CMS能源 (CMS) 2005 Q2 法說會逐字稿

Good morning, everyone, and welcome to the CMS Energy 2005 second quarter financial results and outlook call.

This call is being recorded.

Just for a reminder, there will be a rebroadcast today beginning at 12:00 noon Eastern time running through August 11.

This presentation is also being webcast.

An audio replay will be available approximately two hours after the webcast and will be archived for a period of 30 days on CMS Energy's website in the Invest in CMS section.

At this time, I would like to turn the call over to Laura Mountcastle, Vice President and Treasurer.

Please go ahead.

Thank you.

Good morning, and thank you for joining us.

With me today are Dave Joos, President and Chief Executive Officer; and Tom Webb, Executive Vice President and Chief Financial Officer.

Before they begin, I would like to cover our disclosure statement.

This presentation contains forward-looking statements.

Actual results may differ materially from those anticipated in such statements as a result of various factors discussed in our SEC filings.

This presentation also includes non-GAAP measures when describing CMS energy's results of operations and financial performance.

A reconciliation of each of these measures to the most directly comparable GAAP measure is posted on our website at www.CMSenergy.com/invest.

Now, I'll turn the call over to Dave?

Thanks, Laura.

Good morning, ladies and gentlemen.

We're pleased that you joined us today for our second quarter call.

As is our usual practice, I'll start the presentation with a brief update on the business and then I'll turn it over to Tom Webb for a more detailed discussion on the second quarter financial results and outlook for the remainder of the year, and then we'll close with Q-and-A.

Today we reported second quarter net income of $27 million, or $0.12 per share, $0.02 better than the second quarter last year.

For the first six months, our net income is $177 million, or $0.82 per share, putting us way ahead of last year and ahead of plan.

I don't need to tell you that the weather has been favorable so far in 2005.

The favorable weather, and our employees' hard work to serve the loads reliably, has added $0.04 to earnings through June, and July has also been warmer than normal.

As a result this and other factors that Tom will share with you shortly, I'm pleased to tell you that we've increased our full-year guidance on both the GAAP and adjusted basis by $0.05 per share to $0.95.

Operating performance continues to be strong, and I'll give you more about that in a minute.

We recently made some important progress on two litigation matters.

I'll also discuss these, shortly.

And as you know, we're before the Michigan Public Service Commission with three very important cases, the electric and gas rate cases and the regulatory asset recovery filing.

These proceedings, which I'll go over in a minute, are all on schedule.

Before I turn to the next slide, I should also mention we don't have any news today on restoration of the dividend.

We continue to be committed to restoring a dividend as soon as the Board deems it prudent to do so, but nothing to announce today.

As I mentioned earlier, the weather has been favorable so far this year.

June was the second warmest on record, averaging six degrees warmer than normal and almost eight degrees warmer than last year.

We hit a record monthly peak of 8,327 megawatts on June 28, contributing to four cents of weather-related electric earnings during the quarter.

Incidentally, July was about three degrees warmer than normal, resulting in a new hourly peak demand for the month of 8,191 megawatts on July 25.

And we set a new all-time record distribution peak yesterday, just over 8,500 megawatts on a preliminary basis.

Of the true measures of our operating performance, especially important during the summer months, is the availability of the generating fleet, at both the utility and enterprises.

Once again, our employees have done an excellent job maintaining the fleet with baseload plant availability exceeding 90% at both consumers and enterprises during the second quarter.

The newest IPP plant to enter commercial operation is the 250 megawatt Jabail co-generation plant in Saudi Arabia that began commercial operation on June 23.

CMS Enterprises holds a 25% interest and the National Power Company hold the remaining 75%.

All of the power and steam is being sold under long-term contracts to the Saudi Petrochemical Company.

As we discussed in the past, we don't intend to be long-term investors in Saudi Arabia, and we'll look to sell our interest in the project as soon as we're satisfied with the operation of the plant and the closeout of construction-related items.

On May 12, an International Center For the Settlement of Investment Disputes, or ICSID, tribunal issued an award on a CMS Energy claim against Argentina.

The tribunal found in favor of CMS and awarded damages of $133 million U.S., plus interest, related to our 29% ownership of the TGN pipeline.

Under the ICSID rules, either party may seek an annulment of the award from a new tribunal.

Argentina's indicated its intent to do so, but hasn't yet.

They have until mid-September to make that filing.

On July 8, CMS reached an agreement to settle a shareholder derivative lawsuit linked to roundtrip energy trading.

Under the terms of the agreement, which remain subject to court approval, CMS will receive $12 million under its D&O liability insurance program.

Proceeds will be used to pay costs arising out of a securities class action lawsuit and related attorneys' fees and expenses.

As part of the settlement, CMS has implemented a number of corporate governance changes to foster greater transparency, update its employee compliance and ethics guidelines, and increase oversight by the independent members of the Board.

Incidentally, be the corporate governance changes we've made over the past few years have earned an ISS rating in the top quartile of our peers and of the S&P 500 companies.

The rising price of natural gas has had an overall net positive effect on this year's earnings.

Higher prices have helped increase earnings related to the Midland Cogeneration Venture Resource Conservation Plan, and have boosted mark-to-market earnings.

There are a few downsides, however.

First, higher gas prices harm cash flow and drive up financing costs, as we pay more for gas up front and are reimbursed by our customers later.

Second, as Tom will review with you shortly, increased mark-to-market gains at the MCV in 2005 will result in increased mark-to-market losses in 2006 and beyond as the gas is used.

Also, continued high gas prices over the long term would threaten the financial viability of the MCV, which has paid for energy as though it were burning coal, not gas.

Many forecasters predict a retreat of natural gas prices through the end of the decade, particularly as new L&G terminals are brought on line.

If current prices and longer term price forecasts don't retreat far enough, then the value of our MCV equity could be at risk.

There's more discussion on this issue in our second quarter 'Q.'

Now to our Michigan regulatory agenda.

On June 3, the MPSC staff made its filing in the electric rate case and recommended $98 million of relief.

This was based on a $4.8 billion rate base, 36% regulatory common equity, and an 11.25% return on equity.

Most importantly, the staff has recommended full recognition of the $800 million of equity we've infused into consumers over the past year.

Cross-examination has been completed in the case, and briefs are due this month.

The schedule calls for a proposal for decision from the administrative law judge in early October, which would allow for a decision from the commission by year end.

In June, the administrative law judge in the regulatory asset recovery proceeding issued her proposal for a decision.

She recommends adoption of the staff's position on every issue resulted in recommended recovery of $322 million.

Assuming a final order consistent with the ALJ recommendation, we'd recover this amount over a five-year period, and we'd also see an earnings benefit of about $0.10 per share next year, and then declining over the five-year period.

This proceeding is complete and right for a commission decision, which we anticipate in the next few months.

Also in June, the MPSC authorized Consumers to recover costs totaling $5.6 million, plus interest at a rate of 7%, related to electric restructuring implementation costs incurred during 2002 and 2003.

On July 1, we filed an application with the Michigan Public Service Commission seeking a $132 million increase in our gas rates to recover costs related to increased equity levels, larger rate base, and increased spending for safety and pipeline integrity.

Our filing is based on a $2.3 billion rate base, a 36% regulatory common equity level, and a 12% return on equity.

We also requested interim relief of $75 million by year end 2005, over 80% of which is related to higher gas prices, higher rate base, and increased equity levels.

The prehearing conference is set -- to set the schedule is August 10.

Now let me turn the presentation over to Tom for details of our financial results and outlook.

Tom?

Dave, thanks very much.

And my welcome to everybody on the call.

We really appreciate your interest.

Our second-quarter earnings, as Dave mentioned, was $0.12 a share.

We're a bit better than last year.

As shown on the left of this particular slide, excluding the effects of mark-to-market earnings, they were $0.20 this year, up $0.18 from $0.02 last year.

This includes an 8% mark-to-market gain last year, and an $0.08 mark-to-market loss this year.

Excluding the effects of both weather and mark-to-market, the improvement is $0.13.

You can see that on the right side of the slide.

For the first six months, our earnings per share was $0.82, up $0.78, Including, primarily, mark-to-market gains and losses associated with the sale of Loy Yang last year.

Now let's look further at the second-quarter performance, and look at it by each of our businesses.

Compared with the second quarter of 2004, utility earnings per share were up $0.10.

Enterprises was off $0.06.

Dilution, largely from our common stock offerings, was $0.05, and lower interest from parent de-leveraging was favorable $0.03.

Now at the utility, benefits and other costs were adverse $0.04.

This included increased pension and benefit expense, along with a continued under recovery of costs related to the MCV power purchase agreement.

These increases were offset partially by lower maintenance costs, the absence in 2005 of an outage at Palisades last year, as well as some operational savings from the RCP.

Higher revenue, that you see there in the green bar, of $0.11reflects warmer-than-normal summer weather and stronger residential and commercial sales.

And on the regulatory front, higher gas rates and other added another $0.03.

Now at enterprises, the decrease was due largely to mark-to-market losses related to gas and interest rates derivatives, offset partially by tax benefits from the American Jobs Creation Act.

Let's take a look at that mark-to-market information in a bit more detail.

Although mark-to-market gains and losses will equal zero over the life of the affected contracts, they can have a large earnings impact in any given quarter or any given year.

Now for example, with the MCV resource conservation plan that was approved in January, the first-quarter gain this year was $0.32.

This begins to reverse, as expected, with a decline of $0.05 in the second quarter.

And there you can see the declines in each of the following quarters.

Almost half of the first-quarter gain is expected to reverse this year.

Now as shown on the right of this slide, a substantial portion of the reversal, $0.17, will occur in 2006.

Now absent this mark-to-market loss in 2006, enterprise earnings would exceed $100 million.

Now keep in mind if gas prices continue to rise, the gain in 2005 grows, as does the loss in 2006.

We'll talk more about 2006 when we give guidance early next year.

We continue to be focused on net single-digit earnings growth as our goal.

As Dave mentioned, we've raised our adjusted and our GAAP full-year guidance for 2005 from $0.90 to $0.95.

With customers returning to bundled services, warmer than normal summer weather, and higher than expected benefits from the American Jobs Creation Act, we've improved $0.15.

This improvement's made it possible to raise our guidance and accelerate retirement of costly debt, as well as to invest in the utility for system reliability.

Both of these actions will help us reduce costs in the future.

In our initial plan for 2005, we included mark-to-market gain of $0.05.

Should the mark-to-market gains associated with higher than planned gas prices continue through year end, we could end up with $1.05 per share.

We're not counting on higher than planned mark-to-market gains to meet our guidance that we've shown today at $0.95.

Let's cover a few of the other changes that could impact our earnings this year.

Each 100 gigawatt hour change in electric deliveries can impact our earnings by plus or minus $0.01.

A 10 BCF change in gas deliveries could impact profits by $0.04.

Our present forecast of Nymex gas prices for the remainder of the year averages $7.71.

Each $0.50 change in gas prices, up or down, will impact operational savings from the MCVRCP by about $0.015.

Excluding the MCV, the impact of changes in gas prices at the utility is less than $0.01. 40% of our gas required for the winter already is in storage, and a large portion of the balance is under fixed price contracts.

With most of our coal contracts for 2005 complete, sensitivity to changes in coal prices at the utility are small.

Most of you, though, are aware of an industrywide Western coal transportation issue.

As of today, we do not expect this to impact dispatch of our coal units.

We've talked about mark-to-market, but keep in mind a further change in gas prices of $0.50, up or down, will impact the mark-to-market of gas derivatives by $0.05 in the same direction.

A 50 basis-point change in the interest rate curve has a $0.03 impact.

We've revised our retail open access load loss projection downward from 925 to 1,000-megawatt range, to between 900 and 950 megawatts by the end of the year.

At July 31, the load loss was 811 megawatts, down from 893 in April, as several of our customers have returned to bundled service.

We expect some of our customers will switch to an alternative supplier by year end.

As a result of our present electric and gas rate case request, it may be helpful to take a look at consumers' equity in 2006.

Some of you have asked questions about this.

For our regulated electric and gas businesses, we forecast rate-making equity of $1.8 billion for the electric business and $870 million for the gas business.

Our present authorized return on equity is 12.25% for electric and 11.4% for gas.

About 125 million of Consumers' equity has been allocated to regulatory assets that are not included in the rate base.

For example, consumers has been authorized a return off and on investments associated with the clean air investment, security, stranded cost, and costs to implement Public Act 141.

The weighted average return on these investments is about 10%.

And we gain recovery through a customer surcharge.

We also have about $195 million of equity allocated to the MCV and other small assets.

The return on these assets varies, depending on their performance.

Let's turn to from earnings to cash flow.

As shown on the right this slide, Consumers' cash flow results in cash at year end of $40 million, and $375 million available from our $500 million bank facility.

The key change here from our last call is operating cash flow, noted with a little green arrow.

At $677 million, this is up $22 million from the level in our last call, primarily from lower gas prices and stronger performance.

At the CMS parent, shown on the left, cash at year end is forecast at $188 million, with $195 million available from our bank line.

Asset sales of $58 million are complete, and that's up $14 million from our prior guidance.

Forecast dividends from Consumers and enterprise businesses, as well as tax sharing, are up $57 million from our last call.

These improvements and use of some of our available cash allow us to accelerate debt retirement quickly.

Let's check our report card for 2005.

We're on track to exceed our earnings target by the $0.05 we've discussed today.

Cash flow is off a bit due to higher than planned gas prices.

Although much of this will be recovered through our GCR in 2006, we're giving ourselves a yellow caution check because we're still working to meet our target.

Our capital structure outlook is stronger, with our debt-to-capital ratio forecast at 66%, two points better than target.

Also at $7.1 billion, debt levels are better than target.

So we appreciate your listening.

Thank you, and operator, we'd now like to take questions.

Thank you very much, Mr. Webb.

The question-and-answer session will be conducted electronically. [Operator Instructions.] We'll pause for just a second.

Our first question comes from the line of Greg Gordon with Smith Barney.

Thanks.

Good morning.

A couple of -- couple questions.

The 10D4, did you guys indicate earlier, if I heard correctly, that you thought that would be actually a $0.10 earnings impact next year, and then roll off over the next several years as you recover the money?

Yes, we did.

We indicated that that would be about a $0.10.

And so it's a little bit frontloaded.

That will probably ease off as you go through the years.

But as you look at 2006, 2007, that's a good estimate of the earnings improvement.

I thought that that was a cash-flow item that would flow through without impacting earnings.

How does the accounting for that work?

Well, it is a cash-flow item.

Obviously, this is the opportunity to recover some of that spending in excess of depreciation, so we're going to get that, or we should get that.

That's over a five-year period.

But you also -- because it affects our equity, we get a return on what goes into our equity.

And that's that earnings improvement.

Okay.

Great.

And then you also indicated that one of the things impacting you this year was lower than expected net customer switching.

It looks like, and I'm guessing here, that every 50 megawatts that comes back to you guys could be worth roughly $0.05.

Is that a fair assessment, or am I thinking about that incorrectly?

It's a little -- you know, Greg, it's a little more complicated than giving an answer like that because it does factor into things like our stranded cost recovery.

It factors into the sales that we have to third parties.

So it's not a straightforward an answer as that.

And so I don't really have a precise number to give you on --

But customers coming back is accretive?

It's good news.

It's not dilutive -- there are situations where a customer coming back would be dilutive?

At this stage for this year that would certainly be good news.

And it has been good news for us.

Greg, maybe I'd mention a couple of things.

One is, remember, on the 10D4, that, you know, we haven't gotten an order from the commission yet, and the numbers that we gave are you based on what the commission adopted what is the staff's and the administrative law judge's position.

So until we actually see the order, of course, we don't know what the impact is.

But that's the basis we've given you those numbers on.

Secondly, I would mention on 10D4, of course, the customer's largely taking advantage of choice.

I'm sorry, not -- not 10D4, but choice.

The customer is largely taking advantage of choice tend to be higher -- higher load industrial customers at lower margin.

So if anything, I'd suggest that the numbers you threw out there are probably higher than the impacts.

But I don't think we can give you anything exact in that regard.

Okay.

But it's not a situation where you'd be forced to go to the market to serve these customers at a price higher than what their tariffs would be if they came back?

Well, as long as our power plants operate well and we're in -- in sort of a net sales position, which is generally where we've been through the summer, that's right.

Thank you.

Two more questions.

CMS Enterprises, you indicated, you know, if your mark-to-market situation were zero, that CMS Enterprises would have an earnings run rate in excess of $100 million.

Can you give us sort of what a base case zero mark-to-market sort of net income expectation would be for -- for enterprises?

We actually haven't given any outlook like that.

I'll break that into sort of two pieces if I can.

One focus on cash flow first.

The idea of about $100 million a year, up or down a little bit from there, is probably a good indicator.

Earnings is another story, though.

And on earnings, what we're trying to do is to give you an idea without mark-to-market.

We would probably be a little bit over $100 million.

So you can factor out that 2006 mark-to-market implication and see that that should push down those results for next year.

Okay.

And my last question was with the Jobs Creation Act and other -- you know, other issues, your tax rate tends to bounce around a lot.

Yep.

What should we expect as we move forward through '05 and into '06 and '07 that your effective corporate tax rate ought to be?

I see numbers anywhere between, you know, 26% and low 30's.

Greg, you're right.

You're going to see our number move around a lot.

You're going to see it move around as we look at the size of the earnings and any particular quarter, or the year.

To give you a feel for it, if you look at our first six months of this year, our effective tax rate's 21%.

As you look at where we'll go for the full year, you would expect something in the ballpark of, say, 10% to 12%.

Something like that.

Now, as we go through time, and we don't have this American Jobs Creation Act impact like we do this year, you would expect to see us more in the neighborhood of 25% to 30%.

A little bit less than the normal 35% because of the indefinite deferrals we have on certain projects out there.

So I would caution you to think about 25%, 30% range.

Okay.

And then on the incremental debenture retiring above what your aspiration was in the last quarter, should we just assume what type of -- your sort of average embedded cost of -- cost of debt on that, or is there a specific higher cost piece of debt that you're going after?

Well, we're trying to take out some of the higher cost debt if we can.

So thinking about those obligations that are in the nine and just below the 10% range is what you'll see us trying to retire.

Thank you very much, guys.

You're welcome.

Thanks, Greg.

Thank you, sir.

Our next question comes from the line of Paul Ridzon with KeyBanc/McDonald.

Key McDonald.

The debt reduction hurt, that's just a premium to retire the debt, is that --

Yes, that would be.

Then the accelerated work, what kind of work are you doing there?

Oh, there's a lot of things that we're able to do that can cross over from this year to next year and by accelerating some small outages, maintenance -- and maintenance work and things like that, it's to our advantage to do it.

And given the favorable mark-to-market in 2005, is low single-digit growth still reasonable?

You know, our -- our goal that we're keeping to is mid single-digit growth, as you go out through time.

And we haven't given any guidance for next year.

But we would expect there will be ups and downs as you look at the trend.

And that's what we're still working on.

Okay, thank you very much.

Thank you.

Thank you, sir.

Our next question comes from the line of Andy Smith with JP Morgan.

Good morning.

Can you hear he?

Yes, Andy.

A couple quick questions on the cash balance, looks like you guys had about $1 billion on the balance sheet.

Do you guys have a breakdown of what's at Consumers and what's at the parent?

Glad to do that.

Good question, Andy.

When you look at that billion 13 that's on the balance sheet, you need to dissect that by first taking out sort of the cash that we can't access, like at MCV and the like.

And that's about $365 million.

At Consumers, we have $410 million of cash at the end of the second quarter.

And at the parent, $238 million of cash.

At cash level at the parent today would be a little bit lower than that as we're using a portion of that to pay down debt.

But the guidance that we've given you for where we would expect to end up the year at about $188 million, is still where we think we'll be.

Okay, great.

And that actually dovetails into one related question I had.

It looked like versus the second quarter that your $188 million target is down.

Is that just a function of moving some money around, or has there been a little bit of change in philosophy there?

How are you guys thinking about that?

No change in philosophy.

It's actually good news, and it's from the standpoint that we've been able to improve our cash flow from where we were in the last review.

And we've taken those resources and a little bit of our cash to make some reasonable repurchases of debt.

But our philosophy of trying to keep around $200 million at the parent and use a normal, working level at Consumers is where we are for the time being.

Okay, great.

Thanks a lot.

Thanks, Andy.

Thank you, sir.

As a reminder, ladies and gentlemen, if you do wish to ask a question, please press star-one on your touch-tone telephone.

Our next question comes from the line of Jatin Patel with Helios (ph).

Congratulations on a very solid quarter.

Thank you.

You know, obviously, a nice June played a favorable impact on Q2.

In terms of what you've seen so far in July, and then the couple of days we've had in August, should we expect weather to be even more impactful in Q3?

We don't actually give guidance by quarter.

But part of the reason we took our guidance up for the year is we've had this favorable weather performance in the second quarter, and we've seen it strong again in terms of this last month, and that's all a factor into what we've done with our guidance.

Okay, fair enough, thanks.

Thank you, sir.

And ladies and gentlemen, at this time, there are no further questions.

I'd like to turn it back to our Management team for any closing remarks.

Well, again, thank you for participating on the call today.

To wrap up the call, let me just say once again we've had a good second quarter.

Good first six months giving us confidence to raise our full-year guidance by $0.05.

We do have a couple of key regulatory cases we'll be watching here for a decision later on this year.

The electric rate case and the regulatory asset recovery proceeding.

And, obviously, those are important to our future earnings and cash flow.

I'll say that I'm pleased with our progress so far, and we continue to appreciate your interest in CMS Energy.

Thank you for listening today.

Ladies and gentlemen, this concludes today's conference call.

We thank everyone for your participation.

And you may now disconnect.