of Utilities

* Gregory Harmon Gordon

Evercore ISI, Research Division - Senior MD, Head of Power & Utilities Research and Fundamental Research Analyst

* Jonathan P. Arnold

Deutsche Bank AG, Research Division - MD and Senior Equity Research Analyst

* Julien Patrick Dumoulin-Smith

BofA Merrill Lynch, Research Division - Director and Head of the US Power, Utilities, & Alternative Energy Equity Research

* Michael Weinstein

Crédit Suisse AG, Research Division - United States Utilities Analyst

* Paul Thomas Ridzon

KeyBanc Capital Markets Inc., Research Division - VP and Equity Research Analyst

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Presentation

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Operator [1]

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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. (Operator Instructions) Just a reminder, there will be a rebroadcast of this conference call, beginning today at 12:00 p.m. Eastern time, running through February 21. 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.

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Srikanth Maddipati, CMS Energy Corporation - VP of IR & Treasurer [2]

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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'll turn the call over to Patti.

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Patricia Kessler Poppe, CMS Energy Corporation - President, CEO & Director [3]

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Thanks, Sri, and thank you everyone for joining us today. Rejji and I are excited to share our 2017 results with you, and our 2018 goals. I've scrubbed all of our stories of the month and have selected our winning story of the year, which I will unveil today. Rejji will provide the financial results and an update on federal tax reform. And as always, we look forward to your questions.

We delivered a strong performance in 2017, adding another year to our consistent track record of 7% EPS growth without reset. Operationally, we managed 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 onetime noncash 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, and longer term, the lower bills will provide headroom for necessary capital investments.

In 2017, we continued to grow our operating cash flow, while surpassing our target in yielding an FFO to debt ratio of approximately 20%, which provides plenty of cushion for the potential cash flow impact of tax reform. For 2018, we're raising our guidance to a range of $2.30 to $2.34, which reflects 6% to 8% annual growth from our 2017 actual EPS. We are also increasing the dividend to $1.43 per share, consistent with our expected earnings growth. Longer term, we are reaffirming our growth rate of 6% to 8%, and we continue to be confident in our ability to deliver another year of consistent industry-leading performance. As I stated in the past, we are highly confident in 7% annual growth as demonstrated in 2017, a year where we experienced atypical weather and a record level of storms in our service territory. Yet, we still delivered. As we think about our guidance range for 2018, we will focus on executing our capital plan and realizing cost savings to the CE Way. Admittedly, given the strength of our plan for 2018 and the reinvestments we 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 profit, our triple bottom line, continues to serve us well, driving a year of record-setting milestones in safety, service and customer satisfaction. In fact, our safety performance was our best ever and put us #1 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 #1 U.S. utility by Sustainalytics for the second year in a row. It's no surprise that my coworkers and I love working for such a purpose-driven company that continues to demonstrate that financial performance and sustainability go hand in hand. Yet, we are still dissatisfied and committed to continuously improving our performance every day. For example, we told you a year ago that we only fulfilled our customer commitments on time, 9% of the time. Our goal was to reach 50% by the end of 2017, dramatic improvement. 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 bottom line. This is the kind of improved customer experience and cost savings that the CE Way unlocks. I applaud my coworkers and their relentless dedication to continuously improving our performance. You can count on us to leverage the CE Way to enable our triple bottom line of serving our customers and communities, protecting and improving the planet and delivering strong and predictable financial results.

Now, as you know, I have a series of stories that I call my story of the month. There's nothing like an example to bring to life the power of the Consumers Energy Way and its impact on our continued performance. I reviewed all of our stories last year and have selected the best of the best for my story of the year. As we shared many times, our business model is fueled by needed infrastructure investments on our aging system, partially funded by cost reductions to protect customers from prices they can't afford. Our core competence of cost reduction is enabled by capital investments, which often reduce O&M, our process improvements 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 multiyear capital program designed with the customer benefits in mind from Day 1. Our smart meters have enabled a dramatic improvement in meter read rate, and thereby, improved billing accuracy, while significantly reducing cost. 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 customers and the company. Utilizing smart meter technology and significant process improvements, we've been able to reduce invoice reversals by 90% since 2013, reduce calls to our call centers, and reduce truck rolls investigating perceived billing errors. As a result, this has saved well over $10 million for our customers, and better yet, it freed up time to solve another problem: Customers struggling to keep up with their bills. The very same people who were spending time correcting bills were freed up, and they designed and launched a new payment program called Care, which enables customers to pay on time and rewards them for doing so by reducing their arrearages as they go, creating a new pattern of payment and household stability. We've reduced shutoffs by 30%, while at the same time, reducing our uncollected accounts by $34 million or over 50%. We're able to protect our most vulnerable customers and lower costs for everyone.

We awarded our billing team our first annual Purpose Award this year for their demonstration of world-class performance, delivering hometown service. We're creating a culture of performance and celebrating our success. A 99% meter read rate, a 90% reduction in invoice reversals and a 50% reduction in uncollected accounts was definitely worthy of celebration. True waste elimination. By making smart investments, improving our processes, enabled by the CE Way, and deploying technology, we have substantially reduced costs, which we will return to our customers to fuel new investment, which can add even more value for them. This model works and there is a lot more steam in the boiler for the future. Stay tuned for more stories to come.

We are celebrating on the run and have kicked off 2018 with gusto. Safety is always our #1 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, has added an IRP filing. In parallel, the commission has ordered a 5-year electric distribution plan as well. These long-term regulatory filings allow us to plan for the future, which reduces risk and provides for more predictable regulatory outcomes. As always, we plan to meet all of our financial objectives for the year and Rejji will take you through those along with tax details. We will continue to drive our triple bottom line, delivering the consistent, world-class results for our customers and you.

Our model is simple, durable and continues to deliver. To 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 big part of that growth. I attended our State of the State address in mid-January and the optimism was palpable. The governor even bragged a little bit, which is pretty uncharacteristic of Michigan's famed nerd. Governor Snyder shared that Michigan is the #1 Great Lakes State for inbound college-educated talent, has the 6th 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 system 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 over time. With nearly 1,700 miles of large transmission pipe and 27,000 miles of distribution mains, it will take decades to replace all of it. We plan to continue to align with our regulators on the prioritization and sequence of these needed investments. Our electric distribution system is older than our peers. Our current plan calls for focus on poles, wires and substations, nothing fancy, but the basic building blocks of a resilient system. Finding means and making every capital dollar count, we can deliver more value for customers and enable the long-term delivery of our financial objectives. In the latter half of our 5-year distribution plan, we begin to add smarter grid technology and modernization, which can better optimize and utilize our infrastructure. And we're proud of the way we sell-fund these necessary infrastructure investments, through our commitment to cost reductions. When we look at the total cost structure, we realize the bulk of our costs are not just to operate and maintain the system. Fuel and purchased power costs are larger than O&M, and these are pass-throughs in our regulatory construct here in Michigan, but they are still real expenses for our customers and add no value for our investors. We've reduced fuel prices by shifting from coal to gas generation and that saves our customers' money. But there's 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, were 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's more fish on the hook. In addition to growth, many of our new and expanding customers are looking for help to achieve their renewable energy goals. We're partnering with those companies for success, with our recently announced Green pricing package. Yet, we still plan conservatively. We only add the load to our model, and our sales 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're working with our regulators to pass the tax savings on to our customers. We made a filing on January 19, indicating our preference, which, as you would expect, is to keep it simple. And apply a credit on every bill, and we are awaiting the MPSC's order on how and when they'd 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 a 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 statute, 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 early 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've come to expect, we work closely with everyone, without counting on the weather or other resets to EPS. Over the last 12 years, we have continued to pay a competitive dividend that has grown along with earnings. When we combine the two, our earnings and dividend growth, we yield a double-digit total shareholder return. Over the past 10 years, in fact, we've delivered a TSR that is 3x the performance of the UTY and more than twice the performance of the S&P 500. 2018 will be the 16th year of a track record you've come to know and enjoy, and we intend to keep it that way for many years to come.

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

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Rejji P. Hayes, CMS Energy Corporation - Executive VP & CFO [4]

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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 yet another year of 7% annual growth. Our adjusted EPS in the fourth quarter excludes a $0.52 noncash, nonrecurring charge associated with the federal tax reform. This charge is largely attributable to the remeasurement of deferred tax assets, which now reflect a reduction of the corporate federal income tax rate, 21% from 35%. We are quite pleased with our performance for the year, particularly, in light of the $0.15 of negative variance associated with mild temperatures and storms realized over the course of the year, which were more than offset by cost savings, rate increase of net investments and outperformance at DIG, among other factors.

As always, we take the good with the bad and manage the work accordingly to meet our operational and financial objectives to the benefit of our customers and investors.

Slide 14, best illustrates the resilience of our business model. During periods of unfavorable weather, we rely on our ability to flex operational and financial levers to meet our objectives. 2017 was no different as we experienced mild temperatures and heavy storm activity throughout most of the year, and our team responded with cost performance and sound financial planning to deliver the consistent and predictable results you expect. Similar to our past practice, we continue to reinvest in the business during periods of favorable weather or upon realization of cost reductions in excess of plan. These reinvestments entail pulling ahead work such as forestry, refinancing high coupon bonds and supporting our low-income customers, among other opportunities. In fact, over the past 5 years, we have reinvested almost $0.5 billion in aggregate due to favorable weather and strong cost performance. These reinvestments support our long-term goals and provide more certainty around our operational and financial objectives in the next year and for years to come.

Rounding out 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. To highlight a couple of noteworthy items, in addition to achieving 7% annual EPS growth, we grew our dividend commensurately and generated over $1.7 billion of operating cash flow. Our steady cash flow generation over the years continues to fortify our balance sheet as evidenced by our strong FFO to debt ratio, which at approximately 20% at year-end, exceeds both the 2017 target and our historical targeted range of 17% to 19%. Our conservative management 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 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 aligned with our target of keeping annual price increases at or below inflation, all while investing a record level of capital investment of $1.9 billion at the utility.

As you have grown accustomed, we usually take this time to adjust our EPS guidance based on our actual results. As such, you'll note on Slide 16, that we are 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 apply 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 planned for normal weather, which in this case, would contribute approximately $0.16 of positive year-over-year EPS variance, given the substandard weather experienced in 2017. However, needless to say, we believe we have sufficient risk mitigation in our plan in the event the weather does not cooperate. Additionally, we anticipate about $0.06 of EPS pickup, associated with our pending electric and gas rate cases, net of investment costs and another $0.03 from cost savings, which implies a 2% year-over-year reduction in costs, which we believe is highly achievable, given our track record. Per estimate, these sources of positive variance will be partially offset by select nonoperating savings realized in 2017, that will either be passed on to customers through our pending cases or were onetime in nature. We also have embedded the usual conservatism in our utility sales and nonutility performance forecast.

Moving on to 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 on customer rates. As part of that filing, we proposed an estimated $165 million rate reduction for customers in 2018 and a separate proceeding to determine the treatment of deferred taxes. We are working closely with the commission on this matter and though the amount and the pace at which the tax savings will be provided to customers in 2018 have yet to be determined, we believe the rate reduction could be up to 4%, which clearly facilitates our self-funding strategy by creating meaningful headroom for future capital investments. As you know, we have significant investment requirements at the utility in the form of gas and electric infrastructure upgrades, [DPA] replacements and renewable investments. And the estimated cost savings associated with tax reform, increase the likelihood of us incorporating more projects into our capital plan over the next 5 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 nonutility side, tax reform impacts CMS in 3 ways: First, the new tax law establishes potential limitations on parent interest expense deductibility. However, we are 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 nonutility 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 discussed -- as we have discussed in the past, that some of our nonutility operations produces an overall pretax loss due to our parent interest expense. In the past, the overall loss of our nonutility operations produced a larger tax benefit at a 35% tax rate than it will going forward at a 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 4 years to the tune of approximately $125 million in the first year, which partially offsets the likely near-term operating cash flow reduction at the utility. In summary, the effects of tax reform are manageable in the near term and create long-term opportunities, which provide more certainty around our operational and financial objectives.

To elaborate on the magnitude of the potential long-term opportunity, as Patti highlighted, we have a robust capital investment backlog at the utility, due to our large and aging electric and gas systems, which has historically been executed at a measured pace, given customer affordability constraints. Given the substantial rate reduction opportunity presented by tax reform, in addition to the other aspects of our self-funding strategy, we are forecasting a 5-year capital investment program of approximately $10 billion, which extends our run rate for growth without compromising our annual price increase target of at or below inflation. The expected composition of this plan will be weighted toward improving our gas infrastructure as well as upgrading our electric distribution system and investing in more renewable generation. This level of investment will increase our utility rate base from approximately $15 billion in 2017 to $21 billion in 2022, which implies a 7% compound annual growth rate. This extension of our 5-year capital plan will further improve the safety and reliability of our electric and gas systems to the benefit of our customers, evolve our generation portfolio to the benefit of the planet and extend the runway for EPS growth to the benefit of investors.

Beyond the next 5 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, however, the amount and composition of a revised 10-year plan will be dictated by the analyses performed -- being performed in our upcoming long-term electric distribution and integrated resource plan filings as well as the commission's decision 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 flows 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 are forecasted to generate approximately $9 billion of operating cash flow over the next 5 years, which will play a key role in the financing strategy of our 5-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 shield portfolio enables us to continue to finance our capital investment program in a cost efficient manner. As a result of our solid cash flow generation and conservative financing strategy, which includes a modest ATM equity issuance program, our credit quality has improved significantly over the past 15 years, as evidenced by our strong credit metrics and numerous ratings upgrades. We have also opportunistically refinanced high coupon bonds, such as the partial redemption of our 8.75 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 tenor of 13 years, which largely insulates our income statement from the prospect of rising interest rates. This prudent balance sheet management has enabled us to absorb the effects of tax reform, while extending our capital plan without issuing substantial amounts of equity. As you can see on the right-hand side of Slide 21, our FFO to debt ratio is projected to be approximately 18% by year-end, which includes the effects of federal tax reform and assumes no change to the size of our ATM equity issuance program in 2018.

On Slide 22, we have listed our financial targets for 2018 and beyond. In short, we anticipate another great year with 6% to 8% EPS growth, no big bets and robust risk mitigation. This model has and will continue to serve our customers well, as they realize lower gas and electric prices from our self-funding strategy, which is enhanced through tax reform, as well as our investors who can continue to count on consistent, industry-leading financial performance. Few companies are able to deliver top-end earnings growth, while improving value and service for customers year-after-year after year. And we are pleased to have delivered another year of consistent industry-leading performance in 2017 and expect to continue on this path in 2018.

On Slide 23, we have 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. And there will always be sources of volatility in this business, be they weather, fuel cost, regulatory outcomes or otherwise, and every year, we view it as our mandate to do the waring for you and mitigate the risks accordingly.

And with that, I'll hand it back to Patti for some closing remarks before Q&A.

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Patricia Kessler Poppe, CMS Energy Corporation - President, CEO & Director [5]

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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 investment, we feel that our investment thesis is quite compelling. Now Rocco, please open the line for Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Julien Dumoulin-Smith of Bank of America Merrill Lynch.

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Julien Patrick Dumoulin-Smith, BofA Merrill Lynch, Research Division - Director and Head of the US Power, Utilities, & Alternative Energy Equity Research [2]

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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 the self-funding? And then also, can you just be a little clearer about the year-by-year equity contemplated in the current plan?

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Rejji P. Hayes, CMS Energy Corporation - Executive VP & CFO [3]

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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 a little bit of sales growth, and then a combination of tax planning, unregulated or nonutility 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 is EnerBank bank, and their contributions are relatively modest but helpful. So that's effectively how we see that one.

With respect to your second question on the equity issuances, 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 be doing for some time. And so we foresee, based on the implications of tax reform, we don't see that changing in 2018. But longer term, we expect a modest increase of that to, call it, 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. And so we still think that 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?

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Julien Patrick Dumoulin-Smith, BofA Merrill Lynch, Research Division - Director and Head of the US Power, Utilities, & Alternative Energy Equity Research [4]

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Absolutely. Perhaps turning to the CapEx side of the equation, perhaps twofold here. First, if I have this right, you increased the overall pie to a $50 billion number now, and just curious if there's anything to read into that just in terms of the updates. What gives you that incremental confidence now? And then secondly, more specifically, as you think about this upcoming filing on the distribution front and finalizing that here, is there anything else from a regulatory perspective that 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 curious.

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Patricia Kessler Poppe, CMS Energy Corporation - President, CEO & Director [5]

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Yes. 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 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 is -- 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's limit to how much work needs to be done. It's all about managing our costs 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 that's -- 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, it paints a nice 5-year picture of the investment potential and strategy and results and outcomes that can be delivered from those investments. It also creates a framework for discussion with the Commission. There's 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 the commission about the investment priorities, we can provide more certainty to our regulatory outcomes and derisk the financial plan in the long run.

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Operator [6]

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And our next question today comes from Ali Agha of SunTrust.

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Ali Agha, SunTrust Robinson Humphrey, Inc., Research Division - MD [7]

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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?

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Patricia Kessler Poppe, CMS Energy Corporation - President, CEO & Director [8]

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So the ALJ is just another step in the process. It's not a final Commission order, just to be clear. The Commission speaks with their orders. There's a couple of big discrepancies. Number one is their ROE of 9.8%. We look at the most recent gas order that the Commission issued, and they reiterated that 9.8% was too low and 10.1% was an appropriate ROE at this time, and so that was not that long ago. And so we feel that, that's a difference as well as they had 2 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 have always included our forecasted energy efficiency sales reductions in forward-looking rate making. And so the ALJ opted to eliminate that, that was about an $18 million difference as well as the 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.

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Rejji P. Hayes, CMS Energy Corporation - Executive VP & CFO [9]

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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 fact pattern now versus where we were in the not-too-distant past when the commission gave the decision for the gas case at the end of July, the 10-year treasury was at 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 a realistic credit quality deterioration across a lot of utilities in the sector. And so I think in light of how the fact pattern has 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 orders, so we'll see.

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Ali Agha, SunTrust Robinson Humphrey, Inc., Research Division - MD [10]

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Right. And then second question, the weather-normalized electric sales for the year ended up at 0.4%, which was below your targeted range for the year. 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 '17 outcome impacts your forward thinking there.

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Rejji P. Hayes, CMS Energy Corporation - Executive VP & CFO [11]

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Yes. So, Ali, I would actually beg to differ slightly with your position. Yes, we talked about electric sales forecast between, call it, 0.5% to 1% at the beginning of the year. And that's, obviously, weather-normalized and 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. And so it's interesting as you look at that kind of 40 basis points where we ended up and peel the onion on that sum. Residential was roughly flat. Our forecast at the beginning the year assumed about a 1.5% decline. Again, net of energy efficiency and weather normalized, and so a flat performance there was really above expectations. And so that is higher margin sales as you know, and so that was upside relative to plan. Now on the commercial side, that's really where we saw quite a bit of performance there. And so we're just under 1% weather-normalized net of energy efficiency, and our plan at beginning of the year was about 1% down. And so -- and that implies that where you saw a little bit of underperformance was on the industrial side. But to end the year kind of just under 2% weather-normalized net of energy efficiency, again, below our plan. But still, that's a very nice mix and really suggests that we have a pretty good economic environment and pretty diversified service territory, which is not nearly as cyclical as other parts of the state. 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.

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Ali Agha, SunTrust Robinson Humphrey, Inc., Research Division - MD [12]

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I see. And last question, just to clarify, if I heard the remarks right, as you look about your CapEx plans and factor in the headroom from tax reform, did I hear it right that the next 5-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?

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Rejji P. Hayes, CMS Energy Corporation - Executive VP & CFO [13]

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No, no. So just to be clear, you have a couple of things that are moving in the 5-year plan. So the prior 5-year plan was '17 through '21, that was about a $9 billion plan, which presupposed about $1.8 billion per year. We've moved 1 year forward, so this is now an '18 to '22 plan. And so this now -- this plan for 5 years in aggregate is about $10 billion. So 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 on the side of conservatism is we are not in a position at this point to provide more disclosure on the 10-year plan. Now the only thing we've highlighted on the slide is that we fully expect it to be in excess of $18 billion, given that the prior 10-year plan pretax reform was $18 billion. And so, if you assume with likely significant customer rate reductions associated with tax reform that, that gives us substantial headroom to increase the capital plan to the benefit of customers and investors. So hopefully, that's clear now.

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Operator [14]

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And our next question today, comes from Michael Weinstein of Crédit Suisse.

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Michael Weinstein, Crédit Suisse AG, Research Division - United States Utilities Analyst [15]

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I heard you mention the IRP as the kind of the next catalyst to talk more about the expansion of the 5- and 10-year plan. But is the 5-year distribution plan, which I think is coming up -- that finally is coming up in March, is that also another point where we might see more of that $50 billion talked about?

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Patricia Kessler Poppe, CMS Energy Corporation - President, CEO & Director [16]

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Yes. And it's really -- the timing of these in parallel is really productive. To have the IRP and the electric distribution plans filed within a couple of months of each other, the distribution plan does not result in an order per se of 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, then, the mix of electric spend for sure as part of that 5-year $10 billion plan.

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Michael Weinstein, Crédit Suisse AG, Research Division - United States Utilities Analyst [17]

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Great, that makes sense. And maybe you could just highlight a little bit of the possible upside for DIG as a result of the state reliability mechanism, which just was recently set.

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Rejji P. Hayes, CMS Energy Corporation - Executive VP & CFO [18]

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Yes, Michael, this is Rejji. So couple of things to think about there. So the charge was established in late November by the MPSC and I think they assumed about a just over $300-per-megawatt day for the charge that would potentially be levied to AES, as their alternative electric suppliers, who cannot demonstrate that they have requisite capacity 4 years forward. That translates into about a $9-per-kilowatt month price in the capacity market. And so we assume that anything above $3-per-kilowatt month is upside at DIG. And so, while we don't think that'll create opportunities in the near term, certainly the longer term, particularly, if there's a local clearing requirement that's established beyond 2021, we definitely think that there could be some opportunities for DIG to be competitive in that environment. But certainly, we haven't baked any of that into our plan because it's too premature for that.

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Operator [19]

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Our next question today comes from Greg Gordon of Evercore.

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Gregory Harmon Gordon, Evercore ISI, Research Division - Senior MD, Head of Power & Utilities Research and Fundamental Research Analyst [20]

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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 have -- you still have a fairly significant amount of power generation coming from coal, you also have the Palisades and the MCV PPA is expiring in the mid-2020s. So should we expect to see a sort of a 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. I mean, how aggressive a tilt towards renewables might we see given how much more economic they are becoming, especially as we move out into that timeframe?

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Patricia Kessler Poppe, CMS Energy Corporation - President, CEO & Director [21]

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Yes, great question, Greg. Thanks for asking it. 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 theme that you will see. The economics of renewables 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 of -- through demand response as well as our energy efficiency programs in total. So more excited to get that IRP out in public that will really show our commitment to being a key part in a sustainable energy future, we're excited. I will just make just one note, Greg, that we have retired 7 of our 12 coal units. We retired over -- almost 1 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 #1 utility and Newsweek magazine selected us one of the greenest companies, independent of industry, in the nation, top 10. And we are flanked by Apple and J&J in that top 10 ranking. Our commitment to carbon reduction is both in our actions and our forecasts.

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Operator [22]

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And our next question today comes from Jonathan Arnold of Deutsche Bank.

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Jonathan P. Arnold, Deutsche Bank AG, Research Division - MD and Senior Equity Research Analyst [23]

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

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Rejji P. Hayes, CMS Energy Corporation - Executive VP & CFO [24]

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Yes. So we assumed we erred on the side of conservatism, I'll say, and so, Jonathan, for 2018, we assumed in 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 liabilities. 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, that matter should be adjudicated through a separate proceeding and so as you know through normalization, that could be basically returned to customers over the life of the assets, at least for the property-related deferred taxes. But for the nonproperty, it's -- the new tax law is quite opaque and ambiguous around that. And so it remains to be seen exactly how the rest would be returned but to answer your question, we are assuming I think something around $165 million to $200 million of degradation on '18. But it could flex a little bit upward going forward once there's a decision around deferred taxes going forward.

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Jonathan P. Arnold, Deutsche Bank AG, Research Division - MD and Senior Equity Research Analyst [25]

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And that's what's in that 18% FFO to debt?

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Rejji P. Hayes, CMS Energy Corporation - Executive VP & CFO [26]

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That's exactly right, yes. And so we also have assumed, as I highlighted, that there is a modest countermeasure in the form of monetization of the alternative minimum tax credits. And so we have assumed that we will monetize about 1/2 of that $270 million on the sidelines. And so we're getting about 1/2 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 with cost reductions to offset more of that. But that's what (inaudible).

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Jonathan P. Arnold, Deutsche Bank AG, Research Division - MD and Senior Equity Research Analyst [27]

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Do I understand rightly, Rejji, that there's no doubt that you get that on the lower -- on the AMT?

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Rejji P. Hayes, CMS Energy Corporation - Executive VP & CFO [28]

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

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Jonathan P. Arnold, Deutsche Bank AG, Research Division - MD and Senior Equity Research Analyst [29]

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And don't you have a $0.5 billion of deferred tax asset as well as the $1.5 billion of liability or excess?

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Rejji P. Hayes, CMS Energy Corporation - Executive VP & CFO [30]

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On the -- 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's share of that $0.52 nonrecurring charge that we stomached in the fourth quarter. But we 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 then 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 this separate proceeding that we've proposed to the MPSC.

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Jonathan P. Arnold, Deutsche Bank AG, Research Division - MD and Senior Equity Research Analyst [31]

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Okay. Can you just -- that was the bit I was asking about, what have you proposed in terms of timing on that part?

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Rejji P. Hayes, CMS Energy Corporation - Executive VP & CFO [32]

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So we have basically said, we -- in our filing on the 19th to the commission, that we would propose having that as part of a separate proceeding and so in our modeling we have not assumed that, that is resolved at any point soon and may be 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.

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Jonathan P. Arnold, Deutsche Bank AG, Research Division - MD and Senior Equity Research Analyst [33]

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And then just can I clarify one other thing, I think if I heard you right, you've said at various points 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 of potential incremental rate base. Just -- I know you've touched around this but what sort of timeframe is that -- 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?

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Patricia Kessler Poppe, CMS Energy Corporation - President, CEO & Director [34]

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Jonathan, what I would say is, it's a tailwind to our model. It is consistent with our methodology of offsetting cost of capital by reducing costs 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, derisking the plan further, making us the -- continue to sleep at night stock. We -- it just -- it enables us to continue to do what we do so well, Jonathan. In fact, you could probably sleep through the call if you wanted because there's no new news, no surprises here.

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Jonathan P. Arnold, Deutsche Bank AG, Research Division - MD and Senior Equity Research Analyst [35]

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But 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?

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Patricia Kessler Poppe, CMS Energy Corporation - President, CEO & Director [36]

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We shoot for -- 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 are shooting for that 6% to 8% range. And certainly, we'd 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.

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Operator [37]

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And our next question today comes from Gregg Orrill of UBS.

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Gregg Gillander Orrill, UBS Investment Bank, Research Division - Executive Director & Equity Research Analyst of Utilities [38]

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In the slide deck you had equity infusion to consumers of about $300 million in '18, $450 million in '17. Just wanted to understand how you think about that and sort of going forward?

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Rejji P. Hayes, CMS Energy Corporation - Executive VP & CFO [39]

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Yes. So specifically, Gregg, are you speaking to how we might fund that, is that the direct question?

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Gregg Gillander Orrill, UBS Investment Bank, Research Division - Executive Director & Equity Research Analyst of Utilities [40]

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Really, do you expect -- should we be thinking about what level of annual contributions to consumers going forward if there's a way to think about how to model that?

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Rejji P. Hayes, CMS Energy Corporation - Executive VP & CFO [41]

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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 is 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 flat to maybe modestly declining equity ratio at the utility. But again, we'd assume that $300 million or so -- really of infusion is probably a pretty healthy and appropriate run rate of dollars that would go down into utility.

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Operator [42]

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And our next question today comes from Paul Ridzon of KeyBanc.

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Paul Thomas Ridzon, KeyBanc Capital Markets Inc., Research Division - VP and Equity Research Analyst [43]

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Happy Valentine's Day. Had a question relative to before tax reform. What is, maybe looking 5 years out, what delta do you have in your rate base absent any investment changes?

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Rejji P. Hayes, CMS Energy Corporation - Executive VP & CFO [44]

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You're saying absent tax reform and what specifically, is the elimination of bonus depreciation or what that might do for rate base? Is that where you're going?

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Paul Thomas Ridzon, KeyBanc Capital Markets Inc., Research Division - VP and Equity Research Analyst [45]

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Yes.

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Rejji P. Hayes, CMS Energy Corporation - Executive VP & CFO [46]

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Yes, so it's interesting. We have a fairly different rate construct than others. In some rate constructs across the country, you'll see basically the deferred tax liability serve as a deduct from rate base and so when you have tax reform, obviously, that skinnies and so you get a net increase in your rate base. As you may know, in our rate construct, deferred tax liabilities 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 that deferred tax liability in your rate making capital structure, you will offset it presumably with debt and equity and so you have the effect of potential equity thickness over time, which leads to comparable economics but don't view the elimination of bonus depreciation again in the context of 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 are increasing our 5-year plan by about $1 billion. So that will lead to a higher rate base growth than what we initially presupposed.

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Paul Thomas Ridzon, KeyBanc Capital Markets Inc., Research Division - VP and Equity Research Analyst [47]

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And then switching to Slide 28, the DIG slide. Just want to make sure I'm looking at this properly. Looks like there's a step down in '18, is that just a hole to be filled, is that the right way to look at that?

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Rejji P. Hayes, CMS Energy Corporation - Executive VP & CFO [48]

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No. I just -- I think what you saw in 2017 was we had, as we see it, some nonrecurring 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 as we've been contracted for the long run on the energy side for a good while there, but what we also saw and this is what I think was somewhat atypical was we had pretty good off-peak margins -- merchant sales and so we do not expect that to resume going forward. Now in the interest of full transparency, in 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 bases and so that did impact our layering strategy a little bit. And so we're a little open, it's in the tune of 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 '17 versus what we're expecting in '18 is really attributable to off-peak merchant sales, which we don't expect to recur.

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Paul Thomas Ridzon, KeyBanc Capital Markets Inc., Research Division - VP and Equity Research Analyst [49]

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And that 35 assumes a typical market price that, that 30% gets sold at?

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Rejji P. Hayes, CMS Energy Corporation - Executive VP & CFO [50]

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Well, remember, most of the portfolio is already sold. So we get 70% and we view is upside to the plan is anything above $3-per-kilowatt month. And so you can assume that a good portion of the portfolio is already sold in excess of that. And then, we're assuming, yes, a little bit of softness on the amount where we're open.

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Patricia Kessler Poppe, CMS Energy Corporation - President, CEO & Director [51]

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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 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.

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Paul Thomas Ridzon, KeyBanc Capital Markets Inc., Research Division - VP and Equity Research Analyst [52]

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That car just keeps changing, doesn't it?

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Patricia Kessler Poppe, CMS Energy Corporation - President, CEO & Director [53]

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No, it's all electric, baby, you can count on that.

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Paul Thomas Ridzon, KeyBanc Capital Markets Inc., Research Division - VP and Equity Research Analyst [54]

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And then lastly, I think you're trying to do some upgrades to DIG. Can you just refresh us where that process stands?

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Rejji P. Hayes, CMS Energy Corporation - Executive VP & CFO [55]

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Yes, 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 have 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's upside there.

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Operator [56]

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This concludes our question-and-answer session. I'd like to turn the call back over to Patti for any closing remarks.

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Patricia Kessler Poppe, CMS Energy Corporation - President, CEO & Director [57]

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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 months. And I look forward to seeing you then.

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Operator [58]

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