CMS能源 (CMS) 2012 Q3 法說會逐字稿

Good morning, everyone, and welcome to the CMS Energy 2012 third-quarter results and outlook conference 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 1. This presentation is also being webcast and is available on CMS Energy's webcast -- website in the investor relations section.

At this time, I would now like to turn the conference over to your host for today, Mr. Glenn Barba, Vice President, Controller, and Chief Accounting Officer.

Please go ahead.

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 Chief Financial Officer.

Our earnings news release issued earlier today and the presentation used in this webcast are available on our website.

This presentation contains forward-looking statements.

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

The forward-looking statements and information and risk factors section discuss important factors that could cause the 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.

CMS Energy provides financial results on both a reported Generally Accepted Accounting Principles and adjusted, or non-GAAP, basis.

Management views adjusted earnings as a key measure of the Company's present operating financial performance, unaffected by discontinued operations, asset sales, impairments, regulatory items from prior years, or other items.

Certain of these items have the potential to impact favorably or unfavorably the Company's reported earnings for 2012.

The Company is not able to estimate the impact of these matters and is not providing reported earnings guidance.

Now, I will turn the call over to John.

Thanks, Glenn, and good morning, everyone.

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

I'll begin the presentation with a few brief comments about the quarter before I turn the call over to Tom to discuss the financial results and the outlook for the remainder of the year.

Then as usual, we'll close with Q&A.

Third-quarter adjusted EPS was $0.54 a share, up $0.01 from last year.

Year-to-date results of $1.31 a share keeps us on track to achieve our full-year adjusted EPS guidance of $1.52 to $1.55.

By right-sizing the business over the past three years, we have positioned ourselves to take advantage of increased productivity and system efficiencies.

Reducing the workforce by 7% in those years helps us keep our customer base rates at or below the rate of inflation for the next five years.

In September, we filed an electric rate case seeking an increase of $148 million.

Tom and I will detail some of the features of this case in a minute.

Operationally, we remain on track to achieve our long-term capital investment plan.

I will update you on a few of the major projects, as well as our position on a ballot proposal that could result in significantly greater investments in renewable energy.

And in just a few years, we see a capacity shortfall.

In order to meet our peak load requirements, we will need to fill that shortfall.

I'll discuss a few of the options we are considering, as well as the impact on our financial plan.

As mentioned, we filed a new electric rate case seeking $148 million in rate relief.

85% of the request is made up of capital investments.

These investments enable us to deliver safe, reliable energy and keep our O&M costs down.

As you can see on the right panel, we continue to bring capital-driven cases to the Commission.

In the future, we believe that annual rate cases may be avoided if there is an adjustment mechanism to recover projected investments.

We are also requesting a 10.5% return on equity, up from our current authorized level of 10.3%.

Tom will discuss some of the specific mechanisms we have proposed to help streamline future rate cases.

Operationally, we continue to make good progress on our long-term capital investment plan.

As you know, we have a disciplined plan which limits our investments to hold customer rates to an affordable price.

The Ludington pumped storage project is underway.

All six units will be upgraded one at a time during an outage that starts in September and runs until May.

The first turbine upgrade will be completed in May of 2014.

When the last outage is completed in 2019, we will have increased the capacity by 300 megawatts and improved the operational efficiency and reliability.

At Lake Winds, we are on schedule to begin commercial operation of this 101-megawatt wind park later this year, with all of the 56 turbines having been constructed and we are currently in the testing phase.

And on Smart Meter program, our Smart Meter program is underway on the west side of the state.

As we ramp up installations, we expect to have installed 250,000 meters by the end of next year.

Of course, we are all aware of the upcoming November 6 elections.

In Michigan, we are paying close attention to ballot proposal number three that we were refer to as 25x'25.

If passed, this proposal would require us to produce 25% of our power from renewables by the year 2025, up from the current requirement of 10% by 2015.

You can see on the right panel the consequences of Proposal 3 passing.

Michigan would need at least 5,000 megawatts more of wind capacity at a cost of about $12 billion.

Michigan would be the only state in the country to pass a constitutional amendment mandating renewable energy.

We believe this is the wrong way to implement a renewable energy policy.

The 2008 energy law has provided a constructive framework to implement energy policy, including renewable energy standards.

As we look forward a few years, we anticipate a capacity shortfall as the result of coal plants being retired due to the MATS rule.

With the probability that our classic seven coal plants will be mothballed in either 2015 or 2016, and MISO increasing its reserve capacity to potentially 18%, our shortfall could be as high as 1,500 megawatts.

Our renewable energy expansion in wind farms and at the Ludington pumped storage plant will not be enough to close the gap.

We will need to add more capacity, and it appears that gas generation will be the fuel of choice.

We will carefully evaluate all options, including purchasing assets or building new capacity in Michigan, and I expect we will need to make this decision in 2013.

We talk a lot about the flexibility of our investment plan.

Our 2013 to 2017 plan calls for $6.5 billion of investments.

With the capacity shortfall on the near horizon, this plan could usually be adjusted to accommodate a new gas-generating plant.

If we determine buying or building new gas generation is the most economic option for our customers, our investment plan may grow by as much as $800 million.

Even with this increase to the plan, average customer base rates would be held below 2%.

Now let me turn the call over to Tom to talk about the results for the quarter.

Thank you, John, and thank you, everyone, for joining us today for this, our best performance in over 10 years.

This represents a decade of consistently improving results, and as you can tell, it's a track record that we're proud to deliver to you.

Our third-quarter reported results were $0.55 a share, or $0.54 excluding a favorable legacy insurance claim.

Adjusted earnings were up $0.01 a share.

The utility was up $0.03 with stronger sales and regulatory performance more than offsetting planned investments and accelerated reliability work.

Enterprises and the parent were down $0.02, primarily reflecting the Michigan state tax benefit in 2011 not repeated this year.

Here is a slide that has become a bit more popular than we expected.

It's an update of the version we showed to you in the first half of the year during our last earnings call.

As you can see, we've offset fully the adverse implications of the mild winter earlier this year.

We also have put to use the earnings benefit of the hotter-than-normal summer by investing more in tree trimming, generating plant maintenance, and system hardening.

We have a few more opportunities and are planning those with great care to ensure that our prospects for delivering earnings growth at 5% to 7% are not compromised, while at the same time we reinvest as much as we can for our customers.

We don't want to overearn and we don't want to underearn our authorized ROE, and we plan to deliver our earnings growth commitment while maximizing every opportunity to improve the conditions for our customers.

Our belief is pretty simple.

When our customers win and when you win as investors, we're successful.

So here's our performance year to date.

At the highest -- this is at the highest level in over 10 years, and here's our forecast for the final three months of the year.

If weather is normal and modest sales growth continues, we should be right on target to deliver earnings in the $1.52 to the $1.55 range.

In today's uncertain world, some of you ask us about Michigan and its economy.

To provide a better perspective, here's a comparison of a few economic indicators for the US, Michigan, and our service territory.

While US unemployment peaked in the last recession at about 10%, it's come down to around 8%.

In Michigan, unemployment peaked at 14%, and we've seen substantial improvement, but it's still high, around 9%.

If you look at two major regions in the state, the central and the western regions, which make up a big part of our service territory, you'll see that unemployment reached about 11% and has since declined to about 6.5%.

Over the last 12 months, employment in these regions has improved by about 2.5%, which compares with the overall US growth at 2% and Michigan at 1%.

We're fortunate to serve a portion of Michigan that is economically more attractive than conditions in the state as a whole.

Continuing on with the economy, the Michigan economic index has improved substantially since the middle of 2009.

Evidence of the rebound includes US auto sales up 15% from last year to about 15 million vehicle sales.

Nonfarm payroll is up 46,000, or 1.2%, and manufacturing jobs up more than 3%, while Michigan has improved from 18 to 12 in the ranking of tax-friendly states.

We continue to see signs of further improvement, although uncertainty has grown during this election cycle.

Here's another slide with which I think you've become pretty familiar, and it shows our electric sales, weather adjusted, over the last 35 years.

Recall that the worst recession we've ever seen was in the early 1980s, but the recovery from the most recent recession has been slower.

In fact, as we stick with our cautionary approach to forecasting sales, we've lowered our outlook for 2012 to 1.3%.

Now that's the same as last year's growth, and for the first nine months, sales were actually up 2%.

Excluding energy efficiency work, the underlying economic growth was about 3% and we forecast about 2.5% for the year.

That's about the same growth as over the last two years.

But let's get back to the net numbers.

The net sales improvement forecast at 1.3% for the year includes year-to-date growth of 2%.

This continues to be driven by industrial sales growth of 5.7%, on top of 3.6% last year and 10% two years ago.

Residential and commercial sales lagged; they remain flat.

The primary reason we've lowered the growth rate a bit is because industrial customers that rely heavily on products supplying the renewable energy sector have seen a slowing in their growth rates.

These are customers that generate little margin for us because they are provided with special rates.

Unfortunately, we can't share more detail with you, but suffice it to say, their impact on our profit is minimal.

On a related subject, most of you are aware that we no longer have decoupling for our electric business, following an appeals court decision addressing another utility.

Because the appeals court judge was clear that tracker-like mechanisms are permitted, we've requested a revenue adjustment mechanism in our recently filed electric rate case.

For the gas business, decoupling is still permitted, and while we suspended its use temporarily with the most recent gas rate settlement, we plan to request continuation in the future.

Now John covered the newly filed electric rate case just a few moments ago.

I thought I'd discuss some of our proposed process improvements that are reflected in that case.

Most of you are familiar with the 2008 Michigan energy Law that provides for more timely rate making, limited competition, energy optimization, and renewable generation.

In our new electric rate case, we've proposed some additional steps to make the process even more efficient and effective.

These include a revenue adjustment mechanism consistent with the appeals court decoupling ruling.

These also include potential adjustment mechanisms for pension and retiree healthcare, as well as uncollectible accounts.

For example, if we are able to make expected progress with uncollectible accounts, this mechanism will permit us to share the benefit with their customers quicker than waiting for another rate case.

In addition, we've proposed a two-year capital investment recovery mechanism, also to provide more efficiency.

Should the Commission choose to support this mechanism, then it's not likely that we'll need to request another rate case for two years.

As you know, the bulk of our rate cases are about capital recovery and returning improved levels of O&M to our customers.

The capital investment portion of this request is 85% of total.

There are other features designed to improve reliability for our customers.

For example, we're requesting the resources to shorten our tree-trimming cycle from about 14 years to around eight years, and that's all good news for our customers.

All in all, this rate case is intended to minimize customer volatility and provide more certainty to you as investors.

Talking about stability and certainty, here's the latest look at our liquidity.

At midyear, we were at 32% of market cap, almost twice the level of our peers.

S&P and Moody's outlooks for both the parent and the utility are positive, and we are grateful for this vote of confidence in the improvement we've made to our cash flow metric and to our balance sheet.

Here is our traditional cash flow forecast for both the parent and the utility.

As you can see, most of the financing is complete and the plans continue on a strong track.

And this is our earnings and cash flow sensitivity updated for the latest condition.

You can use this tool for assessing both 2012 and 2013 conditions.

So we're on track to deliver on all of our financial targets, as shown here.

We feel good about our prospects for this year and for next.

John and I look forward to seeing many of you at the upcoming EEI Conference where we'll present on Tuesday, November 13, at 8.15 Mountain time, 8.15 a.m., that is.

We'd be pleased now to take your questions, so Operator, would you be kind enough to open the line for those questions?

Thank you.

(Operator Instructions).

Mark Barnett, Morningstar.

Just a couple of quick questions on the mechanisms that you filed for.

Obviously, you went a slightly different route than DPE has with the Commission, and I'm wondering if maybe you could give a little bit of detail around how your revenue mechanism might work.

And then, secondly, you mentioned that the capital recovery mechanism would be the main driver of whether or not you were going to be a regular filer.

Is that kind of a black-and-white situation?

If you don't get the CapEx adjustments, but everything else, might that still help you stay out?

Yes, thanks for those questions.

Those are good ones.

Let me just give you a brief background first.

We're in the situation where most of our request of the Public Service Commission is all around capital investment.

So as John showed you in one of the earlier slides that you can go back and look at, in our last three rate cases, as well as this one that we're providing for now, the bulk, again, is capital investment.

So to take your second question first, if we had some form of I'll call it a tracker, but it's more like a revenue adjustment mechanism, that permitted us to have a plan in place where we would have the normal year covered as we would in a rate case, and then the next test year also covered, and then there would be a good opportunity for the Commission and its staff to audit just like it does on passthroughs, on GCRs, on PSCRs.

The fact that we followed exactly the plan and any changes that were made to the plan would be accommodated in the audit process later.

If we were able to do all of that, then there'd be no need to come in for a rate case.

Basically what we do is we are typically holding our O&M flat to down a little bit, and that's the other reason that you might need a rate case.

Well, if we're in that zone of flat to down, the only disappointment is our desire to continue to give our customers more rate relief by passing that O&M through to them.

So we're looking at a two-year trial.

Some people have suggested that maybe a three-year approach would be better so we wouldn't have to come in for rate cases for three years, but our view is, let's take it easy.

First step, let's do two years.

If the commission supports that approach, then yes.

We don't see a need to come back on the electric side for a couple of years for another rate case.

And if they support that, we would consider that in our gas business as well and look for an opportunity that might permit us to stay out of rate cases there maybe for two or three years.

Mark, don't think of it like a freeze; that's not what we're trying to do here.

We're just trying to be more efficient and more effective with the rate-making process and make it easier for everybody who has to administer it, but take no exceptions to doing it with excellence and perfection.

And I think most people would agree that it's probably nice to avoid the detail of a rate case if you've got a simple plan on your capital investment.

So yes, it is a little bit of an on-and-off switch and I think that's a fair comparison.

If we get the support from the Commission, we probably won't be back for a couple of years.

If they'd like to see us in each year for those capital requests, we would be happy to do that as well.

Now your second question on the revenue mechanism, do think of it as just a way for us to put something new and different in place now that we don't have electric decoupling.

We have it for gas, but not for electric.

So since the Commission has full authority over tracking-type mechanisms, we're asking for this revenue adjustment which would -- it's a very simple -- the math looks complicated, but it's really a simple request.

It just says whatever is in our rate case, if the sales are better, whether it's for energy efficiency or whether it's for the economy or whether it's for the weather, whatever might happen there, then we would share that good news back with our customers.

Good for them, good for us, and good for you.

If it's the other way and it goes down, same thing.

We would share that.

So it provides more stability in costs and rates that our customers see and more stability for you as investors.

It's really that straightforward.

Now, when the Commission goes through it, I'm sure they're going to be thinking carefully about what they would like to do, and they have some obvious choices on whether they're going to include weather or the economy or energy efficiency.

We're certain, though, [we] would look favorably on energy efficiency since they've been strong supporters of what's in the energy law on that subject, but there'll be choices for them.

And we'll share our thoughts and then they'll make the final decision, and we'll be happy with whatever they conclude.

Thanks.

Great.

Thanks for the detail.

Paul Ridzon, KeyBanc.

Have you seen any polling with regards to where this 25x'25 stands?

Yes, Paul, there's some public pulling out, and it looks like we're ahead of the opposition in this one so far.

Can you share any numbers from the polls?

No, they're public.

You can see some of the ones.

We also have some internal polls that we look at, which I'd prefer not to share with you, but if you look at the public polls, yes, we're moving ahead.

The more -- it's really important that the information is shared with the voters, and the more we share the information with the voters, the more likely we are to get a positive -- an opposition to Proposal 3.

A couple things that you should note, every newspaper that has done an editorial in Michigan so far has been opposed to Proposal 3. That will influence voters, particularly those that are undecided.

And you know, we think we've got most of the momentum in our favor, but there's still a lot of undecided voters with a lot of ballot initiatives on the ballot this year, so they really won't probably make up their mind until a few days before they vote.

Who is advocating this?

The opposition to us?

Yes.

There's some third parties.

It's primarily, you've seen some of the ads out there that CARE has put out, some heavily funded investors from California who are driving this to try to get what they think is important for this state, and that's the constitutional amendment for renewable energy.

So it tends to be -- we like to refer to it as hedge funds in California who want to capture our Constitution and turn it into renewable energy for their benefit.

Because look what's happened to the California economy now.

(Laughter).

Yes, right.

Well, actually, what's unusual, Paul, is that if this passes, as I said earlier, this would be the first constitutional amendment in the country.

California doesn't even have this proposal.

And I was a little confused by the impact of weather with all the decouplings in and out.

Can you just review that?

You want to do that, Tom?

Yes, no, I'm happy to do that.

And Paul, here's the way to try to think through all of that.

On the electric side of the business, a quarter ago we wrote off the decoupling business.

So just -- you get a nice pure look at that.

Just think of what we have in there with it's weather or economy, it's just good and bad.

So the big picture on that is it was really warm in the summer, and you see that flowing through all the numbers that we gave you.

Now on the gas side of the business, a little bit different because we had decoupling in place.

When we got to our settlement, we agreed to suspend it until the next case.

So you're going to get decoupling for the prior year in your gas numbers, and then you won't have it when you come to the new years.

And also remember on the gas side, we never had decoupling for weather.

We had it for the economy and for energy efficiency.

So this mild weather that we had in the first quarter of the year, even early in the spring, all that flows through.

So when you look at something like this slide number 12 and you see $0.13 of bad news, it says, around March 31, but that's really dipping into April just a little bit, that's primarily the weather flowthrough on the gas side.

And then, when you look at the hot summer there's a lot of ups and downs in there, but in the red part through July 23, $0.13, that's really most of that good-news hot weather.

And if that helps you, I'll stop there, but we can go further if you'd like.

I think I'm good.

Thank you very much.

All right, thank you.

Ashar Khan, CMS Energy (sic).

(Multiple speakers) (laughter).

What position am I getting (multiple speakers).

First of all, I just want to congratulate.

You guys have done a great job meeting numbers expectations.

I think the only change that's left, which is I think for the last (inaudible), which I believe is the stock is getting investment-grade rating.

And I really think that is needed for the stock to kind of get to the balance and to the premium.

Can you share, Tom, where we are in that process with the rating agencies?

And is that -- I think that that should be a key goal of management and the Board.

You know, you guys have done exceptionally well on earnings, guidance, getting to the rate, the regulatory thing.

But that remains the weakness.

And I just want to get your thoughts where we are.

Is that a great focus?

And going forward, can we hear some good news or what?

Well, thank you for that question because I think you slipped a nice compliment in there and we appreciate that.

You will have a job when you need it.

(Laughter)

Let me just remind you, and I think most everyone on the call has heard us say this, John and I, before and I want to remind you of our approach.

We have a great deal of respect, as do many, for the rating agencies and we spent a lot of time trying to give them a look for five-plus years out on what the business looks like, and any time there's anything happening, we give them detail on those five years to keep them up to speed.

We put absolutely no pressure on them regarding ratings, and I know you don't want to hear that and others don't like to hear that, but here's why.

It's our view is they do a good job and they'll make the call when they think it's appropriate to make the call.

Consequently, we are very happy that both S&P and Moody's do have the parent and the utility on a positive outlook.

And we're grateful for that.

But we're not pushing them to make a change.

We just want them to see the data and do the right thing, and one of the pieces of logic is this simple.

I'd rather have them make an upgrade when they believe they're comfortable with it, so that their look is at least 50-50 going future -- in the future, than have you as investors be concerned that the rating that we have has a little more downside than it does upside.

I'd rather it be the other way.

So as a Board and as a management team, we are very focused on having a strong, healthy balance sheet that supports the business today and going forward, and we're hopeful that the rating agencies will take a view that merits having a credit rating that's more positive than it is today.

But they'll get there when they do.

So our job is to run the business well and improve it every day and their job is to assess it and share that with you, and I think they've sent you a signal and I have no predictions to offer as to what they might do and when they would do that.

Obviously they'll do that on their own.

I hope that color helps a little bit because we do view it as an important subject.

Okay, congrats again.

Ali Agha, SunTrust.

Thank you, good morning.

John or Tom, either one, going back to the points you made about the need for new capacity and a decision will be made by you guys next year, potentially an $800 million investment.

As you may indeed go down that track, when would that $800 million be spent?

How should we think about the rate base, those implications of that?

And then, on the financing side, Tom, does equity come into the picture or can that still be funded without major equity need?

Let me start with the need for it, Ali.

The first thing we need to do is we need to make sure -- we're still in the evaluation process, and there's still some uncertainty in our mind about what MISO is going to do with the reserve margin requirements; also, what the future brings as far as environmental rules and how long our units can continue to run.

But that all being said, think of 2015 or 2016 as the timeframe that it's likely to be needed.

Once we do that, yes, you can think for your modeling that you could add $800 million into the rate base from that standpoint.

I mean, that's what we think a unit of the optimal size will be.

But what I want to make sure and clear and set the tone for everyone, we're still evaluating this right now.

This is more of a head's up for you.

We have room to do it.

It will affect the plan somewhat, but it's certainly something that we can afford.

But we need to make sure that we do have the plan in place to know that is the right choice.

It changes our balance of the portfolio a little bit and our fleet, but based on natural gas prices going forward, I think that is the right thing to do, which keeps us well balanced but a little heavier on natural gas than we are today.

And as far as financing, Tom, I'll let you take that one.

I'm happy to.

I would just preface the discussion on equity with -- just add to what John just said, that the range of spending he just showed you into the little bubble, $6.5 billion to $7.3 billion, is a range because we may be able to offset some of that with other things we would do differently.

We're constantly focused on how to keep that number around $7 billion, so we make sure that our customer rates don't go higher than the level of inflation.

That's driver number one, and therefore you'd have a sustainable growth plan that goes for years and years.

So the first choice is, do we do it or not?

The second choice is, can we create some offsets?

And if we can, there may be no need to do anything different on our equity plan.

But the third piece is if it turns out we can put all of this in and go to $7.3 billion, and we know we can keep our rates below inflation doing that, then we might possibly look at equity.

Now that's the first time you've heard me say that in a while, but I don't want you to be too concerned because, remember, it's sort of the backup plan to many decisions yet to be made.

We've always said if we ever had a good business proposition that was accretive out the gate, kept the earnings going the way you'd like to see it, that we wouldn't be bashful about coming to you.

We're way far away from that.

We don't see the need to change our description to you that there's no need to issue equity other than the continuous equity program we have over the next several years.

And so, we're probably in good shape.

If, however, we decided that it would be good to issue equity to support this, it certainly wouldn't be this year and it wouldn't be next year, and then the question is, would it be needed in 2014 or 2015?

Uncertain.

So we're still sending the message that we don't need equity.

We'll be managing the numbers as we go through to see if we can maintain that.

But if the growth is going to be that much faster and that much bigger, we are not bashful about coming to you with a good business proposition.

And Tom, just to clarify one point from that.

So in the scenario, as you said, you manage your CapEx and you may take away some other CapEx, some other areas.

So should we think that in case you do spend money on this plant and you decide to go ahead with it, and yet you manage your CapEx so there is no equity need, that the implication for CapEx and rate base would still be the same as they are today with a shifting in CapEx dollars away from other projects to this project?

Is that the way to think about it?

Largely, yes, but I do want you to know I believe personally if we have the need and we decide to do in the future, the new plant, the $6.5 billion in the base will grow a little bit.

It just depends on how much we can offset.

So I think you'll see something in that range, if it's approved, between $6.5 billion and $7.3 billion, still well short of the $10 billion worth of opportunities that we could do.

And I know that also sounds foreign.

Why not do them all?

But we've focused, one, don't let your customer rate spike.

Make sure you've got a sustainable plan; stay below the level of inflation.

And two, if we can do it, avoid that need for equity.

Avoid that dilution.

And those are two major focuses for us as we do the right things for our customers.

One last question, separate topic.

You know, the enterprise business, the earnings that we've been seeing from that through the three quarters of this year have been relatively flat, you know, running at cumulatively maybe $0.03, $0.04 on an annualized basis.

Is this the core earnings power of enterprise we should be thinking about going forward or are there swing factors to consider that would cause it to be much higher or lower than what we've seen through the nine months?

You're seeing a low level from enterprises at this point, and you could, as you're doing your models, see a modest growth in that as you go into the future.

And it's very simple.

We have kept our principal plant there, called the Dearborn Industrial Generation Facility, only partially contracted because we see the market as turning around over the next couple or three years.

And as that market gets richer on the energy prices and capacity prices, there will be opportunities to lock in contracts there that would be more profitable than what we might do today.

So we're running along with the market at a pretty low level of results.

And I think you should anticipate that that's something that will improve as we go through time.

Again, let me put into context.

It's 5% of our business.

Maybe it will grow a little bit more than that as we go into the future, but it's not the core of our business.

Our utility is the bulk and will always remain the bulk of our business.

Jonathan Arnold, Deutsche Bank.

Can I -- on the potential flushing out of the plant for new capacity, can you give us a sense of when some of this might translate into actual projects versus just the concepts?

Is that a later this year or early next?

What is the timing?

Jon, I'd say early next.

I mean, the process we use, we're still evaluating it today.

That will be completed, I expect, by the end of the year.

If the choice is to build, and that's an if, if the choice is to build, you'd have to get an air permit.

We'd go through a con process that would allow more certainty of recovery.

That process would take, I think, legislatively nine months is required.

So to put it into scope, that's what it looks like.

So if we had a no-go decision, it would be well into 2013, if not early in 2014.

And part of it really is dependent, I think -- one of the other people asked the question, too -- what are the environmental rules going to be?

As Tom talked about our CapEx spend, a lot of capital expenditures are based on environmental controls for our plants.

If things are accelerated, changed, delayed, that may also -- or if new technology develops, it may enable us to use different forms of technology to reach the same outcome.

So that will allow us to readjust our capital base.

But timing-wise, I'd give you that timing.

End of the year, we pretty much should have an idea.

Early next year, we'd have an idea specifically that we'd be able to move forward with.

Because I think that's the timing.

If it is a gas plant, we're going to need about three years to get through that process.

John, I think -- we may have misheard you, but it seemed like you listed build or purchase an asset as the options.

Is PPA type of solution in the mix or is it more something you would own?

Yes, I would expect us to own it.

Although PPA, we are evaluating PPA in the short term.

So not a long-term contract, but a short-term contract to fill some of the needs, because with the advantage of capacity prices over the next couple of years, we may go to the market for some short-term PPAs.

But long term, expect us to build it.

Whether we build it or buy it, it would be rate based.

So short-term means basically between now and getting another solution in place?

Exactly.

Okay.

Then could I have just another (multiple speakers).

If 25x'25 were to pass, and considering the rate implications of addressing this capacity deficit, could you deal with both things and keep your rates profile acceptable in a way you want to?

Yes, it would be more of a challenge because you could almost add a percent on top of what we're doing now just for the build of the 25x'25.

So I think in the five-year plan, we stay below 2% for electric.

I think it's 1.5%, 1.4%, 1.5% for that -- for rate growth, for base rate growth.

You throw another percent on top of that, you'd be at 2.5%, 2.6%.

So it would be doable, but you know, and again, part of what I want everybody to understand is that we are opposed to it.

It is not a smart way to legislate -- or to avoid legislation and go through a ballot proposal to ensure renewable energy standards for the state.

The Constitution was not set up, my belief, for renewable energy standards.

Okay, but if it passes, would it change the rest of your business plan?

Well, I'd tell you one thing it would do is when you think about capacity, we would be adding capacity through renewable energy, which may -- we need to look at that as we're looking for the capacity we'd need for other forms.

So let me be very clear.

We'd have a 25% target of renewable energy, which would be a force fit for meeting our capacity energy needs.

Second issue is we need to -- that's an intermittent fuel source, and primarily in Michigan it's wind.

So we'd need some backup to that to be able to provide our customers the reliability that they expect.

So from an investors' standpoint, it actually is an investment opportunity, both renewable energy and backup for capacity.

From a customer standpoint, though, it raises rates, causes us to raise our rates more than what we want to raise our rates, and we're always trying to be most efficient for our customers.

So, that's kind of the balance that we're looking at today.

John, thank you very much.

Thanks, Jonathan.

Thanks, Jonathan.

(Operator Instructions).

Leslie Rich, JPMorgan.

Good morning.

Tom, I wondered if you could talk a little bit about the decline in your sales forecast.

It looks like the amount that you're allocating to energy efficiency remains the same, but your sort of net sales growth assumptions have declined.

And then, any thoughts you might have on 2013?

Yes, thanks for the question.

We brought our numbers down a little bit from the last quarter when we showed you this, but what I want to do is offer, again, what we're seeing so far, actually, because it's kind of like gas prices and things like that.

It's the actuals that are the solid numbers and our guesses are just that, and therefore we try to be conservative.

They're not shown on the slide.

I did mention them, but I want to repeat them.

The nine months -- for the first nine months of the year, the growth compared to the first nine months of a year ago was flat on residential and flat on commercial, so we're staying conservative there.

The industrial side was actually up 5.7%, for an overall growth of just about 2%.

That's what we're looking at.

But we've said there seems to be some uncertainty in this election period, and that makes us want to be conservative.

And then, there's another event going on that, unfortunately, we can't talk a lot about, but I mentioned that some of our renewable-type customers are struggling in this political environment that's going on, so their numbers, we think, should be a bit lower.

And I can't say much more than that.

We factor that into our fourth quarter.

They're special contracts, so there's no profit margin to speak of there, but we brought that number down to 1.3% in total, which is about where we were last year for growth and not that far off from where we were for 2010.

We're going to give you more on 2013 when we get out to our guidance early in the year, and maybe we'll talk about it more as we get to the end of the year, but we felt for the rest of this year we just want to be conservative.

We don't want to plan for something that's better than it turns out, and if it turns out better, great.

Usually that's a help in one way or another.

So those are the facts about the nine months and that's the guidance for the year, so even though the first nine months are up about 2%, we're saying that for the full year we should be about 1.3%.

The industrial will still be pretty good in that, and we still think residential and commercial will be following as people's confidence grow and the economy continues to grow.

Does that help you enough for now?

Yes, so the renewable customers could be things like solar manufacturing, wind turbine manufacturing, things of that nature?

(Multiple speakers).

And I'm going to try not to comment on that because it starts to get close to things we aren't permitted to comment on.

But just generally, that's the right idea.

Okay, thank you.

Thank you.

Thank you for your patience on that.

Paul Patterson, Glenrock Associates.

Hi, can you hear me?

Yes.

Leslie actually asked what I wanted to ask you guys.

I just wanted to follow up on a few things.

One is, for the renewable energy standard for 25x'25, does efficiency or combined heat and power qualify for that, or is it just sort of solar, wind, and sort of what we normally think of?

Actually, I don't think we'll know until it actually goes through the process.

The ballot proposal is fairly general with some broad statements.

If it is passed, then what we'd have to do is go through, I assume, the regulators, maybe the legislature would have to define that.

So we really don't know today.

But generally, renewable energy is considered here in Michigan solar and wind.

It's not hydro.

Okay, but you also mentioned that there's some California hedge funds that are pushing this out-of-state interest.

But one would think if this is as much concern as you guys have mentioned, and others, that there is some underlying demand politically for an increase in renewables above and beyond, perhaps, what we have right now in your state.

So I guess what I'm sort of wondering is, how is -- if there's a potential for more renewable issues -- renewable generation, how are you guys putting that into your plan?

Do you follow me?

Because, like you said, if there's a higher requirement, one would think that perhaps you'd be focused more on, quote unquote, renewables.

Do you follow what I'm saying?

Let me make -- I'm going to answer it, then tell me if I don't hit the mark.

We have a law in place today that requires us to get to 10% renewable energy by 2015.

It also has energy efficiency standards and other things that are associated with it to reduce, I think, our electric sales by 5%, our gas sales by about 4% by 2015.

We're well on our way to achieve those targets.

We've made the investments at Lake Winds, we're working at Cross Winds.

The other major utilities in Michigan are doing the same thing.

So we're moving towards that end.

Your point about is there more political demand for renewable energy, I think it was a good way to state it.

I think there's certain people that have a political view that want more renewable energy than others.

I'll tell you our view here at the Company, my view personally, I like renewable energy.

We support it, but I want a balanced portfolio.

It is more expensive for our customers.

Renewable energy is more expensive, particularly compared to baseload with gas today.

It's an intermittent resource, and with our first wind park that we just built, we find that people like to have renewable energy until you actually locate it.

And then, it becomes a little bit more of a challenge when you start getting into siting and zoning and some of the issues we run into.

If you're familiar with Michigan, we're basically a peninsula, and to hit the targets that would be required by 25x'25, it's likely we'd have to go offshore with wind, which is another issue that becomes a huge political issue and a local zoning issue, too.

Okay.

Just finally, it looks like a lot of the demand growth -- it looks like basically demand growth has been pretty weak, other than really the industrial sector.

And I've been sort of wondering, could combined heat and power, you working with industrial customers, are there any other opportunities there perhaps as a means to deal with the sort of renewable or the sort of environmental desires of some, and perhaps a way of sort of meeting these -- meeting your capacity needs or the system capacity needs for your service territory?

Is that something that could get real (technical difficulty) bring about?

A lot of other states are kind of pursuing it more aggressively.

I'm just wondering if there's anything going on there with you guys?

Yes, I mean, it's something we're continuing to work, particular our large customers.

The smaller ones, we do some one-off things with our smaller customers, but the bigger customers, you're right.

We've talked to them about it.

We'll continue to work with them about opportunities to set aside their need for renewable energy, along with our need for renewable energy.

We haven't seen anything come to fruition yet, but I do think there's opportunities there.

But usually what we get into is it's more smaller scale.

We tend to believe we would rather have a large wind farm compared to a turbine and one-off, or solar panels and so forth.

But we are working with them.

If we find the opportunity, we'll certainly advance it.

Ladies and gentlemen, we have no more questions in queue.

All right, great.

Let me wrap this up.

First of all, thanks, everybody, for joining us today.

We had another good quarter of operating and financial performance.

The results for the first nine months are ahead of plan, allowing us to accelerate reliability spending and improve value to our customers.

As we've talked about today, we're on track to achieve our guidance of $1.52 to $1.55 a share for the end of the year.

We look forward to hopefully seeing many of you at the EEI Conference in the next few weeks.

Tom and I will be there, and I appreciate your joining us today for the call.

This concludes today's conference.

We thank everyone for your participation.

You may now disconnect.

Have a great day.