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CMS Energy Corp. (NYSE:CMS)

Q2 2012 Earnings Call

July 26, 2012 09:00 am ET

Executives

Glenn Barba - VP, Controller & CAO

John Russell - President & CEO

Tom Webb - EVP & CFO

Analysts

Kevin Cole - Credit Suisse

Naaz Khumawala - Bank of America Merrill Lynch

Paul Ridzon - KeyBanc

Ali Agha - SunTrust

Brian Russo - Ladenburg Thalmann

Mark Barnett - Morningstar

Andrew Weisel - Macquarie Capital

Operator

Good morning everyone, and welcome to the CMS Energy 2012 second quarter results and outlook call. This call is being recorded. Just a reminder, there will be a rebroadcast of this conference call today, beginning at noon Eastern time running through August 3. This presentation is also being webcast and is available on CMS Energy's website in the Investor Relations section.

At this time, I would like to turn the call over to Mr. Glenn Barba, Vice President, Controller and Chief Accounting Officer. Please go ahead, sir.

Glenn 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 press 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 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 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 each of these measures to the most directly comparable GAAP measures is included in the appendix and posted in the Investor section of our website.

CMS Energy provides financial results, both on a 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 2012.

The company is not able to estimate the impact of these matters and is not providing reported earnings guidance.

Now, I’ll turn the call over to John.

John Russell

Thanks, Glenn. And good morning, everyone. Thank you for joining us today on our second 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 the remainder of the year. Then as usual, we’ll close with Q&A.

Second quarter adjusted EPS was $0.40 per share, up $0.14 from last year. Strong second quarter results give us the opportunity to reinvest back into the system to further improve reliability and customer service. Year-to-date results of $0.77 a share keeps us firmly on track to achieve our full-year adjusted EPS guidance of $1.52 to $1.55 a share.

In June, the Michigan Public Service Commission authorized us to increase our electric rates by $118 million and our gas rates by $16 million. A significant portion of the amount authorized reflects our investment in distribution and generation reliability, environmental compliance and technology.

We’ve experienced extremely hot weather in Michigan during the past two months. We set a record peak load for June and broke the all-time record on July 17, beating the previous mark by 2% set in July of 2011.

During this heat wave, our system performed very well and I’ll give you more details of that in a minute and later Tom will discuss the financial impacts from the weather and the recovery of the Michigan economy.

As you know, we settled the gas rate case for the second consecutive time. In part due to the relatively small size of the request. The larger electric rate case was approved at $118 million in line with the amount we self implemented. This case was primarily a recovery of investment costs representing 111% of the final order and lower operating cost, down $38 million from the prior order.

The Commission also adopted our sales forecast to reflect the 10% level of retail open access sales, up from 4% in prior rates. This adjustment increased our gross margin by $48 million. The commission approved a 10.3% ROE for both gas and electric.

Over the past few months, our system has been tested by the hot weather and it performed very well given the extreme conditions. On average, we have 10 days a year with temperatures of 90 degrees or warmer. So far this year, we’ve had 26 days with temperatures over 90 degrees and two days over 100 degrees. 10 of these days were in the second quarter, contributing $0.03 of earnings to the electric business.

For the second consecutive year, we set a new peak load record. This year’s peak load was over 9000 megawatts surpassing the previous mark set last year in July by 2%. The trend line shows that peak demand has grown by 200 megawatts since 2006.

Weather was a key factor as it was last year, but a growing economy also contributed. Weather adjusted sales are up 5% over the past three years led by industrial sales and are expected to grow about 1% annually over the next five years.

To meet the growing demand, we have invested over $640 million to increase capacity and improve reliability over the past five years and we plan to invest another 155 million this year. Continued investments are necessary to meet the future peak loads, I also anticipate the need for additional generation capacity in a few years from now due to the load growth and the environmental rules affecting our coal fleet.

Our system has performed, has improved significantly since 2006. Our peak load increased by 3% and a number of customer interruptions declined by 63%. On this year’s peak day, fewer than 1% of our customers had their service interrupted due to the heat and 99.9% of those customers had their power restored within eight hours. The investments we have made to harden this system and improve operations demonstrate their full value in times like these.

Changing gears, Michigan voters will likely face a lengthy ballot in November. Right now there are seven proposed constitutional amendments expected to be on the ballot. Among them is a proposal to require 25% of the state’s electricity to come from renewable sources by 2025. That proposal also would put a 1% cap on annual rate increases to pay for meeting that standard.

It would cost an estimated $12 billion for Michigan Utilities to meet the standard. A broad bipartisan coalition has been formed to oppose this reckless proposal. That coalition includes labor unions, utilities, businesses, elected officials and community leaders. Consumers Energy and the Utility Workers Union of America which represents about half of our employees are members of that coalition.

Many of you are aware of the Retail Open Access Legislation that was introduced in Michigan on March 21st to raise the cap. On June 13, the chairman of the House Energy and Technology Committee introduced legislation to return to full regulation. The chairman isn't planning on holding hearings planning on either bill.

The success of our business strategy depends on delivering reliable energy which provides value to our customers at an affordable price. A key to providing an affordable price is to continuously manage our cost. Over the past three yeas, we have restructured the business, improved safety, productivity and employee engagement while reducing the workforce by 7%. These improvements help us achieve our self-imposed restrictions to keep base rate at or below the rate of inflation for the next five years. Now, let me turn the call over to Tom to talk about the results for the quarter.

Tom Webb

Thank John. We had a solid second quarter and we had good operating performance, constructive regulation and helpful weather. Excluding the upfront cost of our successful employee restructuring, adjusted earnings for the second quarter was $0.40 a share, that's up $0.14 or as John mentioned 54% from last year. This included $0.03 for favorable warm weather in June.

Now please remember in the first quarter call, we noted that mild weather hurt us $0.13 a share. We identified recovery actions to fully offset the $0.13 hurt and it is all done. Our first half results are consequently are $0.77 and that's equal to last year. The improvement in this quarter compared with last year reflects planned rate improvements, cost reductions, the continuing economic rebound in our service territory and a better year to year favorable weather.

Now here's a simple overview of the year so far. We hope you will find it’s a good illustration of our philosophy around meeting our commitments both to our customers and to you our investors.

In the first quarter, earnings were pummeled by mild weather erasing $0.13 of EPS. We not only committed to recover it all we shared with you the line by line detail to do just that. Some of the recovery was non-utility and a good portion came from natural offsets like lower financing cost in the lower than expected interest rate environment and lower customer bad debts during the mild winter weather where we had lower customer usage.

Recently, the hot summer including a bid in June and a lot so far in July provided $0.13 of good news. We have no plan to change any of the recovery actions and we are already reinvesting some of the good news to help our customers.

We've increased tree trimming, we've pulled ahead some generation maintenance and we've accelerated hardening the system. We are looking at even more opportunities to improve this reliability as we go forward. Our customers will be better off and we will deliver our earnings growth commitment.

There is a different view of the 2012 weather impact shown on the left, recovery actions to offset the poor weather in the first quarter and that's in the top right green box. And examples of reinvestments in reliability that are underway to use some of this hot summer weather today and that's in the bottom right box in yellow.

If conditions provide further flexibility, we will add more customer investments. We are just kind of old fashioned about delivering our financial commitments and maximizing the benefits for our customers. So our full year earnings guidance remains unchanged at 5% to 7% growth or $1.52 to $1.55 a share.

Now, this is our traditional waterfall update for the first half now behind us in the second half ahead. Winter weather was a big [hurt] that's dramatically offset this summer. For banking some of the cost savings associated with offsetting the unfavorable mild weather and we are reinvesting gains from the summer heat wave and customer reliability and that's good news for everybody.

And the economy in Michigan continues its rebound at a pace that's a step or two faster than the US economy. We are bothered by national and global uncertainty but so far the recovery in Michigan continues fueled by constructive more supportive state policies and the sound 2008 energy law.

So far in the first half, electric weather adjusted sales are up 3% and you can see that in the bottom right hand corner of this slide in a little gray area. Now that's 3% in our service territory. Also industrial sales are up 7.5% and that's on tough comps from strong performance last year.

Residential sales are up 0.5 a point and commercial sales were up 1%. I know, I know our full year forecast is up 2%. I can hear you guys now. That's in spite of our actual experience of 3% so far this year. We plan conservatively. Further to understand the economy just a bit better if we exclude our energy efficiency work, it adds a full point to sales.

So as you can see here, our sales growth of 5% over the last three years would be about 8% excluding energy efficiencies. And that gives you a clear picture of the economic growth compared to the past.

Now looking a bit further out, it's clear that we will need more utility generation capacity especially if the economy continues to do better than expected in our service territory. If we’re not able to economically upgrade our small classic coal plants, we will need to meet growth requirements without that 950 megawatts of capacity.

Our renewable expansion in wind firms and Ludington pump storage plants will not be enough. Its clear gas generation will be the fuel of choice. Our options will include BBAs, purchasing assets and are building new capacity.

Our challenge is to address this need and all the other investment demands without pushing investments beyond our self composed limit that keeps our base customer rates below inflation. That’s a tall order. And the one we continue to balance.

Adding or dropping $500 million over the next five year period impact space rates around 40 to 50 basis points.

Now this of course depends on the benefits associated with that investment. The $6.6 billion of investment can be closer to six or maybe seven but we think at $6.5 billion it's about the right size.

Now if you can see on this slide, our plants keep electric and gas base rate increases shown in blue, well below inflation. Over the next five years, electric base rates are expected to be up about 1% and that’s a third level of the last few years. Gas base rates would be up less than 1% and that’s way lower than in the past.

Total electric rates however are up or expected to be up about 3% a year on average over the next five years. We’re working on reducing fuel cost to hold down total electric rates and you’ll hear a lot more about this in the future.

Total gas rates are expected to be down sharply over the next few years and about 2% on average over the next five years.

A sample of cost reductions to help keep rates down shown on the right box, we reduced the renewable surcharge by $57 million or 85% by negotiating attractive construction contracts and capturing tax benefits.

As John mentioned, we have reduced headcount over the last three years by 7% and at the same time increased employee engagement by 4% to first quarter peer levels. We introduced sharing of healthcare costs to 70% company, 30% employees and that saves $30 million a year.

Labor agreements provide for industry leading work practices more in line with what our customers expect. Productivity is up 35% over the last five years and we burned 97% less coals saving our customers $250 million a year. Please note, that these cost savings are designed carefully in a manner to avoid adversely impacting customer service or reliability.

According to all of our (inaudible) and associates, our O&M costs of first quarter among peers and our overhead cost near top docile. We still believe that additional opportunities are abundant, our O&M costs are planned to be down about 4% in this year alone.

Our liquidity remain strong and by design we keep a thicker level of liquidity than our peers with prefund parent debt maturities by a year or two in advance, and we sustain a robust backup plan because we keep a level of parent debt that’s just a bit higher than others.

We deploy our CapEx in utility investments with an after-tax return above 10% instead of retiring more debt at a 3% return. We appreciate and deeply respect the positive outlook that the rating agencies maintain.

And here is our cash flow for the parent and the utility. These continue at healthy levels. For the rest of this year, our profit and cash flow sensitivities are less risky than anywhere at the beginning of the year.

This reflects having important rate cases behind us for the year and weather turning positively in our favor, not to mention the economic recovery that continues to out pace even our forecast.

We are on target for all of our financial report card measures. This is a good reflection of the health of our underlying business both operationally and cooperatively from a regulatory standpoint. We hope you find our performance unless you sleep at night and as always we thank you for joining us today and we thank you for your interest in the company. So John and I would be pleased now to take any of your questions.

Question-and-Answer Session

Operator

Thank you very much Mr. Webb the question and answer session will be conducted electronically. (Operator Instructions) Our first question comes from the line of Jonathan Arnold with Deutsche Bank. Please proceed.

Operator

Jonathan may be on mute. All right, we will move to our next question. Our next question comes from the line of Kevin Cole with Credit Suisse.

Kevin Cole - Credit Suisse

Can you help me think through how long you possibly stay outside of filing the rate case for the electric and the gas side? And this 3% labor reduction which I see from the more expensive folks looking for early retirement and so just kind of pure headroom to the best rate case enabling you to stay into, I guess staying on, I guess a longer so?

John Russell

Yeah, a little bit, Kevin let me take this one; maybe a little bit, but our plan is still pretty consistent is that all of the cost reductions we are doing are to keep our rates down, but also at the same time we are making significant capital investments which we need to get recovery for. So I wouldn't expect on the electric side it will be out much longer; this just helps with headroom. And on the gas side I think you know as part of the gas settlement, we committed stay out until later this year.

Kevin Cole - Credit Suisse

And so you will file on the electric side by year end, or early next year?

John Russell

This year.

Kevin Cole - Credit Suisse

This year okay.

Tom Webb

Just for clarity, gas we will file just toward the end of the year and electric I think you should watch this spot, we will come back in again this year, all around that CapEx recovery and we will look for opportunities to extend that, but right now our plan is our annual rate case.

Kevin Cole - Credit Suisse

Okay. And then I guess with the change in kind of decoupling; do you expect for decoupling is a possibility to come back again given I guess the recent weather volatility which demonstrates the need for full decoupling or if it comes back to retracting mechanism that would be largely focused just on energy efficiency?

John Russell

Well as you know Kevin the way its set up because of the courts on the DPE case is that the decoupling has basically ended and I don't think there's going to be any pursuit of that in the future to the Supreme Court. I think you know our philosophy though is that we would like to see decoupling or sales trackers of some sort.

Based on the litigation that occurred in the court ruling there have to be some kind of sales tracker, but even though we benefited from the weather this summer, obviously we are doing well this summer, we didn't benefit from the weather this winter because it was so warm.

So I think the type of business that we are, the consistency and the tracking of sales would be the right approach to do, but right now what we have is simply the tracking of the energy optimization.

Operator

Our next question comes from the line of Naaz Khumawala with Bank of America Merrill Lynch. Please proceed.

Naaz Khumawala - Bank of America Merrill Lynch

Just a couple pf quick questions; one in terms of you know I think you talked about the record peak and MISO and on your system. I think you alluded to that in the call that you guys do have some plans that you are considering now stalling or retiring; can you give me more color on whether you are trying to look for in elemental controls on that or what type of new generation you want to build, I guess you still have the air permit for the coal plant?

John Russell

Yeah, let me go through it; I mean we’ve talked about the seven classes that’s smaller, older coal fired units. We decided to moss all those which we can under the MISO rules for three years and bring them back if we need to, but if we did we would have to have full controls on those units. So I don’t that’s likely based on what I see the EPA doing in the near term.

However, the future really we think is dependent on natural gas generation; I think the fracking is the game changer; going forward we are building, just making clear we talked a little bit about is that we are building renewables now; we are upgrading Ludington pump storage. It’s important for us to keep a balance portfolio which is both, the coal, the renewable as well as the natural gas. But my expectation is to fill this void we’re going to have in the future it will be natural gas generation.

Naaz Khumawala - Bank of America Merrill Lynch

And then, sorry one more question; I think you’ve alluded to both of the house bills that are, I am talking about [Trace Kappaman] the governor is supposed to do an energy feat in the fall and I think you are also looking at choice (inaudible) kind of where the thought is on and what are the possibilities and if you can just give us more information on that?

Tom Webb

Yeah, you are right on all the things that happened at the house; I mean governor has talked about coming out with a plan in the fall. It is planned; I mean that’s something that I don’t want to preempt and nor do I know what he is going to say. He has not talked much about or at all about the CAT. What he has talked about is energy infrastructure. Do we have the infrastructure moving forward to be able to grow with Michigan's economy.

And as Tom mentioned to you, we’re seeing the industrial sales continue to grow at a pretty rapid pace and maybe even don’t hurt us compared to all the utilities in the country. So he wants to have the growth here and the infrastructure in place to move forward and certainly with Michigan's unemployment, he would like to make sure that the jobs fall in line with that too; the job creation.

Operator

Our next question comes from the line of Paul Ridzon with KeyBanc. Please proceed.

Paul Ridzon - KeyBanc

Is this 25 by 25, constitutional magnet, [how many legs]?

John Russell

Depends what side you ask. From our standpoint, no, but they are going to put up a good fight. We’re not underestimating this in anyway. They’ve got, I think, they believe they’ve got over 500 signatures right now that the board of canvases is looking at which needs to approve. They need to approve by early September. I believe there is financial backing behind it. It’s very unique though Paul that this plan, this plan has been done in other states but it’s done for legislative changes. This is a constitutional change. So it is a first time that they’ve gone after a constitutional amendment. So my view is I don’t think we can take a chance not to be prepared for and that’s what we’re doing right now; prepare to win.

Paul Ridzon - KeyBanc

Have they started any campaigning or televised commercials or anything like that?

John Russell

Not yet, I expect they will be. Are you saying right in the future?

Paul Ridzon - KeyBanc

Yes.

John Russell

Yes.

Paul Ridzon - KeyBanc

And if the Chairman of the Energy and Technology Committee, he introduce to both deregulate is that just tit-for-tat against the ROA; raising your ROA?

John Russell

Well you have to talk to him about that, but obviously he was part of the Energy Legislation in 2008 and thinks it’s a good law and I think the statement speaks for himself that when you look at the cost shift for customers for a few customers taking choice it probably isn’t in the best interest of everyone. And particularly when you look at the slides that Tom showed you today about the need for additional capacity, we have been through that here in Michigan back in the early 2000 when we -- I think in 2000 when we deregulated and it just didn’t seem to work very well.

Paul Ridzon - KeyBanc

It sounds as though you are going to just try to manage on your own to hit your guidance just kind of factor forward as the weather dictates?

John Russell

Well, yes, and when you say it you make it sound like we are going to work the numbers that’s not exactly how we are going to do it and I think of it this way. As you saw in the first quarter when times were tough we are going to do whatever it takes to do right things and not hurt our customers, but deliver the results and we have got a pretty long track record of doing that.

But on the other hand when we get the good news and I know not everybody likes hearing this, but we get good news whether it’s weather or whatever it may be we are going to take that opportunity and invest more in our customers and just the right thing to do, it will give you a sustainable growth 5% to 7% on the earnings side and better serve customers and therefore happy customers make for a successful company.

So we are very much driven that way and please don’t think like we are working the numbers, we are actually working the business. So when we talk about what we are doing now, we are doing more pole top maintenance; we are doing things that enhance the reliability with our transformers things that allow us to get work done sooner than we would otherwise have done and that’s good for everybody.

Paul Ridzon - KeyBanc

Understood. And what is going on with the lost gas; is that you are metering infrastructure that’s allowing that?

Tom Webb

No, no big deal there that’s is just doing the good job that we do and during this year we had a pretty mild winter, so think of that rolling to the first and second quarter and therefore you pump in less gas, you move less through the system and that helped us in a couple of ways; we don’t like it, but it help us with lower bills, so lower uncollectible and less loss of gas, it’s kind of a natural offset to that downward slope of the business when the weather was mild. Nothing special.

Operator

Our next question comes from the line of Ali Agha with SunTrust. Please proceed.

Ali Agha - SunTrust

Hey John and Tom, you guys have made a consistent argument that the utility companies in Michigan should have a level playing field as far as ROEs are concerned. You didn’t see that in your latest rate case. Is that issue not pretty much done, you know or do you think that could come back and you see that really as a floor ROE right now; what’s your latest thinking on that?

Tom Webb

Well, I can’t predict what the commission will choose to do in the future that would be kind of out of my shoes. But what I can say is I believe what they are trying to do so far is to provide the utilities with a premium above what other utilities are getting and we are kind of pleased with that. And so at 10.3% I think we are in good shape; we are clearly there for this year, but with our annual rate cases we will be facing that again next year as we go for the electric and gas cases that may come up.

And again I think the commission is trying to get to a healthy utility that serves its customers well. So it's good news when they see us pouring resources back into the customers and trying to earn an authorized rate of return, but not a lot more, not a lot less. And so that's a pretty nice place to be. So I can't tell you the number’s going to be higher or lower than [10.3].

I feel pretty good about where that is, it's very workable for us but I can take you to the sensitivities so that you can see what the impact is if it moves up or down. If it moves a little bit, we can handle that, if it moves a lot, that's another discussion.

Ali Agha - SunTrust

And separately, the balancing act that you referred to in terms of your CapEx budgets and keeping the rate growth at a certain level obviously has a built in assumption on how you see commodity prices trending over the next five years. To the extent that we see commodity inflation pick up for whatever reason and prices start to really move up like they did a few years ago, how sensitive are you to do that as far as your CapEx plans are concerned and how should we be thinking about that from a sensitivity perspective?

John Russell

Now one of the things that we like about our position is the fact that we do have a balanced energy initiative and that's a fact that our portfolio is well balanced between various fuels. So it really desensitizes us if you will to dramatic changes in price based on fuel. For instance I mean right now our coal fleet is running less than it did last year, but as you know we picked up the Zeeland plant which is about a 1000 megawatt gas plant that's running at 88% compared to around 28% the previous year, so that balance really works out well for us. I expect that whatever we do in the future, we will continue to be balanced with coal, natural gas. We've got a long-term commitment for a nuclear plant, we've got renewable energy, we have pump storage and we have our energy efficiency programs that we are working on. But then for the near-term if you look at five or seven years I think the generation that will be built in the state by anybody will be natural gas.

Ali Agha - SunTrust

And John just to be clear there maybe puts and takes and things may move around but you are very confident that $6.6 billion CapEx budget one way or another does get spent over this five year period.

John Russell

Yeah, and as Tom said I think Tom described it well, we self imposed the amount that we spend there but if it moved a little bit but yes as far as spending it absolutely, we have more than enough issues that we could resolve and help our customers by spending that money so yeah don't be concerned about that.

Operator

Our next question comes from the line of Brian Russo with Ladenburg Thalmann. Please proceed.

Brian Russo - Ladenburg Thalmann

Most of my questions have been asked and answered but just curious we've seen some improvement in the electric equity ratios over the last 12 months, it looks like 41% on the 13 month average and you were granted a 42% in the latest GRC, maybe just talk about the appetite for higher equity ratios going forward?

Tom Webb

Brian I would just have you think of those as anomalies. We will go for it, if you don't mind I will use the total number, we will go for that 50-50 ratio. We maybe a little bit higher at some points when we are putting the money down into the utility, or maybe a little bit lower at some point. So depending on the period that you are looking at it could vary a little bit but our goal is to be right about at that 50-50 level and we will be truing up when we follow little short and we will let it drift when we get a little bit ahead. There's no big issues for us to be a little bit higher or a little bit lower but we like to be in that sweet spot the commission prefers.

Operator

Our next question comes from the line of Mark Barnett with Morningstar. Please proceed.

Mark Barnett - Morningstar

Couple of quick questions. This may be a bit of departure from some of the other questions this morning, but can you talk a little bit about with your TRP, kind of where have your rail agreements on your coal moved over the past year or two? And do you see those kind of moving forward as an area of potential cost, further cost reductions in the fuel?

John Russell

As you know, overtime we had some long-term contracts as they were renewed turned into a little bit shorter term contracts. When the environment of the switch to gas there has been desire on other parties parts to actually lock up may be some deal. So we are in the middle of good discussions with our rail carriers and we are optimistic we can do things that are useful to them and useful to us so that’s an area I think you might see as opportunity going ahead.

Mark Barnett - Morningstar

Okay and on the industrial number, obviously pretty strong in the six months. Can you talk a little bit about what's driving that outside of the kind of improving auto sales?

Tom Webb

Sure, the way to think about the industrial side is, we are pretty well diversified. I know when you think Michigan, some times people think Detroit or sometime they think auto. When you are looking at our service territory don’t think either. We are outside of that area; the autos directly contribute about 3% of our gross margin [net] and all their big suppliers. So they are important to us.

But we are pretty widespread, so we have furniture makers, we have food companies, we have pharmaceuticals, we have quite a widespread. What we are seeing is a layering in, so a lot of the metal benders, auto related and different people had a big rebound already, so you have seen our industrial sales up sharply and that’s why described to 7.5% against big tough comps.

Now what happens is there are other people who do better as you go to the recovery cycle. So furniture makers, they typically do better toward the end of the recovery when company start investing more and upgrading their furniture while we are seeing that. And then you have got folks that are in what I will call it solar panels and a lot of a new tech sort of things, we have a big customer in HSC, they are actually recovering kind of nicely and growing with that segment.

So we a nice spread, I think it’s the way you should about us; we are fortunate to have that and therefore as some companies layer in their growth that they didn’t come back as quickly on during the recovery we continue to see some nice uptick. So we are pretty happy with the 7.5%, but I want to mute that a little bit and tell you our outlook as you know for the industrials more or like about 5%.

Operator

Our next question comes from the line of Andrew Weisel with Macquarie Capital. Please proceed.

Andrew Weisel - Macquarie Capital

Just a quick one on the new generation capacity you alluded to; I know it’s far away and you have a lot of options, but any sense of the timeline of when we might start to get a bit more detail on how you would pursue filling that capacity shortfall?

John Russell

Yeah I would expect we would know probably more; let’s just go back to the chart between 15 and 16 as when we begin to hit that shortfall, so if we were going to buy, build, get into a long term contract which are really the options probably all with the natural gas fuel base, it would need to begin sometime early next year. So providing some color within the next half a year or year something like that.

Andrew Weisel - Macquarie Capital

So if you do file an electric rate case toward the end of this year, would that conversation be folded into it or would it be kind of dealt with separately?

John Russell

That’s too soon for the electric rate case; for the one that we will file by the end of the year it will be too soon. So it’s something that we are looking right now, we want to do is give you a heads up because this capacity issue is not only a MISO issue and a consumers energy issue; it’s going to be a national issue with some of the environmental rules that are going into effect in 2015 and 2016. And as we’ve said before, we want to be ready for it and plan for the balance portfolio, so we are just giving you heads up of what we are thinking about now and we’ll certainly provide you more details as we get closer to any type of decision.

Operator

All right, ladies and gentlemen since there are no further questions that concludes the question and answer portion of the call. I would now like to turn the presentation back over to Mr. Russell for closing remarks.

John Russell

Thank you. Let me wrap up today’s call by saying that we did have a good second quarter, both financially and operationally and we’re on solid ground to achieve all of our financial targets this year. Our focus, and this is important for everybody to understand that our focus is and always will be on our customers providing good value is our top priority at a cost effective rate. Appreciate your listening today and we look forward to seeing you in the future.

Operator

Ladies and gentlemen that concludes today’s conference. Thank you for your participation. You may now disconnect. Have a wonderful day.

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