CMS能源 (CMS) 2008 Q2 法說會逐字稿

Good morning, everyone, and welcome to the CMS Energy 2008 second quarter results and outlook call.

This call is being recorded.

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

eastern time running through August 12.

This presentation is also being webcast and is available on CMS Energy's website in the investor relations section.

At this time, I would now like to turn the call over to Mr.

Laura Mountcastle, Vice President and Treasurer.

Please go ahead.

Thank you.

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

With me today are Dave Joos, President and CEO, and Tom Webb, Executive Vice President and CFO.

Our earnings press release issued earlier today and the presentation used in this webcast are available on our website at cmsenergy.com.

This presentation contains forward-looking statements.

These statements are subject to risks and uncertainties and should be read in conjunction if our form 10-Ks and 10-Qs.

The forward-looking statements and information and risk factors sections discuss important factors that could cause results to differ materially from those anticipated in such statements.

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 included in the appendix and posted in the investor section of our website.

We expect 2008 reported earnings to be about the same as adjusted earnings.

Reported earnings could vary because of gains or charges relating to previously sold assets and business operations or other factors.

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

Now, I will turn the call over to Dave.

Thanks, Laura, and good morning, ladies and gentlemen.

Thanks for joining us for our second quarter earnings call.

As is our usual practice, I will start the presentation with a brief update on the business, and then I will turn the call over to Tom for more detailed discussion on the financial results and outlook, and then we'll close with questions and answers.

Solid operating results for the second quarter 2008 reflect the successful efforts over the past few years to restructure the Company.

Our second quarter non-GAAP adjusted earnings were $0.19 a share, up from $0.08 a year ago.

Core utility earnings are up as a result of the investments made to improve the capital structure and grow the rate base.

Enterprises and parent earnings were up slightly as reduced overhead and lower interest expense more than offset lost earnings from assets sold last year.

Year-to-date earnings are on plan, and our full year guidance for adjusted earnings remains unchanged from the target set over a year ago of $1.20 a share.

Tom will get into more detail on both the second quarter results and our year end forecast in a minute.

There has been a lot of activity in the legislative and regulatory front in Michigan, and I want to update you on the progress in these areas.

But before I do, I want to mention how pleased I am to say that as of July 1, we made the transition to our new SAP-based enterprise software system, replacing more than 100 legacy systems that manage all major business processes.

Implementation is going well.

We expect both operating efficiencies and customer service improvements to result from this investment over time.

Turning now to legislation.

The State, House and Senate have been working on the details of the legislative energy reform package we've discussed in the past.

House bill 5524 rewrites the state's electric deregulation law and updates electric utility regulatory policies.

Both the House and Senate version set a cap of 10% for the customer load that can be served by alternative electric suppliers.

While there are differences in the deskewing, provisions of the House and Senate versions -- and remember, deskewing is the interclass subsidies that we're trying to address -- both would result in elimination of skewing over five years for Consumers Energy.

Senate Bill 213 set a combined renewable energy and energy efficiency portfolio standard at 7% by 2015.

The house version approved a 10% RPS standard and a separate energy efficiency standard.

The Senate has a broader definition of renewable energy as well.

The bills were sent to conference committees in late July to resolve the differences in those committees are beginning their work.

This could lead to a vote when both sides meet again in August.

We expect most of the effort in the coming weeks to be focused on reaching a compromise on the energy efficiency and RPS differences.

There has been broad support for energy reform by the Michigan Chamber of Commerce, the Michigan Manufacturers Association as well as many individual businesses, labor unions, the Michigan public service commissioner and the Governor.

We continue to be optimistic.

Turning now to regulatory.

This summer, we received an electric rate order and reached a settlement that revolves issues related to the MCV power purchase agreement.

The rate order was sufficient to support our plan while the MCV order resolved long standing risks associated with the contract.

In February, we filed a new gas rate case requesting a $91 million increase based on a 2009 test year.

We also requested a revenue decoupling mechanism for residential customers that would eliminate the impact of planned energy efficiency and conservation programs.

Staff testimony is scheduled to be filed August 25.

Later this month, we plan to file a new electric rate case reflecting increased investment at the utility to improve customer service and system reliability.

This case will also be based on a 2009 test year.

Now, let me turn the call over to Tom for more detail.

Thank you, Dave, and thanks, everybody, for joining us on this busy earnings call day.

For the quarter, reported and adjusted earnings were $0.19 a share.

Without restructuring and other legacy costs, adjusted earnings were up $0.11 from a year ago.

Now, unique events during the quarter included some unusually severe storms and some game changers included the launch of the new SAP-based system that Dave talked about, resolution of MCV exposure and progress on Michigan energy legislation.

I will talk a little bit more about some of these in just a moment.

The $0.11 earnings increase from last year includes an improvement at the utility of $0.07 and enterprises in the parent of $0.04.

Despite softer than planned sales and an extraordinary storm system, we continue to manage our business and our costs to achieve our earnings target.

At enterprises and the parent results of restructuring are flowing through to the bottom line.

These include big benefits from the sale of international businesses and unlocking value at DIG.

At the utility, earnings improvements flow through from restructuring the MCV contract and accomplishing a good electric rate order.

The order reflects major investments made possible -- the rate order by proceeds that come from international sales last year.

We're very pleased with that.

These results reinforce the decision several years ago to sell higher risk nonregulated assets and redeploy the proceeds from that to improve our balance sheet and invest in the utility.

We're delighted to deliver these results to you.

Now, it is true that the Michigan economy is weak, but not all locations are impacted equally.

The Big Three auto companies are struggling.

The auto sector represented 5% of our customer revenues, but only 3% of our gross margin.

Provisions in the new Michigan energy legislation are designed to help our big customers from deskewing to economical new generation.

We work every day to serve all of our customers better.

There are bright spots in our service territory, and one example is Hemlock Semiconductor, and they're the world's leading producer of polycrystalline silicon, a substance used in solar panels and other electronics.

They approved a $500 million in expansion in 2005 and $1 billion upgrade last year.

This created 500 jobs and likely provides a boost in sales in the second half of this year.

Michigan is on the short list of sites for another major expansion, and that should be announced soon.

Other examples of growth include Kaiser Aluminum Corporation, a leading producer of lightweight fabricated aluminum products for aerospace and engineering applications.

They're planning to locate a new $80 million research facility in Kalamazoo, and MPI research, a provider of comprehensive preclinical research and development services is planning a $330 million expansion in Kalamazoo.

These two Kalamazoo expansions alone are expected to create nearly 4,000 new jobs and those are in our service territory.

Other business expansions have been announced this year, creating several thousand new jobs in Michigan.

Over the last ten years, our total electric demand has increased at a rate of about 1% annually.

This year, we expect to be down due to weather and up slightly on a weather adjusted basis.

For the period 2009 through 2013, we base our plans on an annual growth rate of about 1%.

Our full year guidance, as Dave mentioned at $1.20 is unchanged, and that's up 43% from 2007.

The darker green and red portions of the bars shown on this waterfall chart illustrate what's behind us in the first half.

The lighter portion shows what's left to go.

Even here much of the work is done.

At the utility, we have $0.24 to go, the bulk of which is attributable to electric and gas rate orders in place and the MCV regulatory out accomplished last September.

Most of our large uncertainties are resolved, but we still need to manage the business to address normal issues, whether they're storms or adverse weather or whatever may occur.

At enterprises and the parent in 2007, we had some one time tax and other gains that don't repeat in 2008.

Overhead and interest savings pretty much are in place.

Bottom line, our results are on track to meet full year guidance of $1.20 a share for this year.

Let's switch over to cash flow.

Many of you appreciate having this view of our cash flow.

Except for gas prices up about $2, these data are similar to what we showed you in our last call.

Growth oriented investment of $860 million at the utilities t is funded with earnings and appropriate debt.

Parent cash flow is healthy with dividends from consumers and enterprises more than ample to service debt overhead and the growing dividend.

Gas prices have been volatile.

In this forecast, we've included prices at $11.44, up from $9.43 last quarter.

As you know, that's conservative with prices recently falling below $10.

If this holds for the rest of the year, our cash flow will improve from what is shown here by more than $100 million.

Even so, to provide additional cushion against the risk of rising working capital requirements caused by higher commodity prices, especially gas, we're planning to add a new 364 day $150 million bank facility increasing utilities revolver capacity to $650 million.

With more than $400 million projected as available at year end, this short-term capacity will help to ensure strongly liquidity.

Also, I know many of you like to keep track of our NOLs and AMT credit status.

These should be worth over $600 million at year end.

Here is another slide that many of you like to see.

With it, we provide earnings and cash flow sensitivities.

They're not a lot different from what we showed you in our last call.

Utilities across the country are suffering from rising customer uncollectibles.

We forecast $32 million of bad debt this year, and that's the total for gas and electric.

It's about the same as last year.

Most of this is provided for in our rates today.

As a percent of revenue, this is about 0.5% similar to the levels of the last two years.

Now, our weakness is in communities near Detroit and Flint.

Exposure is lower in the mid and western portions of the state where most of our service territory exists.

If, however, our uncollectibles rise another 10% or about $3 million, we still would be just below our peers.

Looking further into the future, we expect to invest over $6 billion during the next five years providing rate base growth of about 7% a year and our EPS growth projected at about 6% to 8%.

The pending energy legislation that Dave discussed earlier would mandate part of this and facilitate a lot of the rest.

Our balanced energy initiative energy approach supports the state's energy efficiency and renewable priorities and the desire for added clean coal generation to provide cost efficient energy.

Meaningful coal plant investment begins about 2011 and as shown on the right, other important investment opportunities exist if for any reason the plan is delayed.

Alternative investments include extending the life of existing coal generation plants, converting simple cycle to combined cycle gas generation and reliability improvements.

We simply do not lack for attractive investment opportunities.

We prefer our base plan as the most cost efficient for our customers and the most balanced approach that minimizes risks by providing fuel diversity and flexibility.

Now, here is one example of one of those new investments that will lead to improvements in reliability and cost efficiencies.

As Dave mentioned, we launched a comprehensive SAP-based system on July 1.

This replaced over 100 legacy systems including customer billing, supply chain, payroll, asset management, customer management, and a suite of financial management systems.

Many of these legacy systems were well beyond a decade old, and some went back more than 30 years.

Maintaining these systems was becoming costly and cumbersome and candidly, our reliability was not what it should have been.

We've got a good start thanks to the super work of our employees.

Still, we've got a lot of work to do and it will take several months to fully integrate and fine tune.

We invested $174 million and expect this investment to pay for itself in efficiencies and importantly, provide for better service to our customers.

Recapping our progress this year, we're on track to meet each of the financial targets on our score card with one exception.

Our cash flow is still short of target, reflecting the impact of higher than planned gas prices on working capital.

If gas prices continue to pull back, we may end up a little closer to our target, but we'll see.

Capital structure and earnings at $1.20 a share continue right on plan.

Now, we would like to open up the call for your questions if you could help us, operator.

Thank you very much, Mr.

Webb.

(OPERATOR INSTRUCTIONS) Our first question comes from the line of Dan Eggers from Credit Suisse.

You may proceed.

Good morning.

On the Michigan legislation, where are you guys seeing the sticking points between House and Senate right now?

Any thoughts on when we should expect this to get finalized if you have a feeling for that at this point in time and then just the government's comfort with the renewable standards and some of the policies relative to what she had laid out from an expectation perspective?

Good morning, Dan.

Some of this, as you know, is hard to predict.

There is really two major groups of issues here.

One is the reform to the regulatory policies, including the limitation on the alternative energy suppliers providing service to customers here in the state, and frankly, there are not a lot of differences in the two House and Senate versions of those bills, so that's not where most of the attention will be over the coming weeks.

Really, the major difference is that the Senate provided an overall 7% standard which included both renewable portfolio standard investments as well as energy efficiency, while the House version had 10% for RPS alone plus energy efficiency requirements, and I think that's where the discussions and the negotiation between the conferees and frankly, the administration on those issues is probably where most of the attention is going to take place.

Those discussions are ongoing right now.

We continue to be optimistic that a reasonable compromise on those issues can be reached.

The next opportunity for the two chambers to be in session at the same time and vote on the issues would be the 13th of August.

It is difficult to predict whether or not a full compromise on those issues can be reached between now and then, but it is possible, and if not, we still optimistic that that's going to get done yet in the third quarter.

Okay.

Thank you.

And just kind of given the running coal prices in the quarter, can you remind us where you guys are hedged and had kind of the nature of your hedging for the existing fleet, and then maybe any impact on the economics of the new coal plant given the big move in coal costs?

Yes, just remind you and then maybe, Tom might have some more details.

I will remind you that we shifted predominantly to western coal, and despite the fact that eastern coal prices have been up dramatically this year, western coal prices have been relatively well behaved.

The new coal plant we would expect to be western coal oriented as well.

Our cost estimates for the new coal facility are up.

We haven't talked about specifics, but as you know, commodity prices are up, steel, labor, and everything else.

Those are probably going to continue to change and we'll present a forecast to the public service commission as the actual costs when we make a filing associated with that plant, probably sometime next year by the time that all gets done.

But in term of the coal supply for this year, we really got 100% of our estimated coal supply already under contract and about 84% for 2009.

We also have multi-year transportation contracts in place, so we're in pretty good shape with regard to hedging our fuels.

Great.

Thank you, guys.

Your next question comes from the line of Brian Russo from Ladenburg Thalmann.

You may proceed.

Good morning.

Good morning, Brian

It looks like you guys had a very good first half in terms of reducing overhead, and it looks like to meet your guidance of $1.20, you only need $0.03 in the second half, and I am just wondering why isn't it more evenly spread, or why can't you repeat the first half cost cuts in the second half?

You need to remember that some of the things we did were a little bit one-time in nature, because our overhead levels have come down to about where we need them to be on the Enterprises and parent side, and you are going to see that pretty smooth as you then go off into the future.

Plus there is a couple of little one time things that go the other way in these numbers in the second half.

So the key message here is right on target, down where we need to be, interest income falls off just a little bit because we had a little more cash sitting around earlier than we will have in the second half.

Okay.

You also mentioned benefits and savings with the new SAP based system launch that was launched, I think I heard you say early July.

Could that lead to incremental reductions in overhead?

The way to think about that is don't look for over head reductions this year for certain, because this is the launch year.

We just started this out on July 1.

It will take several months to fine tune it and get it into good shape.

Then we do expect to get some nice synergies out of this as we go through next year and the next few years, and what it will do, is it will make it just that much easier to earn our authorized rate of return.

Okay.

And then just lastly, on the utility investment plan slide.

Could you quantify how much of that rate base investment is contingent on energy reform?

I know the coal plant is.

Anything else in there?

There is some additional items in there.

When we talk about, for example, the AMI system, we think AMI makes a lot of sense, but it is sort of tied to providing a lot of the energy efficiency benefits, and it may be that if the legislation doesn't pass, and the energy efficiency requirements are not in place, that we may go a little bit slower on that.

We don't expect that to be the case.

We think it makes sense either way.

The other issue of course and probably the biggest one is renewables, because we have assumed in here investment in wind capacity and other renewables as part of meeting an RPS standard.

We still think that the standards that are likely to come out of this legislation are going to justify that kind of an investment, but we certainly wouldn't go forward at that level until it was clear what the requirements were and we knew that the commission was going to be supportive of those investments.

Those are the two big ones.

Great.

Thank you very much.

OPERATOR INSTRUCTIONS) your next question is from the line of Paul Ridzon with Keybanc.

You may proceed.

Paul, go ahead.

I'm sorry, I was muted.

$0.07 of electric volume declined.

Looks like four of that was weather.

Could we just elaborate a little on the $0.03, and I guess that's lower industrial sales, and what's the opportunity to remarket that at better margins?

Well, remember, a big piece of that when you're looking at the weather piece is there was a hot June a year ago, and then when you look at the weather adjusted kind of numbers, the best message to think about is that we have got a little bit of a kick up coming here in the second half from some of our new customers, primarily Hemlock Semiconductor.

Remember, we talked about their major investments that is they're putting in place?

That's going to translate into more business from them and maybe more jobs with more residential as well.

I would say, Paul, also in the first half of course, the auto sector has been down, but remember, specifically, there was an American axle strike that impacted the auto sector in general the first half of this year.

Did that hit you or Detroit?

Well, it probably hit them more than it hit us, but it hit both.

Okay.

Thank you.

(OPERATOR INSTRUCTIONS) We have no further questions at this time.

Alright.

Well, that doesn't surprise me, because things have been pretty straightforward.

I think as we've indicated, we're pretty much on plan for this year, and a lot of the major issues have been resolved.

As Tom indicated, we still have to manage cross our T's and dot our I's the rest of the year, but we feel pretty good about where we are in continuing to implement our plan, continue to be optimistic about the legislation.

Timing is difficult to predict as I indicated, but there is good progress that's been made there, and I think it is a priority for the state and everyone in the leadership positions have indicated that.

So we continue to be optimistic, and we look forward to talking with you in the future.

Thanks very much for attending today.

This concludes today's conference.

We thank you for your participation.

Have a wonderful day.