CMS能源 (CMS) 2010 Q2 法說會逐字稿

Good morning, everyone and welcome to the CMS Energy 2010 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 noon Eastern Time, running through August 4.

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

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

Laura Mountcastle, Vice President and Treasurer.

Please go ahead.

Thank you, Jim.

Good morning and thank you for joining us today.

With me are John Russell, President and CEO 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 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-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 instead such statements.

This presentation also includes non-GAAP measures.

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 2010 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'll turn the call over to John.

Thanks, Laura.

Good morning, everyone.

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

I'll start the presentation with a few brief remarks and then turn the call over to Tom for more detailed discussion on the financial results and the outlook for the remainder of the year.

Then we'll close with Q-and-A.

Second quarter 2010 adjusted earnings were $0.26 cents.

Down $0.02 from last year.

The decrease was due primarily to the absence of the gain from financing activities in 2009 and the effect of unseasonably warm weather on our gas utilities, partly offset by electric and gas rate relief.

Adjusting for weather at our gas utility, we would have recorded $0.31 in the second quarter.

As a reminder, the sales decoupling mechanism offset the effect of unseasonably warm or cold weather on our electric business, but weather is not included in our gas decoupling mechanism.

For the full year, we expect adjusted earnings at $1.35 a share, unchanged from previous guidance.

Tom will discuss the second quarter variances, and full year guidance, in more detail in a few minutes.

The foundation of our long-term strategy is safe and excellent operations, that provide value to our customers.

I'll review the results of a recent consumer satisfaction survey and other operational improvements shortly.

We'll take another step, -- we've taken another step forward towards achieving our 10% renewable energy target and I'll discuss those in a few minutes, and finally, I will give an update on the status of recent regulatory actions.

First, let me update you on our operating performance.

One of the primary, -- one of our primary objectives is to continue improving the safety and reliability of our systems, which we believe creates customer satisfaction and value.

We have seen the benefits of our efforts in a couple of recent independent surveys.

We moved up 13 places from the fourth quartile to the second quartile in the 2010, University of Michigan, American Customer Satisfaction Index, which surveys residential customers of combination utility companies.

In the annual JD Power survey of electric customer satisfaction, our customer rated us higher, this year, in five of six categories.

But, we still have more work to do to achieve first quartile performance.

I am pleased with our improvement in the area of employee safety, excuse me, from 2007 through the end of 2009.

We improved our overall safety performance by more than 50% as measured by reduction in employee incidence.

Based on year-to-date results, we are forecasting another 20% improvement for the current year.

Another area of improvement is cost management.

A recent benchmarking study, by Oliver Wyman, ranked consumers in the first quartile of overall cost management, which reaffirms our ongoing commitment to keep our customer rates as competitive as possible.

In May of this year, our union employees ratified a new five-year agreement that provides for increased Health Care cost sharing and changed post retirement health benefits onto the old plan for retired employees.

This decreased our UWUA liability by $95 million and will result in a decrease in benefit costs of $14 million in 2010.

As discussed on the next slide, our renewable energy development plan is on target.

To meet Michigan's 10% renewable energy requirement, we expect to add 500 megawatts of owned or contracted renewable capacity by 2015.

The blue dots on the map represent the locations of existing renewable sources that account for approximately 4% of our sales.

In June, we signed agreements with developers for 243 megawatts of renewable energy capacity, as represented by the gold triangles shown on the map.

The 20-year power purchase agreements were approved by the Michigan Public Service Commission yesterday.

On the build side, we plan to construct 100 megawatt wind farm, named Lake Winds Energy Park, located on the west side of Michigan.

We finalized the turbine contract, with Vestas-American last week, and recently issued a request for proposal for the balance of the work.

The wind park is scheduled to begin operation in late 2012.

Renewable energy from our existing projects, combined with our four new PPAs and our Lake Winds Energy project, will bring the total supply from renewables to about 8% of our sales by the end of 2012.

Additional development will take place in our Cross Winds Energy Park.

This project is expected to be fully operational by 2017.

As a reminder, the Company is currently collecting a surcharge, from its customers, to recover the cost of these developments and projects.

Here's an update on our gas and electric rate cases.

In May, the commission issued its final order, authorizing us to increase gas rates by $66 million annually, $23 million less than was self-implemented.

We recorded a regulatory liability, of $15 million in the second quarter, related to the customer refund.

We will file our refund proposal with the MPSC in August.

On July 22, the Company self-implemented an electric revenue increase of $150 million.

The key differences between the amounts self-implemented, and the staff's recommendations, are a lower return on equity and deferral of future recovery of the projected 2011 capital expenses.

Although the staff is not in favor of our proposal for an economic development sales tracker, they do recommend a $25 million revenue increase if the tracker is not approved.

The commission has also decided to read the record in this case, which means we could see a final order before year-end.

This slide gives you a brief update of the timing of our regulatory cases.

The commission has agreed with our recommendation to refund $85 million of Big Rock Point decommissioning surcharges over seven months, beginning in July of 2010.

This will help to offset the electric self-implementation rate increase and cushion the effect on customer bills.

We expect the MPSC to issue an order, in the third quarter, regarding the 2009 electric rate case refund.

Briefs were filed in July, with staff recommending a $32 million refund compared to our proposed refund of $15 million.

Now, let me turn the call over to Tom to discuss the second quarter results.

Thanks, John.

Let me add my welcome to everyone on the call today.

Recorded GAAP earnings are $0.32 for the second quarter and that's equal to 2009.

Adjusting primarily for an insurance settlement, and additional tax expense related to assets sold, our earnings were $0.26 in the quarter.

That's down $0.02 from last year, when we had a gain from the extinguishment of our quips, worth $0.08, good news.

On a weather adjusted basis, our earnings would have been $0.31 a share, this includes a $0.05 for weather compared to last year for the gas business unit, where our decoupling mechanism does not have a weather adjustment.

This excludes $0.03 of favorable weather at our electric business, where we have a weather adjustment in our electric decoupling mechanism.

As you can see on this waterfall chart, 2009 earnings per share was $0.20, before including the $0.08 gain associated with the extinguishment of the quips.

It was $0.28 including the gain.

The utility improved during the quarter by $0.06 with a decline in sales of $0.04, improvement in the cost of $0.03, and rate relief of $0.07.

Enterprises, and the parent, were off $0.08 completely explained by the gain in 2009 on the extinguishment of the quips.

The sales decline for 2010, compared with 2009, includes a loss of demand rate revenues associated with bundled customers who have chosen to take retail open access.

As we covered in the earnings call last quarter, customers that have chosen to take retail open access now represent 10% of our business and that's equal to the cap.

Compared with the retail open access level of 5% a year-ago, the associated impact of lower demand rates was $0.04 a share.

Now, this is a little bit better than what we predicted in our last call, when we thought the impact might be about $0.05.

As you can see, this trend will continue in the third and the fourth quarters until the prior year comparisons reach the 10% ROA level.

Overtime, this will level out rate making and we, for the year, we've reflected all of this in our earnings guidance.

As you can see on this slide, we're still on the path to meet our guidance, of $1.35, for the year.

With results for the first six months $0.05 better than a year ago, we expect a $0.04 improvement in the second half.

This includes a decline in sales of $0.07, which reflects the higher ROA and lower demand revenue we discussed on the prior slide.

In addition, this includes higher cost of $0.12 of the utility for higher capital investments and the absence of a few gains in 2009, including a research tax credit and a surp gain.

We also included an estimate of $0.04, for the notional impact on share dilution, should existing convertibles be exercised.

Rate relief improvements totaled $0.29.

The bulk of this, already, is approved in rates and a portion reflects new rates associated with the self-implementation of our electric rate case.

Let's step back, just for a moment, and think about the economy.

One of the better indicators of a turn around in the US, as well as in Michigan, is the auto industry.

As you know, the autos make up about 3% of our gross margin, but provide a nice indicator of the economy in general.

As of July 17, year-to-date, the US automakers have increased their production by 68%, without inflating inventories.

Those being down 13%, from 63 days supply a year ago, to 55 days supply at the end of June.

This continues to bode well for a reasonable recovery.

Sticking with automotive for a moment, recent ground breaking occurred for another electric vehicle battery plant in Midland, Michigan.

This plant alone involves investment of $600 million, employing 320 workers by 2012.

As shown here, this is only one of several battery plants under construction to meet new auto production requirements.

The 2,000 jobs directly related to production at these facilities, spurs substantially more construction, support and related jobs, and economic activity.

For example, there are 1,000 construction workers on site today at the new Midland plant site.

Restoration of economic activity for existing businesses, whether they're auto, furniture, pharmaceutical, packaged goods or one of the other multitude of industries in Michigan, will layer in more recovery as we go through each of the next few years.

Unemployment has, however, been particularly stubborn in both the US and Michigan, but during the course of the last six months, each month, unemployment in Michigan has dropped modestly from a peak of 14.5% to just over 13% in June.

Here's another indicator for the economy in the future.

Credit scores.

As you would expect, after coming through a deep recession, are worse today than they were prior to the recession.

If credit is not available to business and consumers, then that could dampen the rebound.

We're keeping our eyes on this, along with many economic indicators, to help us predict the pace of the rebound in our service territory.

Let's specifically look at our service territory for consumers in Michigan.

Electric sales have rebounded, led by our industrial customers.

As shown on the left side of this slide, industrial sales began the recovery in the fourth quarter of 2009 and were up 12% compared with year ago levels, both for the first and second quarters.

Now we may be a bit conservative, but we forecast industrial sales to continue to grow at a lower level in the second half of the year.

We anticipate that residential and commercial sales will follow the industrial recovery, with commercial sales flat this year and improving, by about 1% next year, and residential sales down 1% this year to flat in 2011.

As shown on the right side of this slide, consumers electric sales improved 1% in the fourth quarter of last year, 2% in the first quarter of this year and 4% in the second quarter.

Our forecast reflects a continued recovery of 1% in the second half.

Looking at the longer trend, you may recall that the cumulative decline in the 1979 to 1982 recessions, was about 7%, and that's the worst decline in our history.

Less than a year ago, we expected the decline in this recession to be about the same, or a little larger, but the recovery in progress suggests that the combined decline will end up at less than 6%.

It's been a long recession for us in Michigan.

Signs are improving for the recovery.

Now, before we wrap up our formal remarks, I want to share three slides with you that we provide each earnings call to help you assess our condition and ask us questions.

First, our cash flow for 2010 for both the parent and consumers.

The utility continues on plan with operating cash flow of almost $1.5 billion.

Please recall, that we've been growing our operating cash flow, by about $100 million each year, and plan to continue that in the future.

This enhances liquidity, and cash flow, to support the healthy growth of the company.

From a financing standpoint, the equity contributions to the utility of $250 million and $300 million of the financing plan are complete.

We anticipate having well over $400 million of bank facilities available at year end to protect for any uncertainties.

We'll be completing our $150 million, 364 day revolver in a few weeks, and we'll do that for a three year term.

At the parent, our sources of cash are expected to be a little over $650 million with adequate capacity to cover interest, preferred dividends, overhead, and federal tax payments.

This provides nearly $450 million to support our equity contribution into the utility and plenty of room to support the common dividend and continued debt reduction plan.

Here's our sensitivity slide, where we try to give you the tools to assess both the good and the bad that could happen in the remainder of the year.

The sensitivity metrics are unchanged.

As you can see, the impact of variations and sales is muted by the decoupling mechanisms that are in place for electric and gas.

The gas sensitivity is provided to help you assess the impact of weather, since that is not included in the decoupling mechanism as it is in the electric business.

Changes, up or down, in our return on equity of say, 50 basis points, could impact the electric business by $0.06 and the gas business by $0.02, again, up or down.

We've worked hard to improve our disciplines in a way that permits us to minimize volatility providing more certainty.

In addition, we've been able to put in place mechanisms to help mitigate the impact in changes of sales on collectible accounts and fuel costs.

Last, here are the key financial targets that we show you each quarter.

We're on track to meet, or exceed, all of them.

This continues our track record over the last six to seven years.

John and I thank you for your interest, and your support, and we'd be happy to take your questions.

Operator, would you please open the lines for questions?

Thank you very much, Mr.

Webb.

(Operator Instructions) Our first question comes from the line of Dan Eggers with Credit Suisse.

Please proceed.

Hi.

Good morning, guys.

This is actually Kevin.

Can you please provide me an update on the, for the Michigan's governor race and any potential changes you see in policy, or to the commission, and most notably your view on the 10% choice cut?

Yes, let's start, the race is wide open right now, Kevin.

We expect, -- I mean right now there's, the primaries will be held next week.

There's five Republican candidates vying for that position and two Democrats.

Too close to call right now.

Certainly, a common theme between all the candidates is improving the economy in Michigan and creating jobs.

That's what we're seeing right now.

It's too close for us to handicap this race right now, but we'll know much better in about a week.

As far as the plans, with the new administration has compared to the previous administration, it's hard to tell.

But again, job creation, investing in Michigan are a common theme we've heard between these candidates and what the current administration has.

As far as the cap is concerned, there is, there has been something floated in the legislature to increase the cap up to 25%.

The issue with the legislation in Michigan, the Energy legislation, is really is a good, -- it's good legislation that provides a balance between all parties, people that, groups that like renewables, groups that like competition.

I don't think there's much traction to make that change, certainly in the near term, and I really wouldn't expect much changes to the law, even in the long-term, even with the new administration.

The law's only been in existence a couple years.

We're in the process, as you heard me talk today, about meeting some of the targets particularly on renewables and I don't think there's much interest, besides a few people, to change the law.

Okay, great.

With your comments on wind, how many megawatts of wind do you see coming through the thumb, broadly for Michigan, in general and you specifically?

For us, 2,000 will be another 150 for us.

We expect to build in 2017.

The transmission plans that are in place have the capacity of increasing wind, I think, by over 2,000 megawatts in the thumb.

And that's what their plan is.

That's what ITC has there.

I think it's closer to 2,200 actually.

There's a lot of capacity, a lot of potential in the thumb.

Just, if I can mention, the reason we're beginning on the west side, and why I showed you that one chart, is our diversity of supply.

It really is scattered all over the state and the first wind farm that we're building, is we're building where transmission is available.

Transmission won't be a risk as far as building that wind farm.

Great.

Thank you, guys.

Our next question comes from the line of Brian Russo with Ladenburg.

Please proceed.

Hi.

Good morning.

Good morning.

Just to talk a little bit more about the customer choice, potential house incentive bills, could you just talk about some of the rate mechanisms you currently have in place like decoupling or any other mechanisms that, in the event that the choice cap is increased, that it would help to mitigate margin impact?

Well, I don't believe the rate, the cap will increase.

But, if it does, what part of the cap increase is to ensure we have decoupling so that the sales are levelized, from that standpoint, and there also is a potential for to us have a tracker on ROA.

One of the other utilities in Michigan have that.

That would be another option to move forward if there's more volatility in the ROA market, and if there's more uncertainty, and we would pursue that if that's what happens.

Can you just remind me about your load assumptions in the 2010 guidance and, maybe, talk about the earned ROA you guys expect as well?

Yes.

Go ahead.

Let me just talk about that in terms of sales, if you think about, and I'll turn you to one of the slides there, slide number 16 that we showed where we talked about electric sales.

Where we anticipate being is up about 1% in total, 4% of that industrial.

Now, that's a little softer than what you saw in the first quarter and the second quarter, because we'd rather be a little bit conservative with that and see how things play out.

We're all just coming out of this recession.

So, we want to see real results, as opposed to just optimistic estimates and plan accordingly.

That's what we're doing.

That's probably a pretty good indicator, I think, where you would expect us to go in the next six months.

You were asking, I think, about our authorized levels for electric and gas?

We've got on the electric side, an authorized rate of 10.7%.

We're running, to give you an idea on the electric side over the last 13 months, about 9.5% and on the gas business, we're running just a touch over 10%.

So, you can see we're within reach of those authorized levels, but a little more work to do as we go through the year.

Okay, thank you very much.

Thank you.

Our next question comes from the line of Jonathan Arnold with Deutsche Bank.

Please proceed.

Good morning.

Morning.

Two questions I have.

One, is whether you know the recent kind of response from the commission on your self-implementation and lowering the requests right before the decision?

Now, does that have any impact on your strategy around filing annual rate cases or any sources around how we should think about that going forward?

No, I think it was, the commission was pretty clear about their thoughts about that.

In anticipation of that, what we did was lower the amount, as you're aware of, down to $150 million.

I think, it's important that the law continues to be upheld as the law was intended to be, which allows for cases.

What our intent is long-term, is to have routine and regular cases.

My vision for the future is to have those cases, we'll try to do everything we can to keep the costs down and to provide value to customers.

But as we're making capital investments to comply with clean air, improved service reliability, we will need to get recovery for those.

But, I'm hoping in the future that the sizes of the cases will not be as large as they have in the past.

Okay, thank you.

Secondly, could you give us a sense on timing for when you'd anticipate, I guess, providing some more clarity on what the investments that will replace the former plan to build the coal plant will be?

I can't recall when we should be looking for that.

We've talked to you a little about that in the past with the deferral of the coal plant.

You might remember, what we mentioned is, we want to get through our planning process with our Board, which is something that we do annually in August, where will we will show them what the plans will be and then, I think, you can expect to see us unfold where that investment pattern will go.

Whatever it is, I would tell you that it'll still be substantially more investment than we've certainly made over the last five and ten years, as we catch up on things, that both our customers and the commission really would like to see us get done.

So, we'll be telling you more about that in the near future.

Is the third quarter call a reasonable window?

I don't want to pin it down to an event right now.

But, we'll try to find something where everyone can get a good view into this so that you can have your comfort about either continuing to invest materially in important things for their state, so their plans continue as we've seen in the past from an investment standpoint.

Thank you, Tom.

Thank you.

Our next question comes from the line of Ted Heyn with Catapult Capital.

Please proceed.

Good morning.

Good morning.

Just had a, excuse me, had actually two quick questions.

The slide deck, you put out this morning, was missing a couple of slides that you typically have in the past.

I wanted to make sure there was no change?

I think, Jonathan mentioned the CapEx stuff, that's the slide that had the rainbow rate-based growth of around 6% to 8% and then also, the long term EPS growth of 6% to 8% were not in the deck.

Are those, should we assume those have been reiterated or has there been any change in that thought process?

We don't have any change on those and that's a good observation.

Thanks for bringing that up.

At this point in the game, there wasn't any fresh news about that.

As we assured on guidance for this year, there wasn't any new news to share on those subjects.

Importantly, as Jonathan mentioned, as we roll out our new investment plan, you can see where it is, how it works and that will give you appropriate comfort around those items.

Got it.

That's what I thought.

Just wanted to double check.

I thought that would be the answer.

Thanks a lot.

Our next question comes from the line of Ali Agha with Suntrust.

Please proceed.

Thank you.

Good morning.

Good morning.

John or Tom, as you're looking at, and I understand John, I heard your answer saying that the law is set up for annual filing, so you'll continue doing that.

I was wondering, is there an opportunity for you to extend the look forward, in a forward test here in your filings, so that by definition you don't have to come back for annual increases?

If I looked at it correctly, I thought this time around the rate-base that you put in there, the timeline, correct me if I'm wrong, is slightly longer in the forward-looking than it was last time.

I'm wondering if there's more opportunity for you to be further forward-looking and hence, not have to come back on an annual basis?

Yes.

Oh, yes.

We can't go too far out.

I think what you're referring to is, we're using a calendar year, instead we're using our year of filing.

The 12 months may not be January to December.

But your point is right, what the staff came out with in the latest proposal, their position on the electric rate case, is what I would call a capital investment tracker.

That would, if we had enough elements tracked, whether it's uncollectibles, with decoupling, and with a capital investment tracker, that could postpone the need for us to come back in for rate cases.

I thought that was a creative way for the commission to think about ways to do that.

Which I thought was good.

That's still at the start-up level.

Nothing so far out there that would make this more of a, firmed up, I guess, as something to do.

Yes.

Let this play out.

This is a staff position.

This is not an order from the commission.

We'd need to see this in some type of order if that's what they would like to perceive.

If that's the case, what happens is, I think it does, at least allow us to postpone cases, if not eliminate maybe one in the cycle.

Okay.

Separate question.

I was curious, you all have said, obviously in the past, that your dividend payout ratio will need to catch up to the payer group.

It will take a few years to get that set up, I'm just curious, how oven do you folks look at the SSIs of spending the extra amount for rate based CapEx, versus preserving some of the cash, maybe, ratcheting up the dividend faster.

Is that an issue that comes up frequently, or periodically, or right now you're convinced that the rate based investment is the way to go?

Let me start with when it comes up.

That's on our radar screen all the time.

We communicate it and discuss it with the Board on a regular basis.

We have a strategy planning meeting in the next few weeks.

So, we'll be discussing all that with them.

But, it's a regular, and routine, topic that we talk to the Board about.

Ali, I would just add, as you know in the past, or at least the past four years, that's been a January event for us, when we make that kind of, -- the Board makes that sort of decision.

That's what the track record's been.

Right, right.

Last question, any sense, I guess there are elections coming up in Michigan as well this year, any sense of any potential change we should be thinking about on the regulatory front?

Whether on the legislative level or more on the regulatory level?

Anything that you could point to, given the signals, that you've seen in the market locally.

No.

I think, as I mentioned earlier, I think what you're going to see is all the candidates, and there's a lot of candidates for governor and all the way through the various candidates for legislature, common theme for all of them is creating jobs in Michigan, making investment in Michigan and get the economy back to where it had been in the past.

That's what the focus is.

As one of the major investors in Michigan, we can be a key part of that.

I don't see changes based on that.

There are some tenures, at the commission, which come up next year.

Monica Martinez is up next year for her six year term.

So, you will see a little bit of change in the regulators and the commission, as well as, the legislature and the administration.

Okay, thank you.

Thanks, Ali

(Operator Instructions) Our next question comes from the line of Paul Ridzon with KeyBank.

Please proceed.

Good morning.

Good morning, Paul.

Nationally, I think we've seen a little bit of a trend of people stepping back from AMI until we get a better sense of the real benefits, real costs.

What are you seeing locally in Michigan?

We're in the pilot phases right now, I think as you know.

We've got a couple pilots going today.

We're evaluating many vendors to determine the value of AMI, and most importantly, right now with a pilot, does the technology work and how do the customers respond to that?

We are looking, right now, for our strategy meeting about how our original plan makes,-- continues to make sense or should be adjusted going in the future.

We have seen the same things you saw, we looked at them about, maybe some hesitancy about moving forward with the smart grid.

But from our standpoint, everything we will do is to work with the commission and make sure that we get the recovery for the benefit for our customers.

The smart grid, there is a bit of a leap of faith associated with smart grid, but I think it is important for our customers to see the value and the regulators.

We'll be working with them on that as we roll out our pilots.

Do you get the sense that the direction is, the sense is we like it, but maybe not now?

Or just not ever?

No.

No.

I think it may be not now.

If there's a reluctancy, it has to do with right now and, I think, the primary driver behind it, for us and probably many utilities, is the fact that capacity prices are down.

That really does change the economics of the business case.

Thank you.

Yes.

Ladies and gentlemen, this will conclude the Q-and-A portion of the call.

I would now like to turn it over to Mr.

Russell for closing remarks.

Alright.

Thank you.

Let me wrap up today by thanking everybody for participating on the call today with us.

We had another solid quarter of operations and financial results.

Our financial plan is on track to deliver the full year adjusted earnings guidance that we've given you before.

We continue to build on our strategy to provide safe and excellent operations, which will lead to increasing customer and shareholder value.

So, I appreciate your commitment to the company.

Thanks for listening and for your support.

This concludes today's conference.

We thank everyone for your participation.

You may now disconnect.

Have a wonderful day.