Jimmy Addison - CFO
Thomas Webb - EVP and CFO, CMS Energy
Steve Fleishman - BofA Merrill Lynch
SCANA Corporation (SCG) Bank of America/Merrill Lynch 2012 Power and Gas Leaders Conference Call September 19, 2012 3:00 PM ET
Steve Fleishman - BofA Merrill Lynch
So next panel we’ve had rate base growth stories and both these companies have very substantial investment plans, that we will hear more that today. First we will have up Tom Webb. Tom is the Chief Financial Officer of CMS Energy and he want me to say he is been CEO for the last 30 years, but – and then we will have Jimmy Addison. Jimmy is the Chief Financial Officer of SCANA Corp. So let me turn it over to Tom to kick it off. Thank you.
Thank you for that CEO thing. I thought you’re going do seriously there. I was going to tell him I wasn’t getting the full attention I would do. Steve, thank you for having us. This is one of the greatest conferences that you’re running. So it’s a privilege to be here in front of you, next to Jimmy and the invited, Steve to be the part where we are now.
Now what I’m going to do first here is, can you start reading that with care because I’m not forwarding until you’re done. So put your hands up when you’re finished reading through this. And while you’re taking a look at it, I do have Phil McAndrews with me here, somewhere up there in the back with Investor Relations. He is a real pro, most of you know him and throw all the questions you ask later on, that I don’t have the answers too, he does.
And on the slide be careful on our forward-looking statements and make sure you look at the GAAP reconciliations that we provide on our website and the risk factors that we have and you will be in pretty good shape.
Okay, today I’m going to do some material in a very brief period of time that should look familiar to you. But when we’re talking about the theme at least for this particular section about where we’re doing in rate making and what’s unique I’m going to talk a little bit about an interesting self limitation that we have told many of you about that is seen as before, that we put upon our self, that causes us to grow a little bit slower. And you could say, why? But I believe almost every utility does this in some passion or not, but some maybe with more passion than others and more need and others would ever maybe.
So, this is the model that we’ve been using for nearly 10 years now, very simple, we’re investment driven. That’s not too unique for most utilities. We have a bunch of enablers and I’m going to go right through them, show them to you now, which includes things like the energy law that was a comprehensive law in the State of Michigan, gives us forward test years, gets us all kinds of features to make the regulatory process smoother, so we’re fortunate to have that.
We have good constructive regulation. I will show you a little bit about that, a lean O&M and every CFO is going to get up and tell you here that we’re really lean, but we could be leaner. So – and it’s never meant as a personal comment because now I got all my [buckle] around this, so it’s not that kind of lean. But we’re proud at where we’re and I think we have more than we can do in taking costs out of the Company, big enabler.
And we – to the extend that you a good sales recovery, that for us isn’t a profit making or cash flow making thing, but it provides the more head room in our service territory where there is more opportunity to spread our cost over greater base. And then the NOLs and who is not familiar with our piece of the NOL story, allows us to avoid having to issue any big blocks of equity for a long time.
Now the unique part I’m going to come to is the self limitation. Why would anybody limit themselves on their ability to grow? And ours is on rate. It’s very simple and I will show you a slide on it, but I will tell you right up front, I think it’s the key message for us. If we can keep our baserate growth below the level of inflation and it’s different for you and it’s different for you, but we got to look at some averages to figure out how to do this, then we have a chance to have a long-term sustainable growth plan.
If we come in [spurts], then there is a chance that there will be more resistance and it will be more difficult to execute your plan. So that is the thing that I think is a little bit different for some companies and certainly for us. Here is an example on how this works. So our next five years, we’re planning to invest capital to the tune of about $6.6 billion. Over a five-year period, we could easily be investing $10 billion, so why not? And it’s a great opportunity to increase share earnings growth and generate more revenue and cash flow, but the reason is that sustainability.
If you look at the bottom of the slide, you see right there that as long as we stay in that $6.7 billion zone in general and our customer base rates will go up a little less than 2%. But if we were to go over to the $10 billion side, even if that was practical, possible and if we could do it, then we will be closer to 4%. And that’s probably just too much in this inflation environment to ask your customers.
So what’s against you? We’re going to need to put some more capacity in place and we’re going to have a good capacity story I think in just a minute, but we need to put some capacity in place because we’ve got seven small coal plants that we probably have to close down. Right now we’re looking at (indiscernible) in them, but if we do close them down, we got to replace that capacity and that’s the green bars that you see plus cover the growth that we have. But there is a lot of ways to solve that, but one way is to do a bit of an (indiscernible) for somebody in our area and just put in one more gas capacity. But if we do, that’s going to cost money, so you got to watch that investment per how you can fit it in. And here is the impact now for what we’re looking at over the next five years.
On the left side of the slide you will see that in the electric business, our base rates are planned to go up a little more than 1% and that’s in the dark blue. And then over in the gas side of the business, in the next bar you will see our base rates were actually plan to go up little less than 1%, but now look at the grey area with all the pass through of the fuel cost and GCRs on the right and PSCR on the left, you can see our electric rates will be climbing about 3% and gas will be down for obvious reasons by about 2%. So we need to be cognizant of that two, trying to look after our customers. And you can see some of the things on the right side that we’ve actually going to make that possible and happen.
Now I’m going to deviate for a minute because risk mitigations are very important thing. And you can see we have a couple of things going on in our state. One, about choice retail open access where there are some folks who would like to raise the cap, we have a 10% cap on choice today. And there were some other folks who want to go the other way. They want to eliminate the choice completely. We’re not very concerned about this and you can kind of read into that when you look at the slides that you see up here that the Chairman of the House Energy and Technology Committee actually entered a bill that did increasing the choice caps as we will get better choice completely. So you can see there is tension on both sides. My own view is nothing is going to happen in the near-term.
Then we have another interesting thing. Overall, in the left spot you see we had six ballot proposals in our state, State of Michigan and one of them is around renewable energy, and these are shown in the order they will actually show up in the ballot. And on the renewable side is to – it amend the constitution to have a plan to get to 25% renewables by the year 2025. Now it has a little cap in it that say for this you wouldn’t be able to increase your rates by more than 1% each year, but remember the earlier slide. So now we’re talking about base rates going up a little more than 1%, now that going to be going up a little more than 2% if this were passed, a lot of details we would have to figure it out.
The experts tell me this is probably not going to pass, but when you’re talking about going into a polling booth and sort of clicking the button, I still think its hard for people to predict how that will go. So our interest was annoying, it did pass what would it mean. More revenue, more profits for you, more cash flow for you, but an unfortunately higher price for our customers. So we prefer not to see that happen, we prefer to see renewables manage through something less than constitutional amendment so that they can be a bit more fluid and a bit more thoughtful.
Now here is an area that we’re fortunate, I suppose there are times when you would look at something like an energy law and regulation, you might say that’s not an enabler, it goes the other way. For us, we’re very fortunate. The 2008 law, which I won’t go through here is very comprehensive and the [sys] does in a tremendous way in executing our work in the State of Michigan.
It was in place in the fall of 2008 and today we’ve three commissioners, two of which where there during the original votes around the energy law and at the time Orji, who you see in the middle was Chairman Orji. His name is always very complicated to people, so he likes being called Orji and we’re glad for that. He was very helpful to us in getting the law in place and then implementing the pieces of the law, not exactly as maybe everyone would wish, but in a very good fashion and he has left a very strong legacy behind.
Now you can see by the date there on when his term ends, he has to leave us by July of next year. So there will be a new commissioner in place there, which I think will be a very interesting thing. We will miss Orji, but I’m sure there will be a new good appointment to help the new chair, Chairman John Quackenbush, who is trying very hard to streamline processes in bringing in a more organized approach to the rate making process, which is always well received I think by almost all parties.
So here is a picture of something that he has done. This is a photo of some selective members that the Public Service Commission staff along with the three commissioners in the top box. The Chairman is using the Executive Director more than I think he has been used in the past. He has appointed Bill Stosik, that you see on the left bottom side to be Director of Financial Analysis and Dan Blair is coming over from another part of the commission staff to run the Regulated Energy side and these folks are bringing some new ways of thinking in more effective ways of putting the energy law into place.
So, we again are fortunate to have that team and we meet with them as a team frequently now, more frequently than in the past to make sure there is good education around how our business is going and how it affects the state and our customers. So when it comes to rate cases and matters of that kind, they’re more informed decisions than they might have been in the past. Here is little track record of the rate cases we’ve had sent to the energy law. You can see that we’ve done pretty good at trying to keep the actual orders pretty close to where we were self implementing and then last night we announced that today we would be filing a new electric rate case. And this is a summary of that. You can see our request is for a $148 million and 85% of that is related strictly to capital investments, a share of that $6.6 billion that we spend over the next five years.
This is part of our routine annual process, but there is some new features in this particular rate case and they’re shown on the right side of the chart. And they’re called adjusted mechanisms or maybe trackers for different word pension and uncollectible accounts, but two I think are probably more interesting to you. The one called revenue is a means to replace the coupling for the electric business that was not permitted through an appeals court case on a DTE related case. And unfortunately the judge did a plain reading of law and said, the law does refer to decoupling for gas and doesn’t mention the word electric, but the commission does have full authority to track. So this is a way of trying to continue to at least track or decouple the energy efficiency side of the business, although we’re requesting efficiency economy and weather so 100%.
And then the last one that’s mentioned on the slide there is capital investment. We’ve been encouraged to look at a new way of thinking about capital investment since the bulk of our rate cases, is always capital investment. What if you had a mechanism in place where you could actually agree on what those investments were and then you follow those? So to like the pass through and buying gas or buying electric power, buying coal or buying rail services, so that you actually get a good look to approve what’s going to be done and then you monitor that as a staff and you audit what’s there to make sure what the company said they were going to do, they did do at the right level and make any adjustments to that at the end of that tracking period.
So we’re proposing a two-year tracking as a way to give a try at this, which means we would likely not have one of those annual regular rate cases because there is nothing left to ask for once we get into this particular area. So this will be an interesting approach to watch. We’re happy to have it or not have it, but we will see how it play.
Now on the cost side, another important enabler is to be able to keep your cost in line and we think of it not for the profit motive, but for the customers to keep their rate just low as we possible can, because we make our money on the capital investment. So this is just a simple track and you could pick your point in time, but since 2006 to the last year that we can get data for our peers at 2011. This suggest that the O&M cost for non-fuel was up around 7% on average and we were about flat and on the right side of the box you can see some of the tools for how we get there. So why, where are you today? This chart shows that O&M as a percent of revenue on the left and overhead as a percent of revenue on the right is pretty good. I mean we are at about 18% on O&M and you can see where peers are, so there is room to move there. And we’re about 2% on overhead and you could say oops! We must not be able to get better than that. And I can assure you that we can’t. There is more work to do, more efficiencies to be gotten to bring the overhead cost down even more.
Now possibly more important to you, so where you’re going to go? This year, which is not in the data that we just looked at there, we expect to have our O&M cost down 6% and then as we look forward through the remaining years of our five-year plan, we expect the cost to be about flat and there is an – list of examples and I will go through those for time sake, that you can see just ideas for some of the things that we’re actually doing to make that possible. And if we find a way to keep that to be negative instead of just flat, we will work hard to do that as well.
How is the economy in Michigan? This is just a quick look. Most of you’re familiar with the left side of the chart, which shows the longer term history for our electric business on a weather adjusted basis. And then when you look at the right side you get a year-by-year look at the recession and the recovery. And I will draw your attention to two points on that. One, if you see the bright green circle on the bottom right hand corner, that’s actually our sales growth over the first half of the year, 3%. You can see the make up by sector, the industrial being the big drive and the industrial guys have fully recovered to pre-recession levels.
And then if you look up in the top bar on the right, that’s our forecast at 2%. So, we’re little conservative, those of you that have gotten to know us, gotten to know me, that’s the way we would rather be. We would rather be on the safe side, rather than promising something more than it might happen. But we did put a little feature on this that maybe of interest in the little dotted blue parts at the three right bars, is what if you took out the energy efficiency that we’ve been working on for the last three years and we keep a close track on this because we actually get an incentive for being able to get the energy efficiencies really in place for our customers.
As you can see there you take out roughly a point, so this gives you a look at the underlying economics that are growing on in Michigan. In our service territory the growth has been around 2.5% over the last couple of years and we think it might be that are a little bit better this year. The real numbers are in the dark blue, the dotted line just take out the efficiencies so that you can see what’s really happening to customers.
Another key enabler is the NOL. Here is a chart that shows the gross numbers at the bottom of the blue bars and then in the blue bar is the actual net benefit of NOLs along with credit and you can see that helps us from having to issue any equity. So that’s the circle that we follow. It’s the path we’ve been on for some time. It is not perfect and it is not easy, but it is very deliverable. And that’s sort of shows up in this chart except for one-year when we sold the large amount of our international assets and couldn’t redeploy that cash quicker than getting that into rate cases that then used to have lags, so you saw the benefit in the following year. And we couldn’t get the benefit of the interest savings that came with lowering debt for full-year into the following year.
You can see with that exception we’ve been right on track for a good number of years with the growth of about 8% and we continue to project 5% to 7% growth in the future and a dividend that we will try to keep the payout competitive on and I think you can see there a pretty good recovery track even though we wished we didn’t have to have the recovery that had stayed right up there at the whole time. This is to look at our track record compared to the S&P 500 and the UTY in terms of TSR over the last three years and the last 10 years.
I feel pretty good about it, but we know that’s history and you’re interested in where we’re going in the future and that’s on the right side of the chart where we continue to work hard to deliver to you 5% to 7% earnings growth and a good solid dividend yield which could end up in a TSR of around 9% to 11%.
So, just as a wrap up the key takeaways that I would ask you think about are around transparent investment that drives this and it really is not the sales growth and it really is not the O&M reductions, those are enablers to pass good news due to our customers. We’ve got a mounting evidence of a pretty good relationship with our regulators and we’re pleased for that, we’re fortunate for that and we work hard. We’ve always said whoever is selected into a position is who we work with and I think that’s the best approach to take and it’s worked well.
The economy continues to improve, but I’m as nervous as any of you about what's happening to the U.S. economy. So I don’t like to get anybody excited on that subject. I’ll be happy when the elections are over and the cliff is passed and some other things are handled so that we can begin to build a little more certainty for our customers because when we do that then we rest a bit easier.
The cash flow that’s growing about $100 million a year with our program from an operating cash flow basis helps us grow the earnings and delivers that dividend growth that I know that you appreciate, most of you at least. And then S&P and Moody’s have made their own judgment. They have us on a credit rating positive outlook now and we put no pressure on for that. We just try to be transparent with them, so they do what they think is right and move when they think they should move and that adds to a pretty good consistent track record that we’re proud of that’s certainly among some of the better companies and I think you’re going to get a chance now when I turn this over to Jimmy to hear about on the (indiscernible) that I have been told to tell you a little more about another great story. Jimmy?
Thank you, Tom and Steve, thank you for having us here. When I first heard from [RSR, IR] person who’s here and also Jeff Archie is here, our Chief Nuclear Officer. When I first heard from RSR that we were paired up with CMS I said; what do we really have in common? And now that I’ve heard Tom’s presentation I see a whole lot. So, once again you’ve put together an interesting, I think comparable panel at least from an investors’ standpoint here although we get there in different ways for sure. So I’m going to run through a few slides here over 15 minutes or so and then we will go to Steve’s questions.
A similar I am sure a Safe Harbor Statement or as Steve Byrne, our COO said something about boating safety so if you would like to read through this please do. I’ll also be glad to give you a take home copy of it. As far as our strategy of the company nothing’s really changed and that won't surprise you, other than transition of our CEO from Bill Timmerman to Kevin Marsh, nothing’s really changed, we’re the same folks doing the same thing in the same places and that consistency is what we’re about for our customers and for you.
We continue to focus on what we think we do well and where we do it well. Growth is accelerating in our territories. We’ve got constructive regulation. We’ve got about two-thirds of our CapEx in our regulated businesses that are inside of different kind of mechanisms or regulatory wrappers. And our nuclear EPC has two-thirds of that contract with either fixed cost or costs that are fixed with an escalator that is published in know.
If you’re going to be in a regulated business then we are in 95% of it. You better have good relationships with those regulators and you’ll see in the bottom pie-charts there by earnings or by assets how it breaks down. But roughly 95% of our business is regulated. The other 5% or 6% is the Georgia business where it’s the marketing business, but I would tell you the only thing that’s not regulated there is price and its even regulated how you set that price, although not the price of it but the timing of it, how it’s done et cetera. So, the businesses are very similar in very similar markets.
This is our customer growth chart over the last three linked quarters and I’m glad to say that in all three of our regulated businesses the South Carolina electric business, the South Carolina gas business and the North Carolina gas business on the bottom, the growth rate has been accelerating. We’re encouraged by this. I am also a conservative person. I am yet to call this a trend. You might call it trend. I am yet to call it a trend. I want to see a longer period than this. I was to particularly get past these huge events this fall, this fiscal cliff et cetera that Tom discussed earlier before, I really get confidence in these longer term.
Particularly in the gas business you’ve seen noted in the green boxes that a significant portion of this is due to conversions and the largest amount of conversion there is from propane supply. Where natural gas enjoys about one-third the price of comparable price of propane today, so in some of the more rural areas that were initially supplied with propane we can now go in with natural gas and to some positions et cetera and offer a real price advantage and that is why you see much larger growth rates than you do in the electric business.
Here’s an interesting chart and I alluded to this last quarter on the call, but this is the commercial electric customer growth. And if you look at our commercial consumption its basically flat year-over-year, but I hope a hidden gym inside of that is that we’re adding a substantial amount of commercial customers almost twice the amount of residential customers, and that’s very encouraging.
Then you might say well overall they’re still not using anymore than they were a year ago and you’ve got more customers attached on the commercial side. But when you’ve got more drycleaners, more restaurants et cetera coming on that’s a real good sign I think around the economy. And I think the reason that overall it’s just flat is just the kind of timid nature of folks concerned around the economy that we talked about earlier. But hopefully long-term this is a good trend.
Recent economic activities in the Carolina’s; the blue shaded area is our territory and we’ve been very fortunate to have a very large Amazon facility located just about a half mile from our corporate headquarters with 2000 jobs. We have the Boeing kind of the cornerstone of our development in the last year and a half, now there’s 787 Dreamliner. Assembly facility is just outside of Charleston with 3800 direct jobs, and 10,000 total direct and indirect jobs. They just rolled-out their first 787 Dreamliner and delivered it to Air India a few weeks ago. So that is progressing well as far as the jobs perspective.
Additionally, the next phase that I’ve rolled up here are tires, and South Carolina has for quite a while been significant in the tire manufacture business. Michelin, North America is headquartered in South Carolina. But in the last year and half we’ve had substantial announcements from Continental, from Bridgestone and from Michelin. They’re not just passenger tires, but a lot of these large earthmover tires that are $50,000 to $70,000 each. Its custom made for the terrains they’re going to operate in, pre-soled and customer ordered.
These are significant and you can only get two of them in a shipping container. If you see them on the interstate these are huge tires. And this has been a real boom for the economy in South Carolina, good, half paying manufacturing jobs based upon a real good technical college system in the State. When these are all up in fuller capacity, South Carolina will leapfrog North Carolina and Oklahoma is the number one state manufacturing tires in the country.
What's not on this chart is a little project we’ll get to later. Now the [DC] summary units, two and three where Jeff’s project team has about 1000 employees working now building it and we’ll hopefully see at about 3,500 employees, so that’s been a very good investment back into the economy. And one of the really lead things about that is about 60% of the employees and contractors on that site come from the state of South Carolina. So, that has been very important to our politicians and the regulators. And here’s the total cumulative dollars about, close to $4 billion over the last two years.
In North Carolina a different but also a positive story, in yellow are our gas service territories. We’ve had several beer manufacturers located in North Carolina, some other miscellaneous manufacturers there as well. There’s also a restart of a truck manufacturing facility that created 1100 jobs in and around our territories. So, this story in North Carolina as well that was a little slower coming back than South Carolina but coming back now.
So what I wanted to do in the next four or five slides, is walk through each of our regulated business and provide you with the details that you normally use in your various models. First, the SCE&G electric business separate from the new nuclear. So our actual allowed return on equity is about 7.25% that’s based upon the recently filed electric rate case. So the immediately preceding quarter, it was at 8.75%, but once we pro forma in using a historical test year and annualize expenses, annualize depreciation for items that came on late in the year that will on a pro forma basis reduce it to about 7.25%, we’re currently allowed 10.7%.
We filed the case in June of this year and South Carolina is six months by law for new rates, so those will go into effect in January. The hearing is scheduled for the week after the Thanksgiving holidays, and the request overall is for $151 million. We do have electric weather normalization in South Carolina, so all of our regulated businesses have weather normalization now. That mechanism added $0.17 per share in our earnings through the second quarter of this year due to the extremely mild weather in both Q1 and Q2.
On the new nuclear part of the business we have 11% allowed ROE and of course we’re earning at that since its mechanical. It’s under the Base Load Review Act law. It’s got about $1.1 billion in rate base at this point. We filed the most recent, the ROE request in May, I’ll show you a graphic event in a few moment, and the Office of Regulatory Staff has already filed their report reporting $52.1 million which will be effective in November.
In our South Carolina gas business just under $0.5 billion in rate base. About 8% allowed or actual ROE where we’re allowed 10.25%. In this business you may recall we’ve got a mechanism so that it’s measured each year, and if we’re outside of 50 basis points either way it is adjusted after an audit by the Office of Regulatory Staff. They’ve completed their audits. The new rates will go into effect in November returning that ROE back up to close to the 10.25%.
And in our North Carolina gas business we’re allowed 10.6%. Our actual is slightly above that. The difference between this actual and the others is in the -- in the other jurisdictions we adjust those based on the end of period cost run rate. In North Carolina the staff prefers we just file it as per books, so none of those costs are adjusted. That’s why it may appear on the surface that they’re quote over earnings there. But if you were to add any annualized cost, for example if you were to take wage increases that were implemented in the middle of the year and if extrapolate those for a full-year it would be much closer to that, so we don’t anticipate any concern over that.
Few more details about the basic electric case; here is fixed rate items that make up the $151 million. I’ve already gotten a few questions at one-on-ones today about, do we expect to reach a settlement. We're certainly hopeful. Since the Office of Regulatory Staff was formed by law in South Carolina several years ago, we’ve reached a settlement in every case we have been before the commission, so we’re very interested in that.
I have talked to the head of the ORS. I know they’re very interested in it. They’re a very constructive organization, but they’re a very independent organization. So we’ll all work our best to try to come to some conclusion on that. Our testimony is due early in October, there in late October and that’s what really starts the process around settlement negotiations. So, I would expect that somewhere in the early November timeframe before the hearing in late November.
Our new nuclear project, the projected cost and what we have hear presented for you are four snapshots over the last four years of where the cost started and where they are today for the total projected cost. In blue are the capital cost in $2007; in red is the expected escalation, and in green is the AFUDC.
And let me just start there, because of the Base Load Review Act in getting cash rates each year, we project that the AFUDC is the completion of this project or a capitalized interest will be less than 5%. I’ll contrast that four year for unit-1 that’s operating today where about a third of the cost is capitalized interest cost, because all of it went into rate base as the plant was completed and we were in a situation where interest rates were obviously double-digits at the time back in the early 80s, so they tell me.
And today, what we look at today is our total capital costs are roughly the same as projected to be the same as when we started the project, but the real change is in the projected inflation, it has come down and it’s down about $0.5 billion based upon what we originally projected. So we thought $1.5 billion would be the total escalation and now we’re projecting that to be less than $1 billion. So, the overall projected cost of the project is roughly $0.5 billion less at least for our 55% share than when we originally began the project. As Jeff and Steve say it’s been a great time to build the nuclear plant and I’d say it’s been a great time to finance the nuclear plant because we’re financing at with 30 year fixed rate money at about two-thirds of the price we thought we’d be financing and on the debt side too.
Here’s a history of the five years of the base load increases. These are all public for you. You’re familiar with them. The most recent one on the far right in the green is the one I referred to earlier that ORS has filed a report on. Those $52 million is what we would expect to go into rates, November 1. Now we do have an update hearing on the project that we do annually and also in this project we’re asking for an additional $283 million of future cost that we now have plans around for things like bringing on staff, to train them, IT systems et cetera. And the commission will address those on October 2 and October 3. We would expect that order to be out by mid November and then every 45 days after quarter end we’ll file an updated quarterly report which we’ll do on November 14.
And here is the projected total life of the nuclear project, and the bar charts represent the construction cost each year. You can tell that in ‘13, ‘14 and ‘15 we have on average about $1 billion a year, these are the significant years. On the right axis are the customer rate increases. You see over in the box on the far right that the average rate increase is about 2.36% over the life of this construction, so that’s slightly lower and we started off that which was about 2.5% because the inflation is now projected to be lower.
Our strategy around base rate cases is to get this case done this year that we have filed and then stay out of this base rate environment during these three peak years to avoid any pan caking impact on the customers. So we’ve traditionally filed a two to three year base rate case process, model and this year -- at this point we’re going to attempt to really stretch that on the long end of that and stay out of that rate environment during those three years. We’ve got plenty of rate base growth driven off the new nuclear project.
And here is a schematic of the major items that are being manufactured around the world showing the various scheduled items, everything in green has been started. As you can tell there are a variety of very large components literally being manufactured all around the world, the only thing that has not yet started has been the third unit or the second new units Turbine Generator.
Here are a few photos of the current construction site. This is back from March of this year and shows both the unit-2 and unit-3 pit areas, if you will where the sites will be – the plants will be located. In the middle is the heavy lift derrick, eventually the largest in the world over 500 feet tall when elevated straight up.
Here are a few more recent photos of the actual work that’s taking place and you can see on the top left and the reason that date of March is important is that was immediately prior to the receipt of the COL, so we could not have any concrete sliced at that point. After we received that COL, in April we started placing dental concrete, as you might imagine to fill in the cavities in the rock and then in July – I mean in June you see lower leveling concrete and the upper mudmat and then in July you see the vapor barrier being added above that to keep the moisture from elevating through the concrete. And then here you see the unit-2 or the first new unit, a current picture at least 30 years ago with the rebar that sit on top of the concrete and that’s where most people think of the first nuclear concrete will be poured around that rebar and that is said to occur in October.
So where are we trying to get to with this? Here’s our long-term plan on generation mix perspective. Today you can see we’re heavily driven by coal. When the first new unit comes on you’ll see the shift that occurs and then ultimately when the second new unit comes on well basically a third, a third, a third coal, gas and nuclear, and that’s the ultimate goal, and that’s my capacity. On the right we’ll obviously run the nuclear plant flat out other than for refueling and due to the low variable cost the low fuel cost you’re going to get a substantial more higher amount out of the nuclear units, and the real key to this that we’ll have 60% of our dispatch probably on a non-emitting basis.
South Carolina today, the state as a whole not just our territory, 52% of the electricity generated in the state is from nuclear energy, so this would drive it even higher. South Carolina is basically going to be insulated from whatever Washington might decide to do on a common basis. We think that’s very important from a long-term economic development standpoint.
These slides are not new. I’m going to run through just a few of them. Here to wrap up our CapEx plan has not changed. I mentioned earlier 65% of our CapEx over this three-year period is covered under either the gas or the new nuclear mechanism. Our financing plan has not changed. We estimate through the completion of the project we have about $500 million of equity left to issue. Our earnings guidance has not changed. 3% to 5% over to the three to five year period, and we expect to pay out $0.55 to $0.60 of that dollar in dividend.
We're slightly above our dividend payout ratio now mainly driven by the recession over few years ago, we’re gaining on that and we expect and our Board is committed to growing the dividend back inside of that. So, we will back inside of that given the next three years based on review act increases.
And then similar to Tom, here’s our track record. Frankly I would have been very proud to own both of these stocks over the last few years compared to any of these [end of phase], I did own one of them. You can figure out which one that is. But I would love to own some of his too, but it is all about the future.
Steve, that’s it. I’ll turn it over to you.
Steve Fleishman - BofA Merrill Lynch
Okay. Thanks gentlemen. Why don’t I maybe just kick off the questions with just, I think both of you kind of pointed out the importance of managing the capital investment with customer rates and minimizing that impact. Just how do you kind of know what the right level is? Is it just target, we got a stable low inflation et cetera, but how do you know kind of when you’re hitting too high or too low, too high in particular with respect to the – limit the customers?
I can give a couple of thoughts first. We were, before I joined the company (indiscernible) and we learned coming out of that was not we wanted to be, because all of a sudden these are the large numbers and very argumentative and people hadn’t been around working rate cases, it was all new impression and a troublesome thing. The idea of being around inflation is a little artificial; I’ll admit that, because everybody’s inflation is different.
But it seems like a reasonable starting point to say that if you could keep real prices below a negative that’s a nice place to be. So the way we get there, is we talk to customers. We understand the pressures they’re under to reduce their cost. So they’re looking for all the help that they can get and we talk to our commissioners on what they think is kind of a rational long-term look for what you’re trying to do and then live within that. So it’s not as scientific for us as it may sound, but it’s very personal with each and every customer.
And Tom I’d just add, I agree with that. I mean inflation is just a benchmark to start with. It’s not a formulated kind of thing. The other thing I would say is, it’s not just be near inflation over a period to average, either it’s about not coming in for significant shocks. We got that message loud and clear maybe 10 years ago from our commission when we went in for 10% or so request and ended up with 6.5%, 7% increase and they said yeah just once, but come back more frequently with smaller request in the future, make it more like the price of milk moving along.
Steve Fleishman - BofA Merrill Lynch
Okay. Jimmy maybe a question on the new nuclear and then please open it to the audience after that. Obviously this is a tremendous project and you had small issues but resolved them quite well. When you look at what's left to achieve; where if any do you see kind of like key milestone points, key -- maybe or to put like key areas of risk in terms of completing the project on budget on time, as you like.
Well, the largest of those I think is behind us now which is one that was significantly out of our control which was getting the license from the Federal Government. So, that was one that we had input into but not control of. Now I think that we’ve really got things down between us and the consortium of Shaw and Westinghouse. It is a much more -- it feels like its more controllable anyway even if in reality it’s not, but I believe it is more controllable. I mentioned Jeff our Chief Nuclear Officer is here. Jeff’s got folks very actively involved around the globe at each of those manufacturing sites at various checkpoints to make sure that quality is being achieved along the way. I don’t think it’s any secret on these nuclear projects that right now our bigger concern is probably around the module manufacturing facility down in Louisiana, each quarter we file those quarterly report.
We have a section in there of areas of concern. We’ve noted that on the last few quarters. Jeff just had some folks down there last week and is very encouraged directionally on what's going on there now, that is getting the right attention. I think the reason that we’re much more confident now that we do have things within our own control is that with what's going on in the Chinese projects within essentially being two and half to three years ahead of us manufacturing the same, assembling the same facilities we’ve learned a lot of lessons from that, that we have incorporated into our project.
Steve Fleishman - BofA Merrill Lynch
Questions from the audience? Make it tough on me here. Tom maybe …
I have a question for Jimmy.
Steve Fleishman - BofA Merrill Lynch
Please go ahead. Yeah, feel free. Tom one, your other company in Michigan, DT, the decision right now they have got some money they can give back to customers and it’s trying to kind of stay out of rate hikes. Does that create kind of a pressure on you on a relative basis in kind of a special circumstance; but how are you just dealing with the fact that circumstances are just different and you’re in for a hike and they’re trying to delay it?
No well I would want them to speak for themselves. I think they’re fortunate that as the electric decoupling disappeared to the appeals court that they were sitting on a lot of cash and they, I’d be doing the same thing, can deploy that as a way of putting off some rate cases. We’re not in that situation because our base was different. So we had $59 million yet to collect and we wrote that off in the first quarter. What I do think is, is we have a very fair, a very reasonable commission and a good staff. And they recognize that probably isn’t the most reasonable thing to have happened to us. So I think they welcome the idea that we’re in for a new rate case, given our position and I think they’re going to work with us on a lot of features that are different, that may put us in a position where we can actually avoid having the annual rate cases and maybe stay out for a couple of years. So, we have some work to do to get there, but I actually think its in a nice position where there is more of a warm reception about doing the work and getting the capital rate recovery is necessary and I don’t feel bad about it at all. So its different, but everyone has different circumstances.
Steve Fleishman - BofA Merrill Lynch
Okay. Question up front please.
Jimmy are you still interested in a – an offering from the government of the loan guarantee and if so what’s the status of that?
We stay in touch with them. I guess, it’s probably been 90 days or so since I was on the conference call with them. But we constructed our project from the initiation including the contract, the legislation in South Carolina is built from the beginning to be able to finance this publicly, but from the debt and equity side. We’ve done that consistently, I really don’t think that it makes a lot of sense to go the federal route other than an option if you cant execute in the public markets. I don’t think and – stress thing, because I don’t know because we don’t have a kind of a classic term sheet like you would get in any other market. I don’t think it is financially advantageous for the customer, for us to go that route and that’s just trying to measure the objective data before you take into consideration any kind of subjective strengths or issues or constraints or controls that might come with it, so we prefer to go the public route. David.
Jimmy, you were one of the first CFO's I think over (indiscernible) to talk about the decline in usage, we saw to the prior years. Do you still see that continuing, and if so, you see it getting worse, any more commentary you have on that?
Yeah, David actually it’s got a little better. The last couple of quarters have been a positive sign, but to get back to my earlier comment, its no long enough yet to call a trend. But I’m encouraged by that, that chart I put up for the first time the day around the commercial accounts. When you got those commercial accounts, those mom-and-pop businesses and we’re adding, I mean, we got 650,000 electric customers to give you some perspective when you’re adding 100 commercial accounts a month in a territory that’s relatively small that’s fairly encouraging. And so I hope that it leads to a long-term trend there, I’m just – I’m concerned about those cliffs that we addressed early, I’m concerned about these macro issues more if the macro issues were not on the table I will be much more optimistic.
Just maybe for both of you on the issue of ROEs, allowed ROEs, you both in for rate cases just how much of a consistent pressure is there downward and, I guess, (indiscernible) Thomas is that something if you get more trackers, is there going to be consistent pressure on ROEs, would you just not have the file anymore unless there is not a – kind of even under review?
I think anytime you going to your commission with the rate case, you’re exposed to that without a doubt that you might have a change in ROE. There will be a time when we will be looking at that where it would be change upward, but always away from that maybe. In our particular case, I think it’s a situation where the commission, the governor, the state wants to send a message to everybody that Michigan is a good place to invest. So the commission has for sometime try to send the message out there by giving an ROE premium, a little bit over with the average of recent rate cases are to say that hey, this should be an attractive place to invest, and yes. When you take risk out of your model, there is always an opportunity to not have to have as much of an ROE, but I think again that will be overwhelmed by the message that commissioners want to send to the public about investing at Michigan. So, we’ve asked in our particular case for 10.5%. We have 10.3% today, importantly you see we’re not getting in the game we like to have 13%, so we can end up with something a lot lower, but better. And I think it’s a very open adult conversation that leads to good results.
And in our case we have 10.7% today in the electric business, 10.25% or 10.6% in the other two gas businesses. We filed 10.95% in the electric case. The other benchmark I would give you the only other now what to do progress merger the only other IOU in South Carolina is Duke with the two different divisions, and Duke had a case last year that settled at 10.5%. So that’s the other benchmark I would give you around that. So we certainly think that’s somewhere in that range.
So we are [pulling] for Jimmy to be successful because he works into the average there for regulators?
But I have to tell the regulators each time, with office of regulatory staff, I discuss with them and not tell them, but I will discuss with them on ROEs its not all are created equal. I mean, we’re using historical test years, we don’t have trackers etcetera, discussed with most of you about the best case we’re going to get with attrition is within 50 basis points there, because we’re adding customers all the time, we’re adding rate base etcetera. So we’re kind of always chasing that as you’re well aware of.
Steve Fleishman - BofA Merrill Lynch
Other questions? If not, gentlemen thank you very much. I appreciate it Tom.
Thank you very much.
Steve Fleishman - BofA Merrill Lynch
Jimmy, thank you.
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