Good morning, everyone. Welcome to the CMS Energy 2018 first quarter results. The earnings news release issued early today, and the presentation used in this webcast are available on CMS Energy's website in the investor relations section. This call is being recorded. After the presentation, we will conduct a question and answer session. Instructions will be provided at that time. If at any time during the conference you need to reach an operator, please press the star followed by zero. Just a reminder, there will be a rebroadcast of this conference call today, beginning at 12:00 P.M. Eastern Time, running through May 3rd. This presentation is also being webcast and is available on CMS Energy's website in investor relations section. At this time, I would like to turn the conference over to Mr. Srikanth Maddipati, Vice President of Treasury and Investor Relations. Please go ahead.
Thank you, Francesca. Good morning, everyone, and thank you for joining us today. 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. I'll turn the call over to Patti.
Thanks, Sri. Thank you, everyone, for joining us for our first quarter earnings call. This morning, I'll share our strong first quarter financial and operating results and review our regulatory calendar. Rejji will add more details on our financial results and outlook, we'll close with Q&A. We picked up right where we left off. At the end of last year, we are now delivering solid first quarter earnings of $0.86 per share, up 21% year-over-year or up 5% on a weather-normalized basis. The year-over-year comparison was largely driven by weather, given the unusually warm first quarter in 2017, as well as cost savings achieved already this year. Our solid start to the year gives us confidence in our ability to deliver the results you've come to expect, regardless of weather or other changing conditions around us.
Our strength is our agility and ability to flex. While it's early in the year, we continue to reaffirm our year-end guidance of 6%-8% off of last year's actual results, we reiterate that we'd be disappointed not to be toward the high end of our range again this year. Our focus and commitment to our triple bottom line, people, planet, and profit, underpinned by financial and operating performance, is a low-risk and sustainable business approach, it continues to deliver. My story for this month starts at our Campbell Generating Station. I was able to join my coworkers as we celebrated a record run on Unit 3 prior to entering our planned periodic maintenance outage. We're proud of the maintenance work we've done and the environmental upgrades made over the years to protect the land, air, and water for Michigan residents.
We were excited to celebrate this record run knowing that the power we generate at the Campbell plant is not only more reliable, but it's also cleaner than it's ever been. Yet, we are still dissatisfied. Longer term, we know that to reach our clean energy breakthrough goal that we announced in February, there will come a time when these plants will need to be retired. Some of these plants have served our customers for over 60 years. This decision has a real impact on the lives of the people in the communities surrounding our remaining plants, and my coworkers who are employed there. For that reason, like our handling of the Classic 7 retirements in 2016, we plan to work with these communities and our coworkers to ensure a smooth transition.
Our previous coal retirements involved partnerships with developers to decommission these plants and then redevelop them for the good of the local community, which was all done at a lower cost for customers and perfectly exemplifies our triple bottom line. I'm excited to share some of the details of our clean energy breakthrough goal that we announced in February. As you know, we've already taken a leadership position in the sector by reducing our carbon emissions by 38% from 2005 with the closure of approximately a gigawatt of coal at our Classic 7 plants in 2016, which exceeds the requirements outlined by the Clean Power Plan. We've committed to cutting our carbon emissions by 80% and retiring all of our coal plants by 2040, which is a decade ahead of the targets in the Paris Climate Accord.
In that timeframe, we anticipate that more than 40% of our energy will come from clean sources such as wind and solar and from energy storage. Our goal doesn't end there. Over the next five years, we plan to save one billion gallons of water, reduce waste going to landfills by 35%, and protect 5,000 acres of land in Michigan. These industry-leading results and commitments, along with our social and governance practices, have made us the number one U.S. utility in the annual Sustainalytics rankings for the second year in a row, all while continuing to deliver top-tier financial results. On the regulatory front, you may recall that we filed our five-year electric distribution plan in the first quarter.
We believe the five-year plan will provide a visible roadmap of our electric investments on needed infrastructure. Our upcoming electric rate filing in the second quarter will align nicely with that five-year plan. We received an order in our electric rate case in late March, which authorized a 10% ROE and a $66 million in revenue. We view this outcome as constructive and a confirmation of the robust design of Michigan's regulatory statute. We have one additional rate case yet to be determined this year. We expect an order in our gas rate case at the end of August. As a reminder, we initially requested $178 million of rate relief and a 10.5% ROE, which excluded the impacts of tax reform.
Just to walk you through the math, we've revised our request down by $33 million, largely related to cost savings already achieved, such as benefit savings, as well as capital and other O&M that were pushed beyond the test year. We're reducing our request even further by including the impacts of tax reform, which results in a revised request of $83 million and reflects a 10.75% ROE, given the implications of tax reform and current economic conditions. Given tax reform and low commodity prices, this is a great opportunity to make significant safety and infrastructure upgrades to our system while still protecting customers from bills they can't afford. Finally, in June, we plan to file our long-awaited IRP.
The new energy law requires us to file the IRP, which will provide more insight to where our future generation mix is heading and allows the commission to go on the record with their view of our plan. The IRP will also provide investment certainty ahead of capital expenditures and will align with our clean and lean philosophy. We are at a unique moment in time. As we are retiring our traditional coal assets and out-of-market PPAs, we have choices about how to replace that energy and capacity. We're opting to leverage this moment, we don't plan to replace that capacity on a megawatt per megawatt basis right away. Instead, we'll primarily use a modular build-out of renewable sources of power, coupled with energy waste reduction through energy efficiency and demand response.
Our incentive mechanism for energy efficiency and investment in renewables make these choices good for customers and for investors. This is the essence of our clean and lean investment philosophy, which allows us to eliminate energy waste, right-size our energy supply and distribution system, minimize exposure to high-priced PPAs, fuel, O&M, and future stranded costs through big bets. We can then deploy that capital into renewable investments in other areas of the business that provide additional benefits to our customers, including electric distribution and gas infrastructure, which improves safety and reliability while executing on our commitment to the planet. As we focus on the road ahead, it's important to note that we continue to deliver regardless of weather or any other external factors. Just look at our track record. We provide consistent results supported by strong operations performance and no resets. Our agility and conservative planning are our strengths.
With that, I'll turn the call over to Rejji.
Thank you, Patti, and good morning, everyone. As Patti highlighted, we're pleased to report that we've kicked off 2018 with a strong first quarter, receiving earnings per share of $0.86, up $0.15 from the first quarter of 2017, which implies 21% period-over-period growth, largely driven by weather and cost savings. Weather-normalized earnings were up 5% from the prior year, which reflects colder winter weather to the benefit of the gas business and a lack of significant storm activity relative to Q1 of 2017. As a result of this strong start, we're ahead of plan, which is always helpful prior to storm.
That said, it is still early in the year, we'll continue to plan conservatively and manage the business with a focus on executing on our capital plan and identifying cost savings to mitigate future risks to the plan and to perpetuate our self-funding strategy to the benefit of customers and investors. On slide 10, on the left-hand side of the waterfall chart, you can see the favorable comparison of first quarter 2018 results versus Q1 of 2017. Favorable weather provided $0.14 of positive variance and cost savings, including reduced benefits, expenses, and minimal storm activity contributed $0.07. Rate relief net of investments provided $0.01 of EPS upside relative to the comparable period. These sources of positive variance were partially offset by lower non-weather sales, largely due to our energy efficiency program.
As we look ahead to the remainder of 2018, we are encouraged by the path required to achieve our 2018 EPS guidance range, which includes modest pickup later in the year from our already approved electric rate increase, constructive outcome in our pending gas case, and normal weather. As mentioned before, we'll continue to plan conservatively with a keen eye on risk mitigation in the inherent variability that we've experienced in our business. To that end, slide 11 best illustrates said variability, more important, it highlights the resilience of our business model. During periods of unfavorable weather or other sources of downside, we rely on our ability to flex operating and non-operating leverage to meet our financial objectives without compromising customer service. During strong periods, we focus on reinvestment into the business to achieve longer-term benefits for customers and investors.
Every year is different, we always expect to meet our financial and operational objectives year in and year out. On slide 12, we highlight as a reminder, the model that facilitates our ability to deliver consistent industry-leading financial performance. With our extensive backlog of capital investments, which drives earnings growth, significant cost reduction opportunities, and a diverse economy in our service territory, we are confident that we can maintain our success for many years. The multifaceted nature of this self-funding strategy, which is comprised of cost reductions, tax planning, sales, and non-utility earnings contributions facilitates risk mitigation. In fact, our ability to self-fund the vast majority of our capital investments enables us to meet our financial and operational targets while minimizing the customer price impact.
To elaborate on the magnitude of our organic growth opportunity, as noted on slide 13, we have an extensive inventory of capital investment projects at the utility through our large and aging. I'm sorry, excuse me. We have historically invested in our system at a measured pace given customer affordability. As highlighted on our fourth quarter call, given the substantial rate reduction opportunity presented by tax reform, in addition to the other aspects of our self-funding strategy, we have forecasted a five-year capital investment program of approximately $10 billion, which extends our runway for growth without compromising our annual price increase target of at or below inflation. The expected composition of this plan will be weighted toward improving our gas infrastructure, as well as upgrading our electric distribution system and investing in more.
This level investment further improves the safety and reliability of our electric and gas systems to the benefit of customers, evolves our generation portfolio to the benefit of the planet, and extends the runway for EPS growth. Our capital investment needs remain significant beyond the five-year period, as evidenced in the circular chart on the left. As we work through the aforementioned regulatory proceedings and our ordinary course financial planning cycle, we expect that the longer-term capital mix will continue to evolve, and we look forward to providing an update on our 10-year capital plan. As mentioned, our model is successful because we largely self-fund our capital plan through cost savings to minimize customer impact. Now historically, we have emphasized our substantial focus and achievements on reducing operation and maintenance expense. Rightfully, I might add, since we have reduced those costs by 11% since 2013.
We also foresee sustainable process improvements through waste elimination and lean principles embodied by the CE Way, which can lead to future savings in and beyond. To that end, it is important to note that we do not discriminate when it comes to cost savings, and we view literally every component of our cost structure as an. In fact, the non-O&M portion of our cost structure represents a pool of approximately $4.5 billion, which is roughly 80% of our costs. Needless to say, that pool won't go to zero, but it offers a significant cost savings opportunity, which creates headroom to invest capital, improve the safety and reliability of our gas and electric systems, while minimizing customer bills. The expiration of our large PPAs will create substantial cost reduction opportunities in the future.
In the interim, we will continue our efforts to reduce fuel and power supply costs, interest expense, and property and income. As for the latter, over the course of the next several months, we will provide bill credits to customers through a three-step process, which will ultimately equate to a rate reduction of up to 4%. I'll refer you to slide 21 in the appendix of our presentation for additional. As noted in the past, every 1% reduction in customer rate equates to $400 million of incremental capital investment. The benefits of our cost reduction efforts and financial discipline over the years are illustrated on the right-hand side of the slide. As you'll note, residential electric and gas bills have declined relative to inflation over the past five years, despite the fact that we have invested approximately $8.5 billion in aggregate into those systems over that period.
We expect that trend of maintaining customer bills at or below inflation while continuing to make substantial investments into the system, to continue for the foreseeable future. Our capital investment program and self-funding strategy is complemented by an investment-grade balance sheet, which is underpinned by solid cash flow generation and a conservative financing strategy. Our financial discipline has led to strong credit metrics and numerous ratings upgrades over the years, as highlighted on slide 16. 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 a reminder, our FFO to debt ratio is projected to be approximately 18% by year-end, which includes the effects of federal tax reform, is in line with our targeted. On slide 16, we have provided the sensitivities to our plan for your modeling assumptions.
You'll note, upon receipt of the electric rate case order in March, with no further electric orders scheduled in 2018, we have struck that sensitivity for the bound. Suffice it to say, with reasonable planning assumptions and robust risk mitigation, the probability of large variances from our plan are minimized. We feel quite good about our ability to meet our financial targets this year. Slide 17 summarizes the low-risk nature of our business mix. With significant utility earnings contribution, coupled with largely contracted non-utility growth and prudent financial planning, we believe our historical success can be perpetuated in the long term with no big bets. With that, I would like to thank you again on behalf of CMS for joining us this morning, and I'll hand it back to Patti for some closing remarks.
Thanks, Rejji. With our unique self-funding model, enhanced by the Consumers Energy Way and tax reform, a constructive regulatory statute, a large and aging system in need of capital investments, and a healthy balance sheet to fund our plan cost effectively, we believe our financial performance is sustainable over the long term. With that, Francesca, please open the lines for Q&A.
We will now begin the question and answer session. To ask a question, you may press star, then one on your touchtone phone. If you're using a speakerphone, please pick up your answer before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then two. The first question is from Julien Dumoulin-Smith of Bank of America Merrill Lynch. Please go ahead.
Thank you, all. Good morning. Congratulations on the results.
Good morning, Julien.
Hey. Perhaps just a first quick question here. With some preliminary guidance out of IRS on interest deductibility, how are you thinking about your relationship with EnerBank ultimately? I'll leave it broad here.
Well, I'll just start with, as we've always said, EnerBank is a small part of the big picture. It certainly provides a nice buffer in light of tax reform. Given that, however, we still think that in the long run, EnerBank might have more value to someone else. We'll keep our eyes open, but while it's still in the family, we're going to definitely leverage it for its full potential. Again, it's a small part of the total picture. Reg, you might want to touch on some of the tax benefits of EnerBank more specifically.
Yeah, I'd echo that, Julien. We have said for some time clearly it's a non-core business. Historically, it has not provided any sort of drag on the consolidated return on equity of the business, nor has it offered up a drag with respect to growth. The business has been largely self-sufficient for some time now, so we haven't equitized it for a while. Provided it continues to do that, we view it as a nice contributor to the total pie. As mentioned, in the context of tax reform, it does provide a shield, and we still believe that it does in light of the new bill. We'll keep an eye on the IRS guidance, but at the end of the day, we're fiduciaries, and at the right valuation, we're certainly obligated to take a look at it as a potential disposition.
For now, we'll continue to leave it chugging along, and we'll continue to enjoy the tax shield that it creates.
Excellent. Just moving on to the latest MISO auction. If I'm reading between the lines a little bit, seems like you're saying for DIG on 2018 guidance below three versus kind of roughly three before. Is that kind of an appropriate sort of teasing apart of your updated guidance here?
Yeah, I think that's fair, Julien. We have, as mentioned on the Q4 call, we had over 400 megawatts of capacity held up effectively in escrow as part of the Palisades transaction. Because one of the, I'll say, interim or short-term buyout replacement plans as part of that transaction was to sell capacity to the utility. While that 400 or so megawatts was held in abeyance, we missed a pretty good opportunity to sell down that capacity as we often like to do in advance. The economic impact is de minimis, and we were able to offload a good portion of that in the auction. Obviously at $0.30 a kilowatt month, which is where the auction ended up, that wasn't in line with our plan.
There was a little bit of a downside associated with that. Again, the impact on 2018 is de minimis.
I'll just add that we had made some upgrades at the plant at DIG, and that has turned out to be a nice offset. We're actually getting a couple additional megawatts above plan, that's been a nice offset. All in all, Enterprise is in line with plan for the year.
Yeah. The other point I would add is that obviously, given its unregulated status, the tax savings associated with federal tax reform, they get to keep on that side.
Right. Ultimately, you wouldn't necessarily say that bilateral pricing has come off meaningfully as we kind of think beyond 2018 here.
No, I don't think the market has softened all that much. In fact, we've said in the past, in the context of the state reliability mechanism process and the charge that was established by the commission last year, I think we'll get visibility probably within the next few months as to whether or not there'll be a local clearing requirement beyond 2021. So that, to me, should materially tighten the bilateral market, in which case there could be significant opportunities on the capacity side for Dig Energy.
Excellent. Lastly, basically the cost savings of year-to-date, I think it's like the $0.62, is basically to say that you've got some room in the plan to hit the numbers, basically. Is that a fair way to describe that, as you think about that waterfall through the year?
Yeah, that's right. That last column or that last component of the chart has always effectively been the plug. If you look at the opportunities we have within our plan, if you look at some of the activities that we moved forward on in Q4, some of the reinvestment opportunities, the bond tender, those what I'll call discretionary activities, needless to say, we don't need to move forward on those this year. We feel like we have a lot of optionality going into the last three quarters of the year.
Well, thank you all.
Thank you, Julien.
Thanks, Julien.
The next question is from Michael Weinstein of Credit Suisse. Please go ahead.
Hi. Good morning, guys.
Morning, Michael.
Good morning, Michael.
Hey, can you discuss how the state reliability mechanism is kicking in at this point, and what impact that might have or might be having already on collection of revenues for future capacity?
Right now, we had to declare what our ability to serve our own load was, which we did back in December of 2016. In February, the AES had to indicate their ability to serve. At this time, it looks like they are able to serve their load. The state reliability mechanism is fulfilled. Sorry, in 2017, we declared our ability to serve our load. Bottom line, the AES have demonstrated that they can serve their load, and we have a capacity charge then that is assigned to customers only in the event that they cannot. That's not yet materialized. We expect that given the local clearing requirement that will be established later this year, that will be what forces, I think, more transparency about local load being provided to serve AES customers.
Michael, this is Rejji. Just to be clear here, I think you may have described it as a revenue opportunity if I heard you correctly. Needless to say, in the event you do have a situation in which these alternative electric suppliers and the choice customers that they have do not demonstrate that they have the requisite capacity going forward and they are in fact levy to charge, that they would pay back to us, that would go directly to customers. We don't view it as an upside opportunity for the utility per se, but obviously, it's a cost savings-related opportunity to create headroom.
Yeah, we think of it as more accurately reflecting cost of service and cost allocation, if you will, to the appropriate parties who are utilizing the energy should be paying for it. It's a cost savings for customers. As Rejji articulated, it's not a definitely revenue upside, if you will.
I see. Those revenues really are just the pressure on the customers to go ahead and do something about choosing some kind of capacity requirement, right, or capacity contract?
Correct.
Not really, yeah. Just one last question. Just to clarify on EnerBank, you're still offsetting parent interest expense, right, with the interest income there. Are you saying that that might not be necessary and that's why it's being considered for possible disposition at this point?
There's certainly value that we ascribe to that tax shield, we're just saying as a non-core asset and as fiduciaries, if there is a third party that has an interest in buying the property, we would have to evaluate it. We believe that tax shield is certainly of great value, and it does provide a nice shield for the interest expense of the parent. As a fiduciary, if someone comes along and at the right price, we have to have that discussion.
It's probably fair to say that its value did increase given its role that it plays for the company. Certainly we'll leverage that until there's a better offer.
Okay. Is it fair to say that you're getting inbound calls on it at this point?
We don't discuss M&A opportunities.
Got you. Okay. Thank you.
The next question is from Shar Pourreza of Guggenheim Partners. Please go ahead.
Morning, guys.
Morning, Shar.
Hey, Shar.
Can we just real quick touch on stakeholder feedback so far that you're getting around the five-year distribution plan? How's dialogue going? Really more importantly, can we touch on the timing and scope for a rider or tracker request?
Sure. Couple things. First of all, on stakeholder engagement, we've had, I would say, a great amount of discussions, and it's been really good for us to have conversations with key environmental interveners, customer groups, customer types, as well as policymakers on both our distribution and our integrated resource plan. That involvement from stakeholders, I think, goes a long way to having positive outcomes of regulatory filings. Now, keep in mind, the distribution plan actually doesn't result in any kind of order, if you will, accepting the plan. It just creates transparency to the plan. The stakeholder involvement, I think just bodes well to say that we've thought of everything, and we're considering all the appropriate alternatives for our investments in the distribution system, as well as the IRP. The IRP, we're excited to publish that. We'll publish that in June.
I think it will provide a great integrated look between the electric distribution and the supply plan. We look forward to getting those documents public, and that will then provide an opportunity, a window into really what the capital plan is, more specifically on the distribution side. One other clarification on the IRP itself. It's going to be a 20-year look, but the first three years of it are really what provide some of the economic certainty for investments in the first three years of the IRP. It's obviously been a busy regulatory season for our regulators and their staff. A nod to them, all the hard work they've been doing to implement the 2016 Energy Law.
It's been a heavy lift, I think what we're putting in place provides the framework for potentially tracking mechanisms because you've got multiple years of look of an investment strategy. Even without tracking mechanisms, I think it provides some more visibility and alignment around the infrastructure investment upgrades required in Michigan. I'll just add one last thought here that the amount of investment magnitude is driven by our aging system. As we've reiterated multiple times, it's not a shortage of investments, it's just deciding the best investments. These proceedings really do provide an opportunity to align and have more regulatory certainty going into the filings.
Got it. Is there any specific timing we should think about as far as a tracker request? What would be the right timing?
It would be part of any of our rate case filings. We have one tracking mechanism in our gas system right now for enhanced infrastructure replacement program. That's our mains and our service lines. We're looking at increasing that. We've got a current gas rate case that's under review right now that expands it even further. We received an expansion of that tracking mechanism in our last order, we think we're developing a good track record of doing what we say we're going to do, and that's important when establishing a pattern for approval for these tracking mechanisms.
In a gas case, we'd look for additional components to be included in that specific tracking mechanism or a parallel one, for example, on vintage services. On the electric system, we would expect in our electric rate case to file for a tracking mechanism that would align, for example, with that five-year electric distribution plan, and that would be resolved through a final order on that rate case.
Okay, perfect. That answers it.
We plan to file that rate case in second quarter, that's 10 months from the filing date.
Okay, perfect. Just one last question, just thinking more long-term on the back end of your 10-year plan and potential upside around capital program from the IRP and replacing above-market PPAs. How should we think about more specifically around renewables? Are you seeing the same strong wind economics as one of your Michigan peers? Is there any sort of opportunity to pull forward more of that spend maybe because of incremental customer demand for it?
Yeah, you bet. In fact, we've already done some of that. We actually have the green renewable tariff approved, and fully subscribed for our largest customers to have access to additional renewables. Our Cross Winds Energy Park, one of our expansions, was dedicated to that tariff and serving load beyond our renewable portfolio standard. We are obviously also working to achieve the 15% renewable portfolio standard that was part of the 2016 Energy Law. That'll be about 500 additional megawatts. We have about $700 million in our plan to achieve that additional renewables. Any of the incremental renewables, either to fulfill our IRP or to serve additional C&I, specifically the industrial customers who have renewable energy targets, will be incremental to that. Again, our IRP that we're going to file in June will be very reflective of what we see as that plan going forward.
Renewable energy plays a very important part of our future.
Shar, this is Rejji. Just to provide some additional context around the magnitude of the potential, say, supply replacement opportunity. We have, as we've highlighted, about 4 GW of power coming offline over the decade. If you look out to 2040, you've got Palisades in the next decade, you've got [MCV. Those two alone are 2 GW.
Right.
If you look at whole units, that's another 2 GW up to 2040. As we rolled out our clean energy breakthrough goal, we did highlight that if you did backfill a good portion of that energy and capacity with renewable, it could be up to about 40% of our fleet over time. You think about the magnitude and size of that potential opportunity really is quite robust, being you need to see attractive capacity factors. We talked about the opportunities we've got in the context of our RFP and capacity factors in the 30s. We think the renewable opportunities competitive, and we think the cost curve will continue to trend in the right way.
Particularly as we look at the 10, 15-year plan, solar will play an increasing role because we expect prices to continue to drop for solar just as technology advances. Its capacity factor at peak is like 50%, it can play a really important role in planning for capacity for the future. Again, our IRP, I think, will be very reflective of the plan, we look forward to making that public in June.
Terrific, guys. That's all I had. Congrats on the results.
Thanks, Shar.
Thank you.
The next question comes from Praful Mehta of Citigroup. Please go ahead.
Thanks so much. Hi, guys.
Morning, Praful.
Good morning.
Morning. Just staying on the EnerBank theme for a minute. You've talked about non-core asset, wanted to understand if there is an opportunity to sell, is there a tax basis or tax leakage that you see on this kind of transaction? Would this be like a cash sale? If it were a cash sale, what kind of tax leakage do you see in such a transaction?
It's just a function, as I see it, Praful, as the timing of a transaction. We've owned the business for some time, so I assume the basis is low. Remember, we're not scheduled to be a federal taxpayer until the early 2020s. In the event it was for a sale, if a sale or disposition were to take place in the near term, you can assume you get a deferral on that gain for a few years. If it was to take place, say, five, six years from now, you can assume there will be economic leakage. Needless to say, we would take all of that into account in the context of a potential transaction. I don't want to set expectations too much. We're going to be thoughtful about this.
The business contributes quite a bit and obviously has an enhanced strategic value in the context of tax reform. We would take all of that into account if any inbounds were to occur. Again, we won't talk about whether there are any in it.
Fair enough. That's helpful. Then slide 17 is helpful, too. Just wanted to understand on that, the parent growth rate, where you have ±1%, I guess. Just wanted to understand, what are the factors that could drive it both upwards and downwards from the midpoint?
Yeah. Embedded in that, I'll call it just corporate bucket, you have EnerBank within that. EnerBank is a component of that. You've got interest expense at the parent, which is non-recoverable. In the event you get economic refinancing opportunities, that could drive some potential upside there. It's a combination of EnerBank interest expense savings. Those are really the core drivers as I see it.
Got you. Thanks. Finally, I know you didn't want to talk M&A, but just broader corporate M&A. I don't know if you want to touch on that, given your strong financial position right now. Is there more activity you see in terms of conversations around broad corporate M&A? How would you see yourselves both as buyers and sellers right now?
Our plan has so much organic potential. We really are not looking at M&A as a necessary part of our planning. We feel great about our plan. If somebody, again, as fiduciaries, if a great offer came to us, it would have to be a great offer because our plan is solid, and we feel good about the direction that we're taking. Certainly not on the front page of any of our planning. M&A does not play a front-page role of any of our planning.
Praful, this is Rejji. Just to circle back to your prior question about opportunities or the key drivers within the sort of corporate bucket. I would be remiss, particularly I spend a lot of time with our head of tax, to not mention the good work we've done on the tax planning side over the years, that also is a key driver of corporate business. I would say tax planning, interest expense, as well as the EnerBank contribution. Those are all material drivers segment.
All right, great. Thanks, guys. All super helpful. Thank you.
The next question is from Travis Miller of Morningstar. Please go ahead.
Good morning. Thank you.
Good morning.
Good morning.
Hey, good morning, Travis.
Just a quick clarification. On that cost savings, that $0.07, was that more pull forward, or was that more overachieving or achieving in line? Just clarify that cost savings number relative to the rest of the year.
Yeah, I would say a small portion of it's a pull forward. We did a bond or partial bond takeout in Q4 of last year. We had some eight-and-three-quarter senior notes, where it's a $300 million tranche. We took out two-thirds of it. That led to some savings. Obviously, you can do a little better than eight-and-three-quarters in this market. That was a small source of savings. The biggest component of it, though, was related to benefits-related savings, and that was due to changes we made in both our OPEB and pension plans, which led to real cash and significant pension-related savings that we were delighted to pass on to customers in our pending gas case. That's really the primary sources. It's a combination of benefits and interest expense savings.
Okay, those were part of your plan?
They were not embedded in the plan, at least in terms of the interest expense savings. That created some upside. Then the pension, I would say, yeah, largely that was accounted for. Don't believe that that's going to be a significant tailwind for what we deliver at the end of the year, if that's what you're thinking.
Okay.
Keep in mind, our model is all about deploying cost savings, finding them, implementing them, achieving them, then redeploying operating and maintenance dollars back into the business to prepare for next year. When we're doing planning, we are looking at execution this year for sure, but we're also looking about execution in 2019 and building a plan and reinvesting those O&M dollars back into the business, for the benefit of more predictable outcomes at the end of this year and next year, which is what really is our strength. Our ability to flex throughout a year, put to work those cost savings to the benefit of customers and investors. That's what makes us so predictable year after year after year after year.
Travis, sorry, just to clarify. Both the interest expense savings as well as the benefit savings were embedded in our 2018, but I was thinking about it in the context of relative to the comp of Q1 2017 positive variance, 2017, perfectly clear about that.
Okay. Great. Then one longer term, where does energy storage play a role? Either in what we'll see in our IRP or just in your plan already?
Yeah. I think you'll see energy storage also as a part of our IRP. We've been doing work to learn more. We've got some demonstration pilots. We had an opportunity to visit with Tesla and Stem out in California on a benchmarking and learning trip, if you will. We see the opportunity for storage to fit into the plan nicely. It's not economic today, we think that those cost curves will continue to occur, and we think there are places both on the grid side and in residential applications for storage to play an important piece in maximizing the dispatch ability of renewables as well as providing more control and options on the grid. We're excited about that technology, like all things, we're not making any big bets. We're not going along in new, untested technology. We'll do our homework and apply it appropriately.
Okay, great. Thanks so much.
Thank you.
Thank you.
The next question is from Paul Ridzon of KeyBanc. Please go ahead.
Good morning.
Morning, Paul.
Hey, good morning, Paul.
Morning. Slide 10, the waterfall, just the first quarter -$0.07. One of the drivers there is cited as economy. Can you just touch on that?
Yeah, sure. It's interesting. On the surface, if you look at the supporting slides or pages that we provide publicly, you'll see across electric, we saw a little bit of softness, at least in the data around residential, commercial, industrial sales trends. Just to give some specifics on that. Residential was down between 1%-1.5%, commercial down 1%-1.5%. This is on a weather-normalized basis and net of energy efficiency. Industrial was down about 3%. All of that was, again, on the surface, a bit surprising because we still see very good economic conditions within the state, particularly in the heart of our service territory. We're probing that.
I think over time, if you look back at our history, if past is prologue, we never get too excited, good or bad, about Q1 because it certainly is not indicative of the full year. Just to go back to recent memory, last year, in Q1 of 2017, we started out of the gate at about 1%-1.5% up. We ended the year just under half a percent. 2016, we started the year out flat and then ended up at about half a percent. Q1 does not a year make. I'll also just point you to the EPS curve that we've highlighted in the past. It just shows the inherent variability in the business, we never rely upon one driver to help us deliver our financial performance.
Sales is sort of one small component of the self-funding strategy, and we usually overachieve on the cost side as well as some of the other drivers or levers to make it work and make sure we deliver. The only other thing I'd mention, again, because it's, to me, a little surprising, we did really peel the onion on just these data points I highlighted around commercial, residential, and industrial performance. Cycle- billed sales in our service territory for the quarter were actually up quite a bit. I'll just quote for you a couple of sectors that we dug into. As you know, our service territory is pretty well diversified, we saw chemicals up 6%, fabricated metal products up 2%. We saw also transportation equipment up 5%, and then food manufacturing up 13%. This is Q1 of 2018 versus Q1 of 2017.
We have, again, many sectors within our service territory, but I'm not cherry-picking here. Those are the most energy-intensive sectors within our service territory. We actually think that suggests that there's actually a pretty good underlying economic story within our service territory. The last two, transportation equipment as well as food manufacturing, are actually pretty good leading indicators because that suggests both for transportation equipment that the industrial side of the state is doing pretty well, and then with respect to food manufacturing, that usually suggests that commercial retail activity, diners, restaurants, grocery stores are all still humming along. Again, I don't think it really tells the full story, but that's the data that we have at the moment.
As I recall, you had an extremely mild quarter last year. You showed outsized strength on the economy. Is this just the weather norm model breaking down on extremes?
That's an imperfect science, as you know. Given that it was an incredibly mild winter from a weather perspective in Q1 of 2017, we're going to have to dig in a bit more into that Q1 2017 comp because I do think the weather normalization trends may also be leading to a little bit of the vagaries in the math we're seeing right now. I do not believe that the statistics that I read off around residential, commercial, and industrial performance in Q1 are indicative of what we're seeing today.
Lynn, obviously Rick Snyder's termed out. Any candidates out there leaning towards energy as a policy to platform on?
Yeah, Paul, I don't see them leaning towards energy as a key issue because of the law that was passed in 2016. I think all of the candidates are aware and were, in some cases, involved in the passage of that law. I think there's a lot of people with a strong point of view that it's a good construct, it's a good statute that was passed with bipartisan support, to tackle that again would be a big issue. I will say all the leading candidates have good track records, and we, as you know, have always worked with whoever is in office to make sure that we're serving Michigan well. No worry beads on the election front.
Okay. Thank you very much.
Thank you.
Thanks, Paul.
The next question is from Angie Storozynski of Macquarie. Please go ahead.
Thank you. I hate to go back to the bank question, is the bank a big contributor to your operating cash flows? I mean, I understand the earnings impact, given the tax reform, I would have thought that this is actually a pretty important asset because it's likely supporting your cash flows now.
Not a material one. We generally get a run rate of about, call it $45 million, $50 million pre-tax in that business. Tax affect that gives you a pretty good proxy for the cash flow generation. We did $1.7 billion of operating cash flow last year. The target this year [inaudible] . It's not a material contributor from an OCF perspective. Again, it's a self-funding model, we're not equitizing that business. We're not getting dividends out of that business. At the end of the day, we don't rely on it.
Remember, it's an industrial loan corporation, so it doesn't have deposits, if you will. It does loans for home improvements.
Changing topics to the renewables and growing investments in renewables. Initially, to be honest, I thought that if you continue to add, especially wind to your systems, then you will run your coal plants or gas plants less, and that will actually help your O&M expenses. The more we're looking at it seems like the cycling of the conventional power assets actually increases O&M expenses, at least initially, unless the addition of a wind farm coincides with a retirement of a coal plant. Is this a fair assessment? Also I know that you've always managed to beat all of your expectations regarding O&M efficiencies, but does it make it more difficult for you to hit your O&M targets as you increase your renewable power penetration?
I think it's a great question. The coal plants, in particular, were not designed for cycling. The things that you observe are true, but there's an interesting asset in our Ludington Pumped Storage, which is basically the fourth largest battery in the world. It's a pumped storage that allows for dispatching at peak times. It serves as a great complement to our renewable assets. That configuration for us combined Consumers Energy, our gas plants really do, I'd say, perform very well in concert with renewables, and therefore, the O&M expenses associated with the gas plant and the Ludington Pumped Storage plant combined with renewables is actually quite favorable for our operating system. I agree that coal is harder to cycle like that, which is why we retired a gigawatt of coal and is good economically and good for the planet.
That definitely improves our operating expense profile with the transition to more renewables in that way.
Okay. Thank you.
Thank you.
This concludes our question-and-answer session. I would like to turn the conference back over to Patti Poppe for any closing remarks.
Well, thank you, everybody. Great questions today. It was good to be with you. We look forward to seeing you at our upcoming events. For those of you who will be at AGA, we will be happy to see you there as well. Thanks so much.
This concludes today's conference. We thank everyone for your participation.