CMS能源 (CMS) 2016 Q1 法說會逐字稿

Good morning, everyone, and welcome to the CMS Energy 2016 first-quarter results and outlook call. The earnings news release issued earlier today and the presentation used in this webcast are available on CMS Energy's website in the Investor Relations section.

This call is being recorded.

(Operator Instructions)

Just a reminder, there will be a rebroadcast of this conference call today beginning at 12:00 PM Eastern time running through May 5. This presentation is also being webcast and is available on CMS Energy's website in the Investor Relations section. At this time, I would like to turn the call over to Mr. DV Rao, Vice President and Treasurer, Financial Planning, 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 and Engineering and Transmission and incoming CEO; 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 first quarter earnings call. I'll begin the presentation with a review of our first quarter results and operating performance before turning the call over to Patti to discuss our capital investment plan and cost reduction initiatives. Then Tom will provide the financial results and outlook and we will close with Q&A.

First quarter earnings were $0.59 per share, down $0.14 from a year ago. Weather was the primary factor. The mild weather that began last October continued through March resulting in the second warmest winter on record. On a weather normalized basis, first quarter earnings were up $0.12 or 20% compared to last year. And as you would expect, we have already taken steps to mitigate the unfavorable weather impacts. Patti and Tom will talk more about our plans later. But today we are reaffirming our full-year earnings guidance of $1.99 to $2.02 a share.

Earlier this month, we retired seven coal plants totaling 950 MW, bringing our capacity mix to less than 25% coal. Our regular and routine rate case strategy remains on track. Last week, the Commission approved a gas rate case settlement for $40 million using the previously approved return on equity when required. We filed an electric rate case March 1 for $225 million and plan to self-implement later this year. We continue to operate with a constructive energy law. The framework allows for fair and timely regulatory treatment. If the law is updated, we see this as being incrementally positive to our customers.

With the recent coal plant closures, we are proud of the fact that we have reduced the most coal capacity of any investor owned utility. The gas-fired Jackson Generating Station and new wind farms have been added to our portfolio making our capacity mix more sustainable. Additionally, we continue to offer energy efficiency programs which reduce demand 1% annually. This strategy puts us in a good position to meet future carbon reduction requirements. And as I always enjoy saying, the air is cleaner today in Michigan than it's ever been in my lifetime.

Our regulatory track record is among the best in the nation. Over the last five years, we have filed gas and electric cases to recover capital investments and pass along O&M savings to our customers. This has been the foundation of our sustainable business model for the past decade. In some years, our O&M reductions fully offset our capital investment needs and we were able to avoid three rate cases. During this time, the ROE has remained unchanged at a competitive 10.3% for gas and electric. The latest gas rate case was the fourth consecutive one that we have settled dating back to 2011.

The current energy law in Michigan is working well. It allows us to execute our business plan while making needed infrastructure investments and providing energy savings programs to our customers. However, the law still requires that 99.98% of our customers subsidize about 300 large customers. This is simply not fair. We believe that updates to the law would be beneficial to our customers by securing reliable capacity and reducing rates. This is an opportunity for our legislators, and we will work with them on constructive updates. Whether or not the legislators decide to act, we will continue our plan with the current law in place and move to 6% to 8% earnings growth for 2017 and beyond.

There are many external factors that can affect our operational and financial results, but we work through everything and work with everyone. We remain focused on delivering the consistent and predictable results that you have come to expect. It has been an honor and a privilege for me to lead the team that has delivered these results over the past six years. I believe the Company is better today than it has ever been, both financially and operationally, with a very bright future. Now let me turn the call over to Patti who will lead the execution of our model.

Thank you, John. And especially thank you for your leadership and your contribution to our Company over your entire career. CMS Energy is definitely better than when you took the helm as our CEO and President. In fact, if I do my math correctly, I think we're talking about $8 billion better under your watch, proof positive that you walk the talk and follow your motto, to leave it better than you found it.

Thank you.

One of the reasons that we are all optimistic that it will continue to get better is our capital investment in our gas and electric utility. As we said, over the next 10 years we plan to invest $17 billion, and that is a 60% increase over what we invested in the prior years. Each project is screened to ensure that it will in fact add customer value.

The customer value takes the form of customer service, reducing costs, enhancing our productivity, enabling cleaner energy. All of these improvements drive customer value, and in fact, many of the investments provide improvements in several of these categories. For example, our customers benefit with fewer and shorter outages when we make our investments in our electric infrastructure. That not only improves the customer experience, but it reduces costs.

Our customers benefit when they can move into their college apartment, hook up to Consumers Energy Service online, on their mobile phone, never speak to a customer service representative, and because of our smart energy and smart meter investments we can remotely turn on their power. No truck roll required. This not only improves the customer experience end to end, but fundamentally reduces the structural cost to do so. Our smart energy program is a great example of a major capital investment that has ongoing benefits to customers on both the service and the cost side of the equation.

Other cost savings are driven by proactively investing in replacement of legacy gas service lines so that we can prevent an unscheduled maintenance expense and customer disruption. Our gas compression upgrades end the use of field technology, allow for a more productive workforce and less unplanned expense. And with our ongoing transition from coal to gas and our increasing renewable energy investments, we demonstrate to our customers every day that CMS Energy is in fact a great steward of our Great Lakes state.

Now you all know this model has been working for a long time. It has delivered results for more than a decade and the approach continues now and into years to come with our extensive inventory of our self-funded organic capital investment projects, and really importantly, offset by abundant cost reduction opportunities. In a diverse economy, you can see why it works, especially with the continued focus on our cost reductions, which I will talk a little bit more about.

We have been a leader in this area and each year we come up with new and innovative ways to deliver those savings to our customers. For investors, that means we are able to create CapEx headroom and at the same time fulfill our internal commitment to keep those base rate increases below inflation. Cost reductions have been and continue to be an important part of our self-funded model, but we don't cherry pick this when we put all the numbers together. We take the bad with the good, we don't adjust for inflation or things out of our control, and in the past several years, our focus has delivered an average of 3% savings. And we have a well articulated plan to execute another 6% in savings over the next two years.

I'll give you a little more detail on that. In fact, I am often asked if we continue our performance, and this is how I see it. When we look at our total O&M cost per customer we look great and we are in fact among the best of all utilities. But when I dig deep and look into our distribution numbers we can see that we are still only in the third quartile. So for both electric and gas distribution there is more room. And, in fact, when they make up a third of our total O&M expense we know there's more opportunity there.

For example, when we go to a job site only 70% of the time do we build that job per plan. That means that the wrong material was probably ordered, maybe too much, maybe too little. The right equipment may not be available and the right crew makeup may cause a delay. We can eliminate that waste and reduce expense by improving our first time quality and standardization. More broadly, we are embarking on a Company-wide improvement effort and each day real savings are materializing.

This approach to our first time quality is a value creation mechanism that enables for us continued cost reductions and at the same time deliver our 6% to 8% EPS growth in 2017 and beyond, and at the same time, improve our customer experience and keep it affordable. As I look around, I see opportunities throughout the whole Company. We have an established track record upon which we can build new and innovative ways to serve our customers at a lower structural cost, and I am both realistic and enthusiastic about what the future holds for CMS. Now let me turn the call over to Tom.

Thanks, Patti, and thank you, everybody, for joining us today on this very busy day. This is my 54th quarterly CMS earnings call and as usual, no surprises. Our first quarter earnings are down $0.14 reflecting the cold winter last year and mild weather this year. On a weather normalized basis, 2016 earnings are up $0.12 or 20%. Weather normalized, all operations -- the gas utility, electric utility, enterprises, interest and other -- were at or all favorable to plan in 2015.

You can see the unfavorable comparison of 2016 to 2015 weather on this waterfall chart. Our operations are performing well, better than plan, which offsets the weather in the first quarter of 2016. For the nine months to go, if we experience just normal weather we will be $0.16 ahead of 2015, and that's when milder conditions existed. Cost reductions already underway keep us right on track for 5% to 7% earnings per share growth.

Here is how the earnings per share forecast curve looked last year. We were able to reinvest $38 million into the business for our customers because cost reductions were better than planned, and the 2014/2015 winter was cold. Toward the end of year, the warm winter of 2015/2016 began but we fully offset it, delivering our 13th year of consistent EPS growth at 7%.

This slide adds our forecast of EPS growth for 2016. As mentioned, adverse weather in 2016 has been offset fully. The winter of 2015/2016 was the second warmest ever. Not even this, however, dents our ability to deliver 5% to 7% growth without any customer compromises. For example, we were able to enhance cost reductions, including normal changes that come with mild weather like lower uncollectible accounts, because customer bills are actually lower. In late December, with 2015 cash flow better than expected we made a pension contribution improving profits $0.02 for 2016.

Quality improvement programs, similar to pole top hardening work, are $0.03 better than plan. We also adopted a new approach for applying the interest rates to determine the interest cost on pension and healthcare obligations. This was worth $0.05. This new approach was permitted by a favorable SEC interpretation of a proposal by AT&T just last year. The use of his PBO weighted application of interest rates reduces volatility and it improved earnings in 2016. Each year of pension obligation is actually discounted by its yield curve rate as though it had its own pension plan. Instead of the conventional approach of weighting all years by the same average interest rate, as shown in orange on the slide, this new approach, shown in green, reduces the cost of interest in the near-in years, partly offset by higher cost in far out years.

For a defined benefits program like ours, one that we closed about 10 years ago, the advantage is heightened and our volatility is reduced. We're big fans of lower volatility at CMS. This new approach produced an earnings improvement of $0.05 a share in 2016 which helped to offset the abnormal weather.

Here is a look at our EPS curves for the last several years. You can see every year is different, but we have always delivered 7% EPS growth by managing the business on behalf of customers and investors. Over the last three years, we reinvested $238 million into customer improvements, half from favorable weather and half from higher than planned cost savings. Yes, that is worth repeating. We reinvested in O&M $238 million for our customers and we delivered 7% earnings growth.

Most of you are aware of the recent one-year MISO capacity auction for Zone 7. Capacity costs were $2.19 a kilowatt month, which is about a quarter of the cost of building new capacity. This, however, had little direct impact on our business at the Ferrari, oops, I'm sorry, I mean the Tesla in the garage, the Dearborn Industrial Generation facility. Most of our 2017 contracts are bilateral and were in place before the auction. New contracts completed by March added $15 million to our profitability for 2017, increasing DIG profits to $35 million, a nice lift toward the 6% to 8% growth guidance for 2017.

We still have upside opportunity including 25% of DIG energy and 50% to 90% of capacity, depending on the year, still available for 2018 beyond. The MISO capacity auction results were close to being $1 or more higher, incentivizing bilateral customers to pay a bit more to reduce their risk. This could add $20 million to $40 million of profit in the future. As you can see on our sensitivity table that we provide each quarter, risks are not large and mitigation to minimize our exposure continues to be robust.

Just last month, Fitch upgraded the utility rating two notches and the parent rating a notch. Moody's put the utility and the parent on a positive outlook. It's nice to see the agencies recognizing our balance sheet and business model strength. For the year, we are at or above all of our financial targets. From investment, to cash flow, to customer prices, the dividend, and EPS growth, we expect strong performance again this year.

Our business model continues to work well, self-funding most of our capital investment for customers, leaving rate increases at or below the level of inflation. This model is focused on decisions that benefit customers and investors. This permits performance that is sustainable, continuing our track record of consistent high end results for nearly 15 years. Patti, I look forward to continuing this track record together. And, John, it is a pleasure to have done six years of these calls with the best CEO in the business.

Thank you.

Thank you for being a good friend. So let's take questions.

Thank you.

(Operator Instructions)

And your first question comes from the line of Paul Ridzon from KeyBanc. Your line is now open.

Good morning. How are you?

Good morning.

Good morning, Paul.

First of all, congratulations, John. Thanks so much. It's been a pleasure to work with you.

Thank you. You, too. It's been great.

I just had a quick question, with the legislation having been introduced into the Senate, is there any read-through that maybe some common ground has been found with the Chamber of Commerce and the schools?

The fact that it's been introduced is a positive. I think that you know that there's been discussions going on with the schools and the Chamber about supporting this bill or the ones from the House. The bills that came out -- for everybody to know -- the bills are introduced. Just to set the groundwork there, the bills were introduced. Two of them substitute bills, in the Senate Energy Committee yesterday and they were focused on the things we talked about before.

Senator Nofs' bill had to do with retail open access, 10% cap stays, but the suppliers need to have firm forward capacity in Michigan. And any further new ROA customer would have to pay a capacity charge. So we think that -- even though it would be nice to get to a fully regulated entity, that seems to be reasonable. Part of that was the integrated resource plan, which is good for pre-approved generating costs -- or generation of cost, and regulatory, there are some changes there which is good for everybody, including us.

The Chamber needs to decide what they want to do with these. At the end of the day, as I said earlier, it is an unfair system in Michigan that we have today, where 300 customers of our 1.8 million customers benefit and our 99.98% of our customers pay 3% to 4% more on their cost to subsidize these other customers. I think what Senator Nofs is doing is the right thing. Let's get the Senate bill out, get it through the Senate, and try to get as much support as we possibly can.

As far as the schools are concerned, the same thing. A few schools take Choice, most of them don't. At the end of the day, they pay more. The Chamber, a few of their customers take Choice, most of them don't. They pay more. So I hope both of those organizations will be on the right side of this.

Thank you.

Your next question comes from the line of Paul Patterson from Glenrock Associates. Your line is open.

Hi, how are you?

Good morning.

Good morning, Paul.

Congratulations.

Thanks.

I wanted to echo that. I also just wanted to touch base on the legislation. When you have a bunch of people who are subsidized, often they can be pretty effective in blocking things. And the legislation hasn't been going as quickly as you might have expected earlier. And I'm just wondering, any sense about that? You did address it with Paul Ridzon just now, but how do you guys feel about its chances of passing at this point?

You raise a great point about those that have it want to continue it. And, again, if I was subsidized I would want to continue it, too. That has been the battle. The issue is, is that it is just not fair to our customers. As we shut down seven coal plants, and there was other plant closed in Michigan, you see the results of the MISO auction that Tom talked about.

It is beginning to show that we may have capacity tightening up. And if we do, that means that new supply, along with energy efficiency, needs to be combined and moved forward. In the most capital-intensive industry in the world, with the most volatile product in the world, it is hard to make investments unless you have certainty. That is what the law is trying to provide, and I think that's what Senator Nofs' primary view is, reliability and certainty going forward.

Can I handicap whether it's going to get through it or not? I think it will get through the Senate, I'm pretty confident about that. My opinion is it gets more of a challenge in the House. And that is something that we've seen before. So I don't really want to handicap it right now. If we get it, I think it would be an upside. But I do want to emphasize that we are not counting on any law changes to our 10-year plan -- not our 5-year plan, but our 10-year plan.

And, as Patti has taken over, she is growing the business to 6% to 8%. Her and Tom, I think that is great, and none of it is dependent on the law changes. So if the law does change, it is good for our customers, and there may be some upside to us. But that really is the intent that we are focused on is that what is fair for our customers. And I think some of the issues that many of you will be talking about in the next few minutes in Ohio is a good indication of what should not happen here in Michigan.

Okay. And then, just on the pension, what is the full-year impact? Or the impact going forward on this $0.05 and what have you? I'm sorry to be so slow on it, but I want to be completely clear.

No, no, that's okay. That is a great question. The $0.05 is the positive impact from the change in how we calculate the interest on pension and healthcare cost. So I don't want that to sound like it is just a first quarter thing. That is the full-year impact.

You still have other impacts, things like -- remember the discount rate still moves up and down, so that could change things next year. Good to give you a little good news, a little bit of bad news. But $0.05 for that change is the full-year effect. In the future, we will re-measure that each year in January. But what we think we have done is taken volatility out of that particular calculation. But you still could have -- I am going to go to the big side -- $0.01, maybe $0.02, up or down, but less than what we've looked at in the past. Does that help?

Okay. That is fine. And then, just finally on sales growth -- weather adjusted, Leap Year adjusted -- what was it for the quarter?

So, our sales on the quarter were flat. But here is what is interesting. When you look at the weather-normalized sales, we actually are showing in our reports, which you can look at attached to the release, that residential and commercial are down about 2%.

I'll tell you, I actually don't believe that. I don't think we've weather adjusted year to year correctly. Last year, the first quarter was very cold and we said our residential and commercial sales were like 2% up. Now we are comparing to that where it was really mild and we're saying 2% down. What we saw in the second quarter last year with that sort of reversed, it just said, oops, your weather calculations aren't too good.

I think we will probably see that in this year. I hate to dismiss data, but I just don't believe that fall-off in residential and commercial will continue. But I do believe, if you look forward, think of those as flat. We are not seeing great growth there. It is the industrial side that is interesting. Our industrial side was actually up 5%, and if you take one customer out, we were actually up 9% in the first quarter. So there is a lot of good news in there.

The food business was up about 4%, the plastic sector up about 4%, transportation up about 7%, packaging was up about 10%. And here's something that I really like to see: several of our companies in the building sector were up a lot. Cement side was about 17%. So there is a lot going on where we can see the uplift through industrial. But keep in mind, we are a conservative beast. We are still telling you that, for the year as we go out, we're looking for about 1% growth overall. But I will admit the bulk of that will be on the industrial side.

Okay. Thank you very much.

Yes.

Your next question comes from the line of Julien Dumoulin-Smith from UBS. Your line is open.

Hey, good morning.

Good morning.

Good morning, Julien.

So perhaps just a quick question on that Tesla there. Can you comment a little bit on what you are seeing in the future? Obviously, we have seen some improvement in that pricing, and, obviously, it doesn't move the needle too much.

How do you think about layering in your expectations going forward, whether that is status quo or [backwardation] what have you? And then also your existing contracts, and ultimately the earnings profile over a multi-year period? I'll leave it there.

Okay, good. Let me take those in a couple of pieces. First of all, we gave you a little bit of good news showing that, for 2017, the layering in -- and that is a good way to think about how these capacity contracts are being put in: a little bit more good news, layered in; a little bit more good news, layered in with contracts. We are not trying to grab what we think is a peak or rush to anything.

We will miss the peak, we'll miss the trough, but the layering-in strategy should give us some good news. I would say the $35 million number is pretty good for 2017. You know from the chart we showed you, we still have about 25% of our energy and our capacity available, so there's some more upticks that could come from that. Now go to the future.

As you look out further in time, we have anywhere, starting in 2018 out through time, and near time, 50% to 90% of capacity, and still 25% of energy because we have got some nice, long-term contracts in place on energy. I don't want to predict how much of the $20 million to $40 million upside will happen, except to say, because we layer in I don't think you should expect the full $40 million. That would be getting to replacement cost.

But on the other hand, I'm not so negative as to say it will only grow by another $20 million. I think what we've tried to do is give you the zone somewhere in between there that we honestly believe will be achieved, depending on the prices and the bilateral demand, and what we are able to do as a business.

Got it. And to be explicit about your going-forward expectations on where these auction results go out, what do you think of these reforms in terms of impacts on pricing?

Nice and complicated is what they are. (laughter) What we are going to see going forward is MISO is going to be changing to seasonal auctions, they are going to be changing to multi-year auctions. And I wouldn't even fathom a guess about what that will really mean. But what we can look at is the data that just occurred, that $2.19 per kilowatt-month.

If you laid the bids down right along the demand line -- and you all can see this, that is all public record -- you can see that it stays pretty close in there. So, with a modest change of what was happening in the market on the demand side, that could have easily have been $3 plus. What that does to people that are interested in reducing their volatility, they come to businesses -- like the Tesla, the Ferrari, or DIG, whatever we want to call it -- they will come there looking for ways to take out volatility and pay a little higher price than the auctions -- those one-year auctions at least -- to protect themselves from an exposure. So I do see a little upside from that based on that.

And the bigger picture is, it's telling you a little bit about what John talked to. The capacity situation for Zone 7 is just not all that solid. As changes occur in demand or in the supply side, I think that you see a market that could tighten up quite a bit. And it is very hard to predict, but a year from now I just suspect it will probably be a tighter market on capacity. Now that is just a personal opinion, so I will leave it at that.

And actually, that tees up pretty well to the next question. I would be curious, as you think about your portfolio of PPAs, including some of the higher-priced PPAs, is there any ability to potentially step in a little bit earlier to try to come to some resolution on bringing down those costs for consumers by extracting yourself from some of those obligations? Specifically, Palisades is what I am thinking.

I am shocked. (laughter) There is a lot of speculation going on that subject. But all I can tell you, that is the sort of thing that we just don't want to comment on. I would just like to leave that open to see what happens. It is very important that the owners control that, and so we don't want to do any speculation. I hope you will appreciate that.

Absolutely. Thank you so much.

Thank you, Julien.

I am showing there are no further questions at this time.

All right, well, let me close it out. First of all, thank you for joining us today. As Tom said, I know it is a very busy day -- reporting day, and so this will be a quick call.

I also want to thank all of you that are on the line right now for all of your help, support and I will miss all of you as my tenure ends as CEO, and Patti will head up, and Tom will head up the next call without me. So my thanks to all of you. It has been a great run and the Company is in great hands moving forward. So thank you.

This concludes today's conference. We thank you for your participation.