CMS能源 (CMS) 2007 Q2 法說會逐字稿

Good morning, everyone, and welcome to the CMS Energy 2007 second quarter results and outlook call.

This call is being recorded.

Just a reminder, there will be rebroadcast of this conference call today beginning at 11 a.m.

eastern time running through August 9th.

This presentation is also being webcast.

An audio replay will be available approximately two hours after the webcast, and there 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.

Good morning and thank you for joining us for our second quarter earnings presentation.

This presentation contains forward-looking statements.

Actual results may differ materially than 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 the Company's results of operations and financial performance.

A reconciliation of each of these measures to the most directly-comparable GAAP measure is also posted in the investor section of our website.

CMS Energy anticipates its 2007 and possibly 2008 reported earnings will be lower than its adjusted earnings due to the expected affect of asset sales.

We are not providing reported earnings guidance reconciliation because of the uncertainties associated with those factors.

Now I'll turn the call over to Tom Webb, Executive Vice President and Chief Financial Officer.

Tom?

Yes, thanks, Laura, appreciate it.

Welcome, everybody to the second quarter earnings call for CMS.

I'm delighted that you've joined us on this very busy reporting day.

Now originally Dave Joos was not going to be with us today, but he has been able to change his plans and he is here on the call with us and he'll be available in our question-and-answer section.

Operating results for the second quarter 2007 were on plan.

Our full-year guidance for adjusted earnings remains unchanged at $0.80 for 2007 and $1.20 for 2008.

The Michigan Public Service Commission has been pretty busy over the past few weeks.

We're discussing the possibility of a settlement with staff and interveners on our gas rate case, the schedule has been established for our amended electric rate case filing to include the Zealand gas plant and our request for interim rate relief, and we have a new commissioner, and we'll give you an update on each of these in just a minute.

Our business plan continues on track and with the results as expected.

Let's turn to the next slide for a more detailed look at our second quarter results.

We reported earnings of $0.15 a share compared to $0.31 last year.

Excluding the favorable impact of assets sold of $0.25 and the unfavorable legacy legal cost of about $0.18, adjusted non-GAAP earnings were $0.08 this quarter.

That's down $0.11 from last year due primarily to tax benefits in 2006 not repeated this year.

For the first half of 2007, adjusted earnings are $0.50 compared to $0.05 last year.

But recall, last year we had mark-to-market losses of $0.41.

Let's take a look at the details by business on the next slide.

Second quarter 2006 earnings per share was $0.19.

This excludes discontinued operations of $0.04 and includes mark to market losses of $0.10.

From this comparable number, adjusted earnings were up $0.11 due to the absence of mark-to-market losses last year, up $0.04 cents at the utility, and down $0.26 at enterprises and the parent.

The higher results at the utility reflect the strength of our core business.

The gas rate order from last November contributed $0.03 and favorable weather added $0.06.

These gains were partially offset by costs of $0.05, primarily for capital investment.

At enterprises and the parent, the absence of tax benefits received last year and the loss of earnings from assets sold this year resulted in a $0.26 decline in earnings.

Now, let's turn to the next slide to see where our earnings stand for the full year.

For the first half of 2007, we reported adjusted non-GAAP earnings of $0.50 and expect to earn another $0.30 in the second half.

In the first half, the electric utility earned $0.42 and the gas utility earned $0.28.

Enterprises and parent interest expense reduced earnings by about $0.20.

In the second half, the electric utility is expected to earn $0.48 and the gas utility $0.09.

Just as a side note, it's normal for the majority of the gas utility's earnings to occur in the first half of the year, driven by the use of natural gas for heating.

Enterprises and the parent are expected to report a loss of $0.27 in the second half.

This is consistent with our full-year earnings guidance provided in February.

A big part of our strategy has been the sale of nonstrategic assets and the redeployment of cash into the utility to pay down parent debt.

Let's check the progress on that.

Our restructuring work is progressing better than planned and is substantially complete.

We had a busy second quarter, closing asset sales at $1.6 billion.

Proceeds from asset sales in 2007 are recapped on this slide.

The sale of the enterprise businesses totaled almost $1.5 billion, and I'm pleased to report that we closed on the sale of GasAtacama yesterday for $80 million, leaving on the Jamaica sale to close by the end of the year.

Also, the Palisades nuclear plant was sold to Entergy for $380 million.

We're putting the sales proceeds to use right away.

From the enterprise sales, we've invested $650 million in consumers, and by year end we expect to reduce parent debt by another $650 million.

The remainder will be used for general corporate purposes, including the shareowner settlement that we've talked about in the past.

Now on this slide we showed you in February, updated primarily to show the acquisition of the Zealand gas plant, we now show the earnings effect of strategy to sell nonstrategic assets, invest in the utility, and pay down parent company debt.

For 2007, the earnings decline to $0.80 reflects increased utility earnings of $0.31.

The enterprise and parent earnings decline of $0.59 would be due to lost earnings from asset sales and the absence of those tax benefits we had in 2006, offset in part by lower interest expense and overhead.

Now on the right side of the slide for 2008, the utility earnings increase of $0.37 reflects earnings on the equity investment of $650 million and the full-year benefit from the elimination of MCV PPA contract losses.

Higher enterprise's and parent earnings of $0.03 would be associated with lower administrative costs and interest savings from the asset sales, offset in part with earnings loss from asset sales.

In the future, CMS will have less debt, a stronger balance sheet, less risk, and continued strong earnings capacity.

Sensitivities around our earnings and cash flow targets for 2007 and 2008 include the ability to earn on equity invested in the utility and the timing of rate orders.

A 25 basis point reduction in the utility return would impact earnings by $0.02 at the electric business and $0.01 at gas.

A one month delay in the electric rate case would reduce earnings by $0.02 for interim relief and $0.01 for the final order.

Electric and gas sales can fluctuate from our forecast due to such things as the economy and weather.

A 100-gigawatt swing in electric sales results in a $0.01 impact on earnings.

A 10bcf swing in gas sales would impact earnings by $0.04, up or down.

The 2007 cash flow forecast remains strong at both Consumers and the parent.

Now shown on the right, we expect consumers to generate $219 million of positive cash flow.

This is down a bit, about $157 million from our last call, with a substantial portion reflecting a higher dividend to the parent and higher working capital.

Cash at year-end 2007 is forecast to be $536 million; that's $92 million more than we previously forecasted.

This increase reflects the $250 million of equity contributed by the parent in June for the planned purchase of the Zealand plant.

This brings our total contribution to $650 million for the year.

As shown on the left, the parent is expected to have positive cash flow of almost $1.3 billion before the investment in Consumers.

This is up $121 million from our prior call from stronger asset sales and increased dividends from the utility.

After the equity infusion in Consumers of $650 million, net debt reduction of almost $700 million and common dividend payments of $44 million, the parent is expected to have a $121 million level of cash at year end.

This excludes the cash implications of the possible restructuring of our Dearborn Industrial Generation plant.

We continue to evaluate alternatives to improve the long-term financial performance for DIG, and we'll keep you advised as we make progress in this area.

On this slide, we summarize financing at the parent completed this year.

By the end of this year, we'll have redeemed over $1 billion of debt with an average interest rate of 8.3%, and we'll have issued $400 million of notes at an average rate of about 6.5%.

For 2007, we will incur interest expense of $55 million related to the redemptions and $12 million related to the new issues.

The main benefit from this will occur in 2008, when parent interest expense is reduced approximately $30 million compared to 2007.

Parent debt reduction has been a big part of our turn-around story and I'm pleased with the progress we've made so far.

Let's switch to the Michigan Public Service Commission and our rate cases.

The makeup of our Michigan Public Service Commission is changing, with one new commissioner, Steven Transeth, recently appointed to replace Peter Lark.

We expect another appointment soon and we look forward to working with the new commissioners.

Our good-working relationship with the Commission and the staff in the past provides the experience to do just that.

Let me give you a brief update on both our gas and electric rate case proceedings.

In February, we filed a request for an $88 million increase in our gas delivery, and transportation rates.

On July 20, the Commission staff filed their testimony recommending a $35 million rate increase.

Now as I mentioned earlier, we are discussing a settlement for the gas rate case and these discussions are confidential, so we won't be able to provide more detail today.

Regarding the electric rate case, we amended our application to include the purchase of the Zealand Power Plant along with an electric energy efficiency program and a motion for interim rate relief.

At a prehearing conference last week, a schedule was set for staff and interveners to file testimony by September 18th on Zealand and our motion for interim relief.

This should put the case before the Commission in early November.

The schedule also sets a date of November 6th for staff and interveners to file testimony on final rate relief.

This schedule could allow for a decision around the end of the first quarter.

Our original application filed in March was for a $157 million increase.

Since that time, we revised our request to include the purchase of the Zealand Power Plant, recovery of Palisades transaction costs, addition of $250 million of equity for the Zealand plant, and an electric energy efficiency program.

The amended application seeks to increase rates by $282 million.

It reflects a rate base of $5.6 billion, which includes the Zealand plant and an 11.25% ROE.

We've requested interim relief of $77 million plus an additional $84 million related to Zealand.

The proposed refund to customers because of excess Palisades proceeds results in net customer impact of $32 million or about a 1% increase.

Over the past few years, our strategy has been to sell nonstrategic businesses, invest equity in the utility, and reduce parent company debt.

As illustrated on this slide, we've made considerable progress.

We've invested over $1.8 billion in the utility, raising our financial equity ratio at Consumers to 49% or the equivalent of 50% when we used cash to pay down debt early in 2008.

We expect to have reduced parent debt from $5.6 billion to $1.7 billion by the end of 2008.

This results in greatly improved credit metrics.

In May, Standard & Poor's acknowledged our progress by raising our credit rating on our unsecured bonds three notches to BB+.

Moody's followed suit in June, raising the parent to Ba1 and the utility to Baa1.

Our plans are to continue reducing parent company debt to about $1.5 billion, but we may need to extend the date we reach that target to accommodate the attractive acquisition of the Zealand Gas Generation plant and the potential payment around our restructuring for DIG.

Now most of you are familiar with a version of this slide that we used when we described opportunities to grow our rate base by investing in reliability, conservation, generation, environmental improvement, and distribution.

For the five-year period 2008 through 2012, we've identified investment opportunities of about $4 billion, but as shown on the box of the right of this slide, we've now included $2.4 billion in our plan.

We've included advance metering infrastructure, new and upgraded generation capacity, renewables, energy efficiency, and needed improvements to our distribution system.

With these additions, our plan would include more than $6 billion of new investment, resulting in rate-base growth of 6.5% annually.

We believe this strikes a good balance between attractive earnings growth, responsible customer rate increases, and a healthy capital structure.

We're planning a special investment meeting in New York City on September 14th to share more with you on this growth plan and we'll bring along some of our project leaders.

I think you'll find it interesting and look forward to seeing many of you there.

Our report card remains strong.

We expect to meet each target, but we give ourselves a yellow cautionary check on cash flow and debt.

As mentioned, we may delay hitting our debt target for 2007 if we're able to complete favorable restructuring at DIG.

It's too early to provide detail, but it's nice to be so close to the end of our restructuring list.

Thank you, everyone, for listening and now, operator, Dave and I would both be happy to take questions.

Thank you very much, Mr.

Webb.

(OPERATOR INSTRUCTIONS) Our first question comes from the line of Brian Russo with Ladenburg.

You may proceed.

Good morning.

Good morning, Brian.

Could you maybe talk a little bit more about your longer-term generation needs and any timeline of development of those -- any projects?

Yes, this is Dave Joos, maybe I could talk about that briefly.

The 21st Century Energy Plan that was actually shepherded through the process by former Chairman, Peter Lark, suggested that we needed new base-load capacity by 2015 and the plan that we filed earlier this year that we call the balanced energy initiative supports that.

It basically concluded that we needed new gas capacity by about 2011 and then about 500 megawatts of new base-load capacity that we've targeted as coal by 2015.

Both of those are consistent with what we've done.

As you know, we have purchased the Zealand plant, or at least we've proposed to purchase with subject to Public Service Commission approval, and that satisfies our gas plant needs.

But we still think it makes sense for us to continue the development of a coal plant in Michigan, and we've told the Public Service Commission that we'd expect to make a more specific filing on that proposal later on this year.

And then that 21st century Energy Plan also indicates the need for significant additional base-load capacity in that five-year period after 2015, and we would expect that there may be a longer-term need for a second unit somewhere in our service territory, but we haven't made specific plans for that yet.

Okay.

Thank you very much.

You're welcome.

Thanks, Brian.

(OPERATOR INSTRUCTIONS) Your next question is from the line of Paul Ridzon with KeyBanc.

You may proceed.

Morning, guys, how are you?

Morning, Paul, great.

Just a quick update on the status of revamping Michigan restructuring, where is that and where do you see it headed?

Yes, there's been a lot of discussion going on really most of this year on that topic, but no specific action in the legislature.

And to be frank, I think the reason for that is Michigan's has been wrestling with the tax issues and budget issues all year.

There has been sort of a recent indication that the house side, however, will be moving forward with legislation this fall.

There's the Energy Technology Committee is working on that right now, headed up by democrat, Frank Accavitti, but also supported by republican Mike Nofs, and they have established just in the last week or so here three different subcommittees to work on various aspects of the bill; one of them, the reform of PA141, our electric choice law, and the other two to work on the renewables and the efficiency issues -- energy efficiency issues within the state.

And I know they're targeting to try to get something through the committee here in -- probably late in the third quarter and get it on the floor and obviously before the Senate, as well.

So there's a good indication of seriousness about trying to get something done this year and they're talking seriously right now.

Thank you.

And could you review maybe what the next five year will look like from a rate case filing calendar?

Yes, I -- it's a little difficult to talk about the whole five years.

We have said previously that we expected to continuously in for rate case adjustments, particularly with this heavy capital investment.

One of the things that we've got going right now, obviously, is the gas rate case.

The possibility that we'll be able to reach settlement we can't tell at this point in time, we're working on that.

And if we don't we'll have a schedule that gets us toward the end of this year and based on the current schedule some sort of a decision.

And then on the electric rate cases, as Tom indicated, the final rate relief some time probably around the end of the first quarter.

It's always a little difficult to tell when the Commission actually acts, but they would certainly be in a position to do that.

I would anticipate, though, over that five-year period that we'll be going in for additional rate relief, particularly on the electric side but probably also on the gas side, again just because of the continuing capital investment program that Tom discussed.

I had read that the Commission had looked at hiring outside consultants to ease some of the work load with all the on-going rate cases, where is that?

We had actually volunteered that because of the complexity of the electric case and the issues associated with Palisades and Zealand and others that we would be amenable to supporting additional staffing for the staff.

That's not -- we've not actually done anything in that regard -- the staff hasn't, and I really can't predict whether or not they'll take us up on that offer.

I guess we're okay with that, so long as we can retain the schedule that's been laid out, and at least these administrative law judges are supportive of that schedule here last week.

All right, thank you for the update.

Thanks, Paul.

And your next question from the line of Tom Wolfe with Sawtooth.

You may proceed.

Hey, good morning.

I'm wondering if you can remind us what comments have been made at the state level by politicians or regulators in the way of advanced metering initiatives that demonstrate support of that initiative?

And then also what steps you'll have to take in the future in the way of regulatory approval if you ever put that part of your plan into action?

Yes, this -- there's -- I mentioned earlier the 21st Century Energy Plan and the -- the fact that that 21st Century Energy Plan was shepherded through the process by former Chairman, Peter Lark.

That plan actually does address energy efficiency issues and references the fact that advanced metering technologies are available., and suggests that it would be appropriate for the utilities to explore various pilots in that area of AMI.

We're in parallel, working on our specific plan.

We've had discussions with the staff and briefed them on what makes sense and we know that there are other major utilities doing the same thing.

So I would say that there is support for, and recognition of the value of advanced metering initiatives.

We haven't gotten into a lot of specifics yet on exactly what our timetable would be with the Commission.

We'll be getting into that here later.

Obviously they would have to ultimately approve those capital additions to our rate base, but frankly we think that AMI has an awful lot of benefits in terms of customer service, in terms of cost reductions in some areas, and then thirdly in terms of the ability to support meaningful energy efficiency initiatives with feedback to the customers.

And so we're pretty optimistic its going to be something that attractive to both the Commission and the political environment.

Are you at the point where you've already begun to explore specific technologies and providers?

Yes, but I wouldn't comment on that.

We haven't made any specific commitments on technologies and providers yet, but yes, we have been looking at the start of the art and developing a very specific plan in that regard.

This is Tom.

It's one of those cases where we waited a little bit longer, because we dabbled with this a few years ago and technology has certainly caught up a lot, so we have some advantages going in now as opposed to having done it earlier.

I would just comment that we think one of the growing values I mentioned earlier is on customer response from an energy efficiency perspective.

The Electric Power Research Institute has been doing an awful lot of work on putting into effect protocols for the data communications and we think that's really important to make that work, and so we're going to watch that technology develop [more closely] before we make commitments.

Excellent, guys.

Thank you very much.

You're welcome.

(OPERATOR INSTRUCTIONS)

Okay, we know that it's a busy day on earnings calls today, so we thank everybody for joining us.

We feel real good with where we've done in this quarter, sticking with our plan, and we appreciate your interest and we hope to see many, if not all of you out at our conference in New York in September.

Thank you very much.

Ladies and gentlemen, this concludes today's conference.

We thank everybody for your participation.

Have a wonderful day.