CMS能源 (CMS) 2010 Q3 法說會逐字稿

Good morning, everyone, and welcome to the CMS Energy 2010 third-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 November 4th.

This presentation is also being webcast 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.

Please go ahead, ma'am.

Thank you, Jeff.

Good morning and thank you for joining us today.

With me are John Russell, President and Chief Executive Officer, 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 the 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-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.

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're not providing reported earnings guidance reconciliation because of the uncertainties associated with those factors.

Now, I will turn the call over to John.

Thanks, Laura, and good morning, everyone.

Thanks for joining us on our third-quarter earnings call.

I will start the presentation with a few brief comments about the quarter before I turn the call over to Tom for a more detailed discussion on the financial results and the outlook for the remainder of the year.

Then we'll close with Q&A.

Third-quarter 2010 adjusted earnings per share was $0.52, up $0.22 or 73% from last year.

About half of the increase was due to higher electric and gas rate relief, reflecting our growth strategy of investing in the utility to improve customer value and the environment.

The other half reflects the absence of a very cool summer last year and the premium on early debt retirement in 2009.

The warm weather impact in the third quarter of 2010 was largely offset by the sales decoupling mechanism that was not in effect last year.

The decoupling mechanism is working as designed to provide more stability for customers and minimize volatility for the Company.

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

Our guidance assumes an acceptable final order in the pending electric rate case, which is expected before year-end.

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

Although it's old news to most of you, in August, we announced our new business plan that increased our common stock dividend by 40%, reduced our capital investment plan by $800 million over the next five years, and trimmed our long-term EPS growth rate by a point to a range of 5% to 7%.

This new plan was well-received by investors and regulators, and will be of benefit to our customers by lowering future rate increases.

Now, let me give you an update on operations and our regulatory agenda.

One of the primary utility goals is to improve employee safety by 70% through 2012 as measured by a percent reduction in safety incidents since 2006.

With the cooperation of our union employees, we have already seen a 60% improvement and we are well on our way to achieving our goal of 70%.

Last quarter, we announced a new five-year labor agreement with the union that provides for increased healthcare cost-sharing and changed post-retirement health benefits.

In the third quarter, the union ratified a new agreement for the virtual call center employees and our Zeeland generating plant employees.

Going forward, this eliminates the legacy cost for all new salary and union employees.

As part of our commitment to improve the environment, we are in the process of installing selective catalytic reduction equipment at our Campbell 2 plant.

Since our emission reduction initiatives began, NOx has been reduced by 74% and SO2 by 67%.

And for the sixth straight year the Whiting plant received the Michigan Department of Natural Resources Neighborhood Environmental Partner's Award for its commitment to the environment and community.

The award is in recognition of the Whiting employees who donate their time to do natural resource enhancement and environmental cleanup.

I'm very proud of the efforts of our employees to help improve the environment.

Let me give you a brief update on a few key regulatory cases.

I'll begin with the Gas business.

In October, the MPSC staff agreed with our proposed refund of $11 million for the 2009 gas rate case.

We expect a final order from the commission in the first quarter.

We filed a new gas rate case on August 13 seeking a $55 million revenue increase based on an 11% return on equity.

The primary driver for the case is new investment.

A schedule has been set that calls for the MPSC staff to file their testimony on January 24.

We plan to self-implement a rate increase in February.

In the Electric business, on July 22, we self-implemented $150 million electric rate increase.

The staff has recommended an increase of $91 million plus an additional $35 million in lieu of a mechanism to track economic development discounts.

This case is ripe for a final order before year-end.

Another topic that is getting a lot of attention, especially in Michigan, is the plug-in electric vehicle.

The MPSC has approved a new voluntary rate program that offers residential customers three rate options and incentives for charging the new high-tech vehicles at home.

The first 2,500 customers will be reimbursed up to $2,500 toward the purchase of a 240-volt quick-charging station.

Our customers will have the infrastructure and rate options for the upcoming release of the Chevy Volt later this year and the Nissan Leaf next year.

Our new business plan is on track to deliver consistent results.

With the dividend yield up from about 4% to 5%, we have reduced our long-term earnings growth modestly from a range of 6% to 8% a year to 5% to 7% a year, a range we feel comfortable with considering our business plan and the regulatory construct in Michigan.

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

Thanks, John.

Let me add my welcome to everybody participating on the call today.

We know it's a very busy day in advance of the EEI, so thanks for joining us.

Our GAAP earnings are $0.53 for the quarter, up from $0.28 a year ago.

And as John just mentioned, excluding a small gain related to the sale of Latin American assets several years ago, adjusted earnings were $0.52, up $0.22 or 73% from last year.

Weather-adjusted earnings in the third quarter 2010 were $0.50.

Most of the favorable impact of the warmer-than-normal summer in 2010 was offset by decoupling.

Our risk mitigation continues to work well as we decouple lower or higher sales, but continue to be able to earn our authorized rate of return and grow the business.

About half the $0.22 improvement compared with 2009 broadly reflects planned earnings growth associated with our ongoing investment at the utility.

The other half reflects weather, $0.08 of which comes from the mild weather in 2009.

Although this helps the comparison, it does not impact the quality of our earnings this year.

As planned, the results for the first nine months were up 30% from a year ago.

Fourth-quarter results are expected to be lower than a year ago and solidly on our plan.

Last year, in the fourth quarter, we did not have a scheduled generation outages to the extent planned for this year, storm costs were well-below the norm that we expect this year, and maintenance costs are higher at our gas-fired plants that we are running a lot more this year.

Also, we had some gains in the fourth quarter of 2009 that are similar to the gains that already occurred this year.

For example, we enjoyed research tax credits last year of about $0.04.

We had a credit this year in the third quarter.

In addition, we suffer from more dilution this year than last.

We are, however, taking action to minimize dilution in the future.

With the recent conversion of our convertible preferred, we were able to replace the preferred tool with lower-cost debt and avoid future dilution.

This likely will improve our 2011 results by about $0.03 a share.

This lower-cost debt in place of the preferred will, however, increase the face of our parent debt from $1.8 billion to about $2.1 billion, even though the total size of the combined debt and equity-related financing tools are not changed.

This does not change our strategy to hold our parent debt flat to down in the future.

We're simply pleased to have the opportunity to reduce the cost of our financing, improve liquidity, and eliminate related dilution exposure.

With the convertible preferred gone the number of our remaining convertibles is down from four to three.

This cuts our new dilution exposure by about half.

You can see this in the appendix to this presentation.

We'll continue to look for accretive ways to eliminate the remaining exposure over time.

Switching to the economy, it appears the recession has ended with almost a 6% decline in electric sales over a three-year period.

Now, that's a bit less than the three-year decline of 7% in the early '80s, and that was our worst ever.

We expect sales to be up about 1.5% this year and another 2% next year.

As shown here in a bit more detail, the year-to-year improvement that began in the fourth quarter of 2009 has been led by a recovery in the Industrial sector.

We anticipate that commercial sales will be up a bit next year and that residential sales will grow about 1%.

Even though Michigan unemployment is stubbornly high at 13%, it's down from 14.5% at the start of this year.

Several of our industrial customers have restored a pre-recession level of production and hired back many of their employees laid off during 2009.

We're still planning cautiously as you can see in our sales forecast.

We are, however, optimistic that improvement will continue.

Now, for example, the autos continue increasing production in North America without building excessive levels of finished vehicles in their dealerships.

Many dealerships complain about short supply, but the cautious approach sure seems smart.

In our service territory we're seeing strong rebounds in steel production and fabrication, aluminum casting for high-tech turbines, food processing and auto production, not to mention the growth in electric vehicle battery production, solar panel components, and other renewable-based businesses.

Pent-up demand is evidenced in many areas like high used car prices, but the cloud around large national, state, and local government debt provides a cause for caution.

Strong risk mitigation programs, like decoupling, in place at many utilities like our own certainly provide good precautions.

Our cash flow remains strong with sufficient capacity at the utility to fund investment-based growth plans that are well underway.

Cash flow at the parent, which is shown in the left box, is more than adequate to cover interest, overhead, and equity infusions into the utility with sufficient room to fund the dividend.

We continue to meet our parent debt maturity obligations one or two years in advance of due dates while reducing the cost of financing.

Here's a more comprehensive look at profit and cash flow sensitivities for 2010.

The numbers are smaller as we continue our work to minimize volatility.

As shown conceptually here, we've been able to reduce the magnitude of exposure to changes in earnings and cash flow by improving the quality of our own cost controls.

We have also worked with regulators to minimize the risk to our investors and customers with tools like bad debt trackers and decoupling.

This limits risks for investors and also provides upside benefits to our customers without jeopardizing our ability to deliver our authorized rate of return with a 5% to 7% earnings growth.

We may not offer the prospects of double-digit earnings growth, but we do provide more stability and predictability.

We believe earnings growth of 5% to 7% and our improved dividend payout with a yield of about 5% continues to provide an attractive proposition for investors.

So, here's our quarterly report card.

Earnings are on track, cash flow is substantially stronger than targeted, liquidity and equity ratios are right on target, but, as mentioned earlier, the conversion of an equity financing tool to debt will cause us to miss our parent debt target.

We believe this was a good business decision but regret having to report a target missed.

I hope you appreciate the quality of our earnings leading in to 2011.

We look forward to sharing 2011 guidance with you when we report our 2010 results in February.

Thank you for your interest today, particularly spending time on such a busy day.

We look forward to seeing you at EEI and John and I would be delighted to take your questions now.

So, Operator, would you please open the line for questions.

Thank you very much, Mr.

Webb.

(Operator Instructions) Our first question comes from the line of Paul Ridzon with KeyBanc.

Please proceed.

Morning, congratulations on another good quarter.

Thanks, Paul.

Just, obviously with the election here, just wondering to what extent energy may have gotten into the headlines or become a discussion in the election?

It really hasn't been talked about by either candidate, either Mr.

Snyder or Mr.

Bernero.

They are focused primarily on jobs and Michigan recovery.

And so far, what we're doing with the energy legislation that was passed in 2008 is helping that in the sense of, as Tom talked about, some of the production we're seeing and some of the renewable energy businesses.

But it really has not been a topic in the single debate or the various times that we've seen them publicly talk.

And just -- can you give any update on any acceleration of talks about changing the 10% cap?

Yes, sure.

We talked about that, I think, the last earnings call, just updated everybody.

There was some legislation proposed in the legislature last quarter.

It doesn't have any traction right now.

We've reached the cap, though, at 10% and I think other utilities have, too.

But there doesn't seem to -- going forward with the election, there doesn't seem to be much interest today about changing the law.

Because, as you know, Paul, when we change the law, one component of the law, let's say it's the cap, it's likely to have the opportunity to change other components of the law, such as renewable energy, energy efficiency, which to the parties that want to change the cap are generally opposed to opening up to further renewable energy target.

And just one unrelated question.

Even with decoupling you had a weather benefit in 2010.

How much was that and you can just run through that dynamic?

Sure.

I think Tom's got that there.

Happy to do that.

We did have a benefit, particularly this summer, for the quarter.

It was a really hot, muggy summer so that's usually good for the business.

But the way it works, we had -- we show a benefit in 2010 of about $0.02 on the electric side.

Remember that excludes $0.09 that's offset by decoupling.

So, the total weather effect was $0.11 in the third quarter of 2010, $0.09 of that was offset by decoupling.

And recall too, because I think it has confused or might confuse some people, that on the Electric side it was a mild summer back in 2009.

So, that was a $0.07 hurt back then, which is a fair comparison for us now.

So, we've got a big benefit that flows through this year, but most of the 2010 benefit is offset by decoupling.

And Paul, if I just add at one point to that, Tom.

One of the things you would see with the really hot summer that Tom talked about, despite the decoupling of electric with energy efficiency and the weather and the economy, the full decoupling, there is a mix benefit with demand that we were able to enjoy in this this year.

Thank you.

Thanks, Paul.

Thanks, Paul.

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

Please proceed.

Hi.

Good morning.

Morning.

You mentioned the $0.03 positive impact in 2011 related to the convert refinancing.

And I'm just wondering, outside of ongoing rate relief at the gas and electric utilities, is there any other drivers, outside of the normal drivers, that we should be aware of when looking to 2011?

Yes, I think the important things for you to consider are, number one, the rate relief, which just reflects the investments we're making and the growth we're having in the business, which really does drive the 5% to 7% earnings growth.

But there are some good things and some bad things.

We had the dilution that was associated with the convertible preferred, the 4.5% tool.

With that gone that's going to give us a $0.03 tick up.

But, there's always things that go both ways.

Remember we have the 10D4 provision where that has been good news last year, good news this year.

That'll actually kind of disappear as we move into next year so that's probably a $0.03 or $0.04 hurt as you move year-to-year comparison for next year.

So, we got a nice mix of things.

We always plan for normal weather and you see that we show our sales picking up.

If I remember, all that's built around our intent to earn only our authorized rate of return.

So whether there's good or bad, we try to do all the work we can through our cost controls and through things like decoupling to mitigate the downside, but also to reinvest when we can in the business.

Whether we get to trim more trees or whatever it might be, so that we can still grow the business 5% to 7% and end up earning close to, or at, our authorized rate of return.

Okay, great, and just any update on your capital spend?

This year or next year?

Well, you know, we're still on track for the spending that we've been telling you about for this year and we get a little uptick next year with over $1 billion of spending.

I know you're going to be at EEI like many folks.

We're actually, in our presentation, going to give you some more detail year-to-year, by project, as well as talk to you a little bit about the big projects in our presentation.

So, I hope you get a chance to see that.

Okay, great.

Thanks a lot.

(Operator Instructions) Our next question comes from the line of Ali Agha with Suntrust Robinson Humph.

Please proceed, sir.

Thank you.

Good morning.

Good morning.

Tom, I wanted to clarify a comment you'd made earlier during the presentation.

Through the nine months of the year have the results basically tracked in line with your internal expectations or have they actually been coming in, so far, ahead of plan?

We're pretty good on being at or slightly better than plan.

I wouldn't say that it's a big thing, because we had a lot of things tune this year that made for a bigger third quarter and not so big a fourth quarter as we go in the year.

So, we get a little time shift between the two.

Now, those are always driven by the weather, where we're not decoupled, or by things that we don't fully control.

So you can see a little bit of a movement.

But I would tell you we're pretty close to our plan, both in the third and fourth quarter.

Okay.

On a separate note, the electric rate case currently has a forward-looking test year.

Is the plan still to keep going for annual increases or have you rethought your strategy post this latest round of rate cases?

No, our intent, Ali, is the same thing we've had for the past few years, is that we will be in for regular and routine rate cases.

The intent for that is to have our plans in front of the commission on a regular basis and also to minimize the amount of percent increases our customers see.

So, rather than staying out and having a rather dramatic curve upwards and maybe price shock, sticker shock, we prefer to be in frequently, keep the rate relief, especially going forward, around the rate of inflation as far as our operating cost -- total cost excluding fuel.

That's what we would like to do going forward.

So, no, I don't see any change in that.

But John, am I correct in seeing that the test year on this electric rate case, I believe, goes into until July of 2011 or August of 2011, something like that?

Yes, Ali, what we do is we use the test year that starts when we self-implement and it ends when that full-year period is over.

So, it's forward in the sense that when we file the case the test year is not a calendar test year, it's when we self-implement our rate.

Right.

Understood, understood.

And as you going through the mechanisms of these rate cases, any -- I know we've talked in the past about regulatory fatigue, quote-unquote.

But any inclinations from the regulators that may cause to you rethink the annual filing strategy?

No, not the annual filing.

But I think that the important thing for the regulators, the fatigue you talk about, is the frequency of the case, the work.

But as long as we continue to keep the cases simple and straightforward -- and you take the gas case we just recently filed, it's a $55 million rate case on, you know, a company that has revenue of a little over $2 billion.

Most of that, the vast majority, is capital investment to secure the environment and the safety of the pipelines.

So, when you look at that those are the types of things that make it easier for the commission and the commission staff, although they still have to work through the proceeding, to get to the outcome.

That case to me in my mind, you know, maybe there is a potential to get that done even outside of the normal process of the rate case.

Okay.

Thank you.

Thank you.

(Operator Instructions) Our next question comes from the line of Jairo Chung with Oppenheimer & Co.

Hello, how are you?

Good.

I think actually I just found an answer to my question, but my question was going to be with a very strong third-quarter result, why were you guys not increasing your 2010 guidance?

But I guess page 9, or slide 9, is showing that you guys will have a higher utility cost in the fourth quarter, is that right?

Yes, that is a great question, and you're on the exactly right slide to help see that.

Inside the utility piece where that slide says we'll be up $0.14 year-to-year, remember some of that is because of a planned outage that we're going to have in the fourth quarter that we didn't have a year ago in the fourth quarter.

A little more cost, we think, on the maintenance around our gas fired plants, because they're being scheduled so heavily compared to what they were a year ago.

All those things keep adding up to that number.

Then in addition to that, we talk about the absence of gains and research credits for another $0.10.

Remember how that works.

I give you the example of the research credit.

We saved about $0.04 last year from a research credit, and that was good news in the fourth quarter that won't repeat this quarter because we've already been able to do that in the third quarter of this year.

Okay.

So, our plan, shape, and timing here is a little different than it was last year and that's all you're seeing.

Okay, great.

That's really helpful.

Thank you.

Our next question is a follow-up.

It comes from the line of Paul Ridzon with KeyBanc.

Please proceed, sir.

You talked about higher gas plant maintenance because you're leaning on the gas plants.

Is that because of weather or is that displacing some coal fired generation with some more efficient gas plants or both?

No.

Think of that simply as gas being scheduled more in this environment, first, compared to a year ago and, second, just in the shift of scheduling with cheap gas prices.

We end up scheduling Zeeland in particular, remember the new plant that we purchased not so long ago, a little more heavily than we had thought we would have done when we were planning our budget, certainly compared to where we were a year ago.

So, a little more maintenance cost around that.

No strategic change here in terms of coal fuel or gas fuel, just an operating change.

But there's no economic difference that's driving you to burn gas rather than coal?

Is gas displacing coal?

No, just the low gas prices; it's being scheduled more by MISO.

That's all.

Okay, thank you.

You're welcome.

Our next question comes from the line of Dan Eggers with Credit Suisse.

Please proceed, sir.

Morning, guys, this is actually [Kevin].

With the governor election are there any commissioners up for re-appointment?

Yes, Dan.

There's Monica Martinez.

Her term ends the summer of next year, 2011.

I think, you know, is when the governor's appointed they can appoint a Chairman, so that may affect the Chairman Isiogu, who is currently the Chairman.

And his term runs another two years after that, 2013.

So, simple way to think about it -- one commissioner's term ends 2011, another one 2013 and another one 2015.

With the new chairman do you see any changes to energy policy or any changes in agenda?

I don't, no.

He has the right to change chairmans; he may or may not.

Usually they do.

Usually they put somebody in there or adjust it, but they cannot take a commissioner out of their term just because a new governor is elected.

That's great.

Thanks, guys.

All right.

Thank you.

Thanks, Kevin.

(Operator Instructions) All right, it looks like there are no questions in the queue.

All right.

What I would like to do is let me just wrap up today by thanking everybody.

It was another solid quarter for operation and financial performance.

We're on track, as we mentioned before, to deliver our full-year adjusted earnings guidance.

I also want to thank most of you on the call, particularly the analysts, that have called and provided favorable comments to Tom and I about our new business plan, our new investment plan, and the results have that occurred since that announcement.

I pass those comments on to the Board; they're appreciative.

And as you know, we work hard every day to make sure that we have the right business plan for the environment we're working in.

Tom and I look forward to seeing you this weekend and Monday and Tuesday at EEI, and hopefully we can answer any other questions you have at that point.

Thank you, everybody, for joining us today.

We appreciate it.

This concludes today's conference.

We thank everyone for your participation.

You may now disconnect.

Have a wonderful day.