CMS能源 (CMS) 2009 Q2 法說會逐字稿

Good morning, everyone, and welcome to the CMS Energy 2009 second quarter results and outlook call.

(Operator Instructions)

There will a rebroadcast of this conference call today beginning at noon, Eastern time, running through August 6th.

This presentation is also being web cast 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 Ms.

Laura Mountcastle, Vice President and Treasurer.

Thank you, this presentation contains forward-looking statements.

These statements are subject to risks and uncertainties and should be read in conjunction with our Form 10-K's and 10-Q's.

The forward-looking statements and information and risk factors section 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 measures is included in the appendix and posted in the Investor section of our website.

We expect 2009 reported earnings to be about the same as adjusted earnings.

Reported earnings could vary because of several factors.

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

Dave?

Thanks, Laura.

And good morning to those on the call.

Thanks for joining us today for our second quarter earnings call.

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

Second quarter 2009 adjusted earnings were on plan, at $0.26 a share.

This is up $0.08 from last year, due in large past to increased rates and a gain from financing activities, and partially offset by a decline in sales and higher operating costs at the utility.

Tom will discuss second quarter variances in more detail in a few minutes.

For the full year we continue to expect adjusted earnings of $1.25 a share, unchanged from our original guidance introduced in February.

Frankly, staying on target has been challenging with the soft economy and near record mild summer here in Michigan, but we've been able to tighten down costs and implement other measures to offset those impacts so far.

Candidly, we certainly could use some summer weather in August to help the cause.

We didn't have much in July.

The Michigan economy has been in the news frequently over the past six months.

In the second quarter, Chrysler and General Motors filed for bankruptcy protection and quickly reorganized.

General Motors is more significant to our Company, and the good news is that Michigan will continue to be the location for many of GM's ongoing operations.

In fact, they recently announced that Michigan was chosen over two other states as the site for a new small car assembly plant, a nice show of support by General Motors for its long term commitment to the state.

Consumers Energy filed the Balanced Energy Initiative with the Michigan Public Service Commission in May of 2007.

The plan takes a long term look at the supply needed to meet electric customer demand over the next 20 years.

Last month, in response to a request from the Michigan Department of Environmental Quality, in the permitting process for our proposed new clean coal plant, we filed an updated analysis forecasting overall peak load growth of only about 0.3%, much lower than our long term historic average.

Despite that forecast, the filing continues to support the need for new clean coal plant, largely because it will allow us to retire older less efficient coal capacity.

In fact with those retirements, we forecast that over the next decade, we can reduce overall sulfur dioxide emissions by 91%, nitrogen oxide emissions by 83%, mercury by 81%, and carbon dioxide by 10% to 15%.

Some of you have asked if we think a new coal, clean coal plant still makes sense.

And we think it does make sense, not only for our customers, but also from an environmental perspective.

The next milestone is the issuance of final air permit by the Michigan Department of Environmental Quality which we expect will happen in the fourth quarter.

I'm sure you're all aware of the energy reform legislation passed in Michigan last fall.

This was critical in allowing us to move forward with our major capital investment program over the coming years.

I will update you on some of the major initiatives resulting from the legislation on the next page.

Our office in Washington is keeping a close eye on the sweeping energy legislation being contemplated by Congress.

While we're supportive of certain aspects of the Waxman Markey bill, there are some portions we would like to see improved.

In particular, we think the targets and timetables for CO2 emission reductions are too aggressive, and don't allow sufficient time needed for technology development in areas like carbon capture and sequestration.

Also, we would like to see a collar on the cost of emissions allowances to provide better assurance that the long term economic impacts of the legislation don't get out of control.

However we're not concerned with our ability to meet the near-term emissions targets, and the Waxman Markey renewables and energy efficiency goals are fairly compatible with those set in the Michigan law through 2015.

Of course the legislation has a way to go.

It is looking increasingly unlikely in our view that climate change legislation will not pass the Senate this year, and if it does, it will likely be softened somewhat from the House version.

Stay tuned.

In June and July, we completed a couple of parent financing transactions that have reduced the risk of refinancing our 2010 maturities, and a good portion of our 2011 maturity, while at the same time providing a modest overall earnings benefit for this year.

Tom will review these transactions and their impact on earnings in just a minute.

Now let's take a look at some of the initiatives resulting from last year's legislation.

It has now been almost a year since the Michigan legislature passed the package of bills aimed at streamlining the regulatory process, and setting new standards for renewable energy and energy optimization.

And I'm pleased to say the legislation from our perspective is working as planned.

From my conversations with investors and other utility executives it is one of the better models in the country.

Some of the specific actions that have resulted from the legislation include the following.

On May 26, the Michigan Public Service Commission approved our renewable energy and energy optimization plan that we filed in February.

And we're authorized to implement an annual surcharge of $79 million on September 1st, to begin recovery of the planned $1.2 billion renewables investment.

Separately, we began collecting an annual surcharge of $91 million on June 1st, to recover an estimated $508 million of costs associated with our energy optimization plan.

With respect to our electric rate case filed last November, Consumer self-implemented a $179 million revenue increase in mid May as allowed by the new law, significantly reducing the regulatory lag we've experienced under the old rules.

We expect the administrative law judge's proposal for decision September 2nd, and a final order by November 14th, the 12-month deadline, under the new law.

On May 22nd, we filed a new gas rate case, requesting $114 million revenue increase.

Self-implementation is planned for November.

Let's turn to the next page for a little more detail on this filing.

The gas rate case reflects the company's ongoing investment in gas utility assets, declining through-put levels, cost increases, including increases in uncollectibles and employee benefit costs, and a slightly higher return on equity with a 48% financial common equity ratio.

The case is based on a 12-month test year ending September 30, 2010.

As directed in last December's gas rate case order, and as specifically allowed under the new Michigan energy law, we have included a revenue decoupling mechanism in our filing.

The adoption of this mechanism in our view is a necessary element of our effort to promote conservation, and energy efficiency programs as required by the law.

The Company has also proposed rate adjustment mechanisms to address the increased volatility of uncollectibles and pension expense.

The staff is scheduled to file their testimony by October 22nd.

Self-implementation is planned after November 19, 2009.

Now let me turn the call over to Tom for his review of the quarter, and the outlook for the remainder of the year.

Thanks, Dave.

Let me add my welcome to everyone on the call this morning.

Glad to have you with us.

Our second quarter earnings at $0.32 a share were up $0.14 from last year.

Excluding good news from a reserve that no longer is required for special indemnification associated with prior asset sales, and the increase of a reserve associated with our environmental project at Bay Harbor, adjusted earnings were $0.26 a share, and that is up $0.08 from last year.

The year-to-year improvement of $0.08 included improvements at the utility of $0.04, and enterprises plus the parent of another $0.04.

Utility costs were in line with plan, as was rate relief, largely from full-year impacts of prior orders.

Outside of utility, we benefited from a gain associated with early retirement of debt.

Now on this next slide, you can see our progress in the first half of the year, toward our full-year guidance that Dave mentioned at $1.25 a share, as well as what's left to go.

Now, please note that the gain associated with the early retirement of debt in the second quarter is part of a total refinancing plan.

In July, we retired $233 million of parent debt coming due a year from now, and $87 million coming due in 2011.

This is shown in the tender offer bar, and that cost us a $0.05.

With one exception, the cost and rate relief shown in the six months to go portion of the slide largely are consistent with our plan.

The adverse weather worth $0.05 is not.

Weather in July has been abnormally mild.

So far, the weather in July has been one of the coolest on record, even weather in Fairbanks was a bit warmer.

We've offset this $0.05 deterioration with specific cost reductions, and are able to maintain our full-year guidance at $1.25 a share.

If however the chilly weather continues in August, we will have to re-examine our outlook.

Sales continue to be soft with a decline of 3.5% expected in 2009.

That's a little steeper than the 3% we discussed last April.

On a brighter note, GM and Chrysler have worked through bankruptcy filings at a brisk pace, and have announced plans for their future operations.

As shown on the right of this slide, GM plans to restart most of its facilities in our service territory and as Dave mentioned, announced the introduction of an all-new small car facility at its Orion plant.

In addition, four new advanced battery production facilities involving over $1 billion dollars of investment and thousands of new jobs in Michigan have been announced.

Expansions of solar facilities, including production at HSC in Hemlock also are under way.

As the economy begins to tilt toward a recovery, GM firms up its plans in our service territory, suppliers begin to benefit from resumed production, and new green initiatives get under way, we're beginning to see better news in the industrial sector.

Last April, we told you that we expected industrial sales to fall by 11% from 2008.

We now have strengthened this full-year outlook to a decline of 9%, based on an actual decline of 12% in the second quarter, which is better than the earlier expectation of about a 15% decline.

You can see our prior industrial sales estimates in green, and our new outlook in blue, on the right-hand side of this slide.

On the left side, we provided actual sales by customer class in the first half, and our latest outlook for the second half of the year.

Overall, sales slipped 5% in the first half.

We expect a decline of about 2% in the second half.

We expect residential sales to continue to soften a bit, commercial sales to be flat, and the decline in industrial sales to slow.

We've also seen progress in collections.

While we still expect gas and electric uncollectible accounts to increase from $46 million last year to $53 million this year.

This reflects an improvement from our last forecast when we anticipated uncollectibles to grow to about $58 million.

Although the impact of bankruptcies is still up from last year, it is less onerous than we expected.

Coupled with more government support available to low income customers, the outlook for collections has improved.

In April, we mentioned we may have increased the forecast of these uncollectibles a little too much.

So we showed this on our earnings sensitivities chart as both an upside and a down side.

More specifically, regarding bankruptcy, we recently wrote off $3.6 million as GM, Chrysler, Metaldyne, Checker Motors and Lear filed for bankruptcy protection.

And we've also reduced the size of our estimated exposure to further auto-wide bankruptcies from a range of $15 million to $30 million, to about $7 million at this point.

This reflects our potential exposure to 167 companies that have some portion of their business related to the auto industry.

As companies have moved into bankruptcy, or substantially reduced their exposure to the autos, we've excluded them from our list.

Although this is good news, it still represents an incremental exposure, even though much smaller.

As we look to the future, here is a slide that I know most of you are very familiar with.

It provides you with our utility investment program that results in rate based growth, of about 7% a year.

Now, this investment program is designed to minimize the rate impact on our customers, while maintaining a sound capital structure.

It is the most important element of our plan to deliver earnings of $1.25 a share this year, and growth of 6% to 8% in the future.

Our ability to use tax loss carry-forwards of about $600 million, including NOL's and AMT credits helps us to avoid the need for issuing new common equity for a few years, avoiding the earnings dilution that many companies face when they're financing large investment programs like ours.

As Dave mentioned, we're pleased to report that our recent financing transactions have permitted us to reduce the size of parent debt coming due later in 2010, from $300 million to $67 million, as well as the next parent maturity due later in 2011, from $300 million to $213 million.

This reduction coupled nicely with a continued strengthening of our liquidity to minimize our exposure to risk.

Our cash flow outlook for 2009 is similar to our report last April.

But now it reflects completion of the financing plan, payment of pension obligations, and contribution of equity to consumers.

And this latter part should help ensure recognition in both the pending electric and gas rate cases.

Our earnings and cash flow sensitivities chart is similar to our report last April, but reflects lower exposures to uncollectibles and auto sector-wide bankruptcies.

We're pleased to still be on target to meet our EPS guidance of $1.25 even in the face of challenging conditions.

Cash flow is substantially stronger than targeted.

Capital structure is sound.

But we did change our plans around capitalization resulting in parent debt of $1.8 billion, instead of $1.7 billion.

This reflects our recent financing that substantially improves our maturity profile, reducing near-term debt overhang.

Now, with that, Dave and I would be happy to take your questions.

So Diana, could you please open up the lines?

Thank you very much, Mr.

Webb.

(Operator Instructions)

Our first question comes from the line of Greg Gordon, Morgan Stanley.

Please proceed.

Good morning, guys.

Good morning, Greg.

Good morning, Greg.

So could you walk us through the refinancing activities, and what the change in sort of net interest costs are from that?

And are you saving money on interest expense, net of the cost of the transaction?

What were the relative rates of the debt that you replaced?

That's a good question, Greg.

Thanks.

First, what we've done is pretty simple.

We issued some new parent debt, and earlier in the year issued some new utility debt.

And we've take than parent debt as an opportunity to tender for some of those maturities that were due in 2010 and '11.

Now in doing that, we're keeping our interest rates roughly where they are, I wouldn't say that we've made any substantial improvement to them.

But the market was good for us.

And the real benefit comes from taking those near-term maturities, and pushing them out about 10 years.

So that's the main benefit that you see.

Great.

And what's the driving factor in your expectation of a modest or industrial sales being less bad this year, for the -- than what you would have expected at the end of the last quarter?

Yes.

In the second quarter is certainly when we saw the depth of the problem with the auto side.

Even though they're a small part of our business, they're an important part.

Where clearly, as people were heading into bankruptcy filings, they had a lot of their plants down for a good portion of the quarter.

That hurt a lot.

We are going to see that picking back up now, as GM has announced what it plans to reopen, and is beginning to schedule to run some plants.

As are then the associated component suppliers, and even in this case, I think some of the commercial impact will change favorably just a little bit as we see that.

A little bit of turn that we're seeing in the economy is allowing some of our other customers, whether they're food, or furniture, or pharmaceuticals or whatever, to begin to pick up their schedules just a little bit, to begin to normalize.

So it is kind of across the board, but the most visible part is the auto piece.

What if anything is in the public domain with regard to commentary around the self-implementation of the rates you did in May, from either the staff or the commission, or the commission themselves?

I mean what are the risks around getting that interim rate approved at the level you've implemented it?

Well, let me just say there is not a lot in the public domain, other than the fact that the Public Service Commission did indeed hold a hearing.

It was a fairly uneventful hearing.

In fact, I testified personally.

And I got I think maybe two questions, and they were fairly milquetoast kind of questions.

I will just remind you what the process was.

The new legislation allows for self-implementation, after six months.

It does not require that the Public Service Commission take any action to approve that self-implementation, though they have the opportunity to consider and potentially ask the utilities to self-implement something less.

They did a hearing for that purpose, chose not to really intervene in the process.

They did issue an order, however, in our case that was a bit unique.

In that the -- one of the concerns that some of our customer groups had was that the legislation last year also requires a correction of this rate skewing, or inter-class rate subsidies that have existed in Michigan for a long, long time.

And as a result of that, the rate adjustment that was going to take place with the final order in our view would have had different impacts on different classes of customers.

And that created some concern.

The commission therefore jumped in, and said go ahead, and self-implement your increase, but offset part of it by refund of part of the Palisades nuclear plant sale proceeds that were still being held in abeyance.

And we did that.

That limited the impact on the industrial class that would otherwise have had a reduction in the final order.

There is a fair amount of detail, but all I will say is the commission did issue an order in that regard, and we thought made a lot of sense.

We self-implemented that increase.

And of course, we will have to wait until the commission issues its final order in November.

And I will remind you that the way the process works is not unlike how it works at FERC now, is when the commission comes out with a final order, if we have over-collected in their view, we will have to refund the difference with interest.

And that interest rate is established at LIBOR plus 5%, for the first 25% of overcollection, and an equity level interest rate after that.

So that's how the process works.

We will just have to see what the commission does in their November order.

I will just tell you that we have very specifically adjusted the amount that we self-implemented to be consistent with near-term very specific changes in capital spending and capital structure and issues of that nature.

And we continue to believe that the number that we self-implemented is very justifiable.

Thank you.

You're welcome.

Thanks, Greg.

Good luck on the new assignment.

We have a question from the line of Dan Eggers, Credit Suisse.

Please proceed.

Hey, good morning.

Can you talk a little bit more about the cost-cutting that you guys are seeing to offset some of the lower demand, particularly in July?

Where you're seeing it from the magnitude of the cuts, thoughts on sustainability and is there more room if August shows up bad?

Dan, that's a great question.

Couple of thoughts.

One thing we're doing is we're taking a look at any discretionary costs.

And I think all companies are doing that in this environment.

And there are still some small windows here and there, that we're able to take advantage of to benefit for our customers.

So there is another specific area, you will recall, that in July, we just launched our new -- July a year ago, our SAP systems.

And only now are we beginning to be able to back off of some of the additions of folks we put in, particularly around collections, to do the introduction correctly.

And so we're seeing some productivity coming out of there, both for what we had to add in, and also productivity around areas that give us some benefits of putting in an integrated software system.

So that is giving us a little bit of help.

We're doing things that again a lot of people are doing.

We're looking at some grants that may be of use for us, as there is a lot more opportunity with the stimulus work that is going on today.

And the other thing is I already mentioned the UA's those are down a little bit.

Now we don't completely control of that of course, but there has been some benefit.

We probably got a little conservative in the last quarter, as we were protecting for what we were concerned would be a very difficult situation.

But we've been able to back off because the real numbers are a little bit better than that.

So that gives us a little bit of benefit going into So that gives us a little bit of benefit going into the second half.

Even though the weather has been cool, which is not helpful to us here in the summer, the storms have been a little bit lighter.

So the experience that we would have expected to have through this portion of the year is a little bit lighter, and may continue for a bit.

So there is a variety of cost-cutting areas, including just the tough hard-nosed stuff of anything that is discretionary, right on through the productivity work that you do with new systems we're putting in place, and benefiting from those as best we can.

That gives us enough all together that we can offset the $0.05 we showed you about soft weather in July.

If that happens again in August, we will do everything in our power to offset that, but it is too soon to say that if we ran into something that adverse, we could deal with it.

So we will have to see how it turns out.

How are you guys tracking on storm expenses or storm costs this year versus generally what is being planned and what we saw last year.

A little bit better.

Because this mild weather where you don't see the really hot days that typically bring on a thunderstorms.

Any of you who are used to traveling from New York into the Midwest know all about that.

We haven't seen much of that, but the way we plan for it, we've got our average plans for storms for the rest of the year, just the way we look at normal weather for the rest of the year.

So that will be in the end better or worse depending on how mother nature treats us.

Okay.

And then on bad debt expense, just to clarify, you brought in the expectations for what bad debt was going to be for the year.

It was like $3.5 million, $3.6 million of auto bad debt that you have incurred so far.

Do you assume that gets returned to you this year, and is that netted against your full-year bad debt expense?

Or could that, you know, offer upside with GM and those guys actually pay you before year-end?

Our policy that we talked about that we follow religiously from an accounting standpoint, is when someone goes into chapter 11, we take the write off.

So we've taken the writeoff on the cases that we've shown you here that recently had gone through bankruptcy, including GM, Chrysler, Metaldyne, and so on.

Once we have collected that money back, that's when we will do a reversal.

So our reserve reflects exactly what we know today.

We are hopeful, I will say that, on General Motors, that maybe in August, maybe it is later, but sometime in the near term, that we may actually get payment for not all, but most of the portion of what we had written off, because it will only be associated with the new GM that continues.

Anything associated with the old GM, we won't get recovery on.

So we factored that in, but we can't change our reserves till we see how that plays out.

Are you going to -- do you expect to get repayment on any of the bankrupt parties or is it kind of a GM situation?

I think GM is a little bit unusual, but again, the way we do it, you really can't tell, until you get through the court process on how that will play out.

Our expectation is generally that we do not get paid.

Obviously, there are some people that are able to do that in the end, but I would say it is less than the majority that do that.

So the way I think you should look at it, is what we've written off, we probably won't recoup.

If we do, it will be a nice little piece of upside.

How much of a drag in the second quarter were the auto-related, bankruptcy-related bad debt expense?

We have a lot of that laid out in the $3.6 million that we showed on the slide, but the total bankruptcies so far this year have been about $6 million.

All right.

Thank you very much.

Appreciate it.

You're welcome.

Thanks for the questions.

We have a question from the line of Edward Heyn, Catapult Capital Management.

Please proceed.

Good morning.

Good morning.

Had a quick question on the sales forecast.

I'm looking at -- I guess the industrial sales you guys have mentioned, that the forecast has improved slightly since the last quarter call.

But I'm also comparing the slide just on the electric sales, on the page before, that is now 3.5% down, versus I think in the first quarter, it was 3% down.

So I guess is there some additional weakness that you're seeing, I guess in the other sales sectors like the residential and the commercial that's making that total volumes actually go down for the year?

Yes, there is.

We had anticipated in our planning base that the industrial sales would be a little bit worse than what we see them today.

So you see that favorable adjustment.

On the residential side, we had anticipated that the sales would be soft.

Off a little bit, but not as much as they are.

Now, they are about 1%, they're a little less than 1% off, is what we expect, so that is a little bit worse than we had originally anticipated.

And then commercial, probably goes right along with that.

Just a similar piece of drop for the full-year, but most of that was a hit that we took in the second quarter.

So I would say for the outlook for the rest of the year, industrials are a little bit better as you see.

Residential is a little bit worse, being down about 1%, instead of closer to flat.

And commercial, pretty close to what we thought when I look at the numbers here, which is just flat.

Okay.

But just given the rate structure, and the potential that I think the commercial -- the industrials pay a large part of their rates in demand charges, is that shift where the softness in residential versus industrial is actually a net head wind for you, or is it a help?

No question, when you see the hurt on the residential side, that is a little bit more of a hurt overall.

But we've been able to factor that into our guidance and our forecast.

So we're still comfortable with that.

Got you.

And then just a quick question.

What is the Bay Harbor environmental project that you guys took a charge for this quarter?

Well, that could be a long, long story.

And I'm not sure we have a long of enough time on the call.

Let me just say that the Company, at the parent company level, not through the utility, was involved in re-development of a piece of property up north, in the lower peninsula of Michigan.

And it was the reclamation of an abandoned cement plant.

That project was actually completed, gosh, almost a decade ago.

Our involvement of it -- or involvement in it actually ended in about 2001 or '02, something like that.

But rules changed on mercury around the Great Lakes, and there were some concerns with regard to what's called leachate from the abandoned tailings from that cement plant operation, that in some areas more problematic than originally envisioned.

And as a result of that, the EPA, and the Michigan Department of Environmental Quality came to us, and ultimately that site became a reclamation project, if you will.

We have the obligation to our other partners, frankly, to deal with that, and so we have been.

That project is well along now.

In fact, it has been going on for close to five years.

We were getting to the point now where we're very close to filing what is called the remedial investigation alternative evaluation with the EPA to sort of close out the scope of the work that needs to be done there.

But specifically, the increase in the reserve is associated with the fact that in some of the areas we had to implement additional water collection measures during the shoreline to prevent certain PH exceedances from occurring.

And the disposal of that water, the forecast long-term cost of continuing to operate those disposal facilities was simply -- it had to be increased because of the increased volume.

And so that's what the charge is associated with, the second quarter charge is largely associated with the present value of long-term operating costs forecast for water disposal.

Got you.

Thank you for -- sorry for making such a long explanation, but thank you for the time.

You're welcome.

Thanks for the questions.

And sir, there are no more questions in the queue at this time.

All right.

Well thank you for joining us again today.

Frankly, we thought that this call would be a bit uneventful.

We haven't changed a whole lot in terms of our plan.

And I guess that would say that we seem to be comfortable with riding through the bumps in the economy, and certainly some less than favorable summer weather.

And we will continue to work hard to deliver on our expectations, to deliver on our targets this year.

A lot continues to go on, but I would just summarize by saying we're on our plan for capital investment.

We're pleased with the changes that occurred through we're pleased with the changes that occurred through the Michigan energy legislation last fall.

And so far, we think they're working in the way we expected them to, to support our plan.

A lot going on at both the state, and really at the federal level on issues like environmental regulation.

We're very much involved in that process, and factoring it into our plan.

Again, thank you for joining us, and we look forward to talking to you next quarter.

Bye now.

This concludes today's conference.

We thank everyone for your participation.