Feb 23, 2012
Executives
Laura Mountcastle – VP and Treasurer John Russell – President and CEO Tom Webb – EVP and CFO
Analysts
Daniel Eggers – Credit Suisse Mark Barnett – Morningstar Ali Agha – SunTrust Jonathan Arnold – Deutsche Bank Brian Russo – Ladenburg Thalmann
Operator
Good morning everyone, and welcome to the CMS Energy 2011 Results and Outlook call. This call is being recorded.
Just a reminder, there will be a rebroadcast of this conference call today beginning at noon Eastern Time running through March 1st. This presentation is also being webcast, and is available on CMS Energy’s website in the Investor Relations section.
At this time, I would now like to turn the call over to Ms. Laura Mountcastle, Vice President and Treasurer.
Please go ahead ma’am.
Laura Mountcastle
Thank you. Good morning and thank you for joining us today.
With me are John Russell, President and CEO; and Tom Webb, Executive Vice President and Chief Financial Officer. Our earnings press release issued earlier today and the presentation used in this webcast are available on our website.
This presentation contains forward-looking statements. These statements are subject to risks and uncertainties and should be read in conjunction with our Form 10-Ks and 10-Qs.
The forward-looking statements and information and risk factors section discuss important factors that could cause results to differ materially from those anticipated in such statements. This presentation also includes non-GAAP measures.
A reconciliation of each of these measures to the most directly comparable GAAP measure is included in the appendix and posted in the Investor section of our website. Reported earnings could vary because of several factors, such as legacy issues associated with prior asset sales.
Because of those uncertainties, the company isn’t providing reported earnings guidance. Now, I’ll turn the call over to John.
John Russell
Thanks Laura. Let me welcome everyone for joining us today in our call.
Since I will see many of you next week, excuse me, I’ll keep my comments brief and be available for questions after Tom covers the results. 2011 was another year of strong financial performance.
Our adjusted EPS was a $1.45 slightly exceeding the guidance set back in February and up nearly 7% from the $1.36 in adjusted EPS reported in 2010. This was the ninth consecutive year we achieved or exceeded our original EPS target.
Gross operating cash flow continues to grow primarily driven by our investments in the utility. In 2011, this cash flow was $1.6 billion.
It is expected to continue to grow at about $100 million a year over the next five years. Our shareholders experienced an attractive 24% TSR last year and nearly a 150% TSR over the past three years.
It appears the market has recognized our consistent financial performance and significant dividend increases over this period. Although we have made good progress increasing our PE multiples, we still have more work to do to fully eliminate the peer discount.
Few weeks ago, we raised the dividend 14% to a payout level of 62% which is in line with our peers. This is a sign of the Board’s confidence with our progress and with our long-term business outlook.
Overall, I am very pleased with the results in 2011 and look forward to building on our success in 2012. One of our top priorities in 2012 is to focus on our customers’ needs as fundamental as this may seen, we can do a better job.
Last year, we launched the customer value initiative which focuses on moving up the value chain. We will talk more about this important initiative next week at our Investor Meeting.
We also want to firmly align with you, our shareholders. We will continue to be transparent with our business model, clearly identifying the financial and operational metrics most important to you and delivering the results.
We are fortunate to have a good energy law in Michigan that provides the foundation for investment decisions and lays the groundwork for regulatory decisions. However I believe there is room for improvement, for improvement in the process that will be in the best interest of all parties.
I believe the few process changes could make Michigan’s regulatory model one of the best in the country. Risk is one of the key elements of any investment or business decision.
We focus on identifying financial and business risk and evaluating the alternatives along with the cost of mitigation. I have confidence that we have mitigated as much risk as possible or have backup plans in place for the various risks we may encounter.
We are establishing our 2012 adjusted EPS guidance at a $1.52 to $1.55 per share in a tight range of 5% to 7%. This should support continued TSR performance in the 9% to 11% range.
Now I’ll turn the call over to Tom to share more insights about 2011 and 2012.
Tom Webb
Thanks John. Let me welcome to everybody on the call today.
Nearly 10 years ago, we established a course to rebuild the company and grow EPS at what we call the mid single-digit pace. That evolved in the 6% to 8% a year.
We met that goal and we met it at the high end of the range. We dipped once in 2007 to reflect the planned sale of international assets before the full-year benefits kicked in.
The full-year benefit of lower debt and interest expense and higher utility equity and earnings occurred in 2008 as planned. This major sale made possible our consistently strong earnings performance.
In 2010, we moved to increase certainty of our investor return. We shifted a bit towards dividend yield by increasing our dividend 40% from a yield of about 3% to one at 4%.
We also aligned our EPS growth outlook at 5% to 7% and started from the high performance accomplished in 2010. And as John just highlighted for you, we exceeded our EPS target last year continuing to perform at the high end of our projected range.
Our dividend increase last month was the sixth in a row at $0.96 a share, it represents a 62% payout, and that’s about the average of our peers. This combined with strong EPS growth should provide a healthy TSR and the good platform for continued growth.
Equally reflective of our past performance and outlook is our continued operating cash flow growth. That’s averaging about a $100 million each year.
This investment driven growth provides the capacity to enhance the dividend and the capacity to reduce parent debt when our investment needs ease. As you can see here, our 2011 earnings growth compared with 2010 was driven by our core business, the utility.
The impact with soft energy prices on our ITPs was largely offset by refinancing in the attractive financial markets. And this performance isn’t easily accomplished.
Our team works hard every day to deliver it and here is a sampling of the absent flows during 2011. As you can see in the green bulge on the left top of the slide the cold winter a year ago provided financial capacity to accelerate reliability spending, specifically including more tree trimming than we originally have planned.
As you can see in the red dip, around the spring time we had to pull back a little when record storms occurred including ice storms doubled level of previous years. The hot summer along with good tax and better than planned operating performance provided space for more customer reliability investment.
We pushed hard last year and in prior years to balance our work in a manner that accelerates customer performance improvements and delivers consistent earnings growth. It’s not easy that the model works well for our customers and you, our investors.
So here is our final report card for 2011 always but there is no rest, we’ve been working on 2012 plans for more than a year. We are providing 2012 earnings guidance in a narrow range for the first time in many years at 5% to 7% resulting in earnings at a $1.52 to $1.55 a share.
As usual, we’re building this off our results last year where we were already at the high end of our long-term growth range. So here is a look at the work ahead.
We’ve already faced mild winter weather in January and February, and recall we do not have decoupling for weather in the gas business. Although adverse weather has cost us about a $0.05 a share so far this year, we are able to offset it.
We’re taking action to address additional mild weather if it’s necessary and this is fully consistent with our strategic model. So how does it work in 2012?
It’s the same investment driven model we’ve used for several years. The same model that drives us for the next five years.
Our customer driven investment continues at a pace that grows rate base, EPS, and operating cash flow at about 5% to 7%. But why not invest less?
Because there are investments – these are investments that are needed to meet laws, regulations and responsible service levels for our customers. Then why not invest more?
We work hard to prioritize the capital spending in a manner to keep our base rate increases at or below inflation, otherwise we don’t think we’re serving our customers in a responsible manner and one that would be sustainable for you. Importantly many people across Michigan worked hard to establish the new State Energy Law in 2008.
And we’re fortunate to have fair regulation that supports that law. For 2012, our electric and gas rate cases are primarily about new capital investment.
The investment represents 95% of the gas and 97% of the electric self-implementation levels. The gas case maybe at a size that settled but we’ll learn more about that later today.
Staff positions on both cases reflect ROEs that are below the national average. They also include sales on uncollectible account levels below existing experience.
As in our last three rounds of rate cases, the commission may choose to strike the balance that provides resources to continue needed investment and reflect existing conditions. We’re fortunate that they have seen these needs and our commitment to serve customers.
We’re working diligently to keep our cost and customer rates low, but while incremental power prices are extraordinarily low, well below replacement costs, some customers seek to temporarily leave bundled service. Some of those not within the 10% cap established in the 2008 Energy Law have pressed for a higher cap.
Key legislative and administrative leaders have reviewed the situation and chosen so far not to make any change during the period of artificially low prices. When prices return to a level that reflects replacement costs, our base load generation costs will provide clear advantages to all our bundled customers.
Our model includes strong customer focus and we’re pushing hard, in fact very hard to enhance service and minimize prices. We continue to deliver base rate increases at or below the level of inflation.
To support this, we reduced O&M in our last two rate cases. We expect to keep our base rate case increases below 2% through the next five years.
Our approach is to bring smaller, routine rate cases annually in order to simplify the process, avoid rate shocks and permit timely recovery of investment, the primary focus of each request. In the gas business, we expect that reductions in our DCR will result in savings to customers that more than offset increases over the next three years.
We don’t expect to be as fortunate in the electric utility, but we are continuing to work to slow the growth of fuel and PSCR cost. An important part of the plan to hold down rates includes reducing our O&M cost in a manner that enhances service while eliminating waste.
In the last two years, we’ve reduced our headcount by 4% and this is a big contributor to our plan that not only offsets inflation but reduces total O&M cost by 4%. Over the next five years, we expect to lower O&M costs by a further 1% each year more than offsetting inflation costs and productivity.
We’re into the third year of economic recovery in Michigan which is shown here, weather adjusted electric sales up 2% in 2012. This helps all customers by spreading the impact of needed investment more broadly.
During 2011, Michigan added 80,000 private sector jobs. Over the last two years, unemployment dropped five points from 14.1% to 9.3%.
While U.S. unemployment dropped a point, Michigan ranked number one among all states in manufacturing growth up 13% and number two in construction growth up 3%.
U.S. auto production is up 17% so far this year compared to last year.
Used car prices are high and that’s another signal of improving new car sales ahead. Clearly the revisions to business taxes, the auto recovery and the constructive approach to economic development are working.
For example, in the most recent State Business Tax Climate Index update that came from a nonpartisan tax research group, Michigan advanced from 49 to number seven among all 50 states. Pretty good track record.
Although last on our list today, an important and unusual to most utilities element of our model includes the use of NOLs to provide – to avoid the need for equity, not just for this year, not just for next year, but for the next five years. We planned routine drift in another small equity programs but no new block equity offerings over the next five years.
Now clearly it’s an appropriate business case presented itself, we wouldn’t have to take to bring it to you but we are able self fund planned investments of about $6.5 billion over the next five years. Cash flow is healthy with 2012 utility operating cash flow at $1.6 billion, up another $125 million.
Recall that we accelerated both parent debt funding and companywide pension contributions in 2011, eliminating the need for more pension funding this year or next year. We lowered our discount rates at the end of the year to 4.9%, 50 basis points lower than the prior year.
We also lowered our expected return from 8% to 7.75%. The adverse earnings impact of about three pennies a share was more than offset by the effect of our cash contributions to the pension fund.
So as we do with parent debt, pre-funding the pension plan provides another strong measure of risk mitigation. Here is our routine profit and cash flow sensitivity chart, updated to address 2012.
You can use this to easily reach your own estimate of our outlook. Now please note that we expect electric decoupling for energy efficiency to continue but we anticipate decoupling for economic and weather changes to end.
We’ve highlighted that here in our sensitivities. Although we prefer to continue decoupling for economic increases or decreases, this probably provides an upside during the recovery.
Please don’t forget we’ll seek to reinvest any gains should they occur in more reliability. Also please note the ROE sensitivity.
We anticipate a reduction from existing authorized levels and you can see some possible impacts here. So here is a recap of our targets for 2012 with important improvements over 2011.
And don’t forget the Investor Meeting that’s schedule for the New York Stock Exchange on February 29. You’ll have a chance to hear from our executive team and join us in celebrating our 65th anniversary, or 65th year of listing on the New York Stock Exchange as well as our 125th year of proudly serving the people and the businesses of the State of Michigan.
So John and I would be delighted now to take your questions operator, if you’d open the call.
Operator
Thank you very much Mr. Webb.
The question and answer session will be conducted electronically. (Operator Instructions) We’ll pause for just a second.
Our first question comes from the line of Kevin Cole with Credit Suisse. Please proceed.
Daniel Eggers – Credit Suisse
Good morning guys, this is actually Dan.
John Russell
Hi Dan, good morning.
Tom Webb
Good morning, Dan.
Daniel Eggers – Credit Suisse
Good morning. I guess first question is just kind on the O&M outlook.
Can you give a little more color where you guys are finding kind of the magnitude of reductions and do you expect this year maybe to kind of help us get a little deeper into where you’re going to pull that money [ph]?
John Russell
Yes, let me just take that one. What we’ve done is as Tom mentioned we’ve reduced our headcount by 4% over the past two years.
We’ve made a large investment in SAP, one of the largest in the country. I think a few years ago to automate many of our processes.
We’re starting to see the benefits from that automation now. We also reached an agreement with our union last year which so all employees of the company would eliminated the legacy costs going forward.
So we no longer for new employees have any defined benefits programs or all defined contributions. So between healthcare, legacy issues, productivity improvement which we’re going to show you some of that in New York next week, reduction in headcount and overall we continue to invest capital to reduce O&M and fuel costs which on the O&M side is paying the dividend.
Daniel Eggers – Credit Suisse
Okay, got it. Tom, just make sure I had this, the guidance you guys gave today, does that the ROE imply for electric, is that based off of the 10/7 number or a different number?
Tom Webb
Now it’s a fair question Dan, but for obvious reasons we’re not actually naming the number. The way I would ask everyone to think about the answer to that, if you look at the sensitivity chart that we provided you, we show what would happen if there was a 20 basis point drop on electric and gas.
And I would encourage everyone to know that we can manage that kind of level. And then I would just tell you, remember our plan whether we have adverse weather, whatever happens is to do our best to stick right to our guidance and get it.
And it goes the other way. If we get some wind falls, some good news, some favorable weather whatever may happen, we’ll turnaround and reinvest that.
So we’re expecting a drop in the ROE. We don’t want to forecast what we think it will be because we don’t know.
But we will go after doing the things we can control to live within that guidance we’ve provided.
Daniel Eggers – Credit Suisse
Nicely evaded, thank you. And then…
Tom Webb
Thanks Dan.
Daniel Eggers – Credit Suisse
Thank you guys.
Tom Webb
Thanks Dan.
Operator
Our next question comes from the line of Mark Barnett with Morningstar. Please proceed.
Mark Barnett – Morningstar
Hi good morning guys.
Tom Webb
Good morning.
John Russell
Good morning, Mark.
Mark Barnett – Morningstar
ROE notwithstanding, can you talk a little bit about the discrepancy between the staff positions and where you plan will self implements maybe especially on the investment side since it’s not really something that’s proved any kind of sticking points so much with that?
Tom Webb
Yes, what I would ask you to do which is the easy thing for everyone to do is think about our slide 19 which gives you the difference in the gas case where we have proposed self implementing a $23 million compared to the staff at $22 million. And I think the focus would be look at the big items.
There is a difference in ROE which I know Dan credits us [ph] for evading that a little bit but there is a difference there and I have a funny feeling, there will be some good analysts to configure out our number from these. And on uncollectible, it’s simply recognizing a three year history rather than the present experience.
So we’re hopeful on that particular one that folks will acknowledge where we are today. And maybe do something creative whether it’s a tracker or whatever it maybe as a way of ensuring that we don’t over recover on new ways because that’s not our intent.
We just want to recover whatever the experience is. On investment, there is some very small pipeline things that are in discussion right now.
Generally it’s hard to find an example where we’ve ever been trend down on investments. So as long as there is confidence we’re doing the right thing, I think we’ll get proper recovery on the investments.
So there is not really deep terrible issue there. And on revenue it’s a little bit – this isn’t really the mainstream revenue, this is sort of the buy-sells that we do that kind of thing in the gas business.
And this is again staff taking a looking at a three year history rather our most recent experience. And if you look at what’s actually happening today, I think that we can find common ground on that one as well.
And O&M is sort of a little bag of a variety of different things. So the impression that you might get there is that we may not be as far apart as it appears and when you think of the size of where we are, it’s probably something that could move toward settlement, those things take a little bit time though.
And we’ll see that will up to the staff and the commission and all the other parties too.
Mark Barnett – Morningstar
Okay, thanks a lot for that detail. And I guess one more question might be a little hard but if you look at obviously the mild weather, you commented a little bit on the earnings impact already but and you mentioned some of the flexibility you have to offset kind of maybe some continued weakness.
Is there a limit to how much flexibility you have or is it a little hard to quantify?
Tom Webb
No, there is absolutely a limit but we’d never quantify it because we surprise ourselves. And I’ll give you an example that kind of relates to that.
We work hard to bring the O&M cost down because we don’t benefit from that except in the short-term that’s a way of creating headroom and helping our customers and offset the recovery we get from the capital investments that we are putting in place for them. This year, we’re able to take our O&M costs down by about 4%.
That maybe one of the best that we’ve done when I look through modern history our track record has always been up more closer to inflation levels. But we are blowing the inflation away and we’re going to zero and we’re not stopping we’re going down.
We told you here that we are looking for the forward years to be flat to 1% down, but as we get closer to each year that’s when we work harder to do the things that provide the productivity that make a lot of sense. And I’ll give you one example.
Hardening the system is something that we’ve been doing for sometime. We put investment in place to put better poles, better wires, better pipes in place and by doing that, when storms and problems like that that are O&M related occur, we don’t have as much problem.
We don’t have as much damage. And I think that a team that’s focused on improving all the time finds and surprises itself with how much it can do.
So if there are limits, of course there is a point where we can’t go much further and therefore do actions that jeopardize the service that our customers would get. Do we put a number on a cap on it?
No. And so we’ll – I can’t tell you this, this will give you a little help.
We didn’t anticipate $0.05 a bad news in the weather in January and February where we don’t have any decoupling on the weather side for the gas business. So that wasn’t easy but we’ve gone off and we’ve already have all the plans in place to fully accommodate that.
We expect that the weather is pretty mild. You don’t have the benefit of this but I am looking out the window here in Jackson, Michigan.
I wouldn’t say put your bathing suit on but it’s a little more pleasant than what we might normally see this time of year. So we’re putting some work together to figure out what we can do.
Mark Barnett – Morningstar
Okay, great. Thanks a lot.
Tom Webb
You’re welcome.
Operator
Our next question comes from the line of Ali Agha with SunTrust. Please proceed.
Ali Agha – SunTrust
Thank you, good morning.
John Russell
Good morning, Ali.
Tom Webb
Good morning.
Ali Agha – SunTrust
Hi Tom or John, just to be clear as Tom, you alluded a couple of times to the potential for settlements on the rate cases, were you just talking about the gas case or is that possible for the electric as well?
John Russell
Ali, I’ll take that one. I think it’s if we do – if we could reach a settlement, it would be likely in the gas business because the amount that we’re asking for is relatively small.
And that is going to be more than offset by the reduction of gas prices to our customers. So regardless of the amount that we get in that case, customers will benefit from a pretty significant reduction in gas costs.
Ali Agha – SunTrust
Okay. And then secondly, going back to the discussion on Retail Open Access, there has been some talk of press that the Governor’s Office, that the Governor may ultimately take a closer look on his end and then decide if anything needs to be changed, etcetera.
Is that still true, can you just give us an update on where the Governor’s thinking is currently on this?
John Russell
Yes, I was with him yesterday and there is no interest on his part from what he shared with me and others on moving – taking on energy legislation. So this is for the record for everyone, the Governor has made it clear, he likes the energy legislation, the Head of the Senate Energy Committee likes it, the Head of the House Energy Committee likes it.
This isn’t to say that somebody may not introduce the bill to increase the cap or do something different but I think the Governor’s interest is more in infrastructure investments, finding a way to make investments in infrastructure which creates jobs and benefits the state in a long-term basis. It also would help the infrastructure that I think he is worried about which is the road infrastructure.
I think as you know as we go and do replace pipes and mains and services, it does cause havoc in the roads but after it’s completed the roads are replaced. So it may be a nice combination in the future to be able to replace the infrastructure where you have gas mains at the same time have the infrastructure of the roads replaced at the same time.
Ali Agha – SunTrust
Okay. And last question Tom, the enterprise results tend to move around somewhat year-to-year.
Should we take the ‘011 results as kind of a good base to think about in the future or what could be the big variances there to be thinking about?
Tom Webb
Yes, on enterprises, in fact I’ll give you a value add on this. I’ll give you enterprise and one other little piece that’s outside the utility.
Enterprises came in around $0.02 of our earnings and that’s the low side. You can figure out why ITP markets are awful.
And we have two-thirds of the dig operations exposed on contracts because we’re waiting for the turn to put some more favorable contracts in place. So couple of pennies, and I would say that’s closer to the floor, so that maybe a little bit of upside in that but the way to measure that is use your own judgment on when you think the power prices in the ITP market will actually improve a little bit.
So it could be this year, it could be next year. And then the other little one just to take it out is the EnerBank, that’s the only other piece that’s outside of the utility and that’s worth about three pennies of earnings, pretty stable, pretty reliable little business.
Ali Agha – SunTrust
Got it. Thank you.
Tom Webb
You’re welcome.
Operator
Our next question comes from the line of Jonathan Arnold with Deutsche Bank. Please proceed.
Jonathan Arnold – Deutsche Bank
Hi good morning.
John Russell
Good morning.
Tom Webb
Good morning, Jonathan.
Jonathan Arnold – Deutsche Bank
Tom, just I think that you mentioned one thing I want to talk about just sense of start with that on EnerBank, were you highlighting that is something that has been an unusual help in Q4, just to help to offset or would that – and I just not quite sure why you called it out in the slide?
Tom Webb
Yes, the only reason I called it out was so that you would see everything that’s outside of the utility. And between our enterprise business which is the little renewable plants and our Dearborn Industrial Generation, IPP, the only other thing that exists is the EnerBank.
And we’re big on transparency, so I wanted you to know for your own planning purposes when you’re modeling the utility what’s left. No, I am not trying to tell you that EnerBank was any particularly strong contributor in any unusual way to our business last year or this year, but rather to tell you that its inside of that little small organization.
It’s grown very well. And it’s got its risk measures well under control.
So we are very comfortable with where they are but put the two together, we’re only looking at about a nickel contribution to our earnings, enterprises and EnerBank.
Jonathan Arnold – Deutsche Bank
Okay. So besides these would imply that it somehow kind of close the gap in Q4 or something?
Tom Webb
No, I mean you could see some movements up and down but no, nothing. They did well, I am sure one of them maybe listening and I want to complement them on the excellent work they do but no, given within the scale of the company not a giant change.
Jonathan Arnold – Deutsche Bank
Okay. And secondly I am guessing this no real changes to the broad annual year-by-year CapEx plan that you laid out TEi [ph] in November, is that correct?
Tom Webb
No. We’ve had a little bit of change as the EPA has been trying to put new rules in place and the courts have been moving them around but what I would tell you and our folks that work very hard on this probably want to appreciate my comment but it’s a lot of hard work but a lot of noise when it comes to looking at our total capital expenditures of $6.6 billion.
So we’ve had to move the spending around a little bit inside of the five year period but not in total. So there will be lots of other things we’ll be looking at but I would tell you what you’ve seen in our spending pattern is pretty similar to what we have in as we move one year out, we’ll give you fresh five year look.
But keep in mind we’re deep into those spending plans, particularly on the EPA works. So you see this year at $1.4 billion but that’s not new news from what we have been telling you in the past.
We’re well into that spending program.
Jonathan Arnold – Deutsche Bank
So to make up the $1.4 billion more or less unchanged?
Tom Webb
Well minor changes but from the scale of what we look at when we break it out in distribution and the environmental work and in generation, it’s pretty much what you’ve seen. And we’ll talk to you more about that when we come out to New York, I hope you’re able to be a part of that because we’ll have the executives there who will tell you about where that investment goes on the environmental side, and what it does for us and we’ll talk to you about where it’s going on a distribution side and why it’s so important to our customers.
So you’ll get to connect some dots that I think will be real helpful. You’ll get to ask the experts and they may tell you it’s slightly more than noise but I’ve got the big picture look.
Jonathan Arnold – Deutsche Bank
Okay. And Tom if I may one other thing, you’ve talked about closing your smaller coal plants in 2015.
I was just wondering I mean at the current low enough [ph] gas prices can you conceive of a situation where that might potentially be accelerated and in fact was to how and what would be the implications to the plan and maybe transmission or other offsets?
John Russell
Jonathan, this is John. No, we would not accelerate even with the low gas prices, what’s unique about our smaller coal plants is they are cost effective.
They burn western coal. They are almost not fully depreciated but close to fully depreciated.
So their dispatch cost is still very competitive in the market. So despite the natural gas prices, they are today – these units are still running.
What causes to them to be more fault [ph] is the fact that the EPA rules would likely require additional equipments to be put on which will cause them to be dispatched at a higher cost.
Jonathan Arnold – Deutsche Bank
Thank you.
John Russell
Thank you.
Tom Webb
Thanks Jonathan.
Operator
Our next question comes from the line of Brian Russo with Ladenburg Thalmann. Please proceed.
Brian Russo – Ladenburg Thalmann
Hi good morning.
Tom Webb
Hi Brian.
John Russell
Good morning.
Brian Russo – Ladenburg Thalmann
Tom, you mentioned earlier of possibly addressing parent debt once the capital budget eases, just wondering if you could maybe elaborate on that a little bit?
Tom Webb
Yes, that’s a great question. We have a goal inside the company to try to keep that debt flat or bring it down.
I would like to two points about it. One is that with all the bonus depreciation that we’ve been getting each of the last few years including a 100% last year.
It’s been wonderful but it all happens in the utility and creates a bubble at the parent debt because we aren’t able to use our NOLs to shelter taxes because they are already sheltered down at the utility. So for that reason you see a little bubble up, we don’t like it, but we know it’s very temporary and we’re still on our trajectory to bring that down as we go through time.
So that’s our plan. But the second point is the reason we’re not bringing it down at an even faster clip is simply because when we invest in the utility, we get that 10% to 11% after-tax return.
And when we take out the parent debt, we only get a 4% to 5% after-tax return. So the comparison on the economics is real simple.
But we’ll talk to you more. Hope you’ll be with us too.
We’ll talk to you more in New York to remind you about the things we do to ensure that we are well protected like thick liquidity and pre-funding and all that so the parent debt won’t be an issue. And as we keep growing the utility, the cash flow grows through time and it gets to a very high level which was the point in the slide.
So that when your spending comes off a little bit, you can put that to use in more dividend or you can put it in use to parent debt reduction, there will be a lot of wonderful choices that we’re creating for ourselves. But it’s a few years away.
Brian Russo – Ladenburg Thalmann
Okay. And just embedded in the 2012 guidance, what is the assumption on the parent debt costs on a per share basis?
Tom Webb
I’ll get that for you. Our interest expense you mean?
Brian Russo – Ladenburg Thalmann
Yes, the corporate expense stat?
Tom Webb
Yes. We would – the total number – well this is corporate and other, let’s see if we can get that answer on the debt part alone but its $0.39 negative to cover interest expense as well as all our corporate costs.
So if you go ahead we will have somebody quickly look up the interest only. We have that handy for that.
Brian Russo – Ladenburg Thalmann
Yes, that’s fine, the $0.39 is fine. Thank you very much.
Tom Webb
You got it. Thank you for asking.
Operator
(Operator Instructions) All right. Ladies and gentlemen that will conclude the question and answer portion of our call.
I’d now like to turn presentation back over to Mr. John Russell for closing remarks.
Tom Webb
Just before John wraps up because we don’t like to leave anything open, the interest expense side is $0.35. Sorry we didn’t have that at our finger tips.
And then again follow-up in New York we can give you more detailed split of that, how that’s done. So I’ll turn it back to John.
Thank you.
John Russell
Thanks Tom. Let me wrap it up and I’ll wrap it up briefly.
Tom and I are looking forward to seeing all of you in New York next week. I just want to give you a heads up for you New York.
There probably won’t be anything revolutionary there or big strategic announcements. What we really want you to do is meet the executive management team.
We’re going to talk about the customer value initiative. We’re going to talk about environmental compliance plan and we’re going to talk about our regulatory strategy.
And we’ll have the experts there for you to talk to. And I am proud to have them there and I want you to get a change to meet the people that make this company successful.
So with that I am glad you joined us today. We look forward to seeing you next week in New York.
Thank you.
Operator
This concludes today’s conference. We thank everyone for your participation.
You may now disconnect. Have a wonderful day.