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Andy Smith - Analyst JPMorgan Securities LLC

Tom Webb - EVP and CFO

CMS Energy Corporation (CMS) JPM SMid Cap Conference December 1, 2011 8:45 PM ET

Andy Smith

Good morning everybody. My name is Andy Smith. I’m the equity research analyst here at JPMorgan that covers the electric utilities. Thank you guys for joining us today. I’m joined by Tom Webb who’s the CFO of CMS Energy to talk about the company today. So I’ll just hand it over to Tom and let him get started.

Tom Webb

Andy, thanks very much. First of all thank all of you for coming. We appreciate your interest in our company. Your kind. And I want to introduce Laura Mountcastle who’s over in the side here. She’s the Treasurer of the company and runs our Investor Relations side of the business. So if you’ve got any really good questions after the meeting there’s a really good source right over there. But Andy, once again you’re generous having us here at your conference. We appreciate being here.

So if I can make this go forward, there we go; one click. I do want to remind everybody to be careful when looking at this disclosure statement. You know that there are risks and opportunities. Make sure to check our K and the follow-on Qs so you know all about those and understand the business and the risks that we have associated with our business.

So let me get right into it. What you’re probably most interested in and I’m delighted to tell you is that there’s really a pretty good investment consideration when you look at CMS Energy.

You can see it here on this slide, we have a dividend yield of about 4% and an earnings per share growth that we have consistently talked about for a long time and delivered on for a long time at 5% to 7%, an attractive total share on a return when you put those together.

Here’s what may be a little bit different from other utilities and other companies that you look at but particularly in our sector. We all talk about having good investment portfolios but ours is one that we constrain because we want to constrain it. And I’ll show you with the slide in a moment why.

But just to hit it right at the head we don’t want to be charging our customers too much. So we work hard to keep our base rate increases to about the level of inflation or less. So in real terms people are actually not paying much more for their power.

That advantage to us gives us a very transparent look at a lot of investment that’s needed that we’re catching up on candidly and in a manner that’s attractive to our customers which is vital if you want to be sustainable in your approach.

So the investment thesis here is not the one of today but it’s one that’s sustainable as we go into the future. We have a good regulatory environment and we’ll talk more about that too. I’ll, if you haven’t followed introduce you a little bit to our new chair at the Public Service Commission with the slide that’s coming up.

Stepping back a little bit, remember who we are. We’re in the magic hand, when I put it up like this. We’re in the Lower Peninsula of Michigan. We’re the fourth largest combined utility in the United States of America and you can see where some of our generation sites are and the color code there is the territories that we cover.

When you see the blue area that’s where we have gas; the yellow area, that’s where we have electric and then the green area is where we have electric and gas service territory together.

Now let’s take a look at this map because this particular map is a little different from the geography. This is what has made things work pretty well for us over the last almost decade and works well for us today and going into the future. Two little circles that come around that say it’s a pretty simple model for us.

We make investments. We’re able to turn those into approved investments. We’ve never had anything turned away in any serious fashion by our Public Service Commission. That leads to the rate increases which we try to keep low which leads to the operating cash flow and earnings growth as you see here in the 5% to 7% range or if you look at the last five years you can see that in the 7% range.

And then we have this nice little benefit. I don’t know if you want to call it earned or not but we have a lot of NOLs from our history that permit us to put a tax cap if you will on our business. So we’re not going to be paying taxes for several years. And it means that we don’t need to issue any new equity.

In fact we don’t plan to issue any new big blocks of equity. We do some small routine things through a continuous equity program and a drip program but nothing serious or substantial in nature. So what does that mean? All those earnings that I talked about go right to the bottom line.

You will hear other companies in utilities talk about well we don’t need to issue equity this year or we don’t need to issue equity maybe next year but you won’t hear many who can stand in front of you and say we don’t need to dilute our earnings for the next five years. That’s a nice spot for us to be in and the model has worked pretty nicely for us.

So what are the features of this model that make that so possible to continue? So I’ve put a little slide together here that talks about, to get those constant continued results we have first needed investment and the key there is the word needed.

The investment that we look at is not stuff that we would like to do. My gosh, there’s a lot of things we’d like to do. But this is what our customers really need. In fact some of it’s coming slower than they want like Smart Grid. We can’t afford to do it all at once and keep those base rate increases down. So we constrain the amount of investment but nevertheless it leads to that 5% to 7% earnings growth at the level we’re at.

We’ve got terrific enablers. We have an energy law that came into place at the end of 2008 that does all kinds of things I’ll show about in a moment. We have good supportive regulation. We have O&M plans that we keep flat to down. You don’t hear that as much in utilities. You hear that from a lot of companies, why shouldn’t we do that, a great way to keep our rates down too.

Our base rates run at less than the level of inflation. We can all debate what inflation is and where we are but roughly that level. We have those NOLs so we don’t have to dilute earnings and we have a great risk mitigation program.

So here’s the investment. I’m going to show you a couple of slides but for the sake of time I’m not going to take you through a lot of the detail of these slides. This pie is for the next five years and it shows you where that money goes.

So what’s in there? Distribution work that you have to do to take care of your customers. Generation work so upgrading plants that has to be done to make sure you can still deliver the power and deliver the gas. New customers, for hooking up new customers; it’s not a big number but you’d still need to put the new homes, the new businesses in place.

Environmental; that’s about 25% of our program. Everybody knows about the EPA. Everybody knows about Clean Air Clean Water. We don’t whine and complain about all that. We think those are things that need to be done. They’re all covered in this particular investment program which brings us into compliance for all of our major plants.

Smart Grid; you are all familiar with the Smart Grid in one fashion or another. This little wedge of the pie is probably a little smaller than what you see from others because we’re going to bring Smart Grid in a little slower than other people do to make sure the security works to make sure the meters we put in don’t have to be displaced as some utilities unfortunately had to do early in the game. We’re going to wait and be – I’m not even going to say be a fast follower. We believe in the program but we’re going to follow at a pace that is smart for our customers.

And then reliability and the rest of the investment. Let’s look at just in little bit of detail on a couple of these. Here’s the reliability side. We’re going to invest $800 million on the electric side of our business and $400 million on the gas side of our business and it’s to keep those poles, those transformers those pipes and things in place and working well and it’s what you have to do if you want to be safe and reliable.

Let’s take a look then at the renewable side. People are always interested in this. We have a standard in the state of Michigan that says we have to be at 10% renewables by the year 2015.

We were fortunate, we’re the largest renewable provider in the state of Michigan today and we were before the law came into place. We were about 4% renewables through hydro plants and bio plants and the like.

Here we see the bulk of our future is moving over with some new wind farms and the way the law works, for us to go from 4% to 10% we do half of it inside and put it into rate base, then we take half of it and we do it through PPAs. Most of all that is going to be done through wind.

The part that we’re building is two wind farms. One is completely zoned already into place in terms of all the work that needs to be done now we’re installing. That will take advantage of the tax credits.

And then the second wind farm will be over on the other side of the state on the thumb side with the first one over here on the, if you will, those who can’t see this as they’re listening on the webcast that were on the little finger side of the state by Lake Michigan. It’s near our Ludington Pumped Storage Station; great place to be. You got wind sitting next to a battery and we all know the benefits of that.

So again I’m happy to take more questions on any of these but to move quickly let me reinforce that point I made about needed investment. If I were to give you without exaggerating in any way the kind of investment that we could do over the next five years because our regulators are asking for it, customers directly and indirectly are asking for it, the feds are asking you to do things early, pipeline safety, whatever, we could be spending about $10 billion over the next five years. But we don’t. We don’t for a few reasons but the number one reason is if we spend $10 billion we would have to lift our base rates by somewhere around 4% a year.

I personally don’t think that’s sustainable. I don’t think that’s sustainable in any state in the country. You might be able to do it for a year or two or maybe three but you’re not going to be able to do that for five six and 10 years.

So we came up with our own kind of rule of thumb and it’s probably not perfect, so it says the $6.6 billion that we do choose to invest is a level where rates will only come up probably around 2% a little less than 2%. And we think that is a sustainable level. So you could argue that $6.6 billion could easily be $6.8 billion $6.2 billion $6.4 billion. It’s not a precise number but in that area we think is the right place to be.

The Public Service Commission, a quick look. Here are the three commissioners. The new commissioners at the top in the photos there, his name is John Quackenbush. Some of you may know him. He was the UBS buy-side analyst in this particular sector. He has experience in telecom; he has experience in our kinds of utilities.

He’s exactly what the Governor of Michigan was looking for when he was trying to find a new Public Service Commissioner to appoint. He wanted a business person who understood you and he wanted somebody that understood regulation. And through John he was able to get both. And it’s a hard combination to find.

Some states have pulled this off but they don’t think there’s a lot who’ve been able to do this. We’re delighted. John is already taken steps and actions and things to try to figure out how to be more efficient at the Commission and how to give a balance to the utilities that allowed them to be successful and for us to be very successful for our customers.

So watch this spot. There’ll be more things coming. Like we’re doing a self-implementation next week on our electric rate case and six months later there will be a rate order around that rate case and it’s kind of early for John right now but as we get through this rate case I think you’ll see more his influence on how the Commission should work.

I also want to compliment that person in the middle picture, former Chairman Orji. He’s the one that helped bring the law into place, that’s on the left side of this slide. We don’t have time today to go through all the detail of it but we have things like a file-and-implement method.

We have forward test years now that we didn’t have before. We have a renewable standard of 10% by 2015. We have decoupling. We have in the electric business today decoupling for everything which means energy efficiency, the economy, weather 100%.

On the gas side we have all that except not for weather and so the commission is feeling their way through on what’s the right way to do that to help companies like ours when we run into tough economic times and also to help us on energy efficiency so that we’re big promoters of more and more energy efficiency. So it was a wonderful commission we’ve had and a great commission as we go forward and watch that spot; they’ll stand for themselves in the future cases.

O&M cost control. Our only comment here you can see our history. We used to pass through a lot of cost increases. They all seem good, they seem sound, they seem legitimate and they got approved by the Public Service Commission but we on our own said we owe it to our customers who in many cases are having to cut their cost and keep them flat to down. We should do the same thing.

So going forward for the next five years as you see in that sliver of a bar chart, we say 0.1% and we aren’t trying to be cute. That’s just the way the math work. That’s exactly how we ended up. But as we get in to each year we’ll work hard to make that a negative number if we can.

And you can see some of the cost reduction examples on the right side of the slide that give you a feel for the sorts of things that we have already done and there’s more of that to come.

So it isn’t just talk. You are going to give merits to employees. You are going to do things that cost money on the O&M side of the business. It’s our goal to figure out how to offset those costs and that’s what we do.

That leads to this slide which shows you well, what are you doing to take care of your customers? If you don’t manage that side of the business you have nothing. And so, again I won’t go through the list of items that we show there that are important initiatives to us to take care of our customers but I will tell you number one is price.

You’d like to say number one is reliability but number one for our customers is typically price and reliability is right behind it. So you have to do both. And here’s our goal: keep those base rate increases down and then that gives you a wonderful benefit to take care of your customers.

The economy, everybody wants to know how sales are going. It was a tough recession for us in Michigan. It was a tough recession of us in the United States. It was a tough recession for us in the world.

So if you look here, it actually wasn’t as bad as the recession that we went through in the ‘80s which stunned me because I saw a lot of similarities and a lot of dissimilarities but the numbers seem to work out the same.

Back in the early ‘80s for those of you who can remember, back half of ‘79, ‘80, ‘81, ‘82 we had a double-dip recession in the U.S. It hit the auto industry hard, it hit our state hard, it hit us hard. Our sales dropped the most they did over a three year period ever that we have on recorded times of 7%.

In this recession our sales dropped on the electric side of the business, weather adjusted 6%. The recovery is slower though and you can see that in the numbers up there. So even though the first two years after the early ‘80s recession we were up 2% or so or no more than that as you can see here, we’ve only been up a portion of that so far. So it is a more difficult recovery. There’s no question about that.

On the right side of the slide you can see what’s happening. We’ve had a nice 2% recovery last year. We’re looking at 1.5% or so this year and maybe roughly 2% next year. Behind that the way it goes for us, if you don’t follow us carefully, which is true for most utilities, you had a big industrial recovery. So our sales on the industrial customers was up 10% and then a little less than that this year. Then residential follows that. Residential is just now coming around and commercial usually follows that and that’s been flat. So expect that to start to come around next year.

The industrial side of our business, our industrial customers are back to pre-recession levels already. The overall business for us should be back to pre-recession levels next year. So we’re making some nice progress there.

Now a couple more points before I open it up for questions. Let me talk about liquidity. Why are we so focused on this? All the obvious reasons that you know that I’ll try to avoid going through now because they are what you would guess but we keep a liquidity level that’s thick, thicker than our peers.

So if I give you a measure, at this point in time we show for September 30, we keep a liquidity level that’s about 40% of our market cap. Our peers are a little below 20% of the market cap on average. And why do we do that? Because our parent debt is a little bit higher than what our peers are. We’re in that $2 billion range.

Eventually we will keep that flat and bring that down over time, grow ourselves out of that and we've brought it down substantially over the last few years to what I’d call a BB-plus kind of credit rating.

But for us to invest more in bringing that debt down as opposed to investing in the utility is a difficult logic to find. Why do I say that? If we bring the debt down further that’s a 4% return. If we invest in utility, that’s a 10.5% return, pretty easy call to do.

So therefore we keep this thick level of liquidity and we keep refinancing any of that parent debt one and two years in advance so we don’t have the chance for a liquidity crisis in any way and you can see the parent maturity shown there but by the way on that chart it shows 2012 still open but we’ve closed out that debt as well. That’s gone.

So here’s our cash flow. This is the other reason why the rating agencies like the plan that we’re on is because by investing in the utility in the manner that we’re doing, we’re taking the top line on this chart, operating cash flow and we’re growing it by about $100 million each and every year.

So the actual cash flow capacity from the company is growing substantially each and every year. So when the investment which is shown here in green and yellow starts to come back or reduce just a little bit by choice or by getting through our major investment programs there’s a whole lot of cash flow to pour right back in and either reduce debt, increase dividends and all that sort of stuff.

And then under the increasing dividend, I know everybody is interested; here’s that earnings per share projection where we tell you we expect to grow our earnings by about 5% to 7% a year and we have a dividend yield of about 4%. You can see here the growth restoration if you will of the dividend.

My little story is that I like to always tell, as my last earnings call I did with Kellogg Company where I was the CFO there, I remember saying that, and this is the 43rd year of increasing the dividend.

Now I may not live long enough to tell that story here but it won’t be because we aren’t trying to do it each and every year. We believe that that is what we owe you, a competitive dividend that we’re able to grow with earnings as we go through time.

So that’s all part of the formula that we think is critical. If you look at this slide you can see that history shows that we’ve stayed on that course. We haven’t missed a beat. You may say whoop, what’s the little bump that we have there -- some of you might not know -- that little drop in earnings and then coming right back to the growth plane, not just resetting was when we sold the rest of our international businesses.

We took those proceeds. We put a portion of that into the utility so you didn’t recognize, back in those days you didn’t recognize that earnings growth until the following year. And with the rest of that, we put into major parent debt reductions and we only got half a year of interest rate savings.

So we knew to do the restructuring. We had to come down. We refused to accept the idea that we would reset and start from there. So we did it in a fashion that we came right back up to the growth trajectory and we have stayed on that for nine years and we plan to do that as we can in the future.

Last slide, same slide from the first. We think there is a formula here that is interesting. I’m not here to sell to you CMS Energy today. So what we've been doing for the last few minutes? But I’m here to try to provide transparency so that you can make decisions about is this a good investment for you, your firms or whatever, or not and understand where we’re going.

The most important thing, we’ve learned our lesson a decade ago, that we have to earn our stripes with you, with our customers, with our regulators with our employees candidly. We’ve got to earn our life each and every day. And if you ever hear us talking about it’s gravy train, this great model that looks like it’ll work really well is on automation, I don’t know why I’m here, it’s just going to happen, then sell because at that point you know we’re not working hard enough to make sure that this simple model delivers for you each and every day.

And on that I’ll stop and open it up for questions. Andy I hope I didn’t take too long.

Question-and-Answer Session

Andy Smith

No I think you’re fine. We ran off a couple of seconds but no problems. So what I going to do is open up for Q&A in a second and I thought I would kick off with a couple of questions and then we’ll open it up to the room. There should be some microphones coming around.

I think the one question I get all the time from investors is the Michigan economy right? And how does CMS position itself in that versus, obviously everybody worries about autos and everything that goes on there. If you can maybe expand a bit on how you guys have limited exposure to autos, decoupling mechanisms and all the things that go on in Michigan that make that risk a less of a risk than I think some people worry about.

Thomas Webb

That is a great question. We talk a lot about autos and I talk about autos all the time because I spent my first 22 years in business with Ford Motor Company. And I stay very close to the folks there today. Lewis Booth and I grew up together. He’s the CFO over at Ford and Bill Ford is a good, good friend. So I stay close to see what the pulse is for them and how things are going and I find that as my own view a reasonable leading indicator, maybe not a long-term indicator but a good indicator of the economy.

So I talk about that more as one of the tools to understand how things are going on in Michigan. However if you look at the slide that I put back up for you, you can see that we had a difficult recession back in the early ‘80s. Part of that was because we were more automotive centric then than we are today. Our margins depending on how good the autos are doing in any particular year, make up maybe 3% or 4% of our business. We like most utilities are very diversified. So the autos are a small part.

And when I say autos what does that mean because it’s a good question. I mean the original manufacturers and their Tier-1 suppliers; that’s 3% or 4% of our business. I don’t mean the second tier and third tier suppliers who may supply the suppliers or the pencil makers who may also supply the autos, that kind of thing I don’t mean that. And because that adds on maybe – we don’t even know how much that is because it’s usually part of the business of somebody that’s in Michigan. So the autos are important to us but they’re a very small part. They’re just a good indicator.

The other thing to keep in mind is as Michigan goes, we go. But Michigan has been very good with the energy law that came into place in the latter part of 2008 to provide us with tools like decoupling. So I do not want you to think that we don’t care if the economy goes bad or the economy booms because it’s decoupled and we get it all from our customers in any way. That would be a huge mistake to think that way.

We are protected. We are shielded. If the economy falls today it doesn’t hurt us, it doesn’t hurt our earnings. On the same hand if it really booms it doesn’t help us but we still get to earn our authorized ROE and we still get to grow at 5% to 7% on earnings. That’s a great place to be.

So you may say why did you say you care for that? We care because it’s our customers and we have to work that much harder. If we’re spreading more of our cost around fewer customers, because customers are having a hard time then that to us is not a sustainable program and we have to find ways to bring our cost down to help them as they go through tough times as well.

So it’s vital and important to us but we’re quite shielded from it in the near term and we’re shielded to it from our diversity that we have across the state.

Andy Smith

Great. Perfect. Very good. And then I guess the second question I thought would be interesting for the audience is to maybe talk a little bit about how there has been a very meaningful shift in Michigan with the new energy law, real focus from the governor on business. Maybe just a little bit of kind of the history and the background of what makes that such a solid base for you guys to work from and what looks like it’s a pretty permanent situation.

Thomas Webb

Right. And I’d pretty exited, that's terrific. Thank you for asking all these questions that go right with the slides that we have here. This slide shows the energy law. I won’t go through it in detail. What I will do is describe how did we get there.

The Chairman of the Public Service Commission prior to Chairman Orji, the fellow in the middle who is the now the prior commissioner. His name was Peter Lark, this prior chairman. He believes you should have a fair ROE and the ability to earn it. But he always used to say and people never listen to this part but if you over-earn it I’ll hunt you down like a dog. So he was very serious about you ought to have the chance to earn it but not over-earn it, don’t abuse it.

But we were slow. Rate cases could take 18 months, two years and there was a lot of lag. Part of this new energy law that came into place in the end of 2008 is the credit of Chairman Orji, the just prior chairman who is still with us today because he pushed to take that lag out. He said we ought to be able to do rate cases in 12 months and we ought to commit to it.

If we can’t get it done in 12 months what the law says is what you ask for becomes automatic. We never expect that to happen. But we do expect now that the Commission will find a way to always do that.

Now there are many other aspects of the law that I could brag about Orji but I won’t because now I’m going to take you to the next step.

So the new governor comes in and he says, I like this law; this is a very good energy law, but I still think you guys are too slow on your rate cases. It’s too bureaucratic. You have a lot of things that you need to get done.

So he says I want to get a chairman in there who understands business. Voila, he brings in John Quackenbush who’s only been there about 30 days now. But he in partnership with Orji and with Greg White, the other commissioner here those three commissioners are now working to take it to another level where they’re trying to become more efficient.

Now this is not a given, but he’s even commented on maybe we should do rate cases in six months. Then you won’t even need self-implementation which today is permitted six months after a request for a rate case, which is phenomenal.

So he’ll look to speed the process and be more efficient, do things like that and he wants to send a signal, as did Chairman Orji that Michigan is a good place to invest.

So even though ROEs may be coming down a little bit as we go through time, with interest rates and some risk factors coming down, he’ll look to say to you if the average across the U.S. or the typical ROE is -- and you pick a number, I’m just going to throw something out -- let’s just say 10%. I’m going to try to give you something higher than that which will be a premium to send a message to all investors that Michigan is a good place to invest in.

That’s a pretty nice position to have and we’re proud to have that relationship with our Commission. Is everything perfect? No because we’re always working at ways to do things better and they’ll have ideas and we welcome those and work on that with them.

Andy Smith

Perfect. Thanks Tom. Let me see if there’s any questions in the room?

Unidentified Analyst

Could you please tell us about your pension liabilities and what they are and what you’re doing about it?

Thomas Webb

Yes. Every time the market goes down the questions come out, what about your pension liabilities? We are funded to the way the law provides for the funding.

So we keep our funding at about 80% and that meets all the limits that we need to do but we treat our pension obligation just like a debt maturity. And you say what, it’s an obligation that we have to be “fully funded” and I put quotes around it because we fund to the level of the law and you’ll see what we did.

The best way for me to describe the actions on how we do that; we funded ahead of the game last year because, candidly bonus depreciation was there. There were tools available to us that provided some cash that we didn’t think that we were going to have and a portion of that we put into some prefunding.

Now we did that to stay ahead on our obligations, just like the parent debt where I tell you about. We prefund that a year or two in advance. So to prefund the pension is not a bad thing and you get benefits from that. When you do that you get that earnings that flows through but we don’t worry too much about it.

You’ve got my philosophy now on how we prefund and we may be looking at doing that again this year. We don’t need to put more money in this year. But we might particularly if there’s another round of bonus depreciation that’s unclear on what will happen there.

But our philosophy is to meet those obligations, stay ahead of the game, stay “fully funded”, now that’s at that 80% level so that it’s not an obligation that will catch us and create problems for us and it’s our conservative nature.

I’ve been accused many times of belt, suspenders and sometimes skyhook. It’s worked well for us on things like pension fundings, on things like thick liquidity, on things like paying your debt maturities for your parent a year or two years in advance, all those sort of things. So that’s our approach. I hope that helps.

Unidentified Analyst

(inaudible) pension liability.

Thomas Webb

What is the total pension fund? $1 billion, yes. Thank you. Great question.

Andy Smith

Any other questions in the room?

Unidentified Analyst

Hi thanks. You showed the slide with the 2% or a little less than 2% expected rate base growth less than inflation but also the potential for 4% that you could do. Do you have some expectation that maybe it requires a better economy, that some of that investment will happen based on regulatory events that you know about?

Thomas Webb

I do have an expectation. The answer is no because and I want you to follow up on this if I missed the question but as I understood it, why don’t we just pull ahead or spend more than $6.6 billion over the next five years and get closer to that $10 billion let’s say.

And I mentioned to you, showing this slide here that we were trying to keep our base rate increases down and you’re thinking wait a minute. I’m an investor. Spend the entire $10 billion and get the 4%. Your earnings are going to grow a little faster and your cash flow is going to grow faster and you’re going to be better off. I’m absolutely convinced that’s not a sustainable place to be. No one tells us that. We just think it, believe it.

So let’s say the Federal Regulations came in on environmental and they’re way tougher than what we all know they are today. So we have to spend more than $1.5 billion, which is the amount we have in our plan now over the next five years, so $2 billion.

Here’s how we would react. Instead of just increasing the base rate increases to our customers we’d look for ways to defer other investment, smooth it out and we’d still limit spending all the money, but we're just trying to stretch it out over time so that we can do a $6.6 billion kind of level of investment on a rolling basis for five years and probably grow a little bit as you go through time right?

But continue that pace, where that will drive our earnings up 5% to 7% every year, allow us to earn our authorized ROEs and keep our base rate increases down so our customers can say, and inflation is different for everybody right? But if inflation were simple for everybody then they could all say, well we didn’t have any real increases. We didn’t have any increases, net of inflation and that’s a much better place for folks to be. They’d rather say zero so it’s negative but they work with us when they see what those investments are.

People want clean air. They want clean water. They want reliability. They want the things we’re doing. Not everybody but most people want Smart Grid but we’re going to give it to them a little later than they want but we are going to give it to them. So is that...

Unidentified Analyst

Okay.

Thomas Webb

Yes, thank you. Great question.

Andy Smith

Any other questions in the room? Well I’ll go ahead and ask another question following on your belt suspenders and skyhook. We’ve been talking about dividend policy. What do you think, obviously management makes a recommendation to the board and the board makes its decision but what do you think are the key factors that the management team weighs and then that board weighs in deciding how to look at the dividend in context of what appears to be a pretty conservative approach for the rest of the business?

Thomas Webb

I think I got to kind of my personal heart and soul when I told my Kellogg story about, I believe as a utility, more so than a food company, but certainly a utility should have a competitive dividend and it should be growing its earnings and growing its dividend at that level. The decision is up to our board and we do take a recommendation and we do discuss it during the course of the year and we take the recommendation to the board. Our practice has been but not always to do something in January.

For instance a year-and-a-half ago we accelerated it to August. We look at all the things you’d expect us to look at. We look carefully at our cash flow so therefore the affordability. We look carefully at where our peers are going. We look carefully at the level of investment which is very big for us and how it affects our cash flow. We look carefully at what your expectations are.

But we underscore one very important thing. We know we owe a good dividend and we know it’s short of being fully competitive today and we want to get it back to that level and then continue to grow it.

So the question for us is only the timing when we do these evaluations, on how fast you make that last step in the growth and I can tell you we’re very serious about it but I cannot tell you today what our decision will be, what our recommendation and therefore the board decision will also be when we get into the New Year. But we’ll look hard at it and we’ve got the right mindset about it because the mindset is, don’t ever have to turn back.

We’ve done that in our history and we don’t want to do that and I think you see at least for a decade we’ve been very clear on our approach. And I know while this management team and this board is in place you’ll see no change. I can’t predict 20 years from now but I think the success of what we do and the success for you of what we do with our dividend approach is what will sustain this for a long time.

Andy Smith

Perfect. Any other questions in the room? Alright, we’ve got just a couple minutes left. So I think with that I’ll just wrap it up and say thanks for your time.

Thomas Webb

I’m going to turn right around and say thank you very much. It’s always good to be here at this conference with you, Andy. You’ve had great coverage of us in terms of making it transparent on what we’re doing. We welcome that and good luck to you all over the holidays.

Andy Smith

Thank you.

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