CMS Energy Corporation (CMS)

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CMS Energy Corporation (CMS)

Q4 2010 Earnings Conference Call

February 24, 2011, 9:00 am ET


Laura Mountcastle – VP and Treasurer.

John Russell – President and CEO

Tom Webb – EVP and CFO


Paul Patterson – Glenrock

Dan Eggers – Credit Suisse

Paul Ridzon – KeyBanc

Ali Agha – SunTrust

Terry Shu – Pioneer Investments

Michael Worms – BMO

Brian Russo – Ladenburg Thalmann

Mike Bolte – Wells Fargo

Raymond Leung – Goldman Sachs

Ted Hyne [ph] – Catapult

Eric O’Keene [ph] – Basel



Good morning, everyone, and welcome to the CMS Energy 2010 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 March 3rd. 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 Ms. Laura Mountcastle, Vice President and Treasurer. Please go ahead.

Laura Mountcastle

Good morning and thank you for joining us today. With me are John Russell, President and CEO; and Tom Webb, Executive Vice President and CFO. Our earnings press release issued earlier today and the presentation used in this webcast are available on our website at

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

This presentation also includes non-GAAP measures. A reconciliation of each of these measures to the most directly comparable GAAP measure is included in the appendix and posted in the Investor section of our website. We expect 2010 reported earnings to be about the same as adjusted earnings. Reported earnings could vary because of several factors. We are not providing reported earnings guidance reconciliation because of the uncertainties associated with those factors.

Now I’ll turn the call over to John.

John Russell

Thanks, Laura. Let me welcome everyone who is joining us today on the call. 2010 was another good year for CMS, both financially and operationally. We adjusted earnings per share of $1.36 slightly exceeding our guidance and up 8% from the $1.26 in 2009. The increase was driven primarily by recovery of investments and aggressively managing our O&M costs.

Our Board raised the common dividend twice last year by a combined total of 68%. This was the fourth increase since restoring the dividend in 2007 and raises the payout ratio to a more competitive 58%. With the increase in the dividend, our total shareholder return for 2010 was 23%. Customer value is one of the cornerstones of our business strategy.

Last year we enhanced customer value on several fronts. We restructured the workforce early in the year, reducing cost by $30 million on an annual basis. We spent over $55 million on energy efficiency programs. Our customers saved energy and money, and our shareholders earned an incentive for exceeding the annual energy savings targets established by the MPSC.

We also continue to improve reliability on the electric distribution system. Customer outage minutes decreased by 13% last year, and we are now down 36% over the last five years. And we improved employee safety by 20% in 2010 and 57% over the past five years. I’m very pleased with the performance of the management team over the past seven years as we restructured our business and focused on the utility. We set a high standard for performance. As the graph illustrates, it is resulted in consistent financial performance and competitive shareholder returns.

Our annualized earnings per share is up 8% over this time period and expected to be up another 6% this year. Contributing to the future growth, we signed a new contract to upgrade the Ludington Pumped Storage facility. We plan to invest approximately $400 million over 10 years to improve the plant’s efficiency and increase its generating capacity by 16% to about 2,200 megawatts.

The plant allows us to store energy, which will become even more valuable with the development of renewable energy in Michigan. All major contracts for the development of our 100 megawatt Lake Winds Energy Park have been signed and approved by the Michigan Public Service Commission. Construction will begin later this year, and the energy park will be operational by the end of 2012.

We have also completed the majority of work on two major environmental projects to further reduce emissions from our coal-fired plants. We are in the process of installing an SCR at our Campbell plant to reduce NOx, and we are also installing a pulse jet fabric filter at our current plant to comply with EPA standards. These projects continue to add value to our customers, improve the environment, add to our rate base, and help boost earnings going forward.

We’ve recognized that customer value is a critical element to continuing to deliver long-term financial results. In that regard, we have developed several areas of focus to improve the customer value proposition. We have redesigned the customer bills and our website. We have also improved the performance of our call centers. We signed a new five-year labor agreement with the union that provides for increased healthcare cost sharing and changed post-retirement health benefits. Going forward, this eliminates the legacy cost for all new salary and union employees.

We plan to continue maximizing our energy optimization programs to help our customers lower their energy consumption. So far, over 300,000 customers have taken advantage of the programs we offer, helping them to save energy and money. System reliability is an important element of customer satisfaction. As referenced earlier, we continue to make improvements to system reliability in both the electric and gas distribution areas. We plan to spend more than $400 million over the next five years to continue improvement in these areas.

And finally, the most important aspect of service is delivering reliable power at a competitive price. Over the next five years, we plan to invest over $6 billion to drive rate base and earnings per share growth of 5% to 7%. However, with a sharp focus on managing our cost and achieving the benefits from our investment programs, we plan to hold customer base rate increases to about the rate of inflation. We believe this represents a good balance between price and enhance customer value.

As illustrated on this slide, over 80% of our $6 billion investment plan relates to maintaining our electric and gas distribution systems, leading environmental requirements, and achieving the 10% renewable standard in Michigan. The remaining investments are targeted at improving safety, system reliability, and providing a smart grid for our customers.

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