Good morning, everyone, and welcome to the CMS Energy 2017 year-end results and outlook call. The earnings news release issued earlier today and the presentation used in this webcast are available on CMS Energy's website in the investor relations section. This call is being recorded. After the presentation, we will conduct a question and answer session. Instructions will be provided at that time. If at any time during the conference you need to reach an operator, please press star followed by zero. Just a reminder, there will be a rebroadcast of this conference call beginning today at 12:00 P.M. Eastern Time, running through February 21st. This presentation is also being webcast and is available on CMS Energy's website in the investor relations section. At this time, I would like to turn the call over to Mr. Sri Maddipati, Vice President of Treasury and Investor Relations.
Good morning, and happy Valentine's Day, everyone. With me are Patti Poppe, President and Chief Executive Officer, and Rejji Hayes, Executive Vice President and Chief Financial Officer. This presentation contains forward-looking statements, which are subject to risks and uncertainties. Please refer to our SEC filings for more information regarding the risks and other factors that could cause our actual results to differ materially. This presentation also includes non-GAAP measures. Reconciliations of these measures to the most directly comparable GAAP measures are included in the appendix and posted on our website. I'll turn the call over to Patti.
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. 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 resets. 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 one-time non-cash effects of federal tax reform.
As Reggie 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, well surpassing our target and yielding an FFO to debt ratio of approximately 20%, which provides plenty of cushion for the potential cash flow impacts of tax reform. For 2018, we're raising our guidance to a range of $2.30-$2.34, which reflects 6%-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%-8%. We continue to be confident in our ability to deliver another year of consistent, industry-leading performance. As I've 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. We still delivered. As we think about our guidance range for 2018, we will focus on executing our capital plan and realizing cost savings through 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 number one amongst our peers. Nothing is more important. It's a great demonstration of the quality of people here at CMS that are focused and safe every single day. We were ranked and awarded a number of third-party surveys, including being named the best place to work and the best employer for diversity in Michigan by Forbes magazine, and the number one 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.
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. 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. 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 multi-year capital program designed with the customer benefits in mind from day one. Our smart meters have enabled a dramatic improvement in meter read rate, and thereby improved billing accuracy while significantly reducing cost. When we don't read the meter right 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. 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 are 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 is definitely worthy of celebration. True waste elimination. By making smart investments, improving our processes, enabled by the CE Way, 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, there's 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 number one priority, 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. As a result of the 2016 Energy Law, has added an IRP filing. In parallel, the commission has ordered a five-year electric distribution plan as well. These long-term regulatory filings allow us to plan for the future, which reduces risk and provides for more predictable regulatory outcomes. As always, we plan to meet all of our financial objectives for the year, 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, 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. 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 number one Great Lakes state for inbound college-educated talent, has the sixth highest income growth in the nation, and has created the most manufacturing jobs in the country. The Governor reiterated his commitment to infrastructure in Michigan. All of this is good news for our customers and CMS Energy. As we've mentioned, we have a very large and aging system.
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 systems, the reliability of our systems, and often reduces our cost, which is the trifecta for customers. We're the fourth-largest gas utility in the nation in terms of miles of pipe, and that system is going through a refresh 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 of 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 five-year distribution plan, we begin to add smarter grid technology and modernization, which can better optimize and utilize our infrastructure. We're proud of the way we self-fund these necessary infrastructure investments through our commitment to cost reductions. 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 purchase power costs are larger than O&M, and these are passthroughs in our regulatory construct here in Michigan. 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. That saves our customers money.
There's more work to be done. Our PPAs provide a significant opportunity in the very near future to reduce costs for our customers even more and fund necessary capital investments across our system at a lower cost. We lower total costs, we can be more attractive to companies considering Michigan for their expansion or relocation. When Michigan wins, we win. 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. 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. 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 19th indicating our preference, which, as you would expect, is to keep it simple and apply a credit on every bill. 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. 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. 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. 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 three times the performance of the UTY and more than twice the performance of the S&P 500. 2018 will be the 16th year of a track record you've come to know and enjoy. We intend to keep it that way for many years to come. I'll turn the call over to Rejji.
Thank you, Patti, and good morning, everyone. As always, we greatly appreciate your interest in our company. As we reported earlier this morning, for 2017, we delivered adjusted earnings per diluted share of $2.17, which is toward the high end of our guidance and reflects yet another year of 7% annual growth. Our adjusted EPS in the fourth quarter excludes a $0.52 non-cash, non-recurring charge associated with federal tax reform. This charge is largely attributable to the remeasurement of deferred tax assets, which now reflect the reduction of the corporate federal income tax rate to 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 increases, 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 for 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 leverage to meet our objectives. 2017 was no different, as we experienced mild temperatures and heavy storm activity throughout most of the year. 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 five years, we have reinvested almost half a billion dollars 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. 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 debt ratio, which at approximately 20% at year-end, exceeds both the 2017 target and our historical targeted range of 17%-19%. Our conservative management of the balance sheet provides sufficient headroom to manage unforeseen headwinds and supports strong investment-grade credit ratings, which enable us to fund our capital plan cost efficiently to the benefit of customers and investors. Lastly, in accordance with our self-funding model, we kept annual price increases below 2% for both the gas and electric businesses, which align with our target of keeping annual price increases at or below inflation, all 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-$2.34, which is $0.01 above our initial guidance during our third-quarter call and implies 6%-8% annual growth off our 2017 actual results. As for the path to our 2018 EPS guidance range, as illustrated in our waterfall chart on slide 17, we plan for normal weather, which in this case, would contribute approximately $0.16 of positive year-over-year EPS variance, given the substandard weather experienced in 2017. 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 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 our estimates, these sources of positive variance will be partially offset by select non-operating savings realized in 2017 that will either be passed on to customers through our pending cases or were one-time in nature. We also have embedded the usual conservatism in our utility sales and non-utility performance forecast. Moving on to federal tax reform, like most large companies, the new tax law impacts our business in a variety of ways. 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 19th 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're working closely with the commission on this matter, though the amount and the pace at which the tax savings will be provided to customers in 2018 have yet to be determined, we believe the rate reduction could be up to 4%, which clearly facilitates our self-funding strategy by creating meaningful headroom for future capital investments. As you know, we have significant investment requirements at the utility in the form of gas and electric infrastructure upgrades, PPA replacements, and renewable investments.
The estimated cost savings associated with tax reform increase the likelihood of us incorporating more projects into our capital plan over the next five to 10 years to the benefit of customers and investors. In fact, every 1% reduction in customer rates equates to approximately $400 million of incremental capital investment capacity. On the non-utility side, tax reform impacts CMS in three ways. First, the new tax law establishes potential limitations on parent interest expense deductibility. 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 non-utility businesses would realize some upside given the lower federal income tax rate, although this will not have a material impact on our consolidated earnings since those businesses are relatively small.
Third, as we have discussed in the past, the sum of our non-utility operations produces an overall pre-tax loss due to our parent interest expense. In the past, the overall loss of our non-utility operations produced a larger tax benefit at 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 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 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 five-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 five years, our capital investment needs are significant, likely in excess of $50 billion in the long run, as we discussed during our investor day in September, and as evidenced in the circular chart on slide 19. As you can imagine, over the next 10 years, our capital plan will be greater than our previously disclosed $18 billion plan.
The amount and composition of a revised 10-year plan will be dictated by the analyses being performed in our upcoming long-term electric distribution and integrated resource 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 flow, as I alluded to earlier. As a result of the potential reduction of customer rates due to tax reform, we anticipate a flat year-over-year operating cash flow trend from 2018 to 2019 at $1.65 billion, but expect to resume our trend of $100 million per year increases by 2020.
In aggregate, we are forecasted to generate approximately $9 billion of operating cash flow over the next five years, which will play a key role in the financing strategy of our five-year capital plan. In support of our liquidity planning, we also expect to continue to avoid paying substantial federal taxes until 2022. In sum, our forecasted OCF generation, coupled with our tax 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 costs and mitigated refinancing risk. As of December 31st, 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%-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've refreshed our sensitivities for your modeling assumptions. As you'll note, with reasonable planning assumptions and robust risk mitigation, the probability of large variances from our plan are minimized.
There will always be sources of volatility in this business, be they weather, fuel costs, regulatory outcomes, or otherwise, and every year we view it as our mandate to do the worrying for you and mitigate the risks accordingly. With that, I'll hand it back to Patti for some closing remarks before Q&A.
Thank you, Rejji. With our unique self-funding model enhanced by tax reform, a constructive regulatory environment, and a large and aging system in need of fundamental capital investments, we feel that our investment thesis is quite compelling. Now, Rocco, please open the line for Q&A.
Thank you very much, Patti. The question and answer session will be conducted electronically. If you'd like to ask a question, please do so by pressing the star key followed by the digit 1 on your touchtone telephone. If you're using the speaker function, please make sure you pick up your headset. We'll proceed in the order you signal us, and we'll take as many questions as time permits. If you do find that your question has been answered, you may remove yourself by pressing the star key followed by the digit 2 on your touchtone phone. We'll pause for just a second. Our first question comes from Julien Dumoulin-Smith of Bank of America Merrill Lynch. Please go ahead.
Hey, good morning. Congratulations on all the positive updates.
Thanks. Good morning, Julien.
Thanks, Julien.
Hey. 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? Also, can you just be a little clearer about the year-by-year equity contemplated in the current plan?
Yeah. With respect to enterprises, Julien, as you know, that has always been one of several components of the self-funding strategy. Our self-funding strategy is largely predicated on the cost cuts as well as a little bit of sales growth. A combination of tax planning, unregulated or non-utility contribution, and other have allowed us to get to that sort of 75% of funding of the 6%-8% growth, which again, minimizes the annual rate relief request. Enterprises has always been part of that plan, as has EnerBank, and their contributions are relatively modest but helpful. 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 is around $60 million-$70 million on a run rate basis, and that's what we've been doing for some time.
We foresee, based on the implications of tax reform, we don't see that changing in 2018. Longer term, we expect a modest increase of that to call it the tune of about $20 million-$30 million. We think run rate, it's probably around $110 million-$150 million, but not much higher than that. We still think we can comfortably fund that within the dribble program. It's well south of about 1.5% of our market cap, and we think, again, highly digestible. Is that helpful?
Absolutely. Thank you. Perhaps turning to the CapEx side of the equation, perhaps twofold here. First, if I have this right, you increased the overall pie to a $50 billion number now. Just curious if there's anything to read into that, just in terms of the updates, what gives you that incremental confidence now? 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, curious.
Yeah. 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. 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. This constraint of customer affordability and a healthy balance sheet and our credit ratings and credit metrics is an important combination that we're always trying to work. The issue, and what we're trying to reinforce, is that there's no 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. 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 five-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.
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 de-risk the financial plan in the long run.
Excellent. Thank you all.
Thanks, Julien.
Our next question today comes from Ali Agha of SunTrust. Please go ahead.
Thank you. Good morning.
Good morning, Ali.
Morning, Ali.
Morning. First question, on the electric rate case, can you just remind us how to reconcile the ALJ proposed decision to your ask? Just the dollar amount, there's a huge difference there. How are you looking at that in the context of how that fits into your financial plan?
The ALJ is just another step in the process. It's not a final Commission order, just to be clear. The Commission speaks with their orders. There's a couple 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. That was not that long ago, and we feel that that's a difference. As well as they had two other, what I would describe as distinct differences to traditional rate making that we've been doing, specifically around forecasting sales around our energy efficiency and including them or not including them. We have always included our forecasted energy efficiency sales reductions in forward-looking rate making. The ALJ opted to eliminate that.
That was about an $18 million difference as well as a discount rate calculation. There was very specific things that the ALJ pointed to that were very different than what has been traditional. Our final order is expected near the end of March, and our commission is very competent and capable, and they'll weigh all of the inputs, and we expect a favorable outcome.
Ali, this is Rejji. The only thing I would add to Patti's good points is that as it pertains to ROE, if you look at the 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 about 2.3%. I think we all know what has taken place since then. We've had about 55 to 60 basis points of ascension. 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.
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. Ultimately, as Patti highlighted, the commission will speak through their orders, so we'll see.
Right. 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 2017 outcome impacts your forward thinking there.
Yeah. Ali, I would actually beg to differ slightly with your position. Yes, we talked about electric sales forecast between, call it half a percent to 1% at the beginning of the year, that's obviously weather normalized and net of energy efficiency. As we have said throughout 2017, we've actually been tickled pink with the mix of sales that we've seen throughout the year. What's interesting is, as you look at that kind of 40 basis points where we ended up, peel the onion on that some, residential was roughly flat. Our forecast at the beginning of the year assumed about a one and a half percent decline, again, net of energy efficiency and weather normalized. Flat performance there was really above expectations, that is higher margin sales, as you know. That was upside relative to plan.
On the commercial side, that's really where we saw quite a bit of performance there. We're just under 1% weather normalized net of energy and efficiency, our plan at the beginning of the year was about 1% down. That implies that where we saw a little bit of underperformance was on the industrial side, to end the year kind of just under 2%, weather-normalized net of energy efficiency, again, below our plan, still that's a very nice mix and really suggests that we have a pretty good economic environment, pretty diversified service territory, which is not nearly as cyclical as other parts of the state. We were quite impressed with that. Going forward, we do not expect to see a modest degradation of that performance from a sales perspective going forward.
Generally, we do plan conservatively, so we'll see. Again, not disappointed at all with where we ended up.
I see. 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 five-year CapEx plan, we should not expect any changes in terms of the amounts to that, likely the 10-year plan amounts will likely go up. Did I hear that correctly?
No, just to be clear, you have a couple things that are moving in the five-year plan. The prior five-year plan was 2017 through 2021. That was about a $9 billion plan, which presupposes about $1.8 billion per year. We've moved one year forward, this is now a 2018 to 2022 plan. This plan for five years in aggregate is about $10 billion. That implies about $2 billion of spend per year. You've seen a step up there in terms of the aggregate spend. 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.
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 pre-tax reform was $18 billion. If you assume with the 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. Hopefully that's clear now.
Yes. Thank you.
Thanks, Oli.
Our next question today comes from Michael Weinstein of Credit Suisse. Please go ahead.
Hi. Good morning.
Morning, Michael.
Morning.
I heard you mention the IRP as the next catalyst to talk more about the expansion of the five- and 10-year plan. Is the five-year distribution plan, which I think that finally is coming up in March, is that also another point where we might see more of that $50 billion talked about?
Yes. 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. 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 five-year, $10 billion plan.
Great. That makes sense. 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.
Yeah, Michael, this is Reggie. A couple things to think about there. The charge was established in late November by the MPSC, and I think they assumed about just over $300 per megawatt day for the charge that would potentially be levied to AESs, or alternative electric suppliers, who cannot demonstrate that they have requisite capacity four years forward. That translates into about a $9 per kilowatt a month price in the capacity market. We assume that anything above $3 per kilowatt a month is upside at DIG. While we don't think that'll create opportunities in the near term, certainly longer term, particularly if there's a local clearing requirement that's established beyond 2021, we definitely think there could be some opportunities for DIG to be competitive in that environment.
Certainly we haven't baked any of that into our plan because it's too premature for that.
Okay, great. Thank you very much.
Our next question today comes from Greg Gordon of Evercore. Please go ahead.
Thanks. Good morning. 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. 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're becoming, especially as we move out into that timeframe?
Yeah, 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. 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 through demand response, as well as our energy efficiency programs in total. We're 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 one note, Greg, that we have retired seven of our 12 coal units.
We retired almost a gigawatt of coal, so we're actually down dramatically in our generation fleet with coal, so we feel great about where we are. We've reduced our carbon intensity by 38% since 2008 levels. We definitely are leaders. That's why Sustainalytics, I think, continues to choose us as the number one utility, and Newsweek Magazine selected us one of the greenest companies, independent of industry in the nation, top 10. 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.
Thank you, Patti.
Yep, you're welcome, Greg. Thanks.
Our next question today comes from Jonathan Arnold of Deutsche Bank. Please go ahead.
Good morning, guys.
Morning, Jonathan.
When I look at slide 15, where you give the target for 2018 financial targets, I think the green box is 2017. Can you just talk about what you've assumed on tax reform in terms of the pace of refund to customers in that plan? Does that assume, what you mentioned, that it would be relatively quick? Is there sort of some wiggle room around that if it comes out slightly not so quick?
We erred on the side of conservatism, I'll say. 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. In the filing that we submitted on January 19th, we highlighted that there was about a billion and a half of deferred tax liabilities as of September 30th, we have proposed that that matter should be adjudicated through a separate proceeding. As you note through normalization, that could be basically returned to customers over the life of the assets, at least for the property-related deferred taxes. For the non-property, the new tax law is quite opaque and ambiguous around that. It remains to be seen exactly how the rest will be returned.
To answer your question, we're assuming, I think, something around $165-$200 of degradation on 2018. It could flex a little bit upward going forward once there's a decision around deferred taxes going forward.
That's what's in that 18% FFO to debt number?
That's exactly right. Yeah. We also have assumed, as I highlighted, that there is a modest countermeasure in the form of monetization of the alternative minimum tax credits. We have assumed that we will monetize about half of that. We had $270 million on the sidelines, and so we're getting about half of that. There's a little bit of sequestration around 7%. That equates to about $125 million. That's a partial countermeasure, and we'll do what we can with cost reductions to offset more of that. That's what's embedded in the
If I understand rightly, Rejji, there's no doubt that you get that in the law, is there, on the AMT?
Yeah, the law could not be more clear about that. The only risk is if there's government shutdown or something that's very low probability. You never know these days.
Okay. Don't you have a half billion of deferred tax asset as well as the billion and a half of liability or excess?
That's correct. It was subject to impairment, of course, as a result of the federal tax rate going from 35% to 21%. That's the lion's share of that $0.52 non-recurring charge that we stomached in the fourth quarter. We still have a pretty large balance. At the end of 2017, it was just under $900 million. 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. The cash benefit is less than that. We still expect to utilize a lot of that NOL balance going forward. At the utility, there's about $500 million of deferred tax assets. Again, it's pretty ambiguous as to how quickly that might be returned or recovered by us.
That's subject to this separate proceeding that we've proposed to the MPSC.
Okay. That was the bit I was asking about. What have you proposed in terms of timing on that part?
We have basically said in our filing on the 19th to the commission that we would propose having that as part of the separate proceeding.
Okay.
In our modeling, we have not assumed that that is resolved at any point soon. Maybe a safe assumption is that it aligns with the normalization of the property deferred taxes, but it all remains to be seen, quite frankly.
Okay. Thank you. 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. I think you said that you anticipate having about 4% headroom and that each percentage point would give you capacity for another $400 million of investment. 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 of that partly extending the runway or is it bringing things forward?
[inaudible].
When you say accretive, are we talking earnings as well as whatever else?
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%-8% EPS growth. I would best at the highest level, characterize it as extending the runway, de-risking the plan further, making us the continue-to-sleep-at-night stock. It just enables us to continue to do what we do so well, Jonathan. In fact, you could probably sleep through the call if you wanted because there's no new news, no surprises here.
If it's a tailwind, does it by extension become something that makes it more likely that you'll execute above the 7% number or not?
We've been very consistent. I appreciate the push, Jonathan. We're very confident around seven, and I know you're very happy with our 7.4% performance this year. We are shooting for that 6%-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. We're just going to continue to work that direction and everything positive that helps is exactly that. It's a tailwind.
All tailwinds are good. All right. Thank you.
That's right.
Our next question today comes from Gregg Orrill of UBS. Please go ahead.
Yes, thank you. In the slide deck, you had equity infusion to consumers of about $300 million in 2018. You had $450 million in 2017. Just wanted to understand how you think about that and sort of going forward.
Specifically, Greg, are you speaking to how we might fund that? Is that the direct question?
Really, should we be thinking about what level of annual contributions to Consumers Energy going forward, if there's a way to think about how to model that?
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. $300 million, I think is a pretty good run rate from a financing perspective as to what you might expect going into the utility. We would also anticipate roughly a flat to maybe modestly declining equity ratio at the utility. Again, we'd assume that $300 or so, really of infusion is probably a pretty healthy and appropriate run rate of dollars that would go down into the utility.
Okay. Thank you.
Our next question today comes from Paul Ridzon of KeyBanc. Please go ahead.
Good morning.
Morning, Paul.
Happy Valentine's Day.
Thank you. You too.
I had a question. Relative to before tax reform, maybe looking five years out, what delta do you have in your rate base absent any investment changes?
You're saying absent tax reform, and specifically, is it the elimination of bonus depreciation and what that might do for rate base? Is that where you're going?
Yes.
Paul, I just want to make sure. Yeah. 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. 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. It doesn't necessarily lead to a direct increase in rate base. 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. You have the effect of potential equity thickness over time, which leads to comparable economics.
Don't view the elimination of bonus depreciation, again, in the context of our rate construct as a net increase in rate base. Obviously, because of the headroom created by tax reform, it's going to create more headroom for capital investments. We are increasing our five-year plan by about $1 billion. That will lead to a higher rate base growth than what we initially presupposed.
Thank you. 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 2018. Is that just a hole to be filled? Is that the right way to look at that?
No, I think what you saw in 2017 was we had, as we see it, some non-recurring benefits at DIG. 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. 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 the Palisades transaction, we did have about just over 400 megawatts of capacity sold to the utility as part of that transaction on a near-term basis. That did impact our layering strategy a little bit.
We're a little open to the tune of about 30% for calendar year 2018. There's a little bit of softness there, but at the end of the day, I think most of that outperformance that you saw in 2017 versus what we're expecting in 2018 is really attributable to off-peak merchant sales, which we don't expect to recur.
That 35 assumes a typical market price that 30 gets filled at?
Well, remember, most of the portfolio is already sold, so we got 70%. What we view as upside to the plan is anything above $3 per kilowatt month. You can assume that a good portion of the portfolio is already sold in excess of that. Then we're assuming a little bit of softness on the amount where we're open.
Got it.
As we look forward, Paul, DIG, as always, serves its role as the Tesla in the garage. 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 is one of the few remaining sources of excess power available in the state, some real upside in the out years. It has a lot of value to us right where it sits.
That car just keeps changing, doesn't it?
No. It's all electric, baby. You can count on that.
Lastly, I think you're trying to do some upgrades to DIG. Can you just refresh us where that process stands?
Yeah. 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. We don't have any capital investments associated with that baked into our plan. You shouldn't assume that there's upside there.
Okay. Thank you very much.
Thank you.
Great. Thanks, Paul.
This concludes our question and answer session. I'd like to turn the call back over to Patti for any closing remarks.
Excellent. 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, I look forward to seeing you then.
Thank you. This concludes today's conference. We thank everyone for your participation.