CMS能源 (CMS) 2014 Q1 法說會逐字稿

Good morning everyone and welcome to the CMS Energy 2014 first-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 May 1. 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 Mr. Glenn Barba, Vice President, Controller and Chief Accounting Officer.

Please go ahead.

Thank you, 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.

Some of the statements made today may be forward-looking statements.

Our SEC filings including our 10-K for the fiscal year 2013 identify some of the factors that could cause actual results to differ materially from those projected.

Our SEC filings are available on our website.

This presentation also includes non-GAAP measures.

Reconciliations of non-GAAP to GAAP measures are included in the appendix to the presentation and posted in the Investor Relations section of our website.

With that I will turn the call over to John.

Thanks, Glenn.

Good morning everyone.

Thanks for joining us on our first-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 2014.

Then we will close with Q&A.

We are off to a good start in 2014.

For the first quarter adjusted earnings per share was $0.75.

This is up $0.22 from last year primarily due to the winter weather and strong cost performance.

First-quarter results keep us on track to meet our full-year guidance of $1.74 to $1.78 per share.

Tom will provide the details in a few minutes.

You can see from this graph how this winter compared to those of the last 100 years.

It was consistently cold from November through March.

The winter put our gas system to the test and I am pleased to report it performed very well.

Total gas deliveries were up nearly 25% due to the weather.

And there were no major service interruptions.

Here you can see where we are putting our gas investments to work.

The $175 million upgrade at the Ray Compressor Station increased reliability to meet peak demand.

And the $120 million Southwest Michigan Pipeline currently under construction will increase the transmission system capacity and reliability.

Our gas system is the fourth largest in the United States.

During the first quarter we delivered almost 160 billion cubic feet of natural gas to our 1.7 million customers.

About half of the deliveries come from our storage fields.

Consumers has one of the largest storage systems in the country and the highest level of deliverability at 4 billion cubic feet a day.

Our storage fields help protect customers from volatile price spikes which many experienced during this past winter especially in March.

Over the next 10 years we plan to invest $5 billion in gas transmission, distribution and storage systems.

In 2013 strong cost performance and favorable weather allowed us to reinvest back into the business for our customers.

This model allows us to continue to focus on cost performance and reinvestment within the year.

We've been doing this now for several years which is unique in the industry.

We believe this improves performance for our customers and our investors.

The result of our model is sustainable growth.

Each year our growth builds on the previous year's performance without weather adjustments.

Within the year we pull ahead work to accelerate the pace of improvement for our customers and the yearend results are delivered for investors with predictable and consistent growth.

Again this year we plan to take advantage of the cold weather to reinvest for our customers.

In the first quarter we benefited from favorable weather of $0.20 and strong cost performance of $0.04 allowing us to begin our reinvestment plan earlier than last year.

Tom will go through the numbers with you in more detail.

I want to make the point again about our sustainable, consistent growth strategy.

In the first quarter our cost savings alone allowed us to beat our 5% to 7% growth rate.

Our strategy differentiates us from our peers.

The Michigan Energy Law is working well but there is an opportunity to make the law even better in 2015.

The governor has developed a set of no regrets principles shown in the green circle.

We support his vision and work closely with his administration and legislators.

Near term, the House Energy and Technology Committee held hearings on electric deregulation.

There was strong opposition to the bill and the committee took no action.

The administration is looking at options to establish a tariff for energy-intensive customers and the legislature may take action on that.

In the gas business, I expect the House will propose legislation to expand gas mains.

We will support this effort because it will accelerate conversions from propane to natural gas.

Looking into 2015, we see the possibility of an increase in the renewable energy portfolio standard, continuation of energy efficiency goals, regulatory improvements and the potential elimination of retail open access.

We look forward to working with the Governor and the legislators to make Michigan a more attractive state for business.

Next, Tom will take you through the details for the quarter.

Thanks, John and let me add my welcome to everybody on the call today; it's always good to have you.

For the first quarter our earnings were $0.75 a share on both a reported and, we are pleased to say, an adjusted basis.

This is $0.22 better than last year.

Normalizing for weather, as John mentioned, this is up $0.05, or 10% from last year.

This reflects strong cost performance and investment-driven growth nicely above our 5% to 7% earnings growth pattern.

Avoiding gas rate cases for both the gas and the electric businesses this year was made possible through $150 million of cost reductions initiated last year.

As we just discussed, weather-normalized results were up $0.05, or 10% in the first quarter alone.

For the nine months ahead you can see with the yellow arrow that cold weather, up $0.17, has provided considerable space to pull ahead work from 2015 to 2014.

You can also see in the dotted circle the cost savings this year fully funded our planned investments.

Here's a recap of cost performance before and after reinvestment.

Our underlying cost reductions shown in green were 8% last year and we expect 8% this year.

These savings are offset by about 5% of work pulled ahead from the next year.

Pull ahead is permitted primarily by favorable weather in 2013 and so far in 2014 as well.

Pull aheads include actions like incremental tree trimming for reliability, faster pole and pipe maintenance as well as accelerated plant maintenance outages.

Cost reductions cover a variety of items including actions like planned benefit savings, faster installation of smart meters and more productivity.

Even after reinvestment our costs are down about 3% a year.

Our cost reduction track record is better than most peers and it is shown in orange.

At present we plan future cost reductions at about 2% a year reducing our O&M from $1.055 billion last year to $930 million by 2018.

This is a net reduction of $125 million, which is down 12% and a bit more than 2% a year.

This may well be conservative because we do not believe in or count on black boxes.

We plan on cost savings that we know about including actions like gas in place of coal generation, reforming our benefit programs and implementing specific plans for productivity.

We are confident in substantial cost savings ahead making headroom for more capital investment but perhaps there is little more upside.

Let's switch to revenue.

Our electric sales have been better than many others as Michigan continues to grow particularly in our service territory.

As shown in the top left of this slide, key economic indicators like building permits and GDP growth in population and unemployment in our major service area are meaningfully stronger then Michigan as well as the US overall.

For example, during the latest reported 12 months through February, building permits are up 16% in the US, and they are up 25% in Michigan and 39% in Grand Rapids.

For the first quarter, weather-normalized electric sales were up 1.7%.

For the full year we anticipate a similar growth rate.

Over the next several years we plan conservatively at a bit over 0.5%.

We prefer upside opportunities not downside risk.

Our EPS growth over the next five years is not, however, dependent on strong load growth.

Our growth is based on needed investment and solid productivity.

Load growth over and above our conservative estimates could be another catalyst.

We have not factored this into our plan and perhaps this is another upside.

We are not, however, without need to improve.

We do have substantial investment ahead to catch up on.

This investment allows us to meet environmental requirements, add more renewables, improve reliability and enhance productivity.

Our bills are competitive for our residential customers but rates are not competitive for many of our industrial customers.

In many circumstances these rates are higher than rates in other Midwestern states.

We are working hard to correct this through our own substantial cost performance and improved rate design.

This could make us more like our Midwest peers.

Also, possible policy changes could eliminate or reduce existing penalties that all our customers pay to subsidize a few customers on retail open access.

While we have the lowest overhead in our business and among the very best O&M cost performance and advantages like procuring low-cost gas through our huge storage fields we still have disadvantages including our geographic location on a peninsula remote from fuel supplies.

Our goal is to work with our customers, our regulators and policy makers to provide fully competitive prices and reliability.

This is exactly what our customers should expect from us.

So, a great deal of our capital investment focuses on more productivity, the improved reliability completing environmental projects and a major reduction in carbon output to levels below the president's goal.

Our investment in plants using gas and renewable fuels helps make this possible.

Even as we limit the level of capital investment to keep base rate growth below inflation, this investment catch-up provides resources to make necessary improvements.

We have opportunities to spend more than $20 billion over the next 10 years and all in nice bite-size no-bet-the-planet projects.

We have included $15 billion in our plans limited only by that passion to keep customer rates and bills down.

Even after recently pulling ahead $545 million of investment in gas infrastructure, smart energy and electric reliability as well as reinvesting almost $390 million in the gas business associated with securitizing coal plants, we have $5 billion of investment opportunity not in our plans.

Perhaps more upside.

Here is just one example of capital investment growth opportunities not in our plan.

We likely will need to build or secure over 2500 megawatts of capacity just to replace expiring PPAs and coal plant closures.

We already have secured 540 megawatts with the acquisition of the combined cycle gas plant in Jackson.

With conservative load growth estimates and the possibility of customers returning to bundled service the need for secure capacity may be even larger.

We are confident that we can fill those needs.

So here is the math for this addition in capacity.

It is attractive for both customers and investors.

If, for example, we build just 1,000 megawatts of new capacity this could add $0.05 of EPS growth, or about 2 points of headroom to our long-term guidance.

And that is without increasing customer bills.

The rate impact of adding the new capacity is likely to be equal to or less than the cost associated with expiring PPAs.

Customers and investors win again.

We are not, however, raising long-term guidance.

This capacity additions -- these additions -- are not in our plan yet.

This investment opportunity will allow us to redeploy resources in a manner that further strengthens the likelihood of consistent 5% to 7% growth.

Our investment-driven model is not so unique but we work it well enough to improve our gross operating cash flow by about $100 million each year and in some years we have exceeded that substantially.

We self fund our growth with no need for block equity on the five-year horizon.

As a percent of market cap today our spending levels now exceed peers with strong additional growth ahead.

As a risk adverse company our operating cash flow and liquidity are higher too and this is a nice place to be.

You can see our liquidity here with over $2 billion available in a robust financing plan.

Our liquidity as a percent of market cap shown at the bottom right exceeds peer levels.

Moody's upgraded both CMS and Consumers just two months ago.

Fitch upgraded the CMS Energy parent's unsecured rating to BBB- and revised the outlook to stable.

Last month S&P changed their outlook from stable to positive.

Here is our sensitivity chart.

This will help you assess our prospects.

And here is our report card for 2014.

Obviously the Arctic blast -- with that Arctic blast we would be well ahead of our earnings guidance.

We will, however, work to put the surplus to good use with even more reliability improvements for our customers.

You will note we graded ourselves with an orange check on operating cash flow.

Although we anticipate achieving our target we had not planned on the high price of gas transportation for incremental gas purchase beyond what we had contracted and what we had in our storage fields.

As shown on the earlier sensitivity slide each increase or decrease in the price of gas by about $1 impacts our cash flow by $100 million in the opposite direction.

This is a passthrough but some of this may be recovered in 2015 rather than 2014.

So we are on course to meet all of our financial targets with substantial upside in earnings.

We are actively redeploying some of the surplus to improve the lot of our customers with no adverse consequences for you, our investors.

The mindset for customers and investors has worked and we hope you agree.

We are in our 12th year of premier earnings and dividend growth and we plan to continue this performance for some time.

So thank you again for joining us on our call today and we would be pleased to take your questions.

Operator?

Thank you very much, Mr. Webb.

The question-and-answer session will be conducted electronically.

(Operator Instructions).

Dan Eggers, Credit Suisse.

Hey, good morning, guys.

Thanks for the update on slide 16 on the capacity, your resource opportunity.

Can you maybe talk a little bit about where you guys sit from a functional reserve margin between what you guys own and what you have under contract?

And then how much you have in to buy out in the market right now kind of on a spot or normalized basis over the course of the year?

Dan, we've got enough capacity now for our customer load.

That's not an issue for us as far as that.

Next few years we will probably be in the market for a few hundred but very small from that standpoint.

So I think what Tom was showing in the chart, which is an important piece, is we are shutting down coal, which we are beginning to replace.

We will buy more from the market and as the PPAs expire we will need to have replacement capacity.

What makes us a bit unique here, I think very unique, is the fact that we are heavy dependent on PPAs compared to other utilities.

So as those expire it allows us to do the development here and raise our capital investment without raising the cost to our customers.

I guess, John, there's a couple of contingencies out there obviously what happens with choice in the 780 megawatts and then the survivability I suppose of Palisades as a gets older and the prospects for a PPA, beyond your PPA are probably harder to find.

How are you guys thinking about contingency planning for both those issues and if choice does get eliminated early next year would that accelerate the need maybe to revisit Thetford?

Yes, exactly.

You hit it.

The issue -- we have a great site in Thetford.

We are ready to move ahead with it.

The opportunity presented itself with the plant here in Jackson that was best for us and for our customers so we took advantage of it.

The Thetford site is ready to go.

We do have expandability and be changing out some of our simple cycles to combined cycle.

At the Zeeland plant, Thetford can begin at a simple cycle, move to combined cycle.

So we are well positioned to be able to move I'd say quickly but again building plants nothing is quick.

But having the sites and having all that work already behind us really would help us move quickly as retail open access returns, as coal plants are shut down and as some of these PPAs expire.

And with choice being replaced with your own generation, would that prospectively be added for the growth rate because presumably the revenues coming back into pay for that generation would mitigate the concerns you guys always have about billing increases for customers?

Absolutely.

Absolutely.

And the fact that the ROA customers would come back also means that the wall was hit as far as coal being reduced, the capacity markets increasing to the normal levels, we are more competitive and we will be in a very good position to be able to build with that pretty substantial, like you saw there, at almost 800 megawatts of load if it did return.

Got it.

Great, thank you, guys.

Jonathan Arnold, Deutsche Bank.

Good morning.

Could I ask you just to talk a little bit about where you are on days of coal supply, deliverability and if weather being constrained is changing dispatch and how you expect the summer to play out?

Yes, we fell below our normal levels this winter and I think it is what the industry has experienced with some of the rail disruptions primarily due to the cold weather.

We have been able to make up about seven days of inventory over the past few weeks.

So we have been making up ground, we have been putting some more railcars to work, we do have a couple scheduled outages especially at Campbell 3, our biggest plant, which has helped us get back on track.

So we are a little bit below normal levels today but I do feel good that there is finally most of the ice is gone out of the Great Lakes so we do have the opportunity different than other utilities to bring in coal with barge, through barges.

And we are also making progress, as I said, with a seven-day increase over the last several weeks.

John, can you just kind of frame -- so how low did you go and where are you now with that seven delta?

The lowest we ever hit was about 14 days.

That was the lowest.

And what we did as a result of that is we began to conserve our western coal which is cheaper for our customers by working some minimum dispatch on weekends and doing some different things like that, so that did help increase it.

And keep in mind we still have the ability to burn eastern coal which we have this coal piles too but we chose to use western because of the environmental and customer benefits.

So moving up from 14 we are up to in about 21 days right now.

We like to be in the 25 day to 35 days going into summer and I expect we will be there, especially now that the lakes have opened up.

Great.

Thank you for that.

Ali Agha, SunTrust.

Thank you, good morning.

Couple of quick questions.

First off, on the 2014 guidance by the segments, slide 25 I believe, enterprise you are assuming will contribute about $0.11 or so to earnings in 2014, which is significantly higher than what they have been running for the last several years.

Can you just remind us what is causing that pick up this year?

It's about the same.

And what you are reading there, remember, is Enterprises and EnerBank combined.

So you need to split that between those two.

Okay, Tom.

And how should we think of that split?

EnerBank would be about $0.07 or $0.08 and Enterprises would be about $0.03 or $0.04.

They are kind of around in there.

So Enterprises is running what we call a little low on its earnings contribution today because this is not a great market for the IPPs.

But what we see, we've kept ourselves open for the year after next and into the future for capacity contracts and energy contracts, and if you remember John's presentation from some while ago, we have the opportunity for plants like DIG to be a little bit like a Ferrari in a garage.

And so that guy can come out when we need to for the utility if it needed to, if it was the best deal.

Or it can be out there with the higher capacity prices we anticipate will occur over the next couple, three years.

Okay.

And EnerBank, is that something going on there to add the $0.07 to $0.08 again, maybe I just don't recall it contributing that level historically.

No, nothing special just their consistent growth that they have year over year, nice performing little bank.

Okay.

And, John, on retail open access and your thinking there and the prospect that you think that load may come back, how much of that is driven by your outlook for commodity prices?

Are you assuming high commodity prices is what is bringing those customers back, or what is the scenario in your mind that you see that as an incremental load opportunity for you?

I think -- the load projections really don't do it although I will tell you I think we are going to see more normal capacity prices after some of the EPA rules kick into effect for the Midwest, so that is one area.

I really think the driver behind it, Ali, will be legislative changes.

Really today our customers, we've got about 400 customers on retail open access and our the rest of our customers, the 98.98% of our customers pay $140 million more per year to take care of those 400 customers.

That's not fair.

And what we're trying to do, as I mentioned earlier, is work on some industrial, call industrial or heavy energy intense customers, to provide them some savings and some discounts which reflect true cost of savings with the type of -- or cost of service with the type of plants, type of customers that they are.

So I would say that is going to be the driver.

We are out of step in Michigan with having a hybrid market.

We are the only one, maybe one other state in the country, that has this and the trend is pretty clear.

People are moving away from deregulation.

Despite what you saw in Ohio that started before Michigan deregulated and it was kind of interesting to see the governor talk about what he thinks about that as he is moving forward with it.

And while I am on this little soapbox, I think it is pretty important to look around this country and see what happened in March of this year with gas prices, electric prices for those customers that are deregulated and don't have the protection of the utility.

Right.

Got it.

Last question.

Just to again to frame up that 1,000 megawatt capacity potential that you have for owning.

Again, could you just remind us what timeframe -- if I heard you right that was beyond the next five years, but it wasn't clear.

When do you see that opportunity?

If you look at slide 16 you can see on, we have an opportunity to put in another 400 or so megawatts today.

If the Palisades PPA contract is not renewed, it expires in 2022, who knows, something can happen earlier there but we are not projecting that.

And then the MCV PPA expires in 2025.

Okay, got it.

Thank you, Tom.

Paul Ridzon, KeyBanc

Good morning.

Can we just talk about what happened on the industrial side?

Weather-normalized sales were up pretty sharply?

Yes, what we are seeing and that's why we gave you this slide showing you sort of the hookups and the building permits and all of that sort of thing, we are seeing a turn back up on the industrial side.

If you could think back, some of you are able to do this, to a year ago we all saw a softening across the country and we were kind of scratching our heads, everybody had ideas for what was causing it.

We are seeing the reverse of that in the first quarter of this year.

We are seeing things firm up.

In our particular area there's a couple of customers that are doing particularly well in driving that growth in the first quarter.

But we are also seeing a lot of others doing things where they are building and preparing for additions so that is why we are pretty confident with the projections that we have through the rest of the year and we are calling it at about the same level of growth.

So from an industrial standpoint inside of that 1.7% first-quarter growth it was about 5.8% and we are forecasting that will probably continue just a little bit better than 5% for the rest of the year.

Just back to Thetford with that current shortfall will you plan currently just to lean on the markets or could we see tight recovery in a couple of years?

Yes, I think we could, Paul.

Right now I think the markets are the best way to go for us to fill that shortfall, which is small.

Let's put it in perspective.

Our peak load is over 8,000 megawatts and we are talking about capacity only, not really energy, for less than 400 megawatts.

So it's not a big deal to go to the market for 400 megawatts, but when we start seeing that increase to near 1,000 megawatts, I think in that ramp up we will be looking at Thetford because I think that is a critical stage when we see that.

And it can change relatively quickly based on the change in retail open access, or as Tom said, some of the contracts set in the future will move off.

We are very well positioned.

The site is ready.

The site is ready to go.

As we said before we've got gas, we've got electric transmission, we've got some older units on site, it's in a remote relatively remote area, but it's on the east side of the state near Flint, Michigan and they would really like us to build that plant.

So it's a pretty good setup for us.

So I would just add, the purchase we did of the plant in Jackson was at a price that is lower than anything I have seen across the country and so it was a great thing to do for our customers.

But John's point here is that we are going to have to add new capacity for the state as well as our service territory at some point.

You bet.

Are there other plants out there like the Jackson plant that you could buy?

There are.

But there's still three significant IPPs out there, one is ours.

So, yes, there's still opportunities that way too.

But either way it's a rate-based opportunity?

Yes, it is.

Absolutely.

Okay, thank you very much.

Andy Levi, Avon Capital Advisor.

Hi, good morning.

Just two quick questions.

Just on the verbiage on the upsize as far as the growth rate, so that's what we're talking about, right, upsize to the growth rate?

Longer term, 5% to 7%, right?

Yes, so we are talking about the earnings-per-share growth rate.

But when we do that you notice we've been cautious each time whether it was upside because we may be conservative on revenue, or upside because we may be a little conservative on our cost, or all of these different things.

That upside we talk about gives us the opportunity to then put more capital investment in place and then be able to do more work for our customers.

So we would anticipate certainly in the short term that this is what kind of gives us the chance to give you a very sustainable, very predictable growth at that 5% to 7% pace.

What we are not trying to signal here is that you are going to see some new sustainable level at a pace higher than that.

There may be a year or two where something happens but our plan is to continue to deliver that 5% to 7% and our point is we probably have some upsides to make that even easier.

Okay, okay.

I thought you were talking about upside to the 5% to 7% and again it could be lumpy or there's a year that you surpass the 5% to 7% but when you talked about upside, we should just continue to, upside to inflexibility, I guess?

That's well said, thank you.

Okay, okay.

And then at the same time some of us are thinking that maybe you may need to file for, or may choose to file for a rate case on the electric side that rates would take effect, I don't know mid-2015.

So I guess some of this upside could help alleviate or eliminate that potential for 2015, or not at this point?

Well, here is the way I would think about that to put it in perspective.

For 2014 we didn't need to have a rate case for gas or electric, either of those businesses, and that is because we found ways to reduce our costs by $150 million.

That funded, if you will, the investment.

We do plan to do rate cases as we get toward the middle and the end of the year, particularly on the electric side.

The magnitude of that case will depend upon the size and scale of our O&M cost reductions and of course our revenue growth.

So we will watch that carefully.

We do not anticipate being able to avoid a rate case for an additional year but it may be able to allow us to temper the size of the case that we ask for.

Great.

And then one last question.

Any commentary or information you can give us on the, I don't know if you want to call it strategy, but this thinking as far as we approach the PJM auction what you are thinking there?

Yes, we are not prepared today to announce what we are going to do but you know our opportunity to participate there is through our IPP that we call DIG, Dearborn Industrial Generation.

We did participate in the market a year ago for the three-year advance period.

We are looking at that again but you know PJM is doing a good job trying to ensure that the people that participate have hard assets and they plan to be there each and every year.

We've got to play that off against what we see the needs are in MISO and make a decision that is the most economic for you as investors but also the most practical in terms of serving customers in the state of Michigan.

So we haven't made that decision yet and I know there is a lot of people out there sharpening their pencils trying to figure out what they will do too.

It will be an interesting auction.

Thank you very much.

Brian Russo, Ladenburg Thalmann.

Hi, good morning.

Most of my questions have been asked and answered but just curious on the opportunities to reinvest the surplus margins reported in the first quarter.

Does that all get reinvested in the second quarter, or do you kind of spread it out for the remaining three quarters and how important is summer weather to that reinvestment?

Let me start on that and I think both John and I might have some thoughts we would like to share with you to be helpful.

We've already started.

So I don't want you to think that we haven't.

In fact you get a chance to see that on John's slide number 7, which shows the reinvestment curve.

And he noted that the weather was favorable $0.20 and that we had cost savings that were higher than we expected by another $0.04, so we really had good news of $0.24 in the quarter.

You will note there that we also showed $0.06 of reinvestment and some things that are associated with the cold weather.

We always tell you when there's really good news or really bad news.

There are things that come with it on the other side.

So being very cold, our UAs may creep up a little bit more, our lost gas might be a little bit more, so there are some natural offsets.

But we already started the reinvestment in the first quarter and although we give you a curve, the little dotted line, I would caution you not to make that too predictive.

We will take on the things that need advanced notice like forestry, tree trimming, we have to plan those things ahead to line up our crews and treat people fairly and make sure we are doing that in a very safe way.

So the earlier we start that the more of that we can get done for our customers.

We look at outage pull aheads.

Those you can't just say I'm going to do it tomorrow, or I want to do it two months from now.

So some of those sorts of decisions we can make in this timeframe but then there's a lot of other things that can be decided later as we get into the summer and towards the end of the summer.

And you know us, we will hold back on those decisions until we see what Mother Nature has in store for us over the summer months.

And if she is favorable again then we have more opportunity but if she is not, and we can't predict that, we only plan on normal weather, we will adjust accordingly.

So we phase in the reinvestments over time.

I don't know, John if you want to --

No, I think that's a great response.

Brian, one thing too if I understood your question correctly, the reinvestment we started in the first quarter but that's just beginning.

And as Tom said there is a lot of work to be done to be able to spend the money to get the resources in place to be able to make it effective.

So expect that spend to occur throughout the rest of the year.

Okay, great.

Thank you very much.

Paul Patterson, Glen Associates

Hi, how are you?

Just wanted to follow up on a few things, I apologize if I misheard them but just on the RPS standards I think you suggested that they might get, that there may be changes to them to make them more aggressive, is that right?

Well, I just think there will be changes.

2015 is a natural sunset for the law.

I don't expect any changes to the law in 2014.

But in 2015 I do and I think yes, I wouldn't be surprised if the targets that we have today, which is 10% by 2015, which we will achieve, wouldn't be raised or put in context with a energy policy of some sort.

So yes I would expect that to happen.

Okay, and then --

The driver is, there's a lot of interest in renewable energy.

We like to build renewable energy.

The ones that we have done we have completed one wind park, we are building another, it's going very well and the costs are coming down.

That's the nice thing compared to several years ago when the law was first put into place that wind power was not that competitive.

Today it is pretty competitive.

It's just natural gas is the only one that really beats it in our minds.

So the wind regime here is good in Michigan, I think we can do some more and we would like to build it.

Okay.

Going back to this issue of the competitive, the shopping and closing that loophole up, I understand the logic behind, I think I understand the logic that you were just discussing with Ali, but what is the political dynamic that might cause that?

Assume that these guys have been getting the subsidy for some time, they probably won't want to see it go away, if you follow me, so I'm just wondering what leaves the legislature to sort of plug that hole?

Good question.

It's a couple of things.

One is the customers, these 400 customers, the main reason to fix it is that it doesn't make sense to have 400 customers subsidized by 1.8 million, particularly knowing that some of these 400 customers are not big energy users.

The way the law worked they just happened to get into line earlier back in 2008 and some of them are commercial accounts that prepare fast food.

And those really are not driven by energy rates, they are driven more for the success of their business on location.

So that is something that really it's benefiting some customers that quite frankly today probably shouldn't be benefited for $140 million a year.

The second issue that I think is important here is that there are some people that believe that competition is the right thing to do.

Regardless of the industry, it is the right thing to do.

The message we continue to tell them is that we are pretty unique industry.

We are the second-highest capital-intensive industry in the world.

We make electricity.

It moves at the speed of light, therefore, it's the -- and you can't store it, which means it's the most volatile commodity in the world.

And I think this winter really proved to a lot of customers that have ventured out in either on the gas side of deregulation or the electric side of deregulation how volatile that commodity can be.

And you are seeing the lawsuits, you are seeing the claims that people are gouging others and so forth.

That's not what this is all about.

Our large customers particularly want to have competitive rates and they want predictability and they want certainty.

They don't want volatility.

And bringing them back would allow us to have savings that we could allocate, as Tom showed on his slide, maybe to that class of customers that uses more energy and ought to have a true cost of service of that approach.

So that's kind of the whole message that is going on today and I think in the future those customers are probably paying less than buying their electricity from us today.

But I think in the future with what we've talked about earlier today when you see some of these coal plants retire, I expect you're going to see that gap narrow quite a bit.

Okay, and then just on the --

I'm just going to add one little comment there.

It is clear this team, this management team, is driven to be competitive whether it's reliability or the prices, rates, bills, for our customers.

And so the more we succeed on that the less reason there is to have a choice program.

So we will be pushing hard for the success of our customers.

That's the bottom line.

When do you think that this legislation might be introduced?

(multiple speakers)

2015.

I expect sometime in 2015.

As I mentioned, there were hearings at the House about deregulation expanding it beyond 10%, so allowing more customers to go to retail open access and the opposition was very strong.

It's not even getting out of committee.

There was no interest in that.

So it's really, I would say 2015 would be the time to look at all of these things.

Renewable energy, energy efficiency standards, retail open access, maybe some regulatory changes, all in about 2015.

And as I said earlier, Paul, I think we have a good opportunity to improve what we have today, which I think we've got a pretty good law here in Michigan today with good regulation.

I think there's an opportunity to even get it better.

Okay.

I hear you all that.

Let me ask you just on the rate design regulatory on that slide 14, that's also one of the elements that you want to achieve to get your industrial rates more in step so to speak.

How much money are we talking about there, or how should we think about that?

How does that work, is that just residential or commercial to pay that, or how do we think about that?

Well, if you look at that slide, think of it in the three pieces that we show.

One is just our own cost reductions to the extent that we can keep our costs out of the pace faster than our peers then we can keep our bills and keep our rates down relatively.

The second one is rate design and the whole effort there, there's a workgroup going on led by a gentleman appointed by the Governor and he is working with the regulators, the legislature, with our customers, with everybody.

And what they are seeking to do is simply get rate design that's a little more like the rest of the Midwest and not so skewed one direction or the other.

That will help a lot of these industrial customers.

And then lastly it's the whole discussion that John just had about retail open access, so I won't repeat that.

If those three things were to happen in the scale that we expect they could happen, then our industrial customers would be very competitive compared to the rest of the Midwest.

And remember our residential customers already have competitive bills compared to all the utilities across the nation.

And it's not our goal to push this money around and have somebody pay a lot more and somebody pay a lot less.

We are just trying to get the rate design and structure so we don't have artificial subsidies for some customers over others.

So all those things together may -- they will certainly get discussed, they may get acted on in this way through now into 2015 but we can't predict that.

Maybe it will be part of this, maybe it will be more than this, but we will see and we will certainly be an active party in it.

Okay, understood, but just on that second point, the rate design one, is that a generic proceeding or is that going to be part of a rate case?

Well, that's not decided exactly how it will go yet.

The study group will make a recommendation -- and remember that study group has got customers and everybody involved in it.

They will make a recommendation to the Governor and the Governor will share that with the legislature and the legislature may decide to take some action or they may not.

This will be completely their choice.

If they choose not to on the rate design piece then I think there will be a recommendation to the commission to look at this rate design and put something in place, and perhaps it could yet be this summer.

So that for future rate cases when we file a rate case or another utility files a rate case, we would be obligated to use that design.

So putting the rate design in place at first doesn't change your rates until you have a rate case.

And then those rate cases will follow that.

But customers will like that because again, John mentioned they don't like volatility, they do like predictability.

And if they do know they've got something that is coming that is better and it is clear, that's very helpful for their own planning.

Okay, great.

I really appreciate the time.

Thank you.

Steven Fleishman, Wolfe Research.

Good morning.

Just curious if any of the Michigan law issues have come up in the governor election process so far or has it been pretty quiet?

Very quiet.

Hasn't been raised at all.

Okay.

Also wanted to ask to the degree that bonus depreciation is extended by Congress how would that impact your financing plan or growth rate, if at all?

No real impact to us.

I know most utilities would probably answer that question with a no, no, no like Amy Winehouse, but in our case we are happy to have it because what it does -- you guys are laughing at Amy Winehouse, you don't even know -- showing my age again, I guess -- what will happen is that will be a good shelter, as you know Steve, for the utility and that will help us be more productive and that is good news.

But then what we won't have the opportunity to use is our NOLs up at the parent, so they were actually get pushed out further and that is why we are happy.

We will take the good news that 95% of our business for our utility customers and have those NOLs shelter us even longer because we won't need to use those near term.

And you also know there is the downside.

That puts off the point that we can push down our parent debt quicker though, so that's the negative side of all that good news.

Okay, great.

Thank you very much.

At this time we have no further questions.

I will now turn the call over to Mr. Russell for closing remarks.

All right, thank you.

Let me wrap up today's call by saying we are off to a strong start in 2014 and working to deliver the 12th year of consistent financial performance.

We appreciate everybody's interest in CMS Energy and look forward to seeing many of you at upcoming events.

We appreciate your time today and thanks for joining us.

This concludes today's conference.

We thank you for your participation.

You may now disconnect and have a great day.