CMS Energy Earnings Call Nuggets: O&M and Cost Saving

CMS Energy (NYSE:CMS) recently reported its second quarter earnings and discussed the following topics in its earnings conference call.

O&M

Kevin Cole – Credit Suisse: Congrats on the (sale). I guess, just to dig into, I guess, the moving pieces a little bit. So on Slide 20, am I reading it correctly that you expect O&M to fall through 2017 and so the 2015 rate case would just be capital driven?

Thomas J. Webb – EVP and CFO, CMS Energy Corporation and Consumers Energy Company: I think the simple answer to that yes. In fact, there’s other pieces. Obviously, there is revenue pieces to the rate case, there could ROE pieces to the rate case, although we don’t expect that, but as we drive our O&M down, we will have our new capital investment requirements, and we suspect that whatever they are, we’ll be able to offset that a little bit in our request for rate relief.

Kevin Cole – Credit Suisse: Tom, is it possible during the stay out between now and 2015 or during the 2015 is legislature review that you can seek either capital trackers on environment CapEx or on the new gas plant that could enable you to stay out even further?

Thomas J. Webb – EVP and CFO, CMS Energy Corporation and Consumers Energy Company: Well, to get a tracker mechanism in place, as you’ve described it, would require a rate case. So that’s the sort of thing that we’ll talk about with the next rate case, but I’m sure there will be lots of dialog around things like that over the course of the next year as people look at what’s the right legislative model and what’s the right regulatory model. So there will be lots of discussion, lots of progress, but the implementation would be through a rate case.

Kevin Cole – Credit Suisse: Then last question, just so I have the timing right. So with the stay out, are you expecting to file a mid-’14 with self-implementation (115) or to file (115)?

Thomas J. Webb – EVP and CFO, CMS Energy Corporation and Consumers Energy Company: No, we haven’t actually announced what those dates would be, but if you let me characterize it just a little loosely, and gas and electric could be slightly different, but I would expect we do something in the summer of ’14, self-implementation would certainly be towards the very backend of 2014, if not the early part of 2015, but I must say the progress that we’re making on the cost side of the ledger is so strong we’ll be looking at that carefully, but we wouldn’t want to tell you that we could wait beyond the 2015 test year…

Kevin Cole – Credit Suisse: One last question, what are your volumes assumptions for 2014?

Thomas J. Webb – EVP and CFO, CMS Energy Corporation and Consumers Energy Company: What we show is our growth kind of at a modest level. We’ll plan over the period about 0.5% to 1% for electric weather adjusted rate growth and I think if you see something like that in ’14, you shouldn’t be surprised.

 

Cost Saving

Jonathan Arnold – Deutsche Bank Securities Inc.: Quick question on cost saving. John, you mentioned that you had – some of this was kind of outperformance on when you talk to Slide 10 this is, where you showed the kind of 9% reduction on the prior plan and now you think it’s more like 15%. You said some of this is outperformance on existing programs and some of it is the new initiatives. I was wondering if you could just give a bit more color on how much you’re counting on for the new reductions and how much of those are things that are actually basically in the bag and how much do you still have to implement?

John G. Russell – President and CEO of CMS Energy Corporation and Consumers Energy Company: I think Tom showed it in his slide, the detail behind it Jonathan. One of the things that I guess surprised is, pleasantly surprised us a little bit is we’ve been aggressively cutting costs for many years now and many of these legacy costs changes that we made particularly with the union in two contracts ago are paying dividends today. We’re seeing the benefit of that, but also several years ago, we started initiative which just if you can bear with me a minute, I’ll tell you how we’ve really gotten here. We focused on improving safety which we thought safety was the route of getting to the end and making us a successful company. We can’t do it safe, we shouldn’t be doing it. We’ve been able to move from fourth to first quartile in safety. After we did safety, the other focus we had is to ensure we have higher productivity, so we’ve been able to move from productivity about when we started measuring, they are up about 40% or 50% over past five years. As Tom mentioned in his comments which I think is important, our employee engagement is also now first quartile, so what we’ve been able to do is reduce costs capture the productivity, the safety and the performance of our employees with the engagement and what it’s helping us do is, reduce cost and serve customers better than what we expected by this timeframe. So that’s what’s really driving this piece of it, but I’ll tell you the one thing that surprised us most is how the continuation of the employees were retiring with the legacy benefits compared to the new hires that we have, that have some of the pay-as-you-go benefits, which has helped us substantially…

Thomas J. Webb – EVP and CFO, CMS Energy Corporation and Consumers Energy Company: If I might just add, I’d say that your question about what’s in the bag, you never like to say that the hard work we’re doing is all in the bag and the operating guys would hang me if I said that, but I’m going to go ahead and say it anyhow. Because what we are doing a lot of it’s already behind us the way, John, just described it and a lot of what’s in front of us, we control it. It’s things that we do so from that sense they’re in the bag. There are a couple of things we do need help on, so one of the savings will be the securitization. So we will request the Commission’s help on the securitization and we’ll make that request in September. So we need their support on that. We do have the CON in place, which is good economics for our customers. So we need their support on that. Then lastly, we do need an accounting order, it’s almost a technicality, but it saves money for customers. So we’re hopeful that they’ll see that as a very positive thing as well. So there is a few things that we need some support on that are completely in our control, but most of this, we control it, we are doing it, so a CFO calls it in the bag even though there is a lot of work to do.

Jonathan Arnold – Deutsche Bank Securities Inc.: Could you just – can you put a number around the securitization perhaps?

Thomas J. Webb – EVP and CFO, CMS Energy Corporation and Consumers Energy Company: Yeah, you know that savings will be about $20 million to customers and that won’t kick-in until probably around 2015. The reason for that is, this is all provided for in laws put in place 10 years ago and it takes about 90 days for the commission to review if they think it’s the right thing to do, and then we provide time for appeal. So all parties can participate in something like this and ask questions. We assume that process could take as long as into 2014 and if it does, therefore we plan the benefits for customers in 2015, if it happens earlier, that’s great, but that’s our plan.

Jonathan Arnold – Deutsche Bank Securities Inc.: The $20 million would be the savings, then how much would you have be securitizing roughly?

Thomas J. Webb – EVP and CFO, CMS Energy Corporation and Consumers Energy Company: We’d be securitizing in round numbers, $400 million in the annual savings would be about plenty.

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