CMS能源 (CMS) 2014 Q2 法說會逐字稿

Good morning, everyone, and welcome to the CMS Energy 2014 second-quarter results and outlook call.

This call is being recorded.

Just a reminder, there will be a rebroadcast of this conference call today beginning at12:30 PM Eastern Time, running through July 31.

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, sir.

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.

This presentation is made as of today, July 24, and contains forward-looking statements which are subject to risks and uncertainties.

All forward-looking statements should be considered in the context of the risk and other factors detailed in CMS Energy's and Consumer's SEC filings.

This factors could cause CMS Energy's and Consumer's results to differ materially from those anticipated in such statements.

This presentation also includes non-GAAP measures when describing CMS Energy's results of operations and financial performance.

A reconciliation of each of these measures to the most directly comparable GAAP measure is included in the appendix, and posted in the Investor section of our website.

Now I would like to turn the call over to John.

Thanks, Glenn.

Good morning, everyone.

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

I will begin the presentation with an overview of 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.

In the first half of the year, adjusted earnings were $1.05 a share.

That is up $0.22 from last year or 27%.

Favorable weather was a big contributor to the first half results, along with cost savings that were implemented last year.

This strong first half creates headroom that we will use to reinvest in our operations, focused on safety, reliability and customer satisfaction.

As a result of our first-half of performance and confidence for the remainder of the year, we have raised our low end of our guidance by $0.02, from $1.74 to $1.76.

Our top end remains the same, at $1.78.

As you know, we continue to deliver year-over-year growth, based on prior years actual results without resets.

Each year, we have achieved or exceeded the top end of our guidance.

This year we are continuing to move in that direction.

The low end of our guidance is now higher than the midpoint of our original guidance.

Our updated guidance raises this year's EPS growth in the range of 6% to 7%, with our long-term guidance remaining at 5% to 7%.

The Michigan Energy law passed in 2008 is working well.

However, we see an opportunity to update and improve it in 2015.

The Governor has already proposed a set of no regrets principals which we support.

In June, Governor Snyder signed into law a bill that would ensure Michigan's energy rates accurately reflect the cost of service for all customers.

The Governor is focused on making Michigan competitive, and a part of that is having competitive industrial rates.

The new rate design is a first key step.

The Senate Energy Committee has convened a workgroup in which we are participating to review Michigan's energy efficiency and renewable energy policies.

It is likely the group's recommendations will become part of energy legislation in 2015.

Michigan's Governor, Rick Snyder is being challenged by Mark Schauer.

The key issues involved education, creating more jobs, and improving the roads, and resolving the remaining legacy issues of Detroit.

Energy is not an issue, as both candidates meet in the middle on energy policy.

Both favor an increase in renewable standards, a continuation of energy efficiency, along with competitive rates.

We know both candidates very well, and we will work with either to continue to improve Michigan's economy.

The state's economy continues to perform well.

Now in its fifth year of recovery, various national surveys have placed Michigan in the top 10.

The state is striving to achieve top 10 status in all categories, and is well-positioned to achieve that.

One of the last remaining legacy issues is the city of Detroit bankruptcy.

On July 21, Detroit pensioners voted to accept pension cuts and reduced healthcare benefits.

This is a major step for the city to exit bankruptcy.

Our Company has joined other Michigan corporations in this historic initiative to improve Detroit's economic recovery.

On the west side of the state in our largest electric market, Grand Rapids leads the way in economic growth, not only in Michigan, but as a top-ranked city in all of the United States.

The city's economic performance ranks among the best in the nation.

A recent Manpower employment survey found Grand Rapids has the best labor market in the nation.

The survey results showed that 32% of businesses intend to increase staffing during the third quarter.

This compares to 29% in Michigan, and 22% in the United States.

We are fortunate to serve this growing city.

Since the EPA carbon rules were released, we have been studying them closely.

We will be coordinating with the Michigan Department of Environmental Quality and continuing our analysis.

At this time, we appear to be in good position to meet the future targets, but the devil is in the details.

Our plan is to move to a cleaner and more balanced generation portfolio, featuring a greater share of renewable energy, and combined cycle natural gas generation.

Now I will turn the call over to Tom.

Thanks, John.

We deeply appreciate your interest in our Company and for joining us on the call today.

Thank you.

As John mentioned, our second quarter results at $0.30 a share were up $0.01 from last year.

And the first half results at $1.05, were up $0.22 for 27%.

As you can see here, we already have put to work some of the substantial upside from the first quarter, with reinvestments in even more productivity and reliability in the second quarter.

As shown with a yellow arrow, we've got plans to put more during -- put more to work during the rest of the year, and that is without jeopardizing our ability to deliver earnings growth at 6% to 7% this year.

As you can see in the dotted circle, our substantial cost savings in the second half fully fund planned capital investments.

This shows the important work we have completed to self-fund all of our capital investments in 2014.

Now this slide is familiar to many of you.

This shows how we continue to reduce our cost levels, and reinvest good performance from the first quarter.

The O&M reinvestment improves reliability, generates incremental productivity and it prefunds parent debt.

And this last point, maintains our conservative risk profile.

Looking ahead to 2015, here is a summary of our recently filed gas rate case for implementation in 2015.

Over the past three years, we have reduced our customer bills by almost 10%.

That is over 3% a year.

With this case, we are requesting recovery of capital investment, partially offset by substantial cost reductions.

We are also requesting an investment recovery mechanism to improve the process for improving and monitoring capital investment.

And that is the main reason for our rate cases.

Still with an eye on the future, our small business outside of the utility provides meaningful upside.

As most of you know, we plan to layer in long-term capacity contracts at our IPP in Dearborn as capacity prices rise.

We have seen bilateral contracts already in excess of $3.00 a kilowatt month.

This adds to our confidence that prices in the $4.50 range and $7.50 range may be likely.

This would provide an upside of almost $30 million to $50 million, and that is about a full year's level of profit improvement for the Company.

On the energy side, we recently completed a long-term contract for one of our combined cycle units, at over $4.00 a kilowatt month.

This is encouraging.

It is a great sign of value of our IPP, or John calls it, the Ferrari in the garage over in Dearborn.

On the sales front, we are encouraged by industrial growth.

2014 sales are up 8%, compared to last year and we have raised our growth forecast for total electric sales to 2.5%.

You may remember the number was 1.7% in our last call.

For example, you may also have read about an announcement just this week from the Italian brake manufacturer, Brembo.

They are adding 27 megawatts of load to support a new foundry in our service territory.

Great new business.

We continue, however, to maintain a conservative outlook for the future growth.

We plan on sales growth of about 0.5% a year.

Our philosophy has not changed.

We would rather make conservative assumptions regarding the future, so that surprises are good news.

Good news for our customers, and good news for you, our investors.

We take the same approach on cost control.

While our actual cost performance is at the strong end of peers, we continue to plan conservatively for the future.

As shown on the right box of this slide, cost reductions were 3% last year, and before the substantial reinvestment, down 8%.

We forecast that costs will be down another 2% this year.

We have upped our reinvestment another $0.01, because of all the great weather in the first quarter, but made no change to the 8% reduction for this year.

For the future, we plan conservatively at a net reduction of about 2%.

You can see two examples of how this is accomplished on the right side of this slide.

A 2% annual reduction over the next five years is equal to about $100 million reduction in O&M.

The plans to replace retired coal plants with gas generation and renewables, combined with changes already in place to our benefit programs, will save $100 million over the next five years.

Add on other planned productivity around automated meters, improved field mobility and first-time quality, and we have plenty of room to fund new programs and still meet our net cost reduction.

We are planning conservatively, but we consider this to be an important element of our program to improve customer bills and customer service.

I am sure many of you noted that earlier this week, we closed on a securitization of the coal plants that we are retiring in 2016.

We were pleased with the investor interest in these AAA-rated bonds, and the benefits that this will bring to our customers, saving our electric customers $22 million in the first full year, and more than $100 million overall.

We will use these proceeds to pay down debt and equity, and it will provide capacity for us to invest more in needed gas infrastructure projects.

This is a real win-win for our customers and our investors.

The productivity steps that we have been taking have permitted us to self-fund rate cases, and improve our customer's relative price position as shown on this slide.

While our electric residential bills already are competitive, we have much more work to do for our industrial customers.

The legislature has provided direction to the Commission to enhance rate designs, and coupled with our own cost reductions that self-fund rate cases, these could improve our industrial rates by about 8%.

Should policymakers choose to phase out the existing retail open access program, there could be another $150 million available to improve rates further.

These steps can put us into a fully competitive position in a very short period of time.

Looking further into the future, this is another slide that is familiar to many of you.

The need for investment over the next 10 years has grown to over $20 billion, as shown in the blue circle on the right.

Those needs are up from what we expected only a year or two ago.

Our plans, however, only include investment of about $15 billion, limited only by our desire to keep our base rate increases below inflation.

Some of the major investments that we do not yet have in our plan include new capacity for PPA replacements, the potential return of our ROA customers.

And as MISO puts it, a substantial capacity shortfall in Zone 7 of 2,000 megawatts by 2016, when coal plants are expected to be retired.

Here is the good news.

Some of these capacity replacements and upgrades provide an opportunity to reduce customer bills.

This puts us in the enviable position of meeting reliability needs for our customers, and maintaining fully competitive rates and bills, while also providing a nice opportunity for incremental growth.

I wouldn't be surprised if a year from now, we are talking to you about an investment plan of $16 billion to $17 billion, rather than the $15 billion and without hurting price competitiveness for our customers.

Here is a slide from MISO, showing their anticipated shortfall in Zone 7 of 2 gigawatts.

And here is a slide that shows how large the capacity needs would be should ROA customers return to bundled service, either naturally or by policy, as well as the magnitude of capacity needed to replace PPAs.

These opportunities alone require about 3,000 megawatts of new capacity at Consumers.

Meeting our share of the MISO Zone 7 shortfall could be on top of that.

None of this is in our present plan.

So coming back to today, we are pleased to share our sensitivity chart, so you can see the impact of changes to sales, gas prices, ROE and interest rates in 2014, and here is our regular report card for 2014 financial targets.

We are on target to meet all of these goals.

But I want to caution you, that with a need to rebuild fuel inventories that were depleted last year, our operating cash flow target may be at some risk at this point.

And this is a temporary issue.

It will be fairly fully recovered by 2015.

So here is our overall look at earnings and dividend growth, showing our mindset around consistent good performance at the high end of peers for our customers, without jeopardizing our consistent high end performance for investors.

We are proud of the track record, humbled by your interest, and committed to continuing improvements every day.

So thank you once more, for taking time to listen to our call today.

John and I, would be pleased to answer your questions.

So Lisa, would you please open the call for those questions?

Certainly.

Thank very much, Mr. Webb.

(Operator Instructions)

And our first question is from the line of Dan Eggers with Credit Suisse.

Please go ahead.

Hey, good morning.

Good morning, Dan.

Hey listen, just Tom following up on your last comment, kind of the $15 billion prospectively turning into $16 billion or $17 billion.

What you do you see as the progression, when you guys are comfortable to think about moving some of these that you projected generation projects into real spending dollars in the capital plan, just given the time to develop and implement that kind of capital?

Let me start if I may, on that question, because I sort of see a pattern that I have shared I know many times with folks where we have got a lot of work to do first to get our prices competitive.

And what we are doing avoiding rate cases, and what a big working group is doing across all our customers, and legislature and regulators and the like, to try to get our rate design in place can help us get that done.

That is first.

And clearly, we need to get through the elections.

And then third, we need the opportunity to have the law updated.

And that is going to include a lot of things, energy efficiency, renewables, those are going to impact how we respond to the EPA guidelines.

There is a lot going on there, including the retail open access position.

Personally I am a believer that that's going to correct itself naturally, or by policy or by combination of both.

When we get through those three, then I see us starting a more aggressively trying to figure out how to bring the needed incremental capacity into Michigan.

Michigan has a need, we have a need.

And we are happy to respond to that after we get through those steps.

So that's why I said -- it is my own personal beliefs, it is probably a year from now when we tell you that that $15 billion.

And candidly, you all know that we are at about $15.5 billion, we are just conservative with about how we could describe it.

We see that growing to $16 billion or $17 billion, because we will need to put some of that capacity in place we show on slide 20, where we talk about new generation needed that is in the $20 billion, not in the $15 billion.

We see that occurring and we think we can do all of that without hurting our price competitiveness.

That we think is the magic that makes a win-win.

So I apologize for the long-winded answer.

But that is sort of the flow that I think.

And that is why I think it's about a year from now when you will see those numbers start to grow.

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

No, I agree.

I think that is the right thing.

Dan, I wouldn't put it in the book yet.

But as Tom said, really 2015 -- by the end of 2015, we expect to have the law resolved.

And the opportunities here, just give you a little bit of a -- an idea for our concerted conservative nature, but still it doesn't change our growth plan which performance and guidance, which for the forecast is again 5% to 7%.

So there is opportunities here to give us confidence that we continue to hits that 5% to 7%.

Thank you for clarifying that.

I guess, just the other question when you look at the breakdown of weather normalized load growth by customer class, obviously industrials you are remaining pretty strong.

Commercial seems stabilized, in residential you have had still these down comps.

Can you just shed a little more color on what you are seeing by customer class, and how you expect those customers to behave to support the 1/2% growth you are looking at beyond this year?

Yes, that's a good question.

I would say that we still see for the year residential and commercial sales to be about flat.

We are beginning to see lots of signs of new hookups, lots of green shoots, whatever people like to call that which are very positive, but we are unwilling to put that in our forecast.

We still think things are soft enough, so those are sort of flat.

So what is driving the growth as it typically does first, is the industrial side.

And today we told you that we have seen an average increase of a little over 8% on the industrial side, and we are forecasting for the year by the way about that.

You may not recall, in the first quarter we were up 5.8% on the industrial side.

In the second quarter, we are up 10.6% for that average about 8.5%.

Now grant you, there are few people who are really driving that.

There is a particular customer who is just having a lot of success, and we are not permitted to single their name out if you don't mind, and that is helping us a lot.

But it's on the industrial side, we really do see good promise where weather-adjusted on the industrial side, we see the strong numbers I talked about.

There is still underlying growth without that good customer that is really nice and positive in the second quarter, when I would have called it closer to that flat in the first quarter.

So it is pretty good.

Now remember I gave you an example in the presentation about a company called Brembo, they are an Italian brake maker.

They make premium breaks.

They are a highly regarded manufacturer around the globe, and they have chosen to put more of their business into Michigan, which we are delighted.

And with the foundry that they are talking about, that is a pretty big load for us.

So we are seeing a lot more of that.

There are things we can't talk about, that I look forward it to unfolding in the next call or the call after that.

The signs are pretty nice.

John did a nice job describing how in our service territory, the physicals in Grand Rapids, and in the western part of Michigan continue to be really good.

And hopefully, there is going to be a nice turnaround on the east side of the state too.

But does that help, Dan?

Yes.

That was great.

Thank you.

Thank you.

Our next question is from the line of Greg Gordon of ISI Group.

Please go ahead, thank you.

Thanks, good morning gentlemen.

Morning.

A couple questions, one just to follow-up quickly on that -- Dan's question on demand.

I mean, the weather adjusted electric deliveries including retail open access year-to-date are up 2.3%.

Right, six months ended?

And then, which is above your base case long-term forecast.

I know --

Right.

And obviously that has been driven by industrial predominately.

Do you think that industrial base is stable, and that you can continue to grow off that base?

And then if that is true, and you see improvement in residential and commercial on top of that, wouldn't your 1/2% base case (inaudible) conservative?

Greg, it is a great question, and I am going to give you a yes and no.

In 2014, yes, we are seeing a nice recovery.

The weather adjusted number for June year-to-date is 2.3%, and you can tell by the numbers we give you that it is driven by that over 8% industrial.

We are already seeing signs as we begin the third quarter.

That is going to continue.

So that is why we have upped our forecast from 1.7% for overall weather adjusted electric sales for the full year.

We have gone to 2.5% from 1.7%, and we feel good about that.

We think that is in the right ballpark, and give us a tenth or two, we never get that part right.

But we are not willing to encourage people in the future years to plan on big load growth as what drives our earnings, because it doesn't.

And we would rather tell you, we want to be conservative and we expect that growth to be as good as maybe 1/2%.

And that is where we would like to be.

Now if it turns out all the things that are happening makes that better, I think that is good for you, and that is great for us, and it is wonderful for our customers, because it spreads the rate base across more of our customers.

So I hope you work with us.

We plan to be conservative in our forecast beyond 2014, and we are trying to give you the most accurate look we know how to do in 2014.

No, that os exactly where I was going.

The higher load growth forecast doesn't necessarily jack your rate base investment in and of itself, but it allows you to spread your cost over a wider base, and better control costs.

Exactly.

Well -- I'm sorry, your point is right.

Yes.

The second question I had was, can you -- much in the same way you talked about the timing and pacing of revising your expectations on capital expenditures, can you talk about how soon that Ferrari starts inching out of the garage?

(Laughter).

Or to put it in English, the $30 million to $50 million of potential upside from your emerging power business?

What are the milestones and timing that would cause you to be able to sort of execute that and bring it to the bottom line?

To let me correct myself --

So let me correct myself, and call it a Mustang GT, out of the Rouge area.

(Laughter).

Greg says to put it in English, I heard that Greg.

That hurt.

(Laughter).

So here is what we are seeing.

We talked to you about the opportunities on the capacity side, because that is where the big opportunity is done.

It is going to roll out as soon as capacity rises start to recover.

And we believe, we are going to see capacity prices in our Zone in MISO start to move up into the next year and two, but we are already seeing in a bilateral contracts.

In fact, that is why we are encouraged by some of the numbers I told you, like $3.00 already if we wanted to lock it in on the capacity side.

So I suspect, and I may be a little conservative that that good news doesn't roll in this year, it rolls in next year and the year after.

And our strategy is not to be greedy and grab whatever we can get right away, or not to be greedy and wait until it gets to $7.50 and it never gets there.

Our strategy is just to be prudent, and as we see some in the [MISO] zone of -- I don't want to hold-- don't hold me to a number, but a better number -- we will put part of that in place for one of the combined cycles.

And then we will put a little more in place if the numbers get better.

So we will like average our way into some pretty nice numbers.

So to your point I think it is going -- I think it is going to be over the next couple, maybe three years.

And don't forget the energy side too.

We are seeing -- we saw a nice uptake when we entered into this new contract at over $4.00, and then we saw energy rates come right back.

So again, you can see we are just waiting for the right opportunities, trying to be patient.

And we can't tell you the day of the month, or even the year, but we know we are protected on the low side, so we are going to be opportunistic on the high side.

Bottom line, I would say over the next couple, maybe three years you will see this sort of feather in.

And I don't mean to mislead you saying, you are going to see a whole year's growth in the same year.

Yes., and Greg, I would just add too, that it is really a just a complement to our business.

It is not our core.

We focus on Consumers energy, but we just wanted investors to know it is there, there is opportunity, but it is one as Tom said, we don't really count in.

And it's not baked into your earnings growth forecast?

The capacity is not, part of the energy is.

Got you.

Thank you.

Thanks.

Thank you.

Our next question is from the line of Ali Agha of SunTrust.

Please go ahead, thank you.

Thank you.

Good morning.

Good morning.

Hey, Tom just remind us.

You know that sensitivity that you give us, a 1% change of electric sales is -- or $0.05 of annual earnings for the company.

Can you remind us how that changes, depending on the customer class, so that 1% is coming from industrial versus C&I, would it still stay the same?

Or how should we be thinking about that sensitivity based on the customer class?

Well, I would obviously tell you that it is the residential side where the bulk of our business is.

And so, that we are more sensitive to that movement as it goes up.

So if there is a restoration of growth there, it is going to give us more impact, than on the industrial side where we try to provide the kind of competitive rates for our big users.

It doesn't make us a pile of money, but sure brings more business.

So I think that is what you had in mind, and that is the right way to think about it.

Right.

Okay.

Got it.

And then second, in this gas base case, you watch for the full decoupling as well as the investment rate mechanism, can you share with us what kind of receptivity overall you are seeing on the state for those kind of mechanisms?

So on the decoupling, I would like to fashion that is a part of the overall update to the law.

Now I am going to give you an opinion, so anybody listening in could have a different view.

But on that issue, I think there is going to be a pretty good receptivity to decoupling for energy efficiency as you call it, energy optimization as we call it.

But who knows, on the economic side and on the sales side?

I think that is up for grabs in a good dialogue and discussion, and we are not hardheaded about that.

We want to do what the overall group of people, whether it is the legislature, the regulators, or customers or people think make sense.

We are happy to pass back good news and bad news, right away through decoupling, but it may only be energy efficiency.

That is just a personal opinion.

So now when you come to things like mechanisms for recovering investment, they make perfect sense to us, because they provide the regulator team, the staff, the commission even more insight to improving our capital investments, and even more insight to tracking how we are doing.

And full authority, if we change what we are doing, or we don't spend the right amount up or down, whatever, to impact that in a good governance way.

We think this is a great way to go forward.

But I think there are a lot of different opinions.

So people have to think through it, are the customers better off with this mechanism, and I believe they are.

And if people come to that understanding, then I think they need for rate cases will dissipate quite a bit.

And you will see us, if we had a full mechanism on our capital investment, I think what you would see, that we would come in a maybe every three years or so, because we will need to come back just to true-up maybe on revenue and pass-through cost reductions.

But we wouldn't need to come back as often.

So those are up for grabs.

That is part of the healthy discussion that is already underway in work groups over at the legislature, as well as the Commission who will make some decisions that are very important around that and our rate cases.

Got it.

And last question, even though you only modestly raised the bottom end of your forecast for the year, but conceptually as you are looking at the year -- just to get a sense of what has improved, I know you raised your weather normalized sales forecast, are you thinking you are going to maybe spend less O&M maybe in the second half, than budgeted because of the electric sales that are running better?

Overall, what would you attribute the improvement versus say your original expectations?

Yes, the biggest change for us, the first year the weather -- or the first part of the year, the weather was very good, the first quarter of the year in the gas business.

And one of the things I mentioned briefly is some of the aggressive cost measures, the cost reductions that we have taken over the past several years continue to pay dividends year-over-year.

And those are things like some of our legacy costs, eliminating those going forward and so forth.

So we are seeing a nice combination of a top end growth.

With the cold weather, we are able to reinvest, and also the middle line growth or reduction if you will of cost.

So those are the two drivers why we are in the position we are.

Got it.

Thanks, John.

Thank you.

Our next question is from the line of Paul Ridzon of KeyBanc.

Please go ahead, thank you.

Good morning.

Good morning, Paul.

With the securitization, you talked about paying down debt and equity at Consumers, how does that flow through to the parent?

Oh, good question.

Please do think about it just the way you said it.

We take those proceeds to pay to offset equity and debt at the utility.

And then we take those proceeds that come out of that, and we are able to put them to work, the cash part of that, to work in the gas side of the business.

Now typically when you see a securitization at a utility, it is good news for customers, but you lose rate base.

Well this is good news for our electric customers, because we will reduce their rates.

And remember, that is where we have to help be more competitive.

But then the extra capital resources that come out of that, we have got a big need on the gas side of our business.

The gas side of our business is growing exponentially.

It is becoming a bigger part of our Company every day.

So this gives us another $378 million that we can put into that gas business, and of course, the rates base goes up there, and you get earnings on it.

But we are really doing it because we need it.

We have got a lot of work to do there.

Okay.

And thank you, and secondly, this cost of removal benefit, how long that lasts and what is the trajectory of that savings?

Well, okay, it varies by business.

So it goes between five years and a dozen years, and it is a benefits where you will see us, our taxes improve because we have accelerated the -- what is a tax benefit we would have gotten over 20 and 30 years, into that 5 and 10 year period -- 5 and 12 year period, sorry.

So it's 5 years for electric and 12 years for gas.

And that is just -- the main reason we did it if you don't recall, was to improve rates for our customers to help avoid these rate cases in 2014.

That is a beautiful benefit to pour through, and it doesn't damage at all the efforts we have to deliver 5% to 7% growth in the future.

And how is that [$211 million] split between gas and electric?

So the electric is $211 and gas is $264 million.

So the annual numbers if it makes sense when I do the 5 and 12 for you, $42 million at electric and $22 million annually at gas.

And year-to-date, we are about a 34% tax rate, where do see that full-year, and kind of the next few years if you want to go out that far?

Oh, that's good for this year because it is that cost of removal benefit.

That is what you are seeing, and that will help sustain that level for a couple of years.

Okay.

Thank you very much.

And our next question is from the line of Paul Patterson, Glenrock Associates.

Good morning.

Good morning.

Not to go over sales growth just too much, but I am afraid I am just a little confused just in general by the trajectory.

On industrial, it looks to me that last year, there was a substantial decrease.

So if you compare over 2012, I don't see that strong of growth.

And I guess what I am trying to understand is, what has changed here?

Is that -- I mean, you feel more comfortable at industrial growth because of the people who are coming to your service territory, and what have you?

That is the first question I guess.

I think let's step back and take the big picture first.

We see the industrial growth having improved substantially since the recession, and we are way back to pre-recession levels, and we see that continuing to occur.

So the underlying growth is good, it is sound, we are comfortable, it should flow through.

In fact, we are seeing we think things we can't talk about today, that is going to add to that growth in the future.

But let me go to a second level now, a little deeper down in.

We do have an anomaly that you are observing.

Last year, we had a customer that got hurt, and so you saw a little fall off in the industrial side or their share of that.

This year they are fully rebounded.

They are doing great.

They had a bump in the road.

And that is making our numbers even bigger for this year compared to last year.

So you are right on your observation of that.

But now keep in mind for the full year, we see ourselves with all classes, weather adjusted at a 2.5% growth.

But we are telling you, we think the right thing to gone something like 1/2% growth, and maybe we are under calling it.

But we are assuming that on the residential side and the commercial side, nothing is going to come up.

But we might be wrong, because the hookups are increasing this year, but we are assuming not.

And we are assuming that underlying growth on the industrial side, not that special one going up and down, will continue and that is why we are pretty comfortable with that 1/2%.

Again, I hope we are wrong on the downside.

Okay, I hear you.

Now just to sort of to focus on the customer growth, could you give us a sense as to what the customer growth was?

And how that compares to what I see I guess as a negative 0.6% for residential, and 0.3% for commercial?

How do we compare the two, and how do you see that changing to make these do better than what we have seen year-to-date?

So I don't have my old data page in front of me, and I apologize for that.

But I will tell you this, if you looked at the recession our industrial fall off was about 1 point less than where the rest of the country was.

And then, if you look at the recovery, our industrial permit was about 1 point better than where the rest of the country was.

And I see that is your best long-term indicator of growth.

Because I see the residential and then the commercial sides following that.

Now there is one other factor to consider when you are thinking about the economy.

For the last three years, whatever number we give you includes about 1% of energy efficiency across the board, the residential, commercial and industrial.

So that dampens our numbers.

So if we were to tell you, and let's just use this year 2.5% growth, the underlying growth is 3.5% growth, but the energy efficiencies bring that down to 2.5%.

And one of the reasons we want to stay conservative in the future is because we plan to be able to deliver a full point of energy efficiency every year.

That's good for our customers, and we think that's good for the business.

It fits our model well, and that's why we go over to the 1/2%.

I understand.

I guess, I understand what you are saying, particularly on the industrial.

But just moving over though to the residential, I guess what I am missing -- I am sorry to be so slow on this, is why do we have negative sales growth -- negative sales growth for the last six months, if things are doing better I guess?

Do you follow what I am saying?

(Multiple Speakers).

Yes.

I do, I do.

So let's -- we really don't have negative.

Let me take you through that point again.

Let's use the precise numbers, for June year-to-date, residential is down 0.6%.

So that really means it is up 1/2% before energy efficiencies.

So we are seeing the hookups.

We are seeing the growth in the economy and in our customers, and then we are helping them be more efficient, so you see the negative number.

What I also think is the residential and commercial side, we are going to tell you, we think were going to stay in the flat zone, a little negative, a little positive, flat, right, you can't predict that well.

But I think we are probably would be wrong.

I think they will follow industrial as you go through time, and you will see some uptick That is opinion, the last part, and the first part was fact.

Okay.

Let me --

Paul, this is John.

One thing -- I tell legislators this, the way I describe energy efficiency as Tom did analytically.

I mean, generally in the industry, a 1% reduction in growth or energy efficiency is 100% reduction of our load growth.

And I think people that like energy efficiency, which we do, talk about -- talk about it in terms of percent, 1% or 2%.

But that is how significant energy efficiency is.

And it may be an industry thing in those states that are pushing energy efficiency.

Where we are growing, we are growing with energy efficiency included in those numbers as Tom showed you.

Okay.

The me just finally sort of ask about the renewables that are being discussed in the state.

I know you are concerned about customer rates, and I am just wondering how you communicate the message as to -- I guess, what your expected impact of increased renewable requirements will be on rates, and whether that is a fully understood in the politic, if you know what I am saying.

Yes, I do.

In other words -- and I'm just wondering if you could just sort of lay out a little bit of for us, about how you are proceeding with that when people get enthusiastic about renewables?

Absolutely.

Renewables need to be part of a balanced portfolio.

We need base load, I want to increase renewables.

Renewable increase also needs to be looked at fairly, with the cost of renewables.

We have some pretty good wind turbine -- or wind regimes here, and our wind turbines are doing pretty well.

On a scale basis, they are probably with the tax credits, they are second only to natural gas generation.

So on scale, I think there's potential here in Michigan to move forward.

The thing that we are pretty clear about though, is that when you get into distributed generation and some of the subsidies that are required to make that work, it doesn't make a lot of sense for customers if we are working at trying to reduce rates.

A part of it is, we are worried about all of our 1.8 million electric customers, not just the few that maybe subsidized for certain things.

So in other words, what we want to make sure is that, whatever we move forward with renewable energy, it is best for all of our customers, not just a few.

Okay.

Great.

Thanks so much.

Thank you.

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

Please go ahead.

Good morning.

Good morning.

Just -- I am sorry to go back, on sales -- this was -- just in that conversation with Paul it occurred to me.

The 1/2%, is that before or after energy efficiency?

That includes energy efficiency, so the 1/2%, the way we see the math would actually be 1.5%.

Okay, great.

Thank you Tom.

Thank you.

My actual -- the real question was going to be on timing of the next electric rate case and the rate design issue.

I don't recall exactly the details, but there were some issues in that order around how -- when it would be implemented.

Can you give us your sort of latest thoughts on how that may play out for you and the timing of the next case, et cetera?

Yes, so there is three things driving the next electric rate case.

One is just the normal electric rate case.

This year for 2014, we fully offset all the capital with O&M cost reductions.

Next year, we are going to offset a lot of it, but not all of it.

So we need a rate case.

Whether it's December, January, it is not so critical but we need one.

The second thing is, remember we bought to the Jackson plant, and we had an agreement with the seller that we would close on that late in 2015.

And therefore we wanted to push off when we got the approval from our commission to December of 2015.

So that all neatly goes together.

That's the second reason.

The third reason that we are very likely to go in December is because we have a new rate design, and the commission now has the direction from the legislature on moving on some better cost of service oriented rate design.

And for customers to benefit from that, they need to have a rate case to put in place.

We have a few customers that do benefit from some attractive rate designs that expire in January of 2016.

So they are keen to make sure there is an order out in 2015 that supports the new rate design that they are very happy with.

So we have got three pressure points.

This is the first time in my career, I can remember people banging on me to please do a rate case as soon as you can.

So it is a little different approach.

But we actually think -- we want to put it off as long as we can.

We don't need it for Jackson until December of 2015.

We don't need it for the new rate design until the end of 2015, and we really don't need the extra revenue relief until the self implementation in the middle of 2015.

So I think December-ish will probably be our approximate time of filing for those reasons.

December of this year?

Yes.

Great.

Thank you, Tom.

Our next question is from the line of Andy Levi of Avon Capital Advisors.

Please go ahead.

Hello, good morning.

Good morning.

Just a quick question.

I think asked it before.

I am not sure if the answer is the same.

So you have several incremental positives longer-term, whether it's DIG plant, possibly sales growth, higher CapEx.

At some point, is it possible that the growth rate goes up, or do you kind of just manage within that 5% to 7% and continue to allow the rate payers to benefit from the upside, even if it's the DIG plants?

Yes, I am -- (Multiple Speakers).

Yes, I like the plan we have.

I mean, let me state it a little bit differently.

We have continue to grow at -- give a guidance of 5% to 7%.

The last several years we have exceeded the -- at the midpoint and gone to the top end of that.

That is the plan that we have going forward.

We have plenty of investment to make, we are worried about customers and investors.

For our investors, the important thing I would say there is, we tend to perform consistently year-over-year without resets, a couple hundred basis points better than our peers.

So the steady predictable outcome, with a dividend increase that grows with that, is really what we are trying to do.

So let's just talk about the DIG plant.

If you were to be able to achieve the top end of the capacity upside, which let's call is an incremental $0.10, $0.12.

And let's say it could be layered into over three years, so $0.03, $0.04 a year.

And then obviously, your utilities, your utility, that wouldn't add to that 5% to 7%?

It would certainly add to the mix.

The thing that I would look with at there, is it would take risk out of our opportunity to achieve our long-term guidance.

It may actually enable us to avoid a rate case.

I mean, there is things that we can do with that to reinvest it to continue to achieve that piece.

I mean I just want to make sure everybody understands, we really take seriously doing what we say we do.

And whether it's weather upside, weather hurt, it doesn't matter to us.

We continue to achieve what we say we are going to do year-over-year.

And that is -- I mean, that is the mindset we have here, which I think is important, and I think it is something that investors need to do.

I think we are unique in the industry that we reinvest favorable weather.

And I tell our Board this, and that is not easy to do.

Because we are pretty capital-intensive industry, and to move things around within the year is difficult to do.

But I would say right now, I would continue to look at that 5% to 7%.

I mean, as we illustrate some things in the future, some capital additional capital investments and so forth.

They just position us with higher confidence to achieve that outcome year-over-year.

So just make sure I understand what you are saying.

Any upside from the non-regulated business, for no better way, and whether it is EnerBank or DIG, will kind of be used to help the rate payer which is a good thing?

But that is kind of what you are saying, right?

Yes.

Exact -- to our customers.

Yes, absolutely.

Customers?

I mean, our customers may see the benefit from that by additional investment in the utility through some of -- what we have received at CMS.

And all of that increases the probability of performing at the high end year after year, after year, after year.

Got it.

Thank you very much.

Thank you.

Our next question is from the line of Brian Russo of Ladenburg Thalmann.

Please go ahead, thank you.

Hello.

Good morning.

Good morning, Brian.

Most my questions have been asked and answered.

But just on the investment recovery mechanism on the -- in the gas rate case, can you maybe just talk about the mechanics of that?

And how that would be implemented and allow you to avoid annual rate cases?

Yes.

I wouldn't worry too much about the mechanics, candidly.

They are really this simple -- is that we make a request for the 2015 test year, and that would be addressed in the rate case.

And then, we have this request regarding 2016 and 2017, which would be acknowledged and implemented in 2016, and then in 2017.

So we get the three years of capital spending clarified and agreed to, and then the rates that would come along with it, would come along each year.

So not in advance.

They would come along as you need it for the year 2016, and then as you need it for the year 2017.

And the reason I say, I wouldn't get too much into the mechanisms that we have requested, we are very flexible.

It is the concept we think is a really good one.

And we are very anxious to work with the staff and with our customers and all parties involved, to first make sure that they see how much sense it makes for them as customers.

And then the mechanism is put in place that works for everybody.

So we are flexible on that, we just like the concept.

I think there are few people who really do embrace the concept.

Okay.

Understood.

And then, the second half 2014 drivers noted on slide 11.

How is that dispersed over the third and fourth quarter?

The way -- well, you got three different pieces.

The cost savings are in there already, so they are kind of automated.

The $0.11 that you see on that slide, and the capital investment, the $0.09 to $0.11 most of that is already automated.

So I think of that smoothly coming in, or evenly over the quarters.

It is the reinvestment part that we get to tailor a little bit.

So that $0.12, we will -- I don't to say that will be perfectly smooth, we are chickens.

We will put in as much of that as we can in the third quarter without taking and risking the final performance for the year.

So we will leave some flexibility.

We will take things that we know if you don't do them early, you can't get them done, more tree trimming.

We love to do that.

We will do that early.

But we will make other decisions like the potential contribution we might make to a foundation or to low income funds.

We will make that call more towards the end of the period, to ensure that we are maximizing the benefits to everybody involved without missing our commitments we have to you.

So I would say, the borrow and reinvestment can move a little bit.

It will move with, do we end up with a hot summer or a cold summer, so it will flex with those things.

But the cost savings of $0.11, and that reinvestment and other of $0.09 to $0.11, those are pretty smooth.

Those are on autopilot.

Okay, great.

And any initial thoughts on July weather in your service territory?

Yes.

It was a little cool.

(Laughter).

For the first couple of days.

And I will just tell you that there is a few pennies there, that we have already factored into our forecasting.

And I know you don't get to see that, and I apologize for that, but I am glad to tell everybody.

We saw a little cooler weather in July, and our forecast is that there will be some hot and some cool still yet in the rest of July.

So we think there is a few pennies of bad news in there, nothing that bothers us in any great way, causes us to dramatically change our plans.

But we will be watching August carefully, and depending on which way that goes, that is why we will tailor that reinvestment of that $0.12 a little bit based on what comes out of there.

And that is why it is a little hard for me, to honestly tell you exactly how much about will occur or won't occur.

It depends on weather and other things going on.

Does that help?

Yes, it does.

Thank you very much.

Yes.

Thank you.

Our next question is from the line of Steve Fleishman of Wolfe Research.

Please go ahead.

Hello.

Good morning, Steve.

Might be your longest call ever.

(Laughter).

Just a couple specific questions.

The new DIG contract that you announced here, can you disclose who that is with?

No.

I might be able to, but I am going to be safe and not risk that.

I don't think they would want to be advertised anyhow.

I would just tell you it's with a very good counterparty that you would be really comfortable with.

Okay.

And then on the -- you discussed the idea that over the next year we might have visibility on I guess, as much as a couple billion more investment, and it seems like a lot of that may be generation or renewables.

Should we view that as a decent chance that [Thetford] could come back into the mix?

Yes, let me talk about that, Steve.

I think, as Tom said there is opportunity here.

Let's wait until the law, the new law, I guess, comes out in 2015.

I would say yes.

Most of it would be in the generation side, whether it is increasing renewable energy, whether it is somehow we are buying capacity, obviously you know what we are doing at the end of 2015, with the plant, the gas plant we are picking up.

We may need to do some additional capacity upgrades at some of our plants, which is incremental.

And you know this, Steve, but for everybody, we tend to also with our capital investments try to avoid the big bets.

I mean, we try not to bet the farm and build massive plants.

The Thetford plant is something that we have delayed.

Although the permits are still active and we will probably hold onto those permits as long as we probably can.

I think the Thetford plant has potential in the future.

And it is as Tom said in his part of the presentation today, if Zone 7 which is the lower peninsula of Michigan is short by 2,000 megawatts, the way I tell politicians that, that is a nuclear plant, that is two coal plants, that is three or four gas plants.

And that shortages is predicted in 2016.

So I think there will be new capacity needed, and if we are the best one to do and to save rates for our customers, we will make it happen.

Just one more question related to that.

When you think about the Zone 7 and MISO does -- because of the constraints in Michigan, does that generation for the most part really need to come from within Michigan, or can you buy from other zones within MISO?

That's a great question.

I think generally -- for general purposes, think about it, it has to be here in Michigan.

The reason is we on a peninsula, and there is limited capacity, transmission capacity into and out of the state.

And so, there may be some of it with firm transmission that is outside of the state that can get in here.

But if you remember, way back in the 2000 energy law when that went through, we increased the capacity coming into the state, I think to 5,000 megawatts as I recall.

That -- that has been -- a long time since I have worked on that one.

But that is about the limit.

And the lower peninsula of Michigan peak load is around 25,000 to 28,000 megawatts, so a pretty small percentage if you will of the total capacity needed in the lower peninsula.

Great.

Thank you.

Thanks, Steve.

Our next question is from the line of Andrew Weisel of Macquarie.

Please go ahead.

Hello.

Sorry, it is [James Ward] here on his behalf, but the question has been asked and answered.

Thank you.

James, thank you very much.

Okay, so moving on the last question in the queue.

It is from the line of [Asher Aham] of [Sivium Energy].

Please go ahead.

Good morning.

A question John for you, I guess going to slide 25, the payout ratio this year is around at the bottom of the range of 60 % to 70%.

Can you see an acceleration of the dividend growth from the 6% historical in the last couple of years, and the next four or five years, or how you are thinking about that?

How should we think you reaching the 70% over that time frame.

Yes.

One thing, first of all, we want to be competitive with the market which is important to us, and we have stated that come publicly.

The other thing too, as we have talked about on this call, we tend to be growing faster than our peers.

In the past several years, we have grown at 7%.

I think our peer group is about 4%.

So as we grow earnings per share, I expect you are going to see the dividend growth be in line with that level.

So as we continue to perform in the future, as we have talked about here today, I expect you will see the payout ratio increase to get to that higher end.

So what should we expect in a five-year range, if we were to start from now?

Where would you expect the payout ratio to be, say in a five years time from the 60% this year?

I would say, at the low end of 5% a year, and at the top end 7% per year.

Okay.

So just think about earnings growth, which drives dividend 5% to 7% a year.

And again, that would be compounded through the five years.

Right.

But the issue is if you increase it by 7%, by which is the top end of your earnings, which would you have been successfully able to do, the payout ratio would remain at 60%, it won't inch up.

So --

The payout ratio today is 62%.

And where -- John was trying to tell you is that, if we grew average with everybody else, we would stay at 62%.

And if we are -- if our growth rate is a little higher than others, then our Board will consider following that, and your payout ratio could be higher.

What we don't want to get boxed into is, trying to predict that we would be at 64% or 66% or anything like that.

We want to be competitive as John said, and we would like to grow at our earnings growth rate.

And my view is that we will be faster than most of our peers, which provides an opportunity, but we are not willing to quantify it.

Okay.

Thank you so much.

Thank you.

Thank you for your questions.

I would now like to hand it back to Mr. Russell for closing remarks.

Thank you.

Thank you.

Just close by making a comment about, I am pleased with our strong performance in the first half of the year.

It has given us the opportunity that we talked about today reinvest back into the business, to take care of our customers, and that has been our strategy.

It's difficult to do but we work hard every day to do it, to take care of our customers and our shareholders.

The progress that we have made continues.

If things go as planned and we have talked about, we will be on our 12th consecutive year of consistent and predictable performance.

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

So thank you for joining us today.

And I think Steve was right, that this could be a record timing call for us for a full one hour.

So thank you.

Thank you, ladies and gentlemen.

This concludes today's conference.

Thank you for your participation.

Have a good day. [