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Executives

Glenn P. Barba - Chief Accounting Officer, Vice President, Controller, Chief Accounting Officer of Consumers Energy Company, Chief Accounting Officer of CMS Enterprises, Vice President of Consumers Energy Company and Vice President of CMS Enterprises

John G. Russell - Chief Executive Officer, President, Director, Chairman of CMS Enterprises, Chief Executive Officer of Consumers Energy Company, Chief Executive Officer of CMS Enterprises, President of Consumers Energy Company, President of CMS Enterprises and Director of Consumers Energy Company

Thomas J. Webb - Chief Financial Officer, Executive Vice President, Chief Financial Officer of CMS Enterprises Company, Chief Financial Officer of Consumers Energy Company, Executive Vice President of CMS Enterprises Company, Executive Vice President of Consumers Energy Company and Director of CMS Enterprises

Analysts

Kevin Cole - Crédit Suisse AG, Research Division

Paul T. Ridzon - KeyBanc Capital Markets Inc., Research Division

Jonathan P. Arnold - Deutsche Bank AG, Research Division

Ali Agha - SunTrust Robinson Humphrey, Inc., Research Division

Andrew M. Weisel - Macquarie Research

Brian J. Russo - Ladenburg Thalmann & Co. Inc., Research Division

Paul Patterson - Glenrock Associates LLC

CMS Energy (CMS) Q4 2012 Earnings Call February 21, 2013 9:00 AM ET

Operator

Good morning, everyone, and welcome to the CMS Energy 2012 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 February 28. 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.

Glenn P. Barba

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. The presentation contains forward-looking statements. These statements are subject to risks and uncertainties and should be read in conjunction with our Form 10-Ks and 10-Qs. The forward-looking statements and information and Risk Factors section discuss important factors that could cause results to differ materially from those anticipated in such statements.

This presentation also includes non-GAAP measures. A reconciliation of these measures to the most directly comparable GAAP measure is included in the appendix and posted in the Investors section of our website. CMS Energy provides financial results on both the reported Generally Accepted Accounting Principles and adjusted or non-GAAP basis. Management views adjusted earnings as a key measure of the company's present operating financial performance, unaffected by discontinued operations, asset sales, impairments, regulatory items from prior years or other items. Certain of these items have the potential to impact favorably or unfavorably the company's reported earnings in 2013. The company is not able to estimate the impact of these matters and is not providing reported earnings guidance.

Now I will turn the call over to John.

John G. Russell

Thanks, Glenn. Good morning, everyone. Thanks for joining us on our year-end earnings call. I'll begin the presentation with a few brief comments about the year before I turn the call over to Tom to discuss the financial results from 2012 and the outlook for 2013. Then we'll close with questions and answers.

Safety remains a top priority for our company and for our employees. Our goal is for all employees to go home safely each and every day. We have made significant strides to improve safety over the last few years, and I'm proud to say we are now positioned in the first quartile among our peers. 2012 adjusted earnings per share were $1.55, up 7% over the prior year. Tom will provide further details in just a few minutes.

In January, the board approved a 6% dividend increase, the seventh consecutive increase in as many years. The new dividend of $1.02 per share results in a payout ratio of 62%, which is in line with our peers. We expect to continue to grow the dividend with earnings. Overall, 2012 was another strong year for CMS Energy.

For 10 years, CMS has delivered consistent financial performance. Our 7% compounded annual growth rate since 2003 and dividend growth since 2007 have delivered strong returns to our shareholders. Our capital investment plan drives our earnings and cash flow growth. Over the next 5 years, we plan to invest between $6.5 billion to $7 billion, which includes the new gas plant announced last December. We have lowered the high end of our previous range by $300 million from $7.3 billion to $7 billion, helping to keep our customer base rate increases at or below the rate of inflation. And we're still working to reduce it a little bit more.

If you look out another 5 years, we have $8 billion more of needed investment projects to enhance the reliability and safety of our gas and electric infrastructure systems. We are confident in our plan and our ability to execute it.

Last year, during our Investor Day at the New York Stock Exchange, I reported on a number of metrics we track very closely. We call these breakthrough goals, and they start with safety. Our company is committed to working safely every day, whether it's in the office, on the road or getting the light back on. We have seen a 75% reduction in the number of incidents since the goal was set in 2006. Through operational excellence, we deliver value to our customers who want affordable and reliable power. Focusing on reliability has helped us to continue running our generating plants at lower costs and improving our distribution performance.

Over the past few years, aggressive management of costs has enabled us to reduce our O&M and headcount, while improving productivity. We are doing more work with fewer resources. And our employee engagement scores are in the first quartile for the second year in a row.

Finally, the financial results speak for themselves. Our business continues to grow at 5% to 7%, with higher dividends and customer rate increases at or below the rate of inflation.

Our regulatory environment continues to improve, evident by some recent events. In December, the commission approved our DOE settlement, which returned $23 million to customers and $12 million to shareholders. In addition, the commission authorized accelerated recovery of $16 million for gas decoupling over 3 months to meet the deadline for accounting standards. On November 30, Governor Snyder delivered a special message on energy and the environment. The Governor made it clear that changes should not be made to the 2008 energy law until the law is given more time to work in order to allow for a fair evaluation on issues like the renewable energy portfolio standard, energy efficiency and the proper regulatory structure. The Governor called for 2003 to be the year of study on energy policy. The Governor wants to ensure that future energy policy will be made in a thoughtful process based on data developed over the next year or 2. The Governor directed the Chairman of the commission and the Director of Energy -- Director of Energy Office at the Michigan Economic Development Corporation to conduct a series of energy forums to gather the public's opinion on Michigan's energy framework. The commission and the economic development corporation have developed over 80 questions that they are seeking data-driven responses to. The facts will be collected in 2013 and then delivered to the Governor for his review.

Regarding regulatory process changes, we have recommended a few rate adjustment mechanisms in the latest electric and gas rate cases that we believe will be fair and beneficial to our customers and help to streamline the rate-making process, and we'll keep you advised of their success. Our regulatory calendar remains on schedule through this year.

Looking forward, 2014 provides an opportunity to stay out of the rate case process. This would require the approval of the proposed investment recovery mechanisms, which have been included in both the electric and gas rate cases. Our rate cases are heavily weighted with capital investment, requiring us to file regular and routine cases. An enhancement to this process would be the investment recovery mechanism that will allow the commission to review and approve capital expenditures planned subsequent to the test year. The proposed mechanism includes a true-up process to ensure the investments are made or a refund will be issued to customers. If approved as requested, we will increase electric revenue by $82 million and gas revenue by $70 million to cover future capital investments.

By aggressively controlling our cost, we hold down customer rate increases to less than 2%. One of the ways we have been able to do this is by increasing productivity. We have successfully completed 3 voluntary separation programs since the end of 2006, reducing the workforce by 10% over the past 6 years. In the coming years, we expect to continue to reduce O&M through our smart energy program, as well as the mothballing of our small coal-fired generating plants.

As we look to the future, our investment plan will continue to drive transparent, predictable annual earnings per share growth of 5% to 7%. Our investments for the next 5 years are up 40% from the last 5 years and about double what they were 10 years ago. We have grown our dividend payout ratio to a peer average of 62% and plan to continue growing it with earnings. We believe the Michigan economy will continue to grow at a pace slightly better than the rest of the United States. Our plan assumes our annual sales will grow at less than 1% over the next 5 years, and that number includes our energy efficiency programs.

By reducing O&M costs, we will lessen the increase in customer rate base increases and keep them at less than 2%, or as I refer to, the rate of inflation. And we believe Michigan regulation will continue for -- to provide fair and predictable outcomes.

Now let me turn the call over to Tom for a look at 2012 results and the 2013 outlook.

Thomas J. Webb

Thanks, John, and thank you all for joining us on the call today. We deeply appreciate your interest. Our 2012 results are our best performance in 10 years, and importantly, this represents strong, consistent, improving performance year after year. Our full year reported results were $1.42 a share or $1.55, excluding a decoupling write-off earlier in the year. Adjusted earnings were up $0.10 a share, that's a 7% increase on top -- on the top end of our guidance range at 5% to 7%. Our businesses operated well. The utility was up $0.07 with strong sales and constructive rate cases supporting capital investment and accelerated reliability work. Both enterprises and EnerBank achieved improved performance with enterprises and the parent up $0.03 from last year.

Now here's a slide that's become more popular than we ever expected. It's an update of the version we showed you in the first half of the year, as well as in the third quarter. As you can see, we fully offset the adverse implications of unusually mild weather earlier in the year and that was a tall order. Later, we put to use the earnings benefit from the hotter-than-normal summer by investing substantially more in tree trimming and generating plant maintenance, system hardening and so on. We also were able to make important contributions to low income funds and our foundation at the very end of the year. It's our desire not to over-earn or under-earn our authorized ROE. This allows us to deliver our earnings growth commitment to you, while maximizing every opportunity to improve conditions for our customers. Our approach is pretty simple: when our customers win and when you win as investors, then we're successful.

As we look forward into 2013, our top priorities continue to be improving safety and customer value, executing our investment plan, successfully processing the Certificate of Need for our new proposed gas plant, completing constructive electric and gas rate cases, as well as achieving our 11th year of consistent strong financial performance.

With a highly engaged workforce, these priorities focus us like a laser beam on our customers and on you, our owners. So here's our guidance for 2013. Earnings per share is up another 5% to 7% or $1.63 or $1.66 a share. This is accompanied with strong operating cash flow of $1.3 billion, continuing our cash flow growth of about $100 million each year. Importantly, and perhaps unique to only a few companies in our sector, our new year guidance is built on our actual results from the prior year rather than prior guidance or budget or something adjusted for weather. With minor exception, each year, we've accomplished an EPS at the top end of our guidance range or above our point estimate, and each year, we've established our new guidance based on that high-end performance. This provides a unique healthy growth pattern that maximizes earnings and dividend growth for a high-end total shareowner return.

As you can see in this waterfall slide, our growth will again come from our core businesses: our gas and electric utilities. Our investment program drives this growth and it provides for improved service and reliability to our customers. The enterprises and parent may be down with a slightly higher share count, bonus depreciation-related interest savings that's at the utility instead of at the parent and the state tax credit in 2012 that's not repeated in 2013.

Now we talk a lot about flexibility in our investment plan. Our 2013 to 2017 5-year plan calls for about $7 billion of investment. And as John showed you earlier, this includes addressing a future capacity shortfall with a new gas plant. We've offset a good portion of the new plant investment by prioritizing our plans for the next 5 years, with some investments deferred to a later time frame or done with even better technology than we thought possible before. We've reduced the range from prior discussions at $6.5 billion to $7.3 billion, down to a new range of $6.5 billion to $7 billion. This keeps customer base rate increases under inflation. Even though we could invest substantially more in the next 5 years, which would enhance earnings and cash flow growth, we do not. We do not because we believe it's our responsibility to keep our customer base rate increases below inflation and this makes for a sustainable plan for everyone.

Although retained earnings in our NOL are still sufficient to meet our need to maintain a strong equity level at the utility, we're examining options carefully to make sure they're in the best interest of investors and owners. For example, we may upsize a bit our small continuous equity program to take advantage of the accretive investment in the new gas plant, if approved. However, if we can find enough capital investment offsets, we may not even need to do that.

As shown on this slide, we've been catching up on necessary investments over the last few years. Since the need for investment continues to grow over the next 10 years, the pace of our growth may exceed some of our peers. During the last decade, many peers were able to put important programs in place, while we were in a tough period of restructuring. This catch-up provides us with an opportunity to fuel future growth on a consistent basis and for some time.

While we've accomplished a lot reducing our O&M costs in the past, there is still more we can do. We reduced our headcount 3% in 2012 and 10% since 2006. This is a major contributor to our plan that not only offsets inflation, but will reduce costs by a further 6% in 2013. And that's 8% below inflated levels. For the period 2013 to 2017, we project O&M costs to be down about 1% a year. Examples include continuous productivity improvements. We improved productivity 41% since 2006 and target another 25% over the next 5 years. Other examples include mothballing our small coal plants, thoughtful benefit changes and the rollout of smart meters. These savings flow to our customers and are enabled by our investment programs.

Now the Michigan -- in Michigan, it continues to rebound, with many examples of recovery over the last 3 years. Housing starts are up 75%, auto production in Michigan is up 97% and unemployment is down almost 5 points. As Michigan economic recovery continues, sales in our service territory have rebounded nicely.

Industrial sales reached prerecession levels 2 years ago, and as you can see on the left side of this slide, sales growth has continued at a strong pace. Recent growth is cloaked a bit by sales in one narrow customer class, what we call an E1 tariff. This is a unique economic development tariff that doesn't provide for any margin to our company in an effort to support solar-related sales. Sales are falling in this narrow class where we make no profit. For example, last year, our industrial sales growth of over 2% would have been 4%, excluding this E1 tariff. That builds nicely on prior year growth. As we look ahead, growth would be about 1%, including E1 tariff, 3% without it. In other words, sales from all of our industrial customers, save one, are expected to grow 3%. Sales growth for all customers, as shown on the right, has continued at about 1% a year. Also, we show growth, excluding energy optimization program. In 2012, we maximized energy efficiency, receiving an incentive of $17 million on top of our authorized ROEs. Your primary focus really should be on growth including energy optimization, but we thought it would be useful to see the underlying economic strength in our service area with sales up 2%, excluding these energy efficiencies.

As you can see here, electric sales continue to exceed the average growth at EEI companies. We plan for the future conservatively and the actual results speak well for themselves. Overall, our sales have been up 1% in each of 2011 and 2012, when peers were flat in '11 and down 1% in '12. While our industrial sales reached prerecession levels in 2011, the year-over-year effective increases of about 4% compare very favorably with peers, where sales were up only 2% in '11 and down 1% in '12.

With budget and tax reforms in place, as well as growth-oriented fiscal policies, Michigan's GDP growth was the sixth best among all 50 states in 2011. And this performance continued in 2012.

Planned cash flow for 2013 is strong, with operating cash flow at the utility exceeding $1.7 billion. At the parent, sources of cash easily covered equity infusions into the utility, as well as the cost of financing. The financing plan targeted for 2013 is in good shape. There are no maturities coming due in 2013. We will continue to look for opportunities, as we always do, to pre-fund our needs for future years.

Gross operating cash flow continues to grow at about $100 million each year, as does net operating cash flow, which includes interest payments, working capital and taxes. As we make use of our NOLs through 2016, a full 4 years away, we anticipate that we will begin paying some federal taxes in 2016. While a few years ago, our underlying operating cash flow was not as strong as many of our peers, our substantial customer investment program has turned the situation around to a healthy level. As you can see in the yellow banner at the bottom of the slide, NOLs and tax credits continue to be available through 2017.

Our credit ratings have improved a lot over the last few years, and we're pleased that Moody's and S&P have our credit ratings outlook on positive, and we have faith in their insights and look forward to their results.

As we provide in each earnings call, here's a table of profits and cash flow sensitivities to enable you to assess our projections, including changes in sales, gas prices and ROEs. The size of the sensitivities provide some reasonable indicators regarding the degree of change that could occur. Please recall, however, that it's our goal to deliver planned results for our customers and investors even if these conditions change.

Our best measure of confidence in our future is our earning guidance to you. Over the last decade, we've delivered an average EPS growth of 7% a year, a bit better than our peers. We believe we can continue growth this year and in the future at 5% to 7%, continuing performance, we hope, a bit better than our peers. This underlying goal will facilitate increases in our dividend and perhaps -- therefore, that pace might also be a bit better than some peers. So here's our final report card for 2012. All targets were met or exceeded.

And here's our metrics for 2013. They're tough, but they're realistic targets that provide for a strong level of performance for both our customers and our investors. We've included a dividend and a customer rate metric to enhance measuring progress in these important areas. We've continued the all-important earnings cash flow and capital structure metrics. We look forward to reporting on each of these and other important topics as we go through the year.

So thank you for your interest and your time today. We appreciate your faith in our company and in our management team. We're committed to your success and realize that we've got to earn your confidence every day. And on that note, John and I would be happy to respond to any questions you may have this morning.

So Frances, would you please open the call for questions?

Question-and-Answer Session

Operator

[Operator Instructions] Our first question is from the line of Kevin Cole from Credit Suisse.

Kevin Cole - Crédit Suisse AG, Research Division

Tom, just to make sure I got your comment clear on the equity. So you're maintaining your no block equity through the planning period but may opportunistically increase your DRIP from $30 million to $40 million or something small like that?

Thomas J. Webb

That's pretty close, and let me just add a little clarity to that. You remember our capital investment went up $750 million for the new plant that's yet to be approved. We're assuming that does get approved, so we're working at our base capital investment to see what things could push out a little bit or what things could we do smarter and just bring them down a little bit. To the extent we can get in the low end of that range that John gave you, we probably don't need to make any changes whatsoever. To the extent that we stay up around $7 billion or maybe a little bit more, we think we're in pretty good shape. But what we would look at is maybe take the continuous equity program up a notch and we haven't decided to do that. And let me remind you what those numbers are. We have a DRIP program that's about $15 million a year and a continuous equity program that's about $15 million for that total of $30 million, Kevin, that you mentioned. So our goal is to try to stay in that arena. But we realize this is a pretty accretive investment that we're doing and we might want to tip it up just a little bit, if we need to cover that new higher level of investment. But you can see our primary emphasis is to figure out how can we do it without putting people in a situation where we have the potential for dilution. We don't want to dilute anything here. So thanks for the question. We haven't made our final decisions on that, but as of today, I would tell you there's no plan for any new block equity issuances. The NOLs are good enough, along with our retained earnings, to put us in good shape. But we'll be evaluating just how far we can go in that capital investment as to whether we need just a tiny bit more of equity, maybe through our continuous equity program. Okay?

Kevin Cole - Crédit Suisse AG, Research Division

Okay. And one last question, if I could. So I guess on the capital investment tracker, I guess given the ALJ's recent testimony stating that the commission lacks the legal authority to grant such a tracker, what is your updated view on the issue? And generally, do know what the root of the ALJ's issues really are given that -- it seems to me that the commission was clearly -- their authority was clearly affirmed by the Court of Appeals early last year? And, on the decoupling -- I mean, this tracking mechanism is good for all stakeholders.

Thomas J. Webb

Right. We're probably mixing a couple of things in there. I will just make it clear that -- let's use the decoupling appeals court order. The judge in that situation said that their -- by the letter of the law, the word electric was not mentioned in the 2008 energy law. So even though we continue gas decoupling, he did not see the authorization for electric decoupling. When he came out and said that, he said, "But you know, the commission does have full authority to do things like trackers." So it can do -- it can get the effect, if it chooses, of decoupling in different ways. There have been lots of comments and things around this whole subject. But I would tell you it's our understanding that trackers in different words or forms are permitted for the Public Service Commission to do. And so we don't see any barriers to that and decisions they'll be making in the future about our electric and gas rate cases, when it comes to having the revenue mechanisms we proposed or the capital investment mechanisms that we proposed. They can put forms of trackers on that if they so choose, but those decisions are yet ahead for them.

John G. Russell

Kevin, the only thing I'd add to that is I think you're referring maybe to the ALJ case and the MichCon case?

Kevin Cole - Crédit Suisse AG, Research Division

Yes, exactly.

John G. Russell

Yes, they look for -- and right now, I think you know that the staff is supportive of the tracker. The issue there is that, I think, and you'll have to verify this with DTE, is that the DTE gas business in that case was requesting a 5-year duration. And I think that's what caused some angst on the ALJ. But the staff was supportive of it so -- and in our case, we're not looking for that duration. We're looking for a shorter duration, one year.

Kevin Cole - Crédit Suisse AG, Research Division

Okay. So the staff testimony comes out Thursday, is that correct?

Thomas J. Webb

It does, today.

John G. Russell

Yes.

Operator

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

Paul T. Ridzon - KeyBanc Capital Markets Inc., Research Division

Two questions. Can you give some more color as to what's going to drive the 6% cost reduction? How much of that is related to kind of the accelerated spending you did last year? And the second question is, any latest thoughts on the strategic value of EnerBank?

Thomas J. Webb

Yes, I'll take those. First, on the cost side, that's the bigger, more important question, I think, of the 2. And I would tell you yes. This last year -- first of all, to get directly to your point, we had programmed to take our cost down 6%, and we didn't go all the way, because we were able to, in the fourth quarter, make some investments for customer reliability that we wouldn't other be able -- otherwise be able to make when we had the very warm summer. So of course, the net effect of making those investments in our business reduced the size of the year-to-year cost reductions, which were still substantial and maybe among the best in the sector. But this year, that made it a little bit easier than in '13 with those costs in place to not repeat those and be able to lower our cost even further. But I would tell you, take a look at our Slide 22 because we give you what I'll call is a handful of examples of what we've done and a handful of examples of what we are doing for the future. And there are many more beyond this. So on that slide, we remind you that we'll be mothballing our small coal plants. That will save some money. Our productivity commitment for the next 5 years is another 25%. That will save money each and every year. Our benefit plans, we have some smart things to do and partly what the federal government is doing where we'll be able to take some advantages to do our benefit programs more efficiently and economically than we do today, and you'll see some of that this year. The smart energy program at consumers, that's one that I think everybody's familiar with, not needing meter readers and so on and so on. We're really just rolling that out. We're a bit of a laggard. We are behind other companies, but by design, so that we could benefit from the latest technologies and the smartest things to do around security and the like. And so as that rolls out, we'll only start to see some of those benefits coming in. So there's a lot of things we can do. We have a good deal of confidence in where we are for reducing our cost by 6%. And you'll notice that we give you an estimate for the next 5 years, which we think we can do at about, on average, 1% a year. As we get closer to each of those years, we'll look at them a lot harder and that's when we'll see, "Can we do a bit more?" Sure, those cost reductions help us a little bit on our earnings when they're done, but it's temporary. We pass that right through to our customers because we make our money on the investments we're making, which help many of those enable these cost reductions. So from a cost reduction story, yes, we got a little bit of a helping hand this year with some monies that we put in place last year. But we've got a good plan with specific actions on how to get there. On EnerBank, it's a small part of our business and it has grown nicely. It's -- they've done a good job there. They, along with enterprise, make up about $0.11 of our earnings per share last year. I would tell you that we'd like to see the enterprise side grow a bit more. It's $0.05 of that number. And this isn't a great market to have IPPs, but it is one that we're doing okay in and we see some upside there. So we see some nice growth opportunity. We're proud of EnerBank, but it's a small piece of our business that, strategically, we need to keep in place, at least for now.

Operator

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

Jonathan P. Arnold - Deutsche Bank AG, Research Division

I think my question has just been answered.

Operator

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

Ali Agha - SunTrust Robinson Humphrey, Inc., Research Division

Tom and John, the CapEx number that you are budgeting over the next 5 years, $6.5 billion to $7 billion, can you remind us of what underlying annual rate base growth that would support for you guys?

Thomas J. Webb

Yes, I think the way you should look at that is it's roughly in the 5% to 7% zone because that is the driving factor then, of course, for the earnings and the operating cash flow growth. So it's about in that arena.

Ali Agha - SunTrust Robinson Humphrey, Inc., Research Division

Okay. So the point being...

Thomas J. Webb

It's different -- and it's different, Ali, from year to year, as you would expect, because it's not a perfect straight line. So where we might be around $1.4 billion this year and maybe similar the next year, you might see it come down a little bit for a year and then back up. So this -- the curved line that we gave you in our slides today was to give you a general trend, a smooth trend of that investment in the past and into the future.

Ali Agha - SunTrust Robinson Humphrey, Inc., Research Division

And given the fact that the gas part is now in the equation as well, is it fair to say that it's more heavily skewed electric versus gas proportionately?

Thomas J. Webb

Well, for sure it is, but I would also tell you that probably because -- John, didn't mean to here -- that we, when we look at that, even though it is skewed more into the electric than it is to gas, we're looking for opportunities every day to put more money in the gas side of the business because there are good things that need to be done. And with gas pricing having come down so much, there's room in our -- for our customers to be able to absorb that smart investment. Suffice it to say though, we're critiquing everything on the electric side, but we're not putting anything on the gas side that doesn't make absolute good sense for our customers.

Ali Agha - SunTrust Robinson Humphrey, Inc., Research Division

And John, recent commentary coming out from the Michigan legislature regarding a closer look at both self-implementation and again, retail open access as well. Can you just give us your context or give us a sense of where those 2 issues are and how you see that play out?

John G. Russell

Yes, as I mentioned earlier, Ali, you've got the Governor that's come out and said that the law, we like the law, he likes the law. The folks in the legislature, we've seen one bill that's been introduced in the Senate, which was a bill to open up the cap, which was similar to a bill that was introduced last year and no action was taken on it. There's not been any bill, as I know as of today, that's been introduced in the House. The House has -- or the Senate has already gone through hearings on changing the law. Senator Nofs, who runs the energy house -- or the Senate Energy Committee, is supportive of the law, and I think 8 of the 9, or 7 of the 9 committee members he has, which are bipartisan, have been supportive of the law and voted for it in 2008. So if there's work to be done, it's the work that I talked about this year with what the Chairman of the commission is doing, coupled with the Michigan Economic Development Corporation, to go out and seek opinions and thoughts about this in these public forums that are being conducted over the next several months. But in addition to that, and the point I want to make very clear is, they've also been very thoughtful about constructing a list of 80 questions that are going out to all parties for responses back, I think it's in the April time frame, April, May time frame. And what they're trying to do is collect data, not opinions necessarily, but also data-driven approaches about regulatory, renewable energy, energy efficiency, what works, what hasn't worked, what's the data behind it, and that's exactly what they're trying to do. We'll be actively involved in those. I expect there'll be some hearings I'll be involved with as we go forward on this. So the point is they're looking at it. We've always thought that a natural time to look at the 2008 law would be in 2015, and that's what the Governor really directed in his energy message because there are some natural fall-offs that occur in 2015. Do we keep doing energy optimization at the levels we have today? Do we keep the surcharge the same? Do we expand renewable energy from what it is today? And so that's kind of a natural process that we go through right now.

Ali Agha - SunTrust Robinson Humphrey, Inc., Research Division

Got it. Last quick question, Tom, is it fair to say that in your '13 guidance, you assume the rate case outcome is similar to what you got last time?

Thomas J. Webb

I would say it this way, we've asked for what we needed, and we wouldn't want to be talking about other numbers in the middle of that process.

Operator

Your next question is from the line of Andrew Weisel from Macquarie Capital.

Andrew M. Weisel - Macquarie Research

First question, I want to elaborate on the O&Ms. The 6% reduction for this year, if I remember correctly, that did not include the energy optimization spending. So can you remind us what that dollar amount will be and kind of what the appropriate base to apply that 6% is? Just trying to get a better sense of what the actual dollar O&M will look like in 2013.

Thomas J. Webb

Yes, we'll look up the EO number for you right now. I don't actually have it at my fingertip.

Andrew M. Weisel - Macquarie Research

Okay. Well, I'll ask some other one in the meantime then. From the sales recovery slide, it looks like the actual revenue number will be kind of flattish year-over-year. First question is, I just want to affirm that is weather-adjusted, right? So the weak -- the actual number will look a little different than 0?

John G. Russell

Yes, that's true. This is John. Tom's working on your number. Yes, think of the sales for 2013 basically flat overall. And then if you add back the energy optimization, that's about a 1% and then E1 that Tom talked about is about another 1%. So in that range, that's what you should be looking at from that standpoint.

Thomas J. Webb

And then here's your answer on energy optimization. First of all, you're right assuming, as we told you before, we don't put that into the cost levels for which we then count our 6% reduction. That number is about $116.1 million. And it's the same number in '12 and '13, very tiny difference. So you won't see that as a differential for '12 to '13. Does that help you?

Andrew M. Weisel - Macquarie Research

Yes, it does.

Thomas J. Webb

Even as you go forward, you would see that in '14 it's a similar number. But you may recall, if you went back a year to '11, we were still ramping up, so it was a little bit smaller number.

John G. Russell

And Andrew, those are weather-adjusted numbers that I gave you.

Andrew M. Weisel - Macquarie Research

Right. Okay. Great. Then longer term, when we think about the sales growth in '14 and beyond, should we think of it in kind of the same range of flattish growth after E1 and EO?

Thomas J. Webb

I think the way to -- again, weather-adjusted and -- oh, just straight up, about 0.5% to 1% is what you should look for in growth over the longer term. And no one can really precisely say like we do on our books that it's 0.x. So it's really about 0.5% to 1%. And then if you took EO out of that, add back about 1%. So think of -- if I round the number to 1% growth, then you'd be up to about 2% growth without EO.

Andrew M. Weisel - Macquarie Research

Great, very helpful. Then one last one, just the timing of the rate case for gas. I guess I was a little bit surprised on the timing given that you have the electric case outstanding with a few unknowns as far as like the recovery mechanism and the decoupling or whatever flavor name they give it. And given that in April, we'll find out about DTE's infrastructure recovery mechanism, just a little curious on why the timing now as opposed to waiting until we have a bit more clarity from those other 2 data points.

Thomas J. Webb

For us, it's real simple. We kind of put blinders on, like a little horse that's just got oats in front of him, and we just look at the investment that we're making and determine what's the right time to go back to the commission, and that has been something approximately in annual rate cases. And the rate cases have all been about that investment. So we try not to be distracted for a variety of reasons that might happen that would cause you to go a little faster, a little slower. Do we think about those? Yes. Do we think about rates in winter seasons? Yes. Do we do all that? Ours is just plowing down a course that's steady, routine, regular cases. Now I do want to add, because I know you picked it up, but to make sure everybody else does, we've put some mechanisms in both the electric and gas cases that could permit us, if they're granted, around capital spending. For instance, recovery in future years, for at least a year or 1.5 years out, depending if it's electric or gas case, that could permit us not to have to come in for a regular rate case. Since our requests are all capital spending, if we had some form of a tracker that went out for, say 2 years, then we could stay out of rate cases for that period. And if we did one a little bit longer, probably stay out that little bit longer, too. That's one we're not presumptuous thinking that it's our decision. So we'll see what the commission chooses to do with that as to how they'd like to pace this recovery.

Operator

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

Brian J. Russo - Ladenburg Thalmann & Co. Inc., Research Division

Most of my questions have been asked and answered, but I was just curious, if you get approval for the new gas plant, when would construction begin?

John G. Russell

We'd start -- 2 things we need, Brian, we need the air permit and then we need the Certificate of Need. So we'd start construction around '15 and be operational by the summer. Right now, '17 is what we're planning.

Brian J. Russo - Ladenburg Thalmann & Co. Inc., Research Division

Okay. So if there is any valuation of the continuous equity program and et cetera, would it be timed with when the gas plant construction starts? Or would you look to do something sooner than that?

Thomas J. Webb

We're going to -- again, we don't like to get out in front of people and their decisions. We're going to make certain that we have an air permit and a commission that believes we deserve a Certificate of Need and that's when we'll start making the decisions about what we would do that's related to the gas plant. So I think you'd see that out in the future a bit. We'll be looking at our total capital programs and what we need to do each day. But for the, this one, we want to get the decision so that we know we can talk to you about facts rather than just desires.

Brian J. Russo - Ladenburg Thalmann & Co. Inc., Research Division

Okay. And then just your thoughts on the trend in your NOL balance. It looks like it winds down through '17 and less tax shields on your cash flows. And just your thoughts on your external kind of capital needs to fund kind of the latter half of that 5-year capital budget?

Thomas J. Webb

Yes, the NOLs are good, counting this year, through the next 4 years. But here's the thing that could change that. If we had another big bonus depreciation year, which we don't anticipate, but if that were to happen again this next year coming up, you know how that works. That gives us the tax shelter where the investments are made down at the utility, and then that allows us to take our NOLs and extend them out, use them later. They have long lives as they exist today. But we'd be able to take out the time with which they're used up and therefore, take out the time in which we would need to generate more cash through equity or something like that. So we updated this since we talked last third quarter earnings call. We put some new things in with some programs that help us on some tax shelters and the bonus depreciation. And we're clean through 2016. Now we do tell you, we have credits that go further than that, but those have to be looked at each and every year when you do your tax returns. Those are not always all usable right away. Some of those may get used later in time. So the way to think about this, good NOL coverage through 2016 and then we'll work hard to see if we can't do some other things.

Operator

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

Paul Patterson - Glenrock Associates LLC

I wanted to touch base with you on the weather-adjusted sales growth that you experienced in 2012 for gas. If we back out transportation, it looks like it was substantially down and pretty much across customer classes. First of all, on industrial, was there any fuel switching? And if there was, what would it be -- what would have caused that? And otherwise, how do you -- what do you think is actually driving such a decrease in demand?

John G. Russell

Yes, Paul, let me talk about that. One of the things, that we had a remarkably warm winter last year, so when you look at the weather adjustment models we use, I don't think they really have experienced a whole lot around that area because it was, what I would call, almost record-setting as far as warm weather. So I don't see that as a really good indicator for -- I mean, I wish we had better models. But when you get into that territory, as Tom said, that we were losing $8 million, $9 million to $11 million in the winter, ever since [ph], it was a big issue. As far as fuel switching, limited. The bigger thing we're doing in fuel switching in our territory is that we've got propane customers, about 400,000 propane customers that we can switch to natural gas. And we've got an aggressive program that we're working on that today. So -- but that requires pipes to be installed to be able to access those customers. So when you think about compared maybe to the East Coast and others that maybe you're thinking about, we don't have as much of that fuel switching as they do, but it's an opportunity for us to grow and be able to capitalize on the switch from propane to natural gas, which for our customers, is about a 2-year payback after they pay for the installation and all new appliances. So it's something we think has potential in the gas business.

Paul Patterson - Glenrock Associates LLC

Okay. Just industrial in general, I mean, would there be that big a weather impact on industrial for gas?

John G. Russell

I don't know. I mean, it's relatively small when you look at it. I guess it's down substantially. Most of our industrial customers, when you look at the base there, are large customers that take transport. So the mix that we focus on in our business is really the residential and the commercial because that's where the margin is. Most of the large customers are just paying us the throughput charge because most of them are on transportation rates and/or buying from third parties.

Thomas J. Webb

You might be surprised in the gas business that there actually is more weather-related than you might think on industrial. People are heating greenhouses, which is a big thing up in Michigan. People are heating large buildings where they do pharmaceutical testing. So there's more of that than you might think, at least that's what I learned over time.

Paul Patterson - Glenrock Associates LLC

Okay, that's helpful to know. Just on -- back to the electric side. I mean, why is E1 going down? And how should we think about this just in general? Just general -- I realize you don't make money from that, but just to get a sense here. I mean, there was almost no growth at all in residential and commercial and I assume that actually includes leap year. So I mean, I'm just trying to get a sense as to really, when you're mentioning 1% -- 0.5% to 1% growth, we've seen a big boost here in industrial and a rebound in the economy. But just where do you see that growth coming from?

Thomas J. Webb

Well, let me first help you on residential and commercial because we completely agree that that's a slow process in terms of the recovery. Industrial comes first when you're shooting down or up either way. That's just the way it happens in an economy. We're seeing the residential come back up. Remember residential, which we show as sort of flat year-to-year. When you take out the energy efficiency work, it's actually up 1%. So you're beginning to see residential usage come back around. Commercial's following, and I'm just going to tell you, commercial's flat. There are people who are still concerned about the economic conditions of the country and even the globe, I guess, when it gets down to that. So they're being very cautious on their recovery. What is encouraging is the industrial side where industrial customers, as a whole, were back to prerecession levels 2 years ago with great growth on top of that. So here we see our industrial customers, excluding this E1 tariff, up another -- over 3.5%, almost 4%, again this year and we see that as really a good encouraging progress with lots of evidence when we talk to our customers individually about what they're doing and they see we get some comfort. They have worries, like everybody does, in what's happening in Washington, for example, but they're growing their businesses nicely. On the E1 tariff, we're actually not permitted by contract to talk very much about the details that are in that, but I would ask you to accept this, if you don't mind, is that it was a tariff put in place to help start up some sales and boost a particular sector. We did mention around the solar side of the business. With whatever things that are happening worldwide and across the United States, they're struggling right now. And as they fall away sharply, that does ploke [ph] the overall growth that's happening for all of our customers absent that one tariff. So we thought -- and we don't like to call out any particular tariff or any particular customer. We're very loyal to all of them in helping them be successful. But in this case, we thought you needed to know that our growth at 2% would have been 3.5% without that.

Paul Patterson - Glenrock Associates LLC

Okay. And then just finally, I'm sorry to be so slow on the O&M, but when you mentioned 6% decrease, I guess, adjusted -- relative to inflation, I guess, is what we're talking about and...

Thomas J. Webb

No, this is an absolute number and that's something we're very proud of. A lot of folks will tell you on phone calls, numbers versus inflation. If you assumed we have a -- would have a 2% inflation this year, our numbers will be down 8%. So no adjustments, nothing. Dollar to dollar, we are down 6% or will be. That's our plan for this year.

Paul Patterson - Glenrock Associates LLC

And then when you give the 1% for 2013 through 2017, is that inclusive of the 6% or -- I mean, because that obviously is a huge number. I mean, in other words, I mean, when we think about you guys after this year, how should we think about -- do you follow what I'm saying?

Thomas J. Webb

The way to look at it -- the way we run our business here is we build like a 5-year plan where we try to put in some tough objectives. But we don't put things in our plan that we don't know how to do. So when you're out 4 and 5 years, it's a little more difficult to program exactly what all the O&M will be. So we've put in the things we know and we say we've got to, for our customers, at least keep our numbers flat. Then as we get close to each year, we look at what can we do that would be even better. So as you'll -- my guess is, and we don't have any such numbers right now, as we get close to 2014, we'll start to talk about what we can do to bring those numbers down, because we'll have real plans as we get closer to that year. So facts are 6% this year, flat beyond this year, but -- because when you work in the 6%, that will be about a 1% decline as you observed, and we'll look for ways to bring those numbers down as we get close to each and every year.

Operator

And gentlemen, at this time, there are no other questions in the queue.

John G. Russell

All right. Well, let me wrap up today just by saying that we've had a good year of financial and operating performance in 2012 thanks to the employees at CMS Energy and Consumers Energy. They're responsible for this, and we appreciate the work that they've done to help us get to where we are today. We're also well positioned, you heard today, to deliver another year of consistent financial performance in 2013. We appreciate your interest in CMS Energy and look forward to seeing you at upcoming conferences. Thank you for joining us on the call today.

Operator

And ladies and gentlemen, this concludes today's conference. We thank everyone for your participation. Good day.

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Source: CMS Energy Management Discusses Q4 2012 Results - Earnings Call Transcript
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