CMS能源 (CMS) 2015 Q4 法說會逐字稿

Good morning, everyone, and welcome to the CMS Energy 2015 year-end results and outlook call.

The earnings news release issued earlier today and the presentation used in this webcast are available on CMS Energy's website in the Investor Relations section.

This call is being recorded.

(Operator Instructions)

Just a reminder there will be a re-broadcast of this conference call today beginning at 12:00 PM Eastern time, running through February 11.

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, Treasurer, Financial Planning and Investor Relations.

Good morning everyone, and thank you for joining us today.

With me are John Russell, President and Chief Executive Officer; Patti Poppe, Senior Vice President of Distribution Operations, Engineering and Transmission; 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 John.

Thanks, DV, and good morning everyone.

Thanks for joining us on our year-end earnings call.

I'll begin the presentation with a review of last year's results and this year's priorities before turning the call over to Patti for a review of our unique customer and investor model.

Tom will provide the financial results and outlook, and then as usual, close with a Q&A.

2015 earnings per share were $1.89, up 7% from the prior-year's actual result.

We're raising our 2016 guidance to $1.99 to $2.02 per share.

This is an increase of 5% to 7%, reflecting our predictable and consistent 5% to 7% performance year over year.

Recently, our Board approved a 7% dividend increase, raising it to $1.24 per share.

This results in a competitive payout ratio of 62%.

2015 was a record-setting year.

I am most proud of our safety result, the best in our Company's 130 year history.

Our distribution minutes were the best in a decade, and the generation plant performance was the best ever.

Customer satisfaction rose to first quartile for both residential, electric and gas customers.

Since 2006, the Company has achieved breakthrough performance.

Safety incidents are down 79%, productivity is up 62%, outage minutes are down 34% and employee engagement is first quartile.

I am confident this performance will continue to drive the results you have been accustomed to.

These areas will continue to improve, and we look to other initiatives to improve service and reduce costs.

Michigan currently has a strong energy law on the books.

The law supports 10% renewable energy, energy efficiency standards, forward-looking test years, and a retail open access capped at 10%.

As you would expect, the Governor is focused on the water issue in Flint.

His attention should be focused on helping the people of Flint, a city that we serve.

In the meantime, we expect the Energy Committees in the House and Senate to continue their work.

We expect an updated energy law will be passed by the first half of this year.

But keep in mind, and this is important, the update to the energy law is not in our plan.

In fact, we have not included any law-related capital investments in our plan.

For 2016, we plan to continue our breakthrough performance.

Operationally, we will continue to make safety a top priority for our employees, customers and the communities we serve.

Again this year, we are planning cost reductions to our industry-leading performance.

We will continue to execute our strategy and deliver the same predictable financial performance as we have in the past.

Now I would like to welcome and turn the call over to Patti.

Thank you, John.

We are especially pleased to announce today that we are raising our guidance beginning in 2017 to 6% to 8% from 5% to 7%.

This reflects the increase in capital investment to $17 billion over the next 10 years from $15.5 billion as announced last week.

As most of you know, we've been delivering 7% growth each year for over a decade.

While this increase reflects a higher level of capital spending, it demonstrates our comfort in continuing 7% growth, the midpoint of our new range for years ahead.

You might ask why we're not raising the guidance for 2016.

We still have opportunities to reinvest O&M and to strengthen our reliability, and the higher level of capital investment doesn't fully kick in until later this year.

Our confidence in the sustainability of a premier earnings growth rate is a reflection of our business model, where we self-fund a large portion of the capital investment growth for our customers.

We do this by reducing our cost and avoiding the need for block equity with its associated dilution.

This model permits us to keep base-rate increases at or below inflation, resulting in sustainable growth.

Both our core and increased level of capital investment are targeted to improve customer service, enhance reliability, and among several other things increase affordability by providing for cost reductions.

The $1.5 billion increase in capital investment includes $800 million in the next five years to replace aging infrastructure and improve service reliability.

It also includes another $700 million in the following five years to provide for the clean energy resources we believe will be needed to meet the Clean Power Plan in the most economical way.

We still have considerable opportunities for even more capital investment.

Those opportunities include replacing PPAs when they expire.

These opportunities alone represent the need for an additional 2,000 megawatts of capacity and around another $2 billion of capital investment.

We also need to do more with our gas infrastructure and modernization of the grid.

And likely we will need further capital investments for renewables.

None of this is attributable to the update in the 2008 energy law.

These investments will be required with or without a change to that law.

In the past, we reminded you that we've been able to reduce our cost while most of our peers add cost.

Our track record is evidence of our ability to be more productive for our customers, and our plans for the future continue this.

They are based on good business decisions that have already been made that permit ongoing legacy cost reductions, productivity gains as the workforce turns over, the shift from coal to gas generation, the introduction of smart meters and the elimination of waste.

As we improve customer quality through better work processes, we will save on overtime costs and temporary workers by simply doing it right the first time.

For example, nearly one-third of the time when we roll trucks on a job, something goes wrong.

The right parts aren't on the truck, or other parties who need to be on site aren't always on time.

We are aggressively pursuing these opportunities to improve quality for our customers.

For 2014 and 2015 we reduced our costs by 4% and by 2018 expect to have reduced our costs by at least 10%.

While our model is successful with our cost reductions, it helps equally as sales grow.

Our team believes that our sales growth will be about 2% this year and in the future, but we plan conservatively.

For the purposes of executing our model, we're assuming growth of 1%.

We put all of this together and end up with the attractive business model for our customers, where their level of service and affordability improves every year, and the same model permits us to deliver 6% to 8% earnings growth beginning in 2017.

It's a reaffirmation of our confidence in our ability to deliver earnings per share and dividend growth at a level that you have come to expect.

Now, I will turn the call over to Tom.

Thanks, Patti.

Let's look at the business for 2015, 2016 and beyond.

As you can see here, in 2015 our earnings grew by $0.12 or 20% on a weather-normalized basis.

We achieved these consistent results despite the fact that December was the warmest on record, exceeding by 10% the previous record in 1923.

For December, Michigan was 37% warmer than normal.

As we mentioned last week, we offset the mild weather and the couple of year-end storms by achieving a tax settlement in Michigan, putting off some donations to our foundation and other improvements.

With the mild weather, bills were substantially lower than expected, which is helpful to our customers, but it also results in lower uncollectible accounts.

The weather was not normal, dragging down profits.

Our commitment to manage the work was normal.

No excuses from us.

We are pleased to have continued great progress for our customers, and once again delivered on 7% growth for our owners.

We achieved all of our financial targets for 2015.

These included strong capital investment, healthy balance-sheet ratios, dramatic customer price decreases, robust operating cash flow growth, top end of guidance EPS growth, and as announced last week, another substantial increase in our dividend.

For 2016 we are pleased to have raised our guidance to reflect 5% to 7% growth, on top of high-end 2015 results, which were at the top end of guidance for 2015.

We continue to build success upon success, no recess here.

While our electric- and gas-rate cases primarily reflect capital investment, they also permit us to flow through productivity improvements to our customers.

This is one of the elements of our model that makes high-end earnings growth sustainable.

It is also noteworthy that three-quarters of the rate-change impact already has either been authorized or self implemented.

And let's not forget the Ferrari -- excuse me, as Patti would say, the Tesla in the garage.

After all, the Tesla does 0 to 60 in 2.8 seconds.

That's faster than the Ferrari Spider.

At DIG, we have long-term energy contracts locked in, providing stable results.

And with a large portion of capacity available, we continue to have room for upside.

Here is our sensitivity slide that we provide each quarter to assist with assessing our prospects.

There's not a lot of news.

There seldom is.

You can see that with reasonable planning assumptions and with robust risk mitigation, the probability of large variances from our plan are minimized.

And while we look forward to the 2008 energy law update, our plan does not reflect any of the upside associated with it.

Our cash flow and earnings growth are driven by our capital investment program.

With our recent announcement increasing capital investment by $1.5 billion to $17 billion over the next 10 years, earnings and cash flow growth will accelerate.

Starting in 2017, we are lifting EPS growth guidance to 6% to 8%, bracketing historic growth at 7%.

The higher investment kicks in for 2017, and we have more O&M reinvestment to accomplish yet this year.

We still have opportunities in excess of $3 billion to add to our plan in the future.

For the last 12 years, our gross operating cash flow has been growing by more than $100 million each year.

Since 2004, it has increased from $353 million a year to $1.9 billion.

Over the next five years it should grow about $800 million to $2.7 billion.

Cash is king.

Our net operating cash flow also grows by $0.5 billion.

This reflects capital investment recovery, aggressive working capital management, and honestly, a little help from Uncle Sam.

New-bonus depreciation is welcomed, funding part of our increased capital investment and preserving NOLs for future shelter.

Amazingly, I have to admit, amazingly, we may go over seven years instead of five with no need for dilutive-block equity.

While the benefit of bonus depreciation is about a third of our CapEx lift of $1.5 billion, it is half of the rate-base increases for the 2016 to 2020 period.

With the lift, billing CapEx in behind the Jackson plant purchase, which was accelerated to December 2015 from 2016, and our incremental pension contribution, rate base rises $1.2 billion, one-half of which is funded by bonus depreciation.

This results in an upside to earnings of $0.02 or 1% a year, and that starts in 2017.

Here is our new report card.

We anticipate another good year in 2016 and an even stronger year in 2017.

With no big bets and robust risk mitigation, our model serves our customers and you well.

Few companies are able to deliver top-end earnings growth while substantially improving value and service for customers.

Value for customers is what has made our plan so sustainable.

Here is how we do it.

Reasonable cost reductions of 2% to 3%, conservative sales growth at 1%, and other tools that avoid dilution worth another 2% allow us to self-fund 5 to 6 points of earnings-per-share growth.

Customer base-rate increases can be at or below the level of inflation.

This very same model that self-funds investment for customers also allows us to self-fund a large portion of our capital needs.

The model has worked for a decade.

It is our plan for the next five years, and that's making it attractive for investors and customers, and consequently sustainable.

John, Patti and I will be visiting Boston and New York next week, and we look forward to answer your questions about these plans.

So until then, Steve, would you please open the lines to take some questions today?

(Operator Instructions)

Dan Eggers, Credit Suisse.

Good morning, everybody.

We have been waiting and debating this growth rate increase for a number of years, so it finally came.

What drew you guys and the Board to go ahead and make the decision to officially raise the growth rate now versus waiting for legislation or just kind of following the old playbook of beating every year without raising the growth rate?

Dan, you have been pushing us the hardest for the longest period.

I remember saying uncle in meetings with you, so I'll turn this over to John.

Good setup, thank you.

Really, what we needed to do is vest the capital.

This is what we talked about, I think, in the last call, when we announced Patti's succession plan.

At the end of the day is, we can't wait for the law to be done for us to make investments for customers.

And that was clear as we are moving forward.

So as we increased the amount, bonus depreciation obviously took a little bit of that away, but it certainly allowed us to continue to grow at even a higher rate than we had before but also keep our customer rates at or below the rate of inflation.

And that's something that we finally decided to do; and as Patti mentioned in her presentation, we also have increased the operating costs, particularly in the O&M area, that we are seeing the results that our customers want from service and quality, and that's really what we're going after.

So now is the time; and obviously with our performance, we think bracketing it between 6% to 8% is the right approach going forward.

Go ahead, Patti.

And with our operating plan, we have increased confidence in our ability to control costs and make those capital investments, many of them which help enable those cost reductions, to protect our customers from any kind of rate spikes.

So we feel very good about the total combined effort to achieve 6% to 8%.

Then I guess kind of in the spirit of keeping the rate -- the bill inflation below the rate of inflation, legislation -- presuming it gets done, and you have another layer of CapEx that needs to be spent -- does that provide incremental investment opportunities, or do you think that just resequences how you're going to spend this expanded capital budget?

Yes, I mean as Tom pointed out in his slides, there are opportunities of $3 billion on top of what we already are talking about.

But part of that has to come out of not only the law, but I think what's going to come out of that regardless of the law is what happens with Michigan's response for the Clean Power Plan.

I mean, that really is going to drive what we do as far as meeting that plan, and those opportunities are not in there.

And as Tom mentioned in his presentation too, we've got some PPAs that are expiring over the next 10 years, or within the next 10 years, that we need to look at too and see how are we going to replace those.

I'd just add one thing.

Patti mentioned just a minute ago the robust nature of the model and the cost reductions that come out of some of the investment.

Don't forget, of the $3 billion opportunity in CapEx we just talked about, could be that $2 billion is what John just said related to these PPAs.

We can replace our PPAs cheaper than the PPAs.

We can build plants cheaper than what the PPAs are today.

So therefore, the model really works if and when those come in.

We still keep our base rate growth down, and we still can grow a little further.

And Dan I think what's most important in all this discussion, we continue to do what we say we're going to do.

Consistent, predictable, regardless of what the guidance is, we tend to hit it, we have it every single year on top of actual results, which I think separates us from some others.

Very good.

Thank you guys.

Thanks.

Ali Agha, SunTrust.

Thank you, good morning.

Good morning.

If I look at the data correctly, I believe weather-normalized electric sales were down 0.7% in 2015.

Can you just walk through what caused that?

Was that a surprising development, and what gives the confidence that it will be up 1% in 2016?

Good question, thank you, and you can see that on what we call 11 and 12 of our data that comes out with a press release.

The sales were down, and residential is flat; commercial is off a little bit, as you can see there, but industrial is off a little bit.

Recall this: we actually can't name the customer here, but we do have a customer who has spent most of the year getting a supply issue taken care of.

And so, they have actually dampened our sales through the year.

They are not a big margin, so it's not a big issue.

They are starting to turn up already, and so their restoration of just getting back to where they used to be -- and I suspect they are going to do better -- will kind of offset the negative with a plus this year.

Here's the important part: I would tell you our internal data tells us that we are going to grow more than what we've shown you today.

Where we show you 1% and then 4% on the industrial side, our internal data gives us higher numbers.

We just don't believe in going out there with something that we can't deliver on.

So we're put in more conservative numbers.

Here is what is going to drive the uptick.

I think, by the way, residential and commercial will still be a little uneven, but I will just call it flat.

The industrial side is coming around because we are seeing new companies hooking up new facilities, new businesses coming into the state, and our existing businesses doing better.

So for example, we got a brake maker, a high end brake maker, who is going to add 24-megawatts.

And I mean, they're building the building and doing the work right now, so that's coming out.

We see one of our automotive folks actually putting in new paint facilities and running more extended periods of time.

That's another big chunk of megawatts coming in that wasn't there before.

We see just a variety of people, particularly on the food side, housing side, plastic and rubber sector, and paper and paper product sector that are all giving us precise information about upticks.

So we see some good news, and we are happy for that; but we'll tell you, 1% growth we think will be quite good, suits our model.

Understood.

Second question, what happens to the model if anything in we do come back into a period of rising gas prices, which we used to have but obviously have not had for the last several years?

Does that impact your model and your planning in any way?

I would just tell you that these prices are phenomenal.

And even if they did rise -- and I admit, if you look at it from this moment to the next moment a year for now, say, they did rise -- sure, that's an increase.

But people are looking at absolute bills, writing checks.

And when they look at where they were, even if we had a substantial rise, and they look at where they were just a few years ago, way better situation.

They compare gas, for whether it's home heating or industrial or electric, they compare that even with higher prices to alternatives.

It is pretty doggone attractive.

So we don't see that as a big issue, but I will tell you again, if you saw the detail of our five year plans, you would see that we have gas prices rising quite a bit; and even inside of that, our model still delivers what we tell you about with being able to keep base rates low, bills low if we can and also grow the business.

So for us we don't see an immediate concern.

Let me just add to that, Ali.

One thing about the gas business, just to remind everybody, we've got a substantial gas business here, the fourth largest in the country; we have got the largest utility storage field in the country.

So at the end of the day when gas prices rise, we've got over 300 billion cubic feet of stored gas, both base and working gas, that we can draw out, which really keeps us competitive in a rising market.

It tends to work the other way in a declining market, actually, because the gas in the storage fields tends to be a little bit higher price than the market.

So it does give us a competitive advantage, allows us to the transmission system fully; but we're buying gas all through the year, which really helps our customers.

Understood.

Last question, again, great model, great track record.

As you look at the next 5 years, 10 years, what's your biggest worry?

What could potentially go wrong here?

I like what we have.

I mean, Patti is sitting here next to me.

I feel pretty good about the next five years, because our plan is unique, and we can see clearly for the five years.

And the sensitivities that you talk about, we have planned for conservatively.

So I feel good about that.

I actually think the opportunities we have, and as Patti has talked about here with the growth rate and some of the other things we're talking about, are better than we've had in the past.

And I will turn it over to you; obviously it is your five years.

Yes, I would say that we are optimistic, and we -- to sustain the kind of performance that we have become known for, does require endurance.

It requires innovation, and we have that.

And so we are prepared.

We have a good eye on what our opportunities are to continue to make the model work.

And so we are, I would say, was a very optimistic about our future look here in the next 5 to 10 years.

Thank you.

Paul Ridzon, KeyBanc.

Good morning.

Good morning, Paul.

I am looking at the Tesla slide, could you just help me with one question on that?

Yes.

The capacity line -- are those percentages, or is that megawatts, or --?

So when you look down at the yellow bright part of the bottom, that is the percent available.

So if you look at capacity in the future, we have 90% of our capacity available.

Now near term, obviously we don't.

So in 2016 there is 10% available; in 2017, 25% available; and then we have held our powder dry beyond that.

So when you look at the energy line, you can see it is only 25% available.

We've contracted most of that.

And then, how deep are those markets and what kind of visibility do you have on pricing?

Well, the bilateral markets do a lot to tell you where you really are right now.

Our sense is the energy markets got to some pretty good levels that we liked, so over the last couple of years, we locked in some long term contracts.

On the capacity markets we still see there's going to be some movement up and down, and we see in the ups there will be opportunity.

You may recall from the past, we are not trying to wait for a peak and miss it.

We're just layering in these capacity contracts as we get to a little bit better level; so we were doing it at $1 then $2 and $3, and what we've done some recently in $3 plus zone.

But we think there's still going to be some opportunities.

We like having DIG available as a backup if it had to bid into our utility, but we also like the opportunity that when those markets rise a little bit, because people see a shortfall in Zone 7, we can service that market.

And that the upside of the $20 million and $40 million that shows on the slide.

What's the latest MISO view on the capacity adequacy in Zone 7?

It looks like -- I will use what the commission has.

The latest update is we are about at the capacity level; we're about 500-megawatts short for Zone 7 for this year.

But based on 22,000-megawatts, that's in the noise.

So really I think the outlook, if you're thinking about the future, let's look at 2017.

As you know, we're closing seven plants in April of this year.

There some other activity that may occur based on the Clean Power Plan.

So let's see what happens in 2017.

But right now Michigan should be good for this year.

I don't see that as a problem, but we're right at about that line right now.

And also, there's not a lot of new plants being built.

So really it is using the excess capacity up.

You can figure our view by looking at the slide you just reviewed; we would not hold 90% of our capacity available for the long term future if we thought over time there was no opportunity for uptick in those prices.

Thank you.

I think, how many years is it now you have hit the top end of 5 to 7?

13.

Say that again, 13.

13.

Can I assume from that you're pretty confident that you can hit the top end of the new range?

I certainly am.

Patti?

We have communicated a range of 6% to 8%.

We are very confident in our 7% performance, which is the midpoint of that range.

It's a good model.

Thank you very much.

When do we go to 7% to 9%?

Thank you, Paul.

Nice talking to you, Paul.

(laughter)

Thanks, guys.

There is one thing that I will add, because I know you're pulling our leg a little bit on that, but remember what we had said for a long time.

We might get up to 6% to 8%, because we really think that is the very high end of the best performers who can do it year in and year out.

We think when you try to become something you are not, you try to get performance that is better than a utility, it's only a matter time before the model breaks.

That's why we believe so passionately in the model.

We could give you 9% and 10%, but our customers would feel it, so that's not very sustainable.

Sorry, my two cents.

Thanks again.

Julien Dumoulin-Smith, UBS.

Hi, good morning.

First quick question, a little bit of a follow-up, actually.

Let's talk about what's in the garage there again, if you will.

I want to know the Tesla, let's say.

What is the long-term assumption here?

So clearly, we have a potential short situation in the near or medium term; you're raising the long term expectations.

How do you juxtapose the higher growth rate with the price trajectory in the long term here from MISO capacity?

I suppose that's implicitly asking where do you see prices going in the 5 year to 10 year range.

It is interesting; you tied the Tesla slide, which is not the utility, to the utility story.

What I would tell you -- we see our earnings growth and 90% plus of our business out of the utility in that 6% to 8% range.

As so we feel very good about that.

Now, when you talk about the small business and enterprises that is outside of the utility, that's really the DIG piece that you're referring to here.

And all we're saying is we got a nice steady pattern of profit contribution from that group and this plan.

But it is a nice upside opportunity, because our view -- and we might be wrong -- but our view is that we will see capacity prices reach points where they will be a little higher than this $3 zone that we are in today, the $3 to $4 zone, and we will be able to take advantage of that and help people.

So we see that as an upside that's not in our plan.

We think when we don't know something and we can't count on it, we just don't build it into our plan.

We're pretty old-fashioned that way.

So said otherwise, you're not banking on any improvement; and the 6% to 8%, if prices were to stay in this $3 range, that is your assumption, just said differently?

Yes, or I will say it my way, because I know you're asking it a little bit different.

We really do believe in the 6% to 8% growth.

And we believe if there are opportunities to do better than that, we may have chances to plow it right back into our business for our customers, as you've seen us to for some time.

Because new things happen.

And if there are things we can do for our customers that makes either their prices better or their service better, we're going to go for it and still let you have the 6% to 8%.

So I know, Julien, you don't want to hear this, but we don't see a plan where you would expect to see our growth above 6% to 8%.

And if that's not good news, that's just the way we think.

Got it.

That's great.

And then, quickly following up on the other side of the equation here, the dividend, how are you thinking about that in the context of this higher growth rate?

I suppose just frame it, you talked about outsized dividend growth relative to earnings, at least in the past; how do you think about that now?

Well, I think part of the dividend increase, we've been very clear.

We expect the dividend increase to grow with the growth of the Company.

So when we talk about outsized or larger, it's larger than what most in the industry increase.

But as far as a payout ratio, it's very -- it's right at the level that we want to be at.

So at the end of the day I expect the future dividend increase to grow with our 6% to 8% guidance in 2017, our 5% to 6% guidance in 2016.

Got it, all right, great.

Thank you very much for taking the time.

Thank you, Julien.

There are no further questions at this time.

Presenters, I turn the call back to you.

Great, thank you.

Well, thanks, everybody, for joining us today.

We really appreciate it.

We appreciate your interest in the Company.

And for those of you that we have the opportunity to meet with, the three of us, Tom, Patti, and I, will be in Boston and New York next week to talk further about the Company and where we're going.

So thank you for joining us today.

I appreciate it.

This concludes today's conference.

We thank everyone for your participation.