Good morning, everyone, and welcome to the CMS Energy 2016 second quarter 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 today beginning at 1:00 P.M. Eastern Time, running through August 4. 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. DV Rao, Vice President and Treasurer, Financial Planning and Investor Relations.
Thanks, Tiffany. Good morning, everyone. Thank you for joining us today. With me are Patti Poppe, President and Chief Executive Officer, and Tom Webb, Executive Vice President and Chief Financial Officer. This presentation contains forward-looking statements which are subject to risks and uncertainties. Please refer to our SEC filings for more information regarding the risks and other factors that could cause our actual results to differ materially. This presentation also includes non-GAAP measures. Reconciliations of these measures to the most directly comparable GAAP measures are included in the appendix and also posted on our website. Now, let me turn the call over to Patti.
Thanks, DV. Good morning, everyone. Thank you for joining us on our second quarter earnings call. I'll begin the presentation with a review of our second quarter results, the progress made on our first half checklist, and I'll share a little bit more with you about our Consumers Energy Way. Tom will then provide the financial results and outlook. We'll wrap up with Q&A. Second quarter earnings were $0.45 per share, up $0.20 from a year ago. On a weather normalized basis, earnings were up $0.14 or 52%. We're proud of our results. They were driven primarily by our outstanding operational performance. The cost controls and other good business decisions we put in place earlier in the year had a positive impact for this quarter. Today, we are reaffirming our full year adjusted earnings guidance range of $1.99 to $2.02 per share.
For 2017 and beyond, as we previously announced, we plan to grow adjusted earnings per share at 6%-8% annually. Let's go through our first half checklist. We've made good progress achieving our financial and operational objectives. The last 6 months were no different than the last 13 years, focused on delivering results for our customers and our investors. Michigan's track record of constructive regulation continues with the appointment of a new commissioner. Our rate case strategy is on track and focused on recovering capital investments through routine and regular rate cases. We've been a leader in the transition to a cleaner environment. In April, we retired 7 base load coal plants that have been generating power dependably and affordably for over 60 years.
A change like that is not easy, but the way we cared for our people and our communities during the transition makes it a very positive step toward a sustainable energy future. Recently, we launched a new initiative of continuous improvement that we call the Consumers Energy Way. I'm excited about the customer-focused benefits and waste elimination this program will deliver over the next several years. Finally, the Michigan legislature broke for the summer recess without taking action on the energy bills. Although the reforms would be positive for our customers, as we have consistently reiterated, we are not counting on any changes in our long-term financial plan as a result of a new law. We are pleased with the appointment of Commissioner Rachael Eubanks. Her education and financial experience will be a nice addition to an already strong commission, and we look forward to working with her.
Electric and gas infrastructure investment is needed throughout the state. By working with Michigan's Agency for Energy and our commission to prioritize those investments, together, we can assure that the benefits for customers and the state will be realized in a well-planned fashion. We plan to self-implement our electric rate increase of $170 million on September 1st at the current authorized 10.3% return on equity. The staff has recommended a $92 million revenue increase based on a 10% ROE. Half of the difference between our self-implementation amount and the staff's position is the ROE and cost of capital adjustments. On August 1st, we plan to file a $90 million gas case. 93% of this case is made up of new investments to strengthen infrastructure and improve system capacity and deliverability.
As the fourth largest combination utility, the strength of our gas and electric businesses together is a balanced mix that serves the people of Michigan and our investors well. We are very fortunate to be in the desirable position. Reducing coal dependency is a strategy on which we've been focused for several years. A recent example of this was the shutdown of the Classic Seven coal plants that I mentioned earlier. With thoughtful planning years in advance, we were able to keep our promises to employees, local communities, and Michigan's beautiful natural resources. Having reduced our coal generation more than any other investor-owned utility, we are leaving it better than we found it. As we continue to plan, we'll look for additional ways to reduce our coal dependency and become an even more sustainable energy company.
Another critical step we're taking to assure sustainable performance is the rollout of our Consumers Energy Way. For the past couple of months, our executives, directors, and managers have all attended intensive training that will help them to identify the most efficient operational standards and ways to eliminate waste. After talking with each and every one of them, I am further convinced that we can continue improving our customer experience and reducing costs for years to come. The next decade of extraordinary outcomes will be achieved by a strategy of working safely, completing work right the first time, at the lowest cost, and on schedule. We will continue to improve and deliver results for our customers and our investors. One area where I see more opportunity to improve specifically is distribution cost performance. We have a plan to do that.
By reducing our total electric distribution cost by $30 million, we would be in first quartile, and for $70 million, we can make it all the way to the top of the list. The Consumers Energy Way is the strategy that will help us realize that goal, all the while improving our customers' experience and satisfaction. The future performance of CMS Energy is bright and sustainable. The Consumers Energy Way will allow us to drive continuous improvement to achieve and maintain a high level of operational performance. My coworkers and I will eliminate non-value-added activities and replace them with higher-value offerings for customers and more certain financial results for our investors. By creating a culture of continuous improvement, every person, every job, every day, and every customer touchpoint can improve.
With a track record like ours, it's hard to expect more, we have a plan and strategy to do just that. Our commitment to extraordinary outcomes in all areas of our business enables our previously announced move to 6%-8% adjusted earnings growth beginning next year, and that continues year, after year, after year. Let me turn the call over to Tom.
Thanks, Patti. Second quarter results at $0.45 were up $0.20 compared with a year ago, and on a weather-normalized basis, up $0.14. This is substantially better than our original plan, more than offsetting the adverse weather in the first quarter. For the first half overall, our earnings were $1 for a share, up $0.10 or 11% from plan. As you can see here, while first quarter results were down $0.14 from the same period in 2015, we more than offset that with our performance in the second quarter, which is up $0.20. The weather helped a bit, as did the expected impact of approved rates. In addition, we reached a settlement with the Michigan Treasury on use taxes, a nice $0.03 uplift.
As you would expect, we also improved our O&M costs compared with a year ago by $0.09 in the second quarter. This reflects benefit gains, better uncollectible account performance, whole plant closures, and a variety of other solid operating improvements. Looking ahead into the second half, if weather is just normal, we'll accomplish a nice uptick of $0.13 compared with 2015. As you may know, we already have a head start on the third quarter with hot and muggy weather in July. Even without that, we would have plenty of room for growing infrastructure investments, and we continue to project 5%-7% earnings-per-share growth with solid confidence. I know most of you are well acquainted with the concept of this slide, where we show our projected earnings-per-share growth for the full year as the year progresses.
During the first quarter, mild winter weather and abnormal storms reduced our EPS outlook by $0.13, but in a short period of time, we were right back on track with earnings growth in the 5%-7% range. You can see the improvements that offset abnormal weather in the lower box on this slide. We're ahead of our guidance, and as always, we'll put that upside to work for our customers, and we'll deliver consistent, peer-leading EPS growth. We've delivered 7% adjusted EPS growth for almost 15 years. Here's the picture of our track record for just the last five of those years. It shows how we consistently offset bad news and put good news to use for our customers without compromising our predictable earnings growth of 7% each and every year.
Over the last three years, favorable weather and cost reductions in excess of our plan generated room to invest a quarter of a billion dollars for our customers, half from weather and half from cost productivity, better than planned. That's a big number. We put these savings to work in many, many beneficial ways. Turning to 2017 and the future, here's our business model, which is pretty simple and maybe just a little unique. We're fortunate to have a lot of capital investment opportunities over the next 10 years as we catch up on projects we didn't do over the prior 10 years. This investment in reliability, cost improvements, environmental mandates, and other areas grows by about 6%-8% a year.
Perhaps what's unique about our model is that we self-fund the bulk of the investment increase, keeping our customer base rate growth at or below the level of inflation. That discipline provides a real rate reduction for our customers as we make substantial improvements on their behalf. Over the next 10 years, we'll invest over $17 billion in both our electric and gas businesses, as shown in the circle on the left. 37% of this investment is in our growing gas business, which already is the fourth largest in the nation. What's important is that all of these investments add tremendous value for our customers, whether it's exceeding compliance requirements for clean energy, enhancing productivity, reducing cost, or improving our service. We have opportunities to increase spending further on infrastructure as well as replacing large PPAs. We can build new capacity cheaper than existing PPA contracts.
Opportunities around these items could be in the $3 billion-$4 billion range. Part of the secret sauce, as Patti mentioned, is being able to reduce our O&M cost to help fund the investment. We prefer annual rate cases because they're simple and manageable, and they provide us with the opportunity to share our cost reductions with our customers as we gain recovery for capital investment programs. You can see our plans on the right. We're constantly refining, including sizing ourselves to demand. For example, we're in the middle of a voluntary separation program to enhance the pace of savings in a manner that treats our colleagues in a fair and respectful way. Net of cost increases, our cost reductions will be $60 million, or about 3% a year over 2016 and 2017.
That's consistent with our prior performance, as shown on the left, where we reduced our O&M cost by almost 3% on average each year since 2016. It's a program we're proud of and one that we can continue for many years as we take advantage of solid business decisions and better processes that we describe as the Consumers Energy Way. In addition to our cost performance, our conservative view of sales growth, and our ability to avoid new dilutive equity, we still have attractive upsides outside of the utility. As you can see in this slide, continued layering in of energy and capacity sales could enable us to increase our profitability by $20 million-$40 million at our Dearborn Industrial Generation operations. We call that DIG. This is a nice insurance policy for our utility and a catalyst for new growth.
By the way, today we're celebrating 10 years without a safety incident at DIG. Safe and excellent operations are the foundation of our success. Now, here's our standard profit and cash flow sensitivity slide to help you with your assessment of our future performance. Now, I know there's a lot of concerns around the sector about the impact of low interest rates on pension and benefit obligations. A 50-basis-point drop could be worth about a $12 million hit to earnings for us. Lower debt costs, however, would offset much of that, and should we make a pension contribution of, say, $100 million, that would offset the rest and then some. We do not see a major interest rate concern for us. The world changes every day, and our model is built on being prepared to mitigate or take advantage of changes as they occur.
The Brexit from the European Union, which I think surprised a lot of us last month, it sure surprised me, is a good example. It created opportunities to issue more debt at even lower interest rates. It also added to uncertainty, one of the reasons that we keep a little thicker liquidity levels than most of our peers. For example, in May, before Brexit, we extended our 5-year revolvers another year. Our liquidity, including these revolvers, is over 15% of our market cap, and that's a bit thicker than the average of our peers. And here's our report card. We are right on course to achieve our plans for capital investment, a high-quality balance sheet, competitive customer prices, a robust dividend payout, strong operating cash flow, and adjusted earnings per share growth in the 5%-7% range.
We're pleased to have been able to deliver consistent strong earnings growth for 14 years, and we intend to continue this for a long time. Our earnings and dividend growth continue at a consistent high pace every year, no matter what's happening in the economy, the weather, politics, or succession planning. Thank you for your interest and your support. We're deeply grateful for it, and we'd be delighted to take your questions. Tiffany, would you be kind enough to open the lines?
Thank you very much, Mr. Webb. The question-and-answer session will be conducted electronically. If you would like to ask a question, please do so by pressing the star key followed by 1 on your touch-tone telephone. If you're using a speaker function, please make sure you pick up your handset. 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 pound key. We'll pause for just a second. Our first question comes from the line of Julien Dumoulin-Smith with UBS. Your line is open.
Morning, Julien.
Morning, Julien.
Hi, good morning. Hey, perhaps first quick question. Again, congrats on the results, but could you elaborate a little bit on the continuous improvement efforts you guys have emphasized, voluntary separations, et cetera? Where do you stand relative to plan on a multi-year basis? Clearly, given how well you're doing this year, what are the thoughts on the back half of the year on O&M trends?
Well, Julien, thanks for the question because it obviously is an area of real focus for us. We feel great about the relative performance to plan, obviously, and that's reflected in our results. As we look forward to the year for the balance of this year, we really are continuing to, every day, improve our processes and our operations so that we eliminate the waste of rework, the waste of return visits, et cetera. Every time we do that, it's a cost saving. We have those cost savings built into this year's plan, and we continue to execute on that plan. I would also say on the VSP, the VSP is a culmination of many years of working on productivity improvements.
I would say that our recent launch of the Consumers Energy Way is probably too early in its life to attribute to the VSP, but it's always important to right size and match our workload with our workforce. Through a voluntary program like this, we've enabled employees to optionally decide to retire early, which then sets us up for a great performance next year, where we have our workforce and our workload lined up.
Julien, one other thought. Keep in mind-
Got it. Bottom line, it's already reflected. Oh, sorry.
It is. Julien, also keep in mind, the part you don't want to hear, as we do more and more this year, we'll put that surplus cost improvement to work for more reliability and all that good stuff. What it does for us, it gives us headroom. It allows us to fit in more investment.
Right. Absolutely. Second question here on the legislative angle. Can you comment more broadly, if you're unable to get comprehensive legislation, have you guys thought to doing something a little bit more specific or tactical? Just be curious if there's potentially a new avenue for something more specific.
I'd say that, first of all, again, the changes to the energy policy are not embedded in our plan. What we do think is important for the state to address is the idea that alternative energy suppliers don't have to demonstrate that they have firm capacity. Through MISO's recent three-year forward-looking capacity auction proposals, we'll be curious and observing, and we have filed comments that when they make their filing with the FERC in mid-August, we'll have a better indicator if some of the changes that they're recommending will in fact be a way to help address that loophole where people can sell power that they don't actually have. We want to make sure that gets fixed to assure reliability and resource adequacy in Michigan.
Got it. All right. Thank you.
Thanks, Julien.
Good hearing from you.
Your next question comes from the line of Ali Agha with SunTrust. Your line is open.
Thank you. Good morning.
Morning, Ali. Morning.
Thanks. First, Tom, can you just elaborate a little bit on this tax settlement you referred to? Was that just a Q2 event? Will that have lingering impacts over the course of the year? How should we be thinking about that?
The tax settlement was around use taxes, and it's something we've been working on for, gosh, it's almost a decade and a half. The way I would ask you to think about that's a nice benefit that we're glad to have this year because it was worth $0.03 in this quarter, but it's a one-time thing. There's a little bit of a benefit going forward, but it's not big enough that you should get excited about it, right? What we do is we're looking at that. That's a nice offset to the one-time bad weather that we had in the first quarter. It kind of lines up and gives you a good quality of earnings. We're glad to have it. It's been a long time coming, and we're delighted that the Michigan Treasury is happy, and so are we.
Okay. The second question, you referred to the low interest rates and the implications of that. I'm just thinking of that from another vantage point. One of the positives in Michigan from a regulatory perspective is that your authorized ROEs are above industry average and have been very consistent. Just wondering, in this persistent low interest rate environment, are you getting any sense that there may be pressure on authorized ROEs? Or is your sense that the regulators still remain very comfortable with where they are at?
I don't want to speak for the regulators, but I would say this, is that when you look at the authorized ROEs, including riders and things that people have, we're really not that far out of line with the better-performing utilities around the country. I don't think it's that special of a thing. I'd also agree that as interest rates come down, it puts pressure on where those numbers should be. You can see by our request in both of our rate cases that we think that there's something between where we're asking and where the staff often would be, that there's kind of a middle point in there that's around that 10.3%. We're hopeful that they see the usefulness and importance of that and the competitiveness of that level and that could sustain.
Okay. Thirdly, that'll be, the goal to get to the top quartile, you said another $30 million gets you there. How long do you think it takes you to get to that level? Related to that, Tom, I guess the cost savings you laid out for 2016, 2017, over a long period of time, how much more can you think you can take out of the system to continue that very impressive cost reduction program?
Well, Ali, I'll answer the first part of the question. As we build our plan for run rate of our distribution costs and distribution cost per customer, we see a path to mid to late 2018 gets us to the top quartile. Additional savings come from a sustained commitment to continuous improvement and waste elimination. I'd say that's the time horizon we'd be looking for first quartile competitiveness.
Let me just then add to that, because I know it's a good question that people do ask us, and we ask ourselves. If you look at that slide that talks about the O&M cost performance, you'll see a line in there called attrition, for an example. That line is nothing but we lose about 400 or so people each year through retirements and the like. When we bring somebody in to replace that with our new programs for defined contributions to the defined benefit and different healthcare for new employees, we save a good chunk of money, about $40,000, with each turnover. That times the 400 gets you into $16 million a year, and that's 1.6% of our O&M right there all by itself.
That sustains for a good many years because we still have a large population of older guys like me, so there'll be more people that would take advantage of that over time. I would say, beyond smart meters and productivity and VSP programs and all that, what Patti has described that we're proud to talk about is the Consumers Energy Way. It provides a lot of opportunity that she's shown some specifics on, but it provides opportunities in everything we do. It cuts into the finance organization. It cuts into the back office. It isn't just the operating piece out front. We can be a lot better at what we do smartly, not painfully.
Thank you.
Thanks, Ali.
Your next question comes from the line of Paul Ridzon with KeyBanc. Your line is open.
Morning, Paul.
Morning, Paul.
Morning.
Just, are you aware of anything going on behind the scenes in Lansing so that we can hit the ground running in the lame duck session?
Well, we know that there will be conversations in the short window before the election when the Senate comes back into session. We don't expect that the House would take it up before that. If the Senate can come to some conclusions before the elections, then in that lame duck, it's possible, but I would say that we don't think it's likely.
What about into 2017?
There are elections, implications of the elections this fall, particularly in the House. There's a lot of seats up for grab. There's some people who are predicting that the House could shift from Republican to Democrat. That would be a big change. Term limits are a real challenge in Michigan because it requires then that all new legislators have to be briefed on a variety of subjects, including this complicated one. I doubt that they would hit the ground running, but certainly, I would expect that we'll be back at it come the start of the year.
May I just add to that, as Patti said earlier, remember nothing of this new law, whatever it might be, is in our plan. We are pretty happy with the 2008 energy law. It gives us so many wonderful things that we can do. It's got to be good, meaningful change when it occurs.
Got it. Okay. Thank you.
Thanks, Paul.
Your next question comes from the line of Michael Weinstein with Credit Suisse. Your line is open.
Hi, guys.
Hey, Michael.
Hey. Hey, Patti. When you were talking about competitive suppliers and the requirement to buy capacity for their customers, in the absence of those requirements, though, I'm wondering, what does the energy and capacity shortage or availability situation in the state look like over time? I mean, at what point in the future do you see a critical shortage of capacity in Michigan and in Zone 7, Zone 4?
Well, Zone 7, we see, and it was recently published, a 300 MW shortfall in 2017 is the forecast that eats into the reserve margin pretty significantly. By 2021, up to doubling of that, 600 MW, with just the publicly announced plant closures. As you know, DTE announced several closures recently. That definitely is in the forecast. What's not in that forecast is any other early retirements of other units. Again, we do think that it's a critical issue that needs to be addressed, and we need to assure that the people who are selling power in Michigan have that power, that they can actually provide the power they've sold. It does highlight the issue that exists in Zone 7 with this hybrid market.
I guess in the interim, if there is a shortage, how do you meet that shortage?
Well, we are certainly able to cover the load of our customers. We have adequate supply and reserve margin to serve the 90% of the load in our service territory. We are covered. The question will be, how do the alternative providers cover? Now on a hot day when we have to deploy, there's a whole emergency set of procedures that MISO invokes across the entire region if there are constraints on any given day. There's a whole procedure to manage that. Obviously, all the peakers come on, everyone is required to ramp up everything they've got, then we dial down load purposefully as the programs with those customers allow demand response, et cetera. That's obviously an important part of the mix as well.
There's only a couple of IPPs left, and we're one of them, called DIG. It puts us in a good spot to back up the utility so that we do what's needed there, and it also puts the state in a good spot having that bit of an insurance policy. We all agree it's something that needs to be addressed so we have more certainty going forward.
Would it be accurate to say that on slide 18, when you talk about the 450 to 750 possibilities going forward of capacity, is that the high end of that range would be a shortage condition where there is no other solution, DIG just is the solution to serving the region?
Yeah, I'd say what we see in the market as we do bilateral market sales, the upside opportunity is between 450 and 750. You might sell a little bit at 750, but I wouldn't think of us selling what's left there. That would be probably a more aggressive assumption than is realistic. Somewhere in between there is what could happen in the market, and that would be a good opportunity for us. You'll note that we've sold a lot of our energy. That just makes sense to do with long-term contracts out of DIG. We've held a lot of our capacity available, one, for this situation, and two, for insurance for our utility to make sure that we've got backup.
If MISO does a three-year forward-looking auction, it does give more visibility, and these bilateral agreements then become more attractive depending on what that auction foretells. I think a three-year forward-looking capacity auction would be a good enabler to what Tom's describing.
Gotcha. Thank you very much.
Thank you.
Thank you.
Your next question comes from the line of Jonathan Arnold with Deutsche Bank. Your line is open.
Good morning, guys.
Morning.
Morning, Jonathan.
Hi. Two questions. You're $0.13 ahead on weather so far. You alluded to the hot and muggy July. Can you give us a sense of what the through July number might look like? As well, what are you reinvesting in currently? What's the best way of deploying those extra dollars in the system? Is there a possibility you run out of stuff to do?
I'd answer the last part. Nope. I'd ask everyone, if they look at the slide called the 2016 EPS Outlook, which is the little curvy chart. To your point, Jonathan, there's a little box there that shows how we did the recovery. A lot of that's ongoing stuff, and some of that's one-time things, like the use tax. You'll see that we show ourselves running up because we are doing better on our cost reductions than we anticipated. We are on the upside with opportunities to reinvest more. The weather side that you're asking about, which is in addition to that, if you just took July for what we know for the month so far, there's $0.03, $0.04 of earnings upside associated with that. I'm always cautious with those kind of numbers because what's August going to be like?
$0.03, $0.04 up again or down? We don't know. We just plan on normal weather in our projections. Where can we put that money to work? Oh, there's so many opportunities. We can pull some outage work ahead from next year into this year. That helps next year's results and helps our reliability. We're looking at that. We can do more on the tree trimming side. That's probably the single biggest thing we can do to improve our reliability. There's a place that we can do more work on and above and beyond what we've been authorized to do by the Commission. There's also more esoteric things like low-cost financing. If these rates continue to stay low, we can take a hard look, and we can make these decisions sooner or later.
We can go pretty far back into the year and decide that let's just take on some more low-interest debt and pre-fund some of our future debt. All that does is it might cost us a little bit for settling this year. There's the investment part. It'll save more money, create more profits 2017 and sometimes forward years. I could go on because there's an awful long list, but those are some of the areas that are very practical, and they're on our radar screen, and we're looking at them, and we're timing them in a way that we think allows us to do the max performance for our customers and then not miss the earnings growth.
Great. Thank you, Tom. Then can you just remind us how far out your no equity look currently is?
Yep. I think we go out to 2021 and 2022, there is in the appendix of your material a slide that I would refer folks to so that you wouldn't miss that. It's our operating cash flow slide. It's got a big yellow arrow flying over showing that we improve our operating cash flow about $100 million a year. On the bottom box, you can see our NOLs and credits in the yellow side. You can see they go out through 2021. It'll be 2021, 2022 before we're looking at needing any block equity. I caution you again, 10 years running predicting that incorrectly, it could go out further.
Fair enough. All right. Thank you, Tom. Thank you, Patti.
Thanks, Jonathan.
Your next question comes from the line of Leslie Rich with J.P. Morgan. Your line is open.
Morning.
Morning, Leslie.
Question on slide 13.
Morning.
You have $0.13 there attributable in part to pension yield curve and enhanced capitalization. Could you just walk through what that is? With the yield curve moving down, why that's a benefit?
Yep. This is that new process that we put in place toward the beginning of this year, where it is looking at how you do your expenses when you're discounting the pension cost. What we're now doing is actually discounting, if you will, at the point of each year as opposed to an average of all the years. By doing that actually gives us a better look at how to reflect on our programs. Like our defined benefit pension program, where it's closed, new employees aren't coming into that. The bulk of our liability is more upfront than it is in the back. By taking low interest rates in the curve early on, it's cheaper for us. Of course, as you go out in time and the curve rises above the average, it's a little more expensive.
That's a big savings to us, and it should, as well as we go into the future years, minimize the amount of volatility we have when we're looking at discount rates and the pension curve interest rates. That may be why, when I said earlier, the impact of 50 basis points on our pension plan and OPEB is only about $12 million. I know I've heard that's a bigger number for some companies, it could be because our program is closed. New employees come into a DC program. Then on the enhanced capitalization, all that is, that is just where we really should be capitalizing work we're doing instead of putting it in O&M. That allows our customers to get a better deal. They pay for it later.
That's also a benefit for us as we do that because that's less O&M expense and so that our profits are higher, if you will. We're just doing a little more of that. One of the examples that you may recall we've used a few times in our slides is called pole top maintenance. That's just where we do a little more complete work, when there's a storm, replacing a whole pole top, cross arms and the like, instead of just doing bits and pieces. By doing the whole work, we get to capitalize it instead of count it as O&M. Are those a couple of good examples for you?
Yes.
Thanks.
Yes, that's great. Thank you.
Thank you.
Your next question comes from the line of Andrew Weisel with Macquarie. Your line is open.
Hey, good morning, everyone.
Good morning, Andrew.
Just first question. Hi. First question is a follow-up on DIG. It looks like you sold some more capacity and energy for 2017. Yet the outlook for expected income hasn't changed. Does that basically just mean that the prices were in line with your expectations or any other moving parts there?
Nope. No other moving parts whatsoever. Good observation. It showed 25% last time. We're at 0 now. That's around the energy side, and we pretty much, it's a lot of that light blue bar that you see up there in 2017. We had factored that in at the prices that we expected, so there was no big uptick in our numbers from that.
Okay. Moving forward, you said you want to keep some, I forget if it was energy or capacity or both. Do you have a targeted amount of how much you'd want to retain for those future years?
Well, we're at a bit of our sweet spot right now. On energy, we have about 25% available as we go out in the future. Now, we'd be happy to actually market and sell a little bit of that as the right opportunities come up with long-term contracts. On the 50%-90% available, that's already, you could tell, at a ramp as you go through the years. We wanted to keep that 50% level, one, as an insurance policy for our utility in case it was needed, and two, because we really do think economically, those prices will be a little bit better, and that's what we used to call the layering in capacity contracts. We're not trying to be greedy, and we are trying to be patient.
We are layering them in if they're a little bit better each time we get a chance. As some more come up, if there was another good deal, we might layer in some more. We don't have one right now.
Great. Very helpful. My next question is on the weather-adjusted load growth. Residential has been a little bit volatile recently. I believe it was down about 2% in the first quarter, then up 4% this quarter. Any comments on the trends there? You're not really a story based on load growth, but just curious what's driving that, those movements and what you're expecting for this year and beyond.
In part, it's our highly skilled ability to do weather adjustments. We may be the best- Maybe we're not the best in the business. You're right. To be a little more precise, in the first quarter, our residential sales were down 2.1%. We scratched our heads and we said, "Can't be right. It's got to be our weather adjustments when we get more than one or two standard deviations away from normal." Here we are in the second quarter. We're up 3.8% for residential. Often people would cheer and say, "Isn't that great?" Build stories around it. I actually scratch our heads and say, "Isn't that a little bit of the weather adjustment again?" What I like to do, and I hope you'll bear with us, is sort of average those two together.
What we will tell you that we think is that if we're in a small growth this year, that would be nice. What we're planning on is a small decline for residential. We may be, for the full year, we may be a little conservative on that. On commercial, we say it's going to be flat, and I think we're realistic on that. On industrial, we'll tell you we'll be up 2.5%+, and I think that's pretty realistic, too. Because we did see, you didn't ask about it, but a tick down on the industrial side. What we saw there was still good strength on food, manufacturing, automotive, chemicals, a whole variety of areas were ticking up nicely as we expected. Metals did not do well.
I think that has to do with the competitive pressure coming out of China. In addition, we had a couple of our bigger businesses, one on the construction side with insulation, in fact, that just did an acquisition, and they're actually relaying out a lot of their production facilities. I wouldn't even mention it, except that it was a 1% decline all by itself. We may have some oddities on the industrial side in our report for this quarter. We'll see how that plays out. Does that help you?
Yeah, very helpful commentary. Thank you.
Operator, any other questions?
There are no further questions in queue.
Okay, well, thank you everyone for listening in to our call today. We appreciate your interest and ownership. Tom and I look forward to seeing many of you over the next few months.
This concludes today's conference. We thank everyone for your participation.