CMS能源 (CMS) 2014 Q3 法說會逐字稿

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

This call is being recorded.

Just a reminder: There will be a re-broadcast of this conference call today beginning at 12:30 PM Eastern Time running through October 30.

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.

Good morning, and thank you for joining us today.

With me are John Russell, President and Chief Executive Officer; and Tom Webb, Executive Vice President and Chief Financial Officer.

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

This presentation contains forward-looking statements, which are subject to risks and uncertainties.

All forward-looking statements should be considered in the context of the risks and other factors detailed in our SEC filings.

These factors could cause CMS Energy's and consumers' results to differ materially.

This presentation also includes non-GAAP information.

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

Now, I will turn the call over to John.

Thanks, Glenn, and good morning, everyone.

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

I 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 the year.

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

The first nine months have produced good financial and operational results.

Our 2014 full-year guidance remains on track at $1.76 to $1.78, which is at the high end of our original range.

Operationally, our efforts are being acknowledged by nationally recognized surveys.

JD Power and Associates ranks our gas utility the second highest in residential customer satisfaction in the Midwest.

The gas utilities improvement from the prior-year study makes it the most improved utility in the nation.

Sustainalytics, which looks at a number of sustainable factors, ranked Consumers Energy number one among peers.

These recognitions are evidence that our Company is getting better every day.

Looking back over the last few years, we have consistently grown 7% each year.

This is our 12th year of predictable financial performance.

Each year, we grow earnings off the prior year's results.

Today, we are pleased to provide 2015 guidance of $1.85 to $1.89, consistent with our 5% to 7% growth rate.

We are confident in next year's plan and our ability to execute it.

We have many upside opportunities that will keep us on track to achieve our long-term organic growth.

Election Day is less than two weeks away.

We have been watching the local and national races closely.

The race for Michigan's Governor has remained, as we have envisioned, focused on a number of non-energy issues.

The challenger, Mark Schauer, is supportive of an increase in the renewable energy standard, as is Governor Snyder.

We will work closely with either administration on making Michigan's energy policy one of the best in the nation.

The latest polling results show that Governor Snyder leading by 4% over Mark Schauer.

The Michigan senate is reviewing energy policy and beginning to construct legislation.

Senator Mike Nofs is coordinating two work groups.

One is focused on energy efficiency, and the second on renewable energy.

An important issue for Senator Nofs is defining clean energy sources, rather than just focusing on renewables.

This definition may allow us to capture the 300-megawatt upgrade at our Ludington pumped storage facility.

As we look around the corner, we see opportunities to continue to grow the Business.

The election will be behind us shortly, and we can begin focusing on Michigan's energy future.

Next year, we should see improvements with the passage of the 2015 energy law.

Our competitive industrial rate structure will take effect late 2015.

In time, we may see a final order in our upcoming electric case.

As we continue to monitor the capacity markets, we also see opportunities for capital investment that are not included in our current plan.

You can see the impact of the new rate design and next year's fuel savings on electric rates.

Residential customers will see rates fall about 1%.

Commercial customers will be down about 5%, and industrial customers will see nearly a 10% reduction.

The largest energy-intensive industrial customers could see base rates drop up to 15% with the new rate design.

And including fuel savings, these rates could drop 20% in the next 15 months.

These structural changes, rate changes, and fuel savings will improve price competitiveness for all customers, and make Michigan more attractive for large businesses.

I receive a lot of questions about how we can continue our performance for our customers and our investors.

We begin by increasing customer satisfaction, and adding customer value, the foundation of our business model.

Every year, about 400 employees leave, and about 300 full-time employees are hired at lower cost, including benefits.

With fewer employees, we continue to do more work and improve productivity.

This leads to high employee engagement, and our Company ranking is among the most admired in the country.

Although simple, these strategic steps drive break-through results year over year.

Here is a look at two major construction projects: Crosswinds, located in the east side of the state, will begin commercial operations by year end.

With this investment, we are able to meet the state's 10% renewable energy standard 1 year ahead of schedule and at a cost less than planned.

In the southwest part of the state, a 24-mile, 36-inch pipeline has been installed, eliminating a bottleneck and completing a 90-mile span.

This pipeline is capable of delivering 1.2 billion cubic feet of natural gas per day.

Now let me turn the call over to Tom.

Thanks, John.

As always, we deeply appreciate your interest in our Company, and for spending some time with us on our call today.

Thank you.

As John mentioned, our third-quarter results at $0.37 a share reflect continued solid progress.

For the first nine months, adjusted earnings at $1.42 a share were up $0.13, or 10%, from the same period a year ago.

This excludes an increase of $0.03 a share in our long-term reserve for Bay Harbor environmental maintenance.

Having completed the remediation, we are truing up the established reserve back in 2004 to maintain for water treatment facilities over the next couple of decades.

As you can see here on the shaded circle, we've put to work more of the substantial upside from the first quarter with reinvestments in even more productivity and reliability.

As shown with a yellow arrow, we have plans to do even more O&M reinvestment during the rest of the year, and this is without jeopardizing our ability to deliver earnings growth at the high end of our original guidance, which is in the 6% to 7% zone.

As you can see in the dotted circle, our planned cost savings in the fourth quarter more than fund planned capital investment.

This reflects the important work we've completed to self fund all of our capital investment in 2014.

So, in other words, we permanently funded, with continuing O&M cost reductions, 100% of our $1.6 billion of capital investment in 2014.

We are proud of our team that not only has continued our eight-year run of continuous cost reductions, but accelerated them to a level that fully funded a record level of capital investment.

And that's without any increase in rates to our customers.

This slide, which I suspect is familiar to many of you by now, shows how, on top of the large planned cost reductions, we have further reduced our cost levels.

This, as well as favorable weather in the first quarter, provide room for investment to improve reliability, generate incremental productivity, and pre-fund debt.

This not only maintains a conservative risk level, it makes it easier to continue improved performance for our customers, and EPS growth at the high end of our peers.

Now, as the year winds down, there is a number of choices that we have will narrow, but the opportunity continues right through the end of the year.

Taking about the future, this is another slide that is probably familiar to many of you.

The need for important projects requiring a capital investment over the next 10 years exceeds $20 billion, as shown in the blue circle on the right.

Those needs are up from what we expected just a year ago.

Our plans, however, include just a portion of this need, limited only by our desire to keep our base rate increases below inflation.

You may already have noted what is new on this slide.

We've updated the projection period from 10 years starting in 2013 to 2015, and we have raised the level of investment from $15 billion to $15.5 billion for needed reliability upgrades, again, without jeopardizing our ability to keep customer base rate increases well below inflation.

Now, I wouldn't be surprised if a year from now we are talking to you about an investment plan of something in the $16 billion to $17 billion range, rather than the $15.5 billion, and again, that is without hurting price competitiveness.

(technical difficulty) $15.5-billion level of investment, electric base rates are up about 1.5% a year, well below forecasted inflation.

Here, you can see one aspect of investment that still is not included in our plan.

Should ROA customers return to bundled service, either naturally or by policy, we would need to add investment to provide another 800 megawatts of capacity.

Later in the planning cycle, we will need to replace expiring PPAs with more than 2,000 megawatts of capacity, and we believe we can do that without raising customer bills.

These opportunities alone require 3,000 megawatts of new capacity at Consumers, and none of it is in our present plan.

While you can see this investment creates a substantial upside for organic growth in our Business, there are several other upsides ahead.

For example, even though we've got a pretty good track record on cost savings, and a reasonable plan ahead, we likely have more room to improve productivity, which can create more room for capital investment, and that's our growth engine.

While some companies have increased their cost over the last seven years, we have been able to reduce ours, and reduce it enough to fully offset inflation, and reduce our absolute costs by 7%.

Our plans permit us to achieve another 10% reduction over the next five years.

As shown in the right box on this slide, these future savings already have been identified, the decisions have already been made, and they would be difficult to reverse.

For example, the planned shift from coal to gas generation with the closure of 950 megawatts of coal plants will reduce O&M by $25 million.

This simply reflects the fewer number of workers needed to run gas plants compared with coal plants.

With the responsible decisions already taken regarding benefits, we will save another $75 million over the next five years.

As we replace retiring workers with new employees, and achieve reasonable levels of productivity, we will save another $75 million.

And although we have one of the slower rollouts of smart meters, as we prioritized our capital, these smart meters provide new levels of productivity and service, and we have counted only $25 million for that.

We are comfortable with projecting net savings of $100 million, or10%, over the next five years, but there may be room to move.

Sales may provide additional upside.

Michigan continues a robust recovery, and is among the top 10 states in GDP growth.

Grand Rapids, one of the major locations in our service territory, has an even higher pace of GDP growth.

Its growth is in the top 10% of all US cities.

Michigan has done pretty well compared to US averages, and economic performance in our service territory has been even better.

We may not have factored fully this level of economic performance in our sales outlook.

As you can see in the box on the right side of this slide, industrial sales have been strong, up 8% this year.

Residential and commercial growth has lagged, but still up 2.5%, or 3.5% if you exclude energy efficiencies.

Our outlook for 2015 to 2018 may be somewhat conservative, with industrial growth at about 2% a year, and total growth at about 0.5%.

That's fine with us because we would rather be surprised on the upside than the downside.

In fact, here is a listing of some recent announcements by various companies making substantial additions to their business or entering Michigan with new business.

These examples alone add 155 megawatts, or about 2.5% of sales growth.

These all happened over a couple of years, and we expect there are a few more announcements yet to be made.

On top of that, the Ferrari in the garage is winding up its engine.

As capacity prices in Michigan rise, there is an opportunity for our Dearborn industrial generation plant to realize profit improvements between $30 million and $50 million higher than what's in our plan.

Over the last few months, we've seen good signs, including a new long-term energy contract for 250 megawatts at over $4 a kilowatt month.

We also are seeing near-term bilateral transactions for capacity at prices in excess of $3.

In addition to that, the DIG plant bid successfully into our competitive utility capacity auction for 25 megawatts in 2015, and 50 megawatts in the 2016 planning year, and all at good prices.

These are all excellent signs regarding additional upside.

Now, that is a lot of upside, including utility capital investment, cost reductions, and sales growth, as well as the Ferrari in the garage.

As a reminder, we have an active gas case that should permit us to recover $144 million of investment for the 2015 test year.

That would be $88 million after cost reductions.

This is a simple, small case, and it is possible it could be settled.

We still plan to file an electric rate case at the end of this year, for three reasons.

First, this is the mechanism to authorize improved rate design that will provide more attractive rates to large job providers, without losing our competitive position for our residential customers' bills at about 10% below the US average.

Second, this is the process to authorize the purchase of the 540-megawatt combined cycle gas plant in Jackson, lower than any other over the last six years, and near a record.

Last, this permits us to recover investment in the 2015 test year, substantially offset by continued cost reductions.

And with a roll off of the 2001 securitization charges of $80 million, the rate impact will be smaller.

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

As we continue with our capital investment program, our CapEx levels at 19% of market cap now exceed the average of our peers.

Importantly, our liquidity and operating cash flow levels also exceed the average of our peers.

And as shown on the left side of this slide, our financing work continues to benefit from attractive markets and smart use of good tools.

For example, our 2014 securitization lowers costs for our electric customers by $22 million next year, and provides more resources for investment in our gas business.

In addition, we recently issued a 50-year first mortgage bond.

That's a first for us, and that's the lowest 50-year bond rate for any utility in my lifetime.

So, coming back to today, we are pleased to share our financial sensitivity table.

You can see the impact of changes in sales, gas prices, ROE, and interest rates in 2014.

No worries here.

And here is our report card for 2014, as well as the new outlook for 2015.

We are on a target to meet all of our goals, but I continue to caution that, with the need to replenish our fuel inventories from low levels at year-end 2013, our operating cash flow target may be at risk in 2014.

It is a temporary issue; recovery occurs in 2015.

As you can see, our targets for 2015 show another year of strong, consistent growth.

I hope you were not surprised by our initial EPS guidance of up 5% to 7%, again, in 2015, and growth in operating cash flow up another $100 million.

I know that some of you believe that regulated utility models have increasing risk, but we hope you are beginning to see just the opposite at CMS.

Our efforts to improve our cost, our reliability, customer rates and bills, as well as customer satisfaction, actually improves our ability to deliver consistent earnings and dividend growth at a level that you've become accustomed to from us over the last 12 years.

Here is our outlook for the overall 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, we are humbled by your interest, and we are committed to improving performance every day.

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

John and I would be delighted to answer your questions.

So, Jenna, would you please open the line?

Thank you very much, Mr. Webb.

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

(Operator Instructions )

Dan Eggers, Credit Suisse.

John, I guess as we are moving into the winter season you covered a lot of topics on the call but can you just talk about where you see the system operationally going in the winter given some of the challenges we saw last year and kind of your comfort on the MISO reasons as far as reliability is concerned with fuel and all those sorts of issues.

Dan, are you talking about the electric side?

Probably both sides actually.

Okay, gas is well-positioned.

Storage is full, which is great after a very cold winter, the beginning of this year so the teams did a nice job of replenishing the fields.

So I am comfortable on the gas side.

On the electric side we are good as far as capacity for this year.

The real issue in MISO, and particularly Zone 7, becomes 2016.

That's when you begin to see the fall off of the retired plants, there will be capacity needs there.

The debate going on today is MISO is looking at their forecast thinking Zones 7 could be anywhere from 2000 megawatts to 3000 megawatts short.

So, from our standpoint that's something that we are looking at, we've got plans in place that if we need to add capacity we can.

I think everybody is familiar with the plant that we were going to build, the gas plant that we decided not to and instead bought the JPMorgan plant for a much lower cost.

Everything is a place to move ahead with that one.

Expansion of existing plants could take place.

So there is a lot of opportunities we have here.

The big thing is we just need to see where this kind of shakes out with if MISO's predictions are right and what happens with the energy law.

As Tom mentioned in the markets begin to tighten, which I expect they will, what you may see as a return from customers who are taking their supplies from third-party suppliers today return to us.

And at that point that's an opportunity for us to execute some of the plans we have to build the capacity to serve their needs.

That is kind of in summary what the next two years will look like.

But we are in good shape for next year.

The following year is the one that a lot more will -- ( inaudible ).

I guess, John, on that point and if you look at slide 16 where you guys continue to show the perspective need for a lot of capacity to serve as customers coming with open access coming back and in, and PPAs in the way.

When do you guys get comfortable enough to put that into your CapEx program and what milestones should we be looking at for you guys to get there?

One of the things, Dan, that we are doing, our plan is not to build above the growth, so at the end of the day what we do is we look at our forecast for five years out, 10 years out, but our planning and our construction will really follow where the load goes.

So what we will do is in the short term probably buy from the market and in the long term build.

And that may be different from most regulated utilities that build large incremental projects that go above the growth rate and then wait for several years for the growth to catch up to that.

With the hybrid market that we have today, that is a disadvantage to us because if we do that we simply put what seems like free capacity on the market for the third-party suppliers to take advantage of.

So ours is to build to that level of capacity.

And the good news is, since most of our growth in the future will be renewable energy or growth as far as a fuel source for generation, it will be renewable energy or gas.

You have a lot more flexibility in building to that level and not building above it as we did in the old days with coal and nukes.

John, should we assume if choice goes away in early 2015 with new legislation, would that advance at least the need to address the 800 megawatts of potential load coming back with the change in CapEx plans?

Absolutely.

Absolutely.

When they come back we are going to have the power for them.

And then I guess one last question on the renewable front with potential expansion of the renewable energy target.

How do you guys see the mix of kind of wind and solar in the next cycle given the fact it was a pretty wind heavy first round of renewable investment?

I expect that to continue, Dan.

The one thing that Michigan has proven with the way the teams built the plants here, the wind regime in Michigan is clearly the most cost advantageous renewable energy source in Michigan.

Solar, although it's getting a lot of play in a lot of other areas it really hasn't taken hold here.

Part of it is our conditions here, a lack of huge incentives like you see in other places throughout the country.

And really if you want renewable energy here, wind resources are the way to go.

So that is definitely the plan of the future here.

Although I think distributed generation to some extent will take off.

I think you'll probably see us doing some pilots in certain areas because if customers want that, we want to provide it for them.

But there isn't the great demand like we see or the economic benefit like we have for the large wind scale projects.

Very good.

Thank you, guys.

Thanks, Dan.

Paul Ridzon, KeyBanc.

I know Bedford is all permitted but do those permits subset in any point?

Yes they do, Paul.

We've got another year and a half, something like that, 18 months as it is today.

So if we move forward with it today in a combined cycle we could do it otherwise we would have to re-permit it.

As we have talked about before everything is in place.

The site is there, we own it, we have generation on site, electric facilities there are good, the gas facilities are good.

And as we talked earlier in Dan's question, if there was a need to drive and build that plant soon, I expect that the permitting process would go along very quickly.

Just remember the policymakers really will be driving for it, not against it.

Right.

And how long would it take to be re-permit?

Oh, less than a year.

It could be nine months.

And then construction is what?

12 months, 18 months?

Yes.

Start to finish say three years between permitting and final construction.

So, 9 of that would probably be 9 to 12 permitting, but we would be doing the engineering during that time.

And then 24 months for construction.

And how should we think about balancing rates with CapEx if a plant is needed?

Would you defer some of the other capital to keep it intact?

No.

Great question.

We have talked about this on some of the other calls is that if the return, if the ROA customers returned, that's about $150 million more in revenue to us, and it's about a 4% discount for all of our customers across the board if they return.

So we would probably, one way to think about it, is eat into that 4% reduction to a small percent but all of our customers would benefit from that plant being built.

Not only having the reliability in Zone 7 but also the fact that rates would go down not up.

And then lastly just an update on what is happening in the UP.

Any discussion around that?

What you want me to say?

(laughter)

I guess it's still a mess, right?

Yes.

Let's just for everybody on the call, we are not involved in the Upper Peninsula in Michigan, we don't we don't serve there.

But I think what it does, Paul, is demonstrate to a lot of people in Michigan the unintended consequences of what I would call full deregulation.

Even though it's not, but basically 80% of the load shifted from WEC to Integrys.

And right now, at least for everybody listening, it looks like the impact to 50% of the customers in the Upper Peninsula increase in rates on December 1st.

And that is not what we should be in as far as a business.

So yes, I think it's think it's going to change people's outlook about deregulation.

Thank you, very much.

Thank you.

Brian Russo, from Landenburg Thalmann.

I think you mentioned earlier the $15.5 billion of CapEx can increase to $16 billion to $17 billion.

Is that encompassing the potential for a new cc GT if ROA is eliminated?

And would that impact your EPS KEGR?

First of all, the first part of that question is yes.

It assumes a lot of the capacity that we are talking about is not in 15.5.

So as John just described we would have to pickup some--remember this edition and what we are doing here with the purchase of a plant is one of the cheapest adds of capacity that you will see.

And then building of Bedford is going to be a very efficient approach to what we would do as well.

So, to answer point 1 it would increase our cost a bit, so we've left those out.

And question 2, I kind of leave it to you to kind of think about what the answer is in regards what we would do with our earnings guidance because we have looked for every opportunity we could.

You would naturally think--let's raise the five to seven to a higher number.

We will stick to the five to seven and look for ways to put that benefit to work for our customers if we can.

So we still deliver for them and for you.

Okay, great.

Other questions were asked and answered.

Thanks, Paul.

There are no further questions.

Thank you for joining us today on the call.

First nine months were good months and a good position for us, we are in a good position to meet our guidelines.

Obviously we appreciate your continued interest in the Company and we look forward to seeing many of you at EEI over the next week or so.

With that we will close up the call.

Thank you.

This concludes today's conference.

We thank everyone for your participation.

( End of transcript )