CMS能源 (CMS) 2009 Q3 法說會逐字稿

Good afternoon everyone.

And welcome to the CMS energy 2009 third quarter results and outlook call.

(Operator Instructions)

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

Laura Mountcastle, Vice President and Treasurer.

Please go ahead.

Good afternoon and thank you for joining us for our call today.

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

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

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 management's discussion and analysis of 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 measure, is included in the appendix and posted in the Investor section of our Web site.

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 reported earnings guidance, reconciliation because of the uncertainties associated with those factors.

Now, I will turn the call over to Dave.

Thanks Laura, and thanks for joining us today.

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 will close with question-and-answers.

Third quarter 2009 adjusted earnings were $0.32 a share, unchanged from last year.

Rate relief resulting from the May self implementation at the electric utility, was offset by lower electric sales, higher operating costs at the utility, and premiums paid on the early retirement of parent debt.

And Tom will discuss the third quarter variances in more detail in a few minutes.

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

That forecast, of course, assumes an acceptable final order in the pending electric rate case, which is due by November 14th, so it is coming soon.

And it also includes the planned November 19th, self implementation of an $89 million increase in base gas rates.

The Michigan economy has been challenging over the past year, as you all know with automotive bankruptcies and record unemployment.

We are, however, starting to see positive signs.

In August, the department of energy awarded $1.3 billion in grants for 12 Michigan projects, involving advanced battery, and electric vehicle manufacturing and development.

These projects are estimated to create 6800 jobs in the next 18 months, and thousands more by 2020.

Earlier this month, the Governor's office announced that Georgia-based Suniva Incorporated, is planning on investing $250 million in new solar manufacturing facility, in Saginaw county, that is expected to create 500 new jobs over the next five years.

And two other companies announced plans to transform the idle Ford Wixom Assembly Plant into a renewable energy production facility that could employee an estimated 4,000 workers.

The redevelopment work is expected to begin early next year, with manufacturing at the site slated to begin in late 2011.

And not all of this development is in our service territory, but it nevertheless creates some optimism for the state's turn around.

As Tom will show you in a minute, economists are predicting modest growth in gross state product beginning in the fourth quarter of this year.

We expect that to translate into electric sales growth by about the middle of 2010.

We're looking forward to the Commission's order on our electric rate case, and of course, will analyze it for you as soon as it is issued.

Today, however let me mention a couple other items.

The show cause order we received in mid October relating to tree-trimming and plant operating and maintenance expenditures and the gas rate case status.

In 2005, the Commission issued an electric rate order, in which they established a tracking mechanism, for forestry and generating plant O&M expenses.

The order required that we file annual updates on these expenditures, which we have done.

On October 13th, the MPSC directed Consumers to show cause why it should not refund to its electric customers unspent tree-trimming funds and operating maintenance funds related to its fossil fuel plant operation.

The order asserts that we under spent in these areas in certain years.

As these graphs illustrate, our expenditures over the applicable period which were four years for tree trimming and three for the generating plants, match the rate case amounts in total though they were not identical in each year.

In fact, we elected to front load our expenditures to accelerate the benefits to our customers.

We believe we have achieved our commitments associated with the tracking mechanisms, and therefore, should not be required to make any refund.

Of course, the Commission is going to hear this case, and a pre-hearing conference as scheduled for November 19th.

Last week, the MPSC staff filed their testimony in our gas rate case, recommending a $63 million revenue increase, and a 10.7% return on equity.

You will recall that we originally filed for $114 million increase in base gas rates.

We have since notified the Commission that we intend to self implement only an $89 million increase in November, reflecting changes in our assessment since the original filing.

There are three primary differences between the staff's position, and the $89 million that we intend to self implement.

The staff adopted our gas sales forecast as proposed.

The $6 million difference shown, relates to third party revenues from whole sale transactions.

We included $10 million based on a seven year average while the staff used $16 million based on a three year average.

Incidentally, the staff proposed a revenue decoupling mechanism, that would be effective at the date of self implementation, though they exclude the effects of weather in their proposal.

This is a stretch in the right direction but we would like to see a comprehensive decoupling.

And we will continue to advocate for that.

There is a $16 million difference in O&M between our filings, although $4 million is a reclassification to investment and other.

So the net difference is $12 million.

That difference is attributable entirely, to forecast uncollectibles.

Our self implementation filing includes $30 million for uncollectibles, up only $4 million from our 2008 actual, and actually down $5 million compared to our 2009 forecast.

The staff used historical averages to arrive at the recommended uncollectibles, which is clearly not consistent in our view with the forward-looking test year concept, given the decline in the economy, and higher unemployment.

We have also proposed a tracker for uncollectibles.

However, they do recommend that if the Commission chooses to implement a tracker that they model it after the tracker that is currently in place from MichCon.

And finally, the staff recommends a 10.7% return on equity, and a lower debt cost to account for a $8 million variance.

There are number of other very small offsetting differences between the company and staff.

Overall, we continue to make progress in streamlining and simplifying, and that is reflected in the small numbers of differences in our case and the staff's filing.

Now let me turn the call over to Tom to discuss third quarter

Thanks, Dave.

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

Our third quarter earnings as Dave mentioned are $0.32 a share were flat from last year.

Similar to most utilities, we continue to manage through the weak economy and mild weather.

Cool weather this summer reduced earnings by $0.08.

Otherwise, third quarter earnings would have been about $0.40.

Again, as Dave mentioned we still expect to be on plan for the year.

Aggressive cost reductions, help make this possible.

Our capital investment also continues as planned, to meet renewable energy efficiency, and environmental regulations as well as reliability, maintenance, and generation needs.

Compared with 2008, utility earnings were up $0.04, with rate relief more than offsetting the impact of mild weather, and costs associated with investment plans.

Enterprises was a bit better, than last year.

Costs associated with early debt retirement premiums, however, reduced our earnings per share by a $0.05.

Now please recall, that these early debt retirement costs were more than offset, with gains of about $0.08 in the second quarter, related to that refinancing program.

Earnings per share for September, year-to-date of $0.88 is $0.05 below last year.

Planned actions in the fourth quarter keep us on target to deliver $1.25 for the full-year.

Of course the electric rate case order anticipated by November 14th will be an important part of this plan.

Our self implemented electric rates are worth $0.19 in the last two quarters, and $0.11 in the fourth quarter.

We expect self implemented gas rates to be worth $0.04, in the fourth quarter.

Our capital structure, and liquidity are healthy.

As you can see by the checks on this slide, much of the major work is done.

We have completed planned long-term financing actions at the utility and parent, and prefunded a large portion of parent maturities due next year, and in 2011.

Despite the soft economy, we have improved working capital at the utility by $100 million, since our last call.

And this is done through better than anticipated customer collections, taxes, and lower commodity prices.

The economy has been one heck of a challenge this year.

With electric sales down more than 4%, from 2008 on top of a decline of 2% in 2008.

This decline, over two years, is nearly as deep as the decline during the early 80s recession of 7% over three years.

We are, however, seeing signs of a turn around, the decline in Michigan's real gross state product have slowed substantially, and positive growth is forecast for the next few quarters.

Electric sales are expected to be down 4.5% this year, with industrials off 9%.

The industrial sales decline was 11% in the first quarter, 12% in the second quarter, and 4% in the third quarter.

We now expect the recovery to be a little later than anticipated earlier in the year.

This year, sales were down 5% in the first half, and we're looking at a decline of almost 4% in the second half.

As we look ahead to 2010, we expect sales to be soft in the first half, with growth in the second half.

Industrial sales are projected to be up about 2%, in the first half of 2010, and 6% in the second half.

We anticipate that a recovery and commercial and residential sales will follow that.

With companies like GM, resuming production, new firms also are beginning to gear up.

As you can see here, several auto battery producers and renewable companies have announced major new investments with meaningful job additions.

Dave highlighted a few of these for you earlier.

Many of these initiatives have received Federal grants and state support in Michigan.

These examples alone, include about $5 billion of new investment, and about 12,000 new jobs.

Most of these are underway, and several will launch in 2010.

With two months to go the magnitude of profit and cash flow sensitivity for the year are diminishing.

But metrics shown here will allow you to you judge for yourself.

Again, key to the outlook will be our electric rate case, which we will talk more about when we have an order.

Despite tough economic conditions, we continue to meet earnings targets.

This is driven in part by our strong investment program.

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

This is an important element of our plan to deliver earnings growth in the 6% to 8% range in the future.

Our ability to use tax-loss carry forwards of about $700 million including NOLS and AMT credits continues to help us avoid the need for issuing new common equity in the next few years.

This helps us to avoid earnings dilution that many companies face when they are financing large investment programs.

We continue to be on target to meet our earnings per share guidance of $1.25.

Cash flow was substantially stronger than targeted.

Capital structure is sound, and our financing actions substantially improved our debt maturity profile.

And with that, we look forward to seeing many of you at EEI, and we would be happy to take your questions, this afternoon, and operator, if you could open those lines we would appreciate it.

Thank you very much, Mr.

Webb.

(Operator Instructions)

Your first question is from the line of Daniel Eggers of Credit Suisse, please proceed.

Good afternoon, guys.

I was wondering, we heard a lot more momentum recently in Michigan on pushing forward and decoupling on the electric rate case side.

Can you just kind of share your thoughts of how you expect to see that -- one, if you expect to see it, two, how you expect to sow that policy implemented with this upcoming order.

Well, it is hard to predict anything specific.

We know there has been a lot of interest in it.

We have, of course, requested in our case -- in fact, the legislation on the gas side last year, the new law, actually requires it on the gas case that we meet certain conditions.

And the administration has been interested as well because they have obviously been very interested in energy efficiency, here in the state.

So, we know there is a lot of talk about it.

We obviously have been advocating for it.

We're optimistic the Commissions going to improve something in the way of decoupling.

But it is a bit difficult to predict how comprehensive, and exactly what that mechanism might look like, until we see the actual order.

With an order, with rates effective, I think in just a couple weeks now, could you get a decoupling mechanism in place in a timely fashion, or because it -- you get made whole later it would be okay to give a little time for --

Well, you know if they were to approve mechanism, I would expect it to go into effect very rapidly.

The -- the only point is, from a cash perspective, exactly when the true up occurs, how it occurs, all those details I think would have to be sorted out.

They may or may not be addressed if they do approve something at that level of detail.

They may actually be follow-up proceedings.

We just don't know yet.

I guess what our concern is is just, looking at the -- the issue of sales impact particularly on earnings.

And obviously we can be conservative on cash flow as well but directly on earnings.

To the extent we put something in place we think that would be helpful and we're hopeful the commission is going to go there.

On the -- the government grants on the smart grids this week, you -- did that allocation or lack of allocation change any of your thought process and how you guys plan to roll out AMI in your service territory?

No, not really.

I mean, we -- we were a bit disappointed that we didn't get to participate in that program.

We looked at what they did and I am sure that you're aware that there were about five times as many applications as got approved.

So, we were in a very large crowd.

And at least in our assessment we weren't quite as far along with starting to rollout meters in some of the other utilities, and that seemed to be one of their considerations.

So we're a bit disappointed but -- that's not going to preclude us from moving forward with our plan.

We still think its the right thing to do.

As you recall it is a fairly significant investment close to $900 million, over the next five years or so.

Although we don't start the major part of that rolling out the meters for a couple of years yet.

And then, we also think it is very important obviously for the energy efficiency goals that we want to achieve over the next decade.

Okay.

Thank you, guys.

You're welcome.

Thanks Dan.

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

Please proceed.

Thank you, good afternoon.

Yes, hi, Greg.

The -- when you formulated your guidance on slide 11.

For -- sort of a continued sort of modest decline in sales in the first half of '10.

and subsequent modest recovery.

and the second half, and therefore a flat expectation.

I mean, is that -- you all just trying to be ultra conservative in your approach to rate making?

Not wanting to -- to -- have to rely too much on an economic recovery to meet your revenue requirement?

Well, --

Are you -- have you done you know a real deep dive on what you think -- what your industrial customers are saying your -- their electricity consumption expectations are going to be?

Well, -- somewhere in the middle.

I mean, first of all, let me just say when we do these forecasts we don't do them to be conservative or anything else.

We use our best shot at these forecasts.

We use various economic projections and services to do that.

We don't necessarily go out to individual industrial customers and try to sort out what we think is going to happen, but we take into effect anything we know about.

So this is a -- it is a study on our part.

That we do internally and based on external economic forecasts.

And it is our best shot of what we think is going to happen.

Keep in mind Greg that when you look at these numbers that we have put together where it is down a little bit in the first half and up in the second half that's the whole side.

We do expect to see industrial sales clicking back up in the first quarter, second quarter, and even more in the third and fourth quarters.

But what we're anticipating as best we can judge, is that a reassumption in growth on -- reassumption on growth in residential and commercial will follow.

You can call that conservative.

It is just our best guess at the -- economics from the data you see.

So, you do see a -- on the leading edge of the recovery in the rest of your local consumption.

Absolutely.

Okay thank you.

That was really what I was getting at.

Yes.

(Operator Instructions)

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

Good afternoon, guys.

Hi, Brian.

Just quickly, I didn't see a CapEx slide in the presentation that usually include and I just wanted to make sure nothing has changed there.

I don't know that we usually include it in our quarterly calls, but we often do.

And certainly we will be going over that here next week.

When we're at EEI, but it really hasn't changed.

It is still in that $6 million-plus range over the next five years.

Okay.

Thank you.

You're welcome.

And we do look forward to talking more about it at EEI.

The next question comes from the line of [Edward Arkin]of Vasco Capital.

Please proceed.

Yes, hi, guys.

Just wondering if you could just give us a a little more detail on the cash flow from the operations side.

For the -- for the third quarter.

Sure.

I mean, just look -- just trying to figure out -- seems like from my numbers seems like the number is around $65 million.

-- it is just that --

Yes, our cash flow really looks pretty good to us.

And I think on the numbers you see in the reports that we put out, was pretty strong.

This is a period, though, in which we made our pension contribution.

And we did a few other small things like that, some settlements and the like.

So when you look at what we have done this year, we have put all that behind us.

And I would have you also look at slide number 9, which shows you the cash flow so, you pick up the full-year then.

And that will reflect what you would expect to see in the rest of the year.

And again, I would emphasize on the utility and working capital, that's actually better than where we were in the second quarter report,, by about $100 million of working capital.

So we're making some progress in the area of collections, which is always a nice leading indicator on what might be happening in the economy.

And we have had some tax benefits and of course the lower utility -- the lower commodity prices also help us a little bit.

Okay.

All right.

Thank you.

At this time there are no more questions in the queue.

All right.

Well, let me just wrap up.

This is Dave Joos.

Tom and I and Laura, John Russell will all be down at EEI here next week.

We made mention several times of the electric rate case and of course November 14th is coming soon.

I think the next Commission scheduled meeting is next Friday.

And so, if I had to guess I would say we're going to see rate order pretty soon, perhaps even next week.

And it will take us no doubt a little bit of time to analyze that.

And get the information out to you, but I promise you we will tell you what is going on as quickly as we can in that regard.

And other than that, I know we will see many of you down at EEI and have a chance to talk with you more about what is going on with the Company.

I will be making a presentation on Tuesday, and we will get into some of the longer term issues like capital investment program and things of that nature.

We continue to stay on track.

It has been challenging this year with the economy, and particularly with the unfavorable weather, But we have worked hard to continue to stay on track with our numbers.

And we look forward to see what the Commissioners have to say in the rate case.

Thank you for joining us today.

This concludes today's conference.

We thank for participating.

Thank you.