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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

Mark Barnett - Morningstar Inc., Research Division

Andrew M. Weisel - Macquarie Research

Paul Patterson - Glenrock Associates LLC

Kevin Cole - Crédit Suisse AG, Research Division

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

Jonathan P. Arnold - Deutsche Bank AG, Research Division

CMS Energy (CMS) Q1 2013 Earnings Call April 25, 2013 9:00 AM ET

Operator

Good morning, everyone, and welcome to the CMS Energy First Quarter 2013 Results and Outlook Call. This call is being recorded. Just to remind you, there will be a rebroadcast of this conference call today beginning at noon, Eastern Time, running through May 2. 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. This presentation contains forward-looking statements. These statements are subject to the risks and uncertainties and should be read in conjunction with our Forms 10-K and 10-Q. The Forward-looking Statements and Information and Risk Factors sections 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 each 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 first quarter earnings call. I'll begin the presentation with a few brief comments about the quarter before I turn the call over to Tom to discuss the financial results and the outlook for 2013. Then, as usual, we'll close with questions and answers.

We're off to a good start in 2013. For the first quarter, adjusted earnings per share was $0.53, this is up $0.16 from last year, primarily due to more normal winter weather as compared to one of the warmest winters on record a year ago. First quarter results keep us on track to meet our full year guidance of $1.63 to $1.66 a share.

We've identified a number of near-term catalysts that we believe provide the foundation to achieve our long-term goals. Tom and I will provide you an update on each of these during today's call.

This slide shows a list of 8 catalysts that will have an effect on our future performance. You probably heard us talk about them over the past few months. As we look at the list, good progress has already been made. In fact, a couple have been completed, while others provide us opportunities ahead.

The first catalyst is the 2008 Energy Law and the effect it has had on Michigan regulation. The 2008 Energy Law is working as designed. The latest example is our recent electric self-implementation filing. For the first time since the law was passed, there was no opposition and no order to our self-implementation request. A significant milestone and another constructive development.

But despite how well the law is working, there are a few special interest group that would like to change parts of the law. Last November, the Governor gave a report on energy and the environment. Included in the report was Appendix A titled Readying Michigan to Make Good Energy Decisions. The appendix calls for 2013 to be the year of study on energy issues. The Governor outlined a measured approach of data gathering that will help policy makers made good energy decisions for Michigan's future based on facts rather than soundbites.

Seven public forums have been held across the state to gather information on renewable energy, energy optimization, electric retail open access, and other energy-related topics. The Michigan Public Service Commission Chairman and the Michigan Economic Development Corporation Energy Office Director are leading this effort. They will submit a report to the Governor, who is expected to give his recommendation by the end of the year. We expect that the legislature and governor will be looking at changes to the law in the 2014 and 2015 time frame, after certain provisions of the current law sunset. We will keep you updated on the progress throughout the year.

The second catalyst is our rate cases. In March, we self-implemented a $110 million electric rate increase. As we have mentioned before, our electric and gas rate cases are primarily for capital investment needed to provide safe, reliable service to our customers and to meet mandatory state and federal requirements. We will continue to file routine and regular cases for timely recovery of these investments, which keep average base rate increases below the rate of inflation.

We have been a leader in the industry in O&M cost control. Converting all of our coal plants to burn western coal has generated substantial savings for our customers. Restructuring the workforce and labor agreements are 2 more examples that have helped us reduce legacy costs. And as we look forward, there is more that we can do. We are always looking for ways to improve reliability and affordability for our customers. A strong customer focus is important to the sustainability of our business model.

During the first quarter, we announced plans to reduce natural gas fuel costs by 15% over the next 12 months. This will result in a total bundled gas rate, which includes the commodity and the distribution charge being reduced by 7% this year and by 2% on average over the next 5 years. This creates headroom and opportunities to invest in our gas infrastructure business to deliver safe and reliable service.

The third catalyst is our capital investment plan. You can see on the map where we are planning on making our investments. Environmental compliance, the new gas plant, gas infrastructure and upgrades to the Ludington Pumped Storage Plant are some of the major projects planned within next 5 years. We have lowered the top end of our investment plan over the next 5 years to $7 billion from the $7.3 billion you can see on the chart.

Looking out over the next 5 years, we have a solid plan to invest another $8 billion in needed projects that will improve our electric and gas systems. Our investment program continues to drive reliability, safety and customer value, as well as grow earnings and cash flow over the long term.

Catalyst #4. Catalyst #4 is the filing of the Certificate of Necessity, often referred to as the CON for our proposed new gas plant. Late last year, we submitted an air permit. This summer, we will file the CON with the MPSC. The purpose of the CON is to demonstrate the need for new generation and to support our decision that a natural gas plant is the most efficient choice. It also will secure cost recovery.

This new plant will be built on a site we already own. The location is ideal, with full gas supply and electric transmission already on site. The plant will include the latest technology to run as an efficient baseload unit with an optimal heat rate. And it's timed right. The plant will be operational soon after our small coal plants are taken out of service.

Now let me turn the call over to Tom to talk to you more about our first quarter results and the outlook for the rest of the year.

Thomas J. Webb

Thanks, John. The investments that John described deliver vital services for our customers and continued growth for you, our investors.

For the first quarter, our earnings were $0.53 a share on a reported and an adjusted basis. This is $0.16 better than last year. Colder than normal weather provided a boost of $0.03 this year, which was much better than the mild winter experienced last year. With self implementation of our new electric rate case on March 19, our earnings run rate is comfortably in that 5% to 7% growth range. Actual and projected cost are as planned. While recent sales are stronger than planned and promising, we continue to plan conservatively to stay realistic and maintain a solid focus on customer service and investor results.

We're maintaining our guidance at $1.63 to $1.66 a share. Now as is our past practice, we intend to reinvest stronger than planned financial performance in customer reliability improvements. Now please recall, our work that we did last year when we offset fully the adverse implications of an unusually mild winter weather. Otherwise, this would've reduced 2012 earnings by $0.13 a share.

Later in the year, we benefited from a hotter than normal summer, and we put this upside to use by investing substantially more in tree trimming, generating plant maintenance and system hardening. We also were able to make important contributions to low income funds and our charitable foundation at the end of the year. None of these jeopardized delivering another strong year of earnings growth up 7% from the prior year.

Now with all that in mind, it's good to have a fast start this year. And in April, we continue to experience more upside, enhancing the fast start by another $0.02 or $0.03. We already are putting some of this favorable performance to work with incremental improvements to customer reliability. Some of the reinvestment is in our plans for later in the year, and we'll monitor conditions to see how the summer shapes up before acting.

The post-recession recovery has been strong for our industrial customers and, overall, we call the recovery good, but not great, but perhaps just a little better than our surrounding states. This chart shows our year-to-year change in electric weather normalized sales, the green bars show us -- the gray bars are the average of U.S. utilities. The recession hit us a bit harder, but our recovery has been a bit better than most. GDP in our service territory was better than 90% of all states or among the top 10% in both 2011 and 2012.

Industrial sales growth offset recession losses in 2010, building nicely since then. Residential and commercial growth has been modest. Excluding the sales from one company that's on a no margin economic development tariff, we anticipate industrial growth at about 1% this year, and that's on top of a good 4% last year.

We project total sales to grow less than 1% this year on top of 1% last year. Excluding energy optimization, underlying economic growth was 2% last year, and we expect that it would be about 1.5% this year. Now this, of course, is even higher or about a 2% growth if you consider the impact of leap year in 2012.

The shift from propane to natural gas continues to enhance new gas customer hookups, almost doubling new customer hookups last year. We expect to add a third to the level of new hookups this year. This provides substantial savings to customers and should add about 70,000 new customers to our network overall. While many of our near-term catalysts that we're talking about today are in the future, we're pleased to report credit rating upgrades for CMS and for consumers by both S&P and Moody's.

The utility rating is a notch stronger and the parent now has an investment grade rating for the first time. I know for some of you, this has been an overhang, so it's especially pleasing to eliminate this disadvantage.

We plan to continue our strong level of liquidity with $1.2 billion in 5-year revolvers, supporting $2 billion of liquidity overall. We maintain a liquidity level about twice the thickness of our peers, continuing to maintain our conservative approach to the business. Just last month, we prefunded $250 million of parent debt maturities with a 30-year debt. That's another first for the parent.

We also completed our 2013 continuous equity program. Parent cash flow is strong and utility operating cash flow is at its best level ever. This reflects our healthy customer-oriented capital investment program. We've completed planned parent financings for 2013, and we expect to wrap up the utility needs soon.

As always, here's our earnings and cash flow sensitivity chart. So far sales and gas prices are on the high side. Our ability to apply NOLs and tax credits continues to help us avoid the need for new block equity and associated dilution. This is an enviable position. So we're on track to meet all of our financial targets for 2013, and fortunately, with some room to move. If successful, this will be our 11th year in a row with a continued on-plan track record of growth at a premium to our peers.

Thank you for your attention on what we know is a very busy day of earning calls. We appreciate, and we value your interest and your support. We'd be happy to take your call. So Kathy, would you please open the call for us?

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Mark Barnett of Morningstar.

Mark Barnett - Morningstar Inc., Research Division

Just a quick question. You mentioned, for the first time, with the self implementation that went in totally smoothly, could you possibly discuss some of the -- not the actual growth level of the increase, but some of the rate mechanisms that you had proposed along with the filing? And maybe what kind of feedback you've had so far, even though it's been only about 1.5 months?

Thomas J. Webb

Yes, Mark. A couple of things. The reason we comment things going pretty smoothly is, as you know, when we do a self-implementation in the past, it's got a little bit of debate or discussion in terms of the level and the way we go. The commission has been very helpful, and in fact, in this particular process, they chose not to really have any comment. In other words, saying that you can choose to self-implement the level you want as long as it's not higher than your request, and it's responsible. And two, they chose to use the default mechanism in the law that provides for essentially peanut-buttering these rates across all of the customers. Because, typically, what they might do is ask for a little reshaping of that, in one fashion or another. So that's, in part, what we call, as very smooth. A second part of a 3-part answer here is that for the first time on an electric rate case, they actually built in a schedule and did some work to look at the possibility of settling a case. Now that's very unusual. And electric cases are big and complex, and gas plays cases are small, a little bit more routine, and those get settled. But for an electric rate case, that would be very unusual if that happens. But that's still on the scheduling process. And then third, if I can comment, overall, we've asked for a mechanism that essentially takes the capital investment that we make and permits that to be tracked in just common words, if I may use it that way, so we called it an adjustment mechanism. That's not something that we're counting on. We're counting on our kind of routine approach to rate cases, but it's something that many parties have been interested in. So we've included that in our request as a mechanism that might allow us to avoid the need for these annual rate cases, if the commission were to choose to include that in its order. Now I would like you to know, as everybody, that we've always viewed that as something that's less than a 50-50 probability. So it's an upside, if it were to get approved, and we'll just have to see how that goes. There's been a couple of other rate cases that are unrelated recently that in one fashion or another, have include some form of a tracking mechanism around some capital investment. But this would be pretty new, doing it like we do at PSCR or even a GCR, but for all the capitals. So that's an item of interesting discussion. But I'd call it no more than that, because it's a request that we're trying to get good debate on and see if there's a possibility for consensus.

Mark Barnett - Morningstar Inc., Research Division

Okay. If I could, just one more quick question on the -- on your usage numbers. You have pretty -- a fairly conservative forecast. I was wondering about just in the quarter, weather normalized on the residential side. You saw a little bit of a dip. Was there anything in particular driving that? And just anything you saw that's a bit -- you, obviously, still have a slight improvement forecast for the year. Just wondering about how that fits into your expectations?

Thomas J. Webb

Yes. In fact, the way to think about that, when you look at the residential weather-adjusted side, you'll see that for the quarter, it's down, as you were observing, 0.8%. Then you'll see commercial up 1.5%, and you'll see our overall industrial with that one adjustment that I talked about being positive too. On the residential side, I hate to use excuses, but I will remind you that it was a leap year, last year, and it wasn't this year. And the leap year impact overall was worth 1 full point, having that lost day. So inside the quarter, there's a little bit of that and some other things going on. But here's what I would offer to you for the outlook for the year. Think of residential and commercial as positive but still modest growth. It's on the industrial side we've seen a really good rebound. And as you know, that will actually feed the residential side later, and it will feed the commercial side to some point later as well. So the fact we're seeing a good rebound on the industrial side is what we're watching with a lot of care. And then we think, as people get more confidence and more businesses expand in Michigan, the way they're doing today, that eventually will bring along more hookups on the residential side. I hope that helps.

Operator

Your next question comes from Andrew Weisel, Macquarie Capital.

Andrew M. Weisel - Macquarie Research

If you could just elaborate on that last point a little bit more? When I look -- compared to the full year forecast for usage, it looks like it has come down. It was 1% total, now at 0.5%. And industrial was plus 3%, now it's plus 1%. Can you just talk -- is that something that you saw in the first quarter trailing your expectations? Is it more of a forecast of lowering the bar going forward? And then maybe talk about usage per account versus customer growth.

Thomas J. Webb

Yes. I would tell you that we're seeing -- we saw a little bit of softening in the fourth quarter and first quarter, particularly, as it may impact the residential side. And we would sound smarter than we are if I told you we knew the exact answers on this. But I would say there's some concern on confidence of individuals. And therefore, moving out from shared homes and things like that may not be happening as quickly as we thought. And I would say that probably, the withholding tax had an impact on people's confidence. And I think you're now seeing that in a lot of the records, the Michigan consumer confidence index and that sort of thing. So what we're doing is reflecting what we see is a little slow down and projecting that out through the rest of the year. You know us pretty well by now. We do not like to get out there with optimistic assumptions, and then find they're the cause of not being able to do what we need to do for our customers, or what we need to deliver for you on a financial performance. So we'd rather project a little conservatively. So the mixture of real news we've seen. And our desire not to get ahead of ourselves on the recovery and the residential and commercial side has us being a little cautious with the numbers that we're providing. The usage per household, I'd say that the trend has been pretty strong in terms of up, up, up over the years, save the fact but we've spent a lot of work on energy optimization. And that's why I don't like -- ever sound like an excuse, but I do think it's important for you as investors to see the underlying economic growth, and with the energy optimization in and excluded. It's worth about 1 point to us, and a lot of that's on the residential side. So let me help you. I think you could add a little more than 1 point to our residential year-to-year growth, if you were to look underneath the energy optimization. And you can do the same on the total sales, which may help you a little bit. Because we follow that to make sure we're understanding the health of our customers and the pulse of the economy. But you should, in the end, track the bottom line numbers, of course, that include the energy optimization. Because as you know, those are good programs that we're behind solidly, and they actually help our customers and their usage. And they still permit us to get an incentive in terms of a little extra earnings beyond our authorized ROE as a way to help us promote these things. Does that get to your question?

Andrew M. Weisel - Macquarie Research

Yes, that's very helpful. And then one more. I appreciate introduction of this target for propane to gas switching. Can you just elaborate maybe a little the pace of the switching? Any thoughts on political or regulatory support for a plan like this, maybe compared to what we've seen in New England? And then lastly, how we should think about the economics and the operating earnings impact per customer?

Thomas J. Webb

Well, you get a good sense of the pace, if you will look at our Slide 16 called Customer Value, and that's the propane to gas switching. You can see the number of hookups that we had last year, about 1,345. What we expect this year -- but we haven't finished it, about 3,000, and then what you see going into the future. The economics are very strong. They're what drives this. Propane is just gone -- it's disconnected with the price of natural gas. And it looks like it's more of a permanent feature, this disconnection. So there's a lot of people that would like to economically benefit. But I will tell you, on the electric side of the business, when we hook up new customers that the connection part to the general area is socialized. That's not true on the gas side. So we have our regulators looking at that. In fact, encouraging us in regards to finding ways that we could socialize that cost and not have a such a big impact on one customer, as you're trying to take your service into a neighborhood or a business region. So that will help this economics a lot. But clearly, it's a safer place to be with natural gas, it's now, clearly, economically more attractive. We think we're going to get encouragement and support from our regulators to help push this along. And therefore, what we're providing to you here in terms of the number of counts, we think, is pretty reasonable. It could grow a little bit more than that, with the support that I've just been describing. But again, we don't want to get too excited. This is not, in my mind, the New England story, where you're going from oil to natural gas. That's bigger economics, bigger customer counts. For us, it's very important. It's a big deal in Michigan, but not to the scale that you've seen in terms of the growth that they have. This organic growth that we've got, this will supplement and puts us in a pretty good place. So we're real pleased with it, but careful on scale, when you're looking at what is happening in New England.

Andrew M. Weisel - Macquarie Research

Okay, that's good context. Just on the economics, I was referring to the economics to you. How -- what will be the earnings impact for your company, not for the customer?

Thomas J. Webb

I apologize, very good question. Just think of the capital investment involved. I -- let me just give you a ballpark. If you look at the number of hookups we've described, you could be talking in the neighborhood of $150 million, $160 million. And then as that comes into the rate base, just take our 10.3% return against that, and you can see the kind of impact that it can have on the company and still provide an attractive payback to our customers.

Operator

The next question comes from Paul Patterson of Glenrock Associates.

Paul Patterson - Glenrock Associates LLC

Again, just to sort of follow-up. The change -- just to make sure I understand this. The change in the forecast for sales growth is because of customer behavior driven by less than robust, previously -- previous expectations as to how they'd be responding to the economy at this point in time. Is that the way to think about it?

Thomas J. Webb

Yes. And then later on, a little bit of our conservatives. I don't want to overstate that, but you know us, we've lived through the hard times a decade ago. We are never going to get bold and optimistic about our planning assumptions.

Paul Patterson - Glenrock Associates LLC

Okay. But I mean -- but you guys are pretty -- you haven't gotten more conservative than you had 6 months ago, right?

Thomas J. Webb

No, no, no.

Paul Patterson - Glenrock Associates LLC

So it's basically -- it's -- the real driver should be basically because of this change in behavior that you guys hadn't expected? Is that...

Thomas J. Webb

That's right, exactly right. So we're seeing pretty good upticks on industrial, slows a little bit because you're building on year-to-year comps that are pretty high to start with, right, through the recovery. But on the residential and economic, on the commercial side, we're seeing the green shoots, as people like to call it and describe it. But we're still cautious that, that side's going to follow and is not robust yet. I've watched a lot of other locations around the country. And they're seeing sort of similar situations, and it quarter-to-quarter varies a little bit. But I think it's almost a national issue that we're facing in terms of that side of the recovery.

Paul Patterson - Glenrock Associates LLC

Sure. Now you also mentioned that there was -- I believe that you guys, just to make sure I understood this. 1% -- you guys would have 1% higher sales growth, if it wasn't for utility, energy optimization, energy-efficiency programs? Did I understand that correct?

Thomas J. Webb

You understood that exactly correct. And that 1% is about the same number if you were to look at residential side, because -- as you look at the classes. But overall, we would have about 1% more growth. So if we tell you, we're to be about 0.5% before that, we'd be at 1.5%, if you excluded the energy optimization.

Paul Patterson - Glenrock Associates LLC

These are only your efforts, not what might be happening -- this is people's individual initiative?

Thomas J. Webb

No, that's right. But sometimes that's hard to break out the 2, if somebody's screwing a new light bulb in. And we can take credit for that, we'd like to.

Paul Patterson - Glenrock Associates LLC

Okay. I got you. Now just finally. And I apologize, there was a discussion at the beginning of the call, and, of course, got little distracted with things going on about legislative and just policy initiatives in the state. And I, obviously, don't want you to repeat what you guys said there. But just, any specifics or bottom line takeaway that we should be thinking about in terms of what those policy initiatives will drive in terms of the opportunities specifically? Just quickly, I don't want you to, obviously, rehash what you just said. But, gee, I'm saying, just sort of like, bottom line takeaway, how should we think about that?

John G. Russell

I think the key -- this is John, the key is that I would look at 2013. I mentioned it's a year of fact gathering. And you've got a data-driven administration, a data-driven commission. And what they're trying to do is find out what is the -- what are the facts behind where we should go when the law, the energy law that was put into place in 2008, comes to sort of what I would call a natural sunset in 2015? At that point, we will have achieved our renewable energy targets. Do we move forward with that? Or do we keep them the same? Energy optimization would be the same. Retail open access, we have a hybrid system here, what do we do at that point? So this is going to be a multiyear process. It'll go through the legislature. I think it's important to note that the administration like -- seems to like what's going on today with our investments. The Senate, the people that run the Senate, and all of the members of the Senate, voted for the energy law in 2008, every single one of them. And most of the folks on the -- most of the Legislature on the House side, almost all of them have been supportive of the law. So we're in a pretty good position to continue what we have here. But the key is we need to look at what's beyond 2015, and that's what the focus of these efforts are.

Paul Patterson - Glenrock Associates LLC

Okay. So we'll stay tuned, I guess.

John G. Russell

Yes. I think that it's going to be a process.

Operator

The next question comes from Kevin Cole of Crédit Suisse.

Kevin Cole - Crédit Suisse AG, Research Division

I guess had a follow-up question to Paul's, actually. So, I guess, I'd like to ask a couple of high-level questions, just on general resource planning and need for new generation. And so, I see you've indicated that the system will need a potential of 1,000 to 1,500 megawatts, sort of -- that's going to be the shortfall in 2015 or '16? And to meet that shortfall, you're going to construct a 700-megawatt gas plant, leaving the system roughly 300 to 700 megawatts short. Is that not -- I recognize that your system will at least be tight in that timeframe. How are you and the commission contemplating, like the possible early retirement of Palisades in 2017, which I believe is a big resource for you? Out of state coal plant retirements that could change the general economics of importing power? And then, I guess, separately, do you have any other PPAs that could be subject to early retirements that could further tighten your system?

John G. Russell

Yes, great question. Let me you take that. We've got -- first of all, the coal plants, you're aware, we've got 7 small coal plants that we're looking to retire in the '15, '16 timeframe. That will take out about 1,000 megawatts. The PPA we talked about -- 2 major PPAs we have, one is with the MCV, and one is with Palisades. The Palisades question you raised, really, you need to talk to Entergy, because they're the ones that run Palisades. We have an agreement with them through 2022. They're obligated to us that if they do, if they no longer run Palisades, they need to supply power to us some way for 2 years, and then the contract would be eliminated. And the key is that what we need to do is find out from them -- you need to find out from them what they're actually going to do about the plant. But we assume the plant's going to continue to run and we'll have the power. Your point is right today. We have a shortfall in about 2017. This gas plant will make up for that, part of that gap that we have. But until 2017 -- this is an important piece that will come out in the CON process, we will have an excess of power, a glut of power on the market between now and 2017. I think you've seen the MISO results recently that talked about nearly 20% overcapacity in the area. So the timing of the plan is critical as we go forward.

Kevin Cole - Crédit Suisse AG, Research Division

Great. And then, I guess, now with -- I guess, a quick question on the tracker. As I guess that with last week's success by DTE Gas and their capital tracker, I guess, answers the ALJ question, I guess, it's certain of the commission lacks the authority to grant tracker. Can you spend a couple of moments, I guess, just talking about how you expect that tracker to work like, for example, will you get cash recovery and customer bills? Or will it be a recovery of deregulatory asset, what type of CapEx will be included in that mechanism? Will that CapEx may be preapproved and just kind of the duration of the tracker until it resets?

Thomas J. Webb

Sure. I will remind you again that this is an upside opportunity that's got nothing to do so much with the numbers but has to do with the process. So it would provide more certainty. What -- our request was over a 2-year period. It provides more certainty for that recovery over the 2-year period. And then avoids the need for us to be able to come in for an additional rate case. So it simplifies the process, it gives a little more certainty about the results, and it gives certainty when I say that, not only to you as investors, but to our customers, to know exactly what to expect. So the mechanisms, really, it sounds complicated when you read them, but it's pretty straightforward. It just says for the second year, you project the capital that you would need. We, the commission, will review it and authorize it. You can go ahead and charge for it at the beginning of that second year, self implement, if you will. But we reserve the right, as they should, to audit what was actually spent to make sure it was spent on the right things, and it was the proper amounts. So it gives full authority and full accountability for us, to the commission, to ensure that we've done no more than we should, no less than we should I suppose, too, but that we've done the right things. It just makes the whole process more efficient. And since our rate cases, largely, are all about capital investment to do things that we're catching up on for our customers, and to meet environmental requirements and so on, it just makes for a more effective, efficient process for everybody involved. There's no magic, doesn't make the numbers any bigger, any better, any different, it just makes the process much more stable and more predictable and more efficient to administer. So that's the way to think about it. And I just want to close the answer on this one with -- it's an upside, up for all those things I described. I still give it less than a 50-50 chance of success. But if it were to happen, it'll be terrific. So you're seeing other people get little pieces of it. So I think there's a desire to move in this direction. And sure, there are people who are nervous about change, so they'll find ways to say, well, it's not appropriate or not legal, or not whatever. We're not going to do anything or ask for anything that's not fully legal and fully proper to do.

Kevin Cole - Crédit Suisse AG, Research Division

And what percentage of CapEx will be covered in the tracker?

Thomas J. Webb

Well, in our proposal, for the electric side of the

business, it would be 100%. So it wouldn't be cherry picking this piece or that piece. It would say, "Here's your program, of your spending for the year," like "Here's your program for the power that you're going to buy and how you're going to do that per -- again, for a year, and then you go ahead and execute that. And to the extent that something is changed, the rules change, the laws change or something, explain that to us, because we'll have to agree to modifications." But if you spend what you said you were going to on the things that you said you were going to, and you get the sort of performance you said you were going to, then you'd have a complete tracker. But more on that, I think that's something that we'll work to over time. I wouldn't expect -- and maybe we will be fortunate in this case. But there's a lot of good important things happening in addition to that.

Kevin Cole - Crédit Suisse AG, Research Division

And do you expect this to be fully litigated? Or is this -- or do you think you can now get to a settlement part [indiscernible]?

Thomas J. Webb

Oh, if you're talking now about the General Electric rate case, I did make some comments earlier. And I was -- we were pleased to see that the commission scheduled the fact that there would be discussions around a settlement, and they followed up. They lead that effort. And they have had some discussions around the settlement. But that's all I could say, because, remember, all parties are involved in these sorts of things. And it's not our position to say what will or won't happen. We'll announce anything, if something were to happen to everybody at the point that it occurs.

Kevin Cole - Crédit Suisse AG, Research Division

If a settlement were to happen, when would it happen? Like what would be the time frame?

Thomas J. Webb

Well, it can't take too long, if it were to happen because you'd be deeper into the regular rate case. So if something were to happen in that arena, now you're asking me for what I'm looking around, and I'm giving you my personal estimate. I'd say it's something that would be within the period of a month, or even more likely see the rate case go through it's standard process. So again, don't please, we're not foreshadowing anything or trying to raise expectations. But we've been asked about it, because it was scheduled and because that some word got out about discussions. It will be a wonderful thing if it happened, but it's nothing that we're planning or counting on.

Operator

The next question comes from Paul Ridzon, KeyBanc.

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

When do you expect capital to start flowing on the gas plant, assuming it gets the approval?

John G. Russell

Little bit of capital in 2013, '14, as '14 is really when it begins to pick up.

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

You have a sense of magnitude in '14?

John G. Russell

Yes. About $100 million as its planned today. And then you go up -- beyond that, then you go up to about $350 million and then $250 million to complete it over the 3-year period. So the next 2 years, very small capital investment.

Operator

The next question comes from the line of Jonathan Arnold, Deutsche Bank.

Jonathan P. Arnold - Deutsche Bank AG, Research Division

Could you maybe just give us an update on where you said that coal plants on your coal piles versus normal? And what you're seeing versus last year, say, in first quarter and also now, in terms of dispatch?

Thomas J. Webb

I would call it substantial improvement. We -- you remember we were reporting to you a year ago, and I was wringing my hands at that point. Inventory coal piles were more -- double the level of what we would have expected them to be. And, obviously, that was a mild winter, and that was a lot of switching from coal to gas going on. And so, the economics were just going crazy. Well, our supply team did an outstanding job. And I think we talked about this in either the second or the third quarter, working with our suppliers on the rail side and other suppliers to figure out ways to optimize that, and to get better economics for our customers, and to not have to take so much of the coal that we were scheduled to take, so that we've been able to work those inventory levels down closer to normal levels. And what helped us get through that, and I have to admit, we're in a heck of a hot summer. If we hadn't had the real heat out there, that would've been tougher for us to make that progress. So I would -- I don't have the exact number in front of me for the inventory level. But I would tell you that we're closer to normal, and it's not a worry for us right now. What I would add is that we are continuing to work with our suppliers on this subject, because the -- there's been a fairly permanent shift in the general economics, and so we will work on the best way to optimize the supply from all of our fuel suppliers, but particularly on the coal side.

John G. Russell

And Jonathan, if I could just add one thing to that, what Tom said, just a walk-around number for you, anywhere from $2.50 for gas or $3 is where our western coal units begin to be in the money. So in other words, they're dispatched at or ahead of gas. So that has also helped in the first quarter too that the gas prices are well over that $3 level. And we're are dispatching the coal now as we usually have.

Thomas J. Webb

And the team just showed me, so I can share it with you. We're down from over 60-day supply a year ago, down in the 40-day zone, which is more the place we'd like to be.

Jonathan P. Arnold - Deutsche Bank AG, Research Division

Okay. Can -- any data points you can share on sort of capacity factors now versus then, John? Or anything like that, you have?

John G. Russell

Let me see if we have it here. I think we're up to 64% kind of year-to-date basis. And last year, we were at 56%.

Jonathan P. Arnold - Deutsche Bank AG, Research Division

And that's on the coal plants?

John G. Russell

The coal, yes. And that's kind of a normal run rate, Jonathan. That's tends to be what we normally run.

Jonathan P. Arnold - Deutsche Bank AG, Research Division

And on the other side, gas was and now is?

Thomas J. Webb

Well, the Zeeland factor -- Zeeland combined cycle utilization was, if I'm reading this right, about 22% in the first quarter. But you'd expect to see that come up a bit as we go through the year.

Jonathan P. Arnold - Deutsche Bank AG, Research Division

And how did that compare with Q1 of last year, Tom?

Thomas J. Webb

Well, it was higher last year in the 86% level, and then 88% in the second quarter. So you'd see a lot of shifting back.

Operator

The next question comes from the line of Kevin Fallon [ph], SIR Capital Management.

Unknown Analyst

I just wanted to clarify, on the certificate of need process, what's the threshold for the MPSC to make the decision? And in particular, are they obligated to consider other plants? Or is the entire opportunity to cover the net short going forward consumers' opportunity

John G. Russell

Yes, first of all, it would be dependent on what we submit. That threshold is over $500 million, so it has to be a significant investment, that's one of the thresholds. The other threshold is the timing that it needs to be completed in less than 1 year. It's about 9 months that it has to be completed. The key there though is that what we get into is that we have to show the need. So what we have to do is submit an integrated resource plan, which will show the need in 2017. And then on the second item that we have to look at is, is this plant the most competitive for customers? I'll tell you what's nice over the past year or 2, it's pretty clear that natural gas is the choice -- is the fuel choice in the future. A few years ago, I think you were familiar we're thinking about building a coal plant. That part of it, I think, will be pretty clear. But the competitive piece of it, you'll see other people intervene in this case that may be independent power producers today that have gas plants, in Zone 7, in MISO, that will probably claim that their plant built in the last boom back in '98, '99 are better than a plant built in 2013 or '14. So expect that to happen, that's part of the process. The reason we go through the process though is to get approval for the integrated resource plan, to get approval for that -- this plant, the fuel source. The plant is the right one. And we get assurances of recovery, as long as we stick to what we said we would do on the schedule and the cost.

Unknown Analyst

But you guys would feel pretty comfortable, obviously, going into that process, that your project would be able to provide greater benefits than an alternative?

John G. Russell

Absolutely. As I mentioned earlier, we have a site, we've got almost 300 acres on the site, gas is on the site, transmission is on the site, it doesn't require any kind of third-party intervention as far as bringing in cost to that site. We'll have the latest technology today. It'll be a combined cycle plant. There were a lot of plants that were built in Michigan in the late '90s that were peaking plants. So they were simple cycle plants. So there's those out there. That's not really what we're looking for here. This is going to be a base load unit to pick up, in part, for what we retire a mothball on the coal side of our fleet.

Unknown Analyst

That's great. And just one other thing. On the slide in the deck of 2013 sensitivities, when we look at the plus or minus 1% change in electric sales, that's excluding the E1 tariff sales, correct?

Thomas J. Webb

Oh, it doesn't matter if it's in or out, because there are no margin. So you could answer that question yes and no and still be right.

Operator

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

John G. Russell

Thank you. Let me wrap up today's call by saying we're off to a strong start in 2013 to deliver our 11th year of consistent financial performance. We appreciate your interest in CMS Energy and look forward to seeing many of you. And I think the next conference will be at and look forward to see you at, is the AGA Financial Conference in May. So I appreciate your support, and we'll see you soon. Thank you.

Operator

This concludes today's conference. We thank everyone for your participation.

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