Glenn P. Barba - VP, Controller and CAO John G. Russell - President and CEO Thomas J. Webb - EVP and CFO.

Daniel Eggers - Credit Suisse Paul Ridzon - KeyBanc Capital Markets Brian Russo - Ladenburg Thalmann.

Good morning everyone and welcome to the CMS Energy 2014 Third 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 12.30 PM Eastern Time, running through October 30.

This presentation is also being webcast and is available on CMS Energy's Web-site 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..

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 Web-site.

This presentation contains forward-looking statements which are subject to risks and uncertainties. All forward-looking statements should be considered in the context of the risk and other factors detailed in our SEC filings. These factors could cause CMS Energy's and Consumers' results to differ materially.

This presentation also includes non-GAAP information. A reconciliation of each of these measures to the most directly comparable GAAP measure is included in the appendix and posted to the Investor section of our Web-site. Now, I will turn the call over to John..

Thanks, Glenn, and good morning everyone. Thanks for joining us on our third quarter earnings call. I'll begin the presentation with an overview of 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.

The first nine months have produced good financial and operational results. Our 2014 full year guidance remains on track at $1.76 to $1.78, which is at the high end of our original range. Operationally, our efforts are being acknowledged by nationally recognised surveys. J. D.

Power and Associates ranks our gas utility the second highest in residential customer satisfaction in the Midwest. The gas utility's improvement from the prior year's study makes it the most improved utility in the nation. Sustainalytics, which looks at a number of sustainable factors, ranked Consumers Energy number one among peers.

These recognitions are evidence that our Company is getting better every day. Looking back over the last few years, we have consistently grown 7% each year. This is our 12th year of predictable financial performance. Each year we grow earnings of the prior year's results.

Today, we are pleased to provide 2015 guidance of $1.85 to $1.89, consistent with our 5% to 7% growth rate. We are confident in next year's plan and our ability to execute it. We have many upside opportunities that will keep us on track to achieve our long-term organic growth. Election Day is less than two weeks away.

We have been watching the local and national races closely. The race for Michigan's Governor has remained as we have envisioned, focused on a number of non-energy issues. The challenger, Mark Schauer, is supportive of an increase in the renewable energy standard, as is Governor Snyder.

We will work closely with either administration on making Michigan's energy policy one of the best in the nation. The latest polling results show that Governor Snyder is leading by 4% over Mark Schauer. The Michigan Senate is reviewing energy policy and beginning to construct legislation.

Senator Mike Nofs is coordinating two workgroups, one is focused on energy efficiency and the second on renewable energy. An important issue for Senator Nofs is defining clean energy sources rather than just focusing on renewables. This definition may allow us to capture the 300 megawatt upgrade at our Ludington pumped-storage facility.

As we look around the corner, we see opportunities to continue to grow the business. The election will be behind us shortly and we can begin focusing on Michigan's energy future. Next year we should see improvements with the passage of the 2015 Energy Law. Our competitive industrial rate structure will take effect late [2015] (ph).

[Inaudible] time we may see a final order in our upcoming electric case. As we continue to monitor the capacity markets, we also see opportunities for capital investment that are not included in our current plan. You can see the impact of the new rate design and next year's fuel savings on electric rates.

Residential customers will see rates fall about 1%, commercial customers will be down about 5%, and industrial customers will see nearly a 10% reduction. The largest energy intensive industrial customers could see base rates drop up to 15% with the new rate design, and including fuel savings these rates could drop 20% in the next 15 months.

These structural changes, rate changes and fuel savings, will improve price competitiveness, competitiveness for all customers, and make Michigan more attractive for large businesses. I receive a lot of questions about how we can continue our performance for our customers and our investors.

We begin by increasing customer satisfaction and adding customer value, the foundation of our business model. Every year about 400 employees leave and about 300 full-time employees are hired at lower costs including benefits. With fewer employees, we continue to do more work and improve productivity.

This leads to high employee engagement and our Company ranking is among the most admired in the country. Although simple, these strategic steps drive breakthrough results year-over-year. Here's a look at two major construction projects. Cross Winds, located on the east side of the state, will begin commercial operations by year-end.

With this investment, we are able to meet the state's 10% renewable energy standard one year ahead of schedule and at a cost less than plan. In the southwest part of the state, a 24-mile, 36-inch pipeline has been installed eliminating the bottleneck and completing a 90 mile span.

This pipeline is capable of delivering 1.2 billion cubic feet of natural gas per day. Now let me turn the call over to Tom..

Thanks, John, and as always we deeply appreciate your interest in our Company and for spending some time with us on our call today, thank you. As John mentioned, our third quarter results of $0.37 a share reflect continued solid progress.

For the first nine months, adjusted earnings at $1.42 a share were up $0.13 or 10% from the same period a year ago. And this excludes an increase of $0.03 a share in our long-term reserve for Bay Harbor environmental maintenance.

Having completed the remediation, we are truing up the established reserve back in 2004 to maintain for water treatment facilities over the next couple of decades. As you can see here on the shaded circle, we put to work more of the substantial upside from the first quarter with reinvestments in even more productivity and reliability.

As shown with the yellow arrow, we have plans to do even more O&M reinvestment during the rest of year, and this is without jeopardizing our ability to deliver earnings growth at the high end of our original guidance which is in the 6% to 7% zone.

And as you can see in the dotted circle, our planned cost savings in the fourth quarter more than fund planned capital investment. This reflects the important work we've completed to self fund all of our capital investment in 2014.

So in other words, we permanently funded with continuing O&M cost reductions 100% of our 1.6 billion of capital investment in 2014.

We are proud of our team that not only has continued our eight-year run of continuous cost reductions, but accelerated them to a level that fully funded a record level of capital investment, and that's without any increase in rates to our customers.

This slide, which I suspect is familiar to many of you by now, shows how on top of the large planned cost reductions we have further reduced our cost levels. This as well as favorable weather in the first quarter provides room for investment to improve reliability, generate incremental productivity and pre-fund debt.

This not only maintains a conservative risk level, it makes it easier to continue improved performance for our customers and EPS growth at the high end of our peers. Now as the year winds down, there's a number of choices that we have will narrow but the opportunity continues right through the end of year.

Thinking about the future, this is another slide that's probably familiar to many of you. The need for important projects requiring a capital investment over the next 10 years exceeds $20 billion as shown in the blue circle on the right. Those needs are up from what we expected just a year ago.

Our plans however include just a portion of this need, limited only by our desire to keep our base rate increases below inflation. You may already have noted what's new on this slide.

We have updated the projection period from 10 years starting in 2013 to 2015 and we've raised the level of investment from $15 billion to $15.5 billion for needed reliability upgrades, again without jeopardizing our ability to keep customer base rate increases well below inflation.

Now I wouldn't be surprised if a year from now we're talking to you about investment plan of something in the $16 billion to $17 billion range rather than the $15.5 billion, and again that's without hurting price competitiveness.

[Inaudible] $15.5 billion level of investment, electric base rates are up about 1.5% a year, well below forecasted inflation. Here you can see one aspect of investment that still is not included in our plan.

Should ROA customers return to bundled service either naturally or by policy, we would need to add investment to provide another 800 megawatts of capacity. Later in the planning cycle, we'll need to replace expiring PPAs with more than 2,000 megawatts of capacity and we believe we can do that without raising customer bills.

These opportunities alone require 3,000 megawatts of new capacity at Consumers and none of it is in our present plan. While you can see this investment creates a substantial upside for organic growth in our business, there are several other upsides ahead.

For example even though we've got a pretty good track record on cost savings and a reasonable plan ahead, we likely have more room to improve productivity which can create more room for capital investment, and that's our growth engine.

While some companies have increased their cost over the last seven years, we've been able to reduce ours and reduce it enough to fully offset inflation and reduce our absolute cost by 7%. Our plans permit us to achieve another 10% reduction over the next five years.

As shown in the right box on this slide, these future savings already have been identified, the decisions have already been made and they would be difficult to reverse. For example, the planned shift from coal to gas generation with the closure of 950 megawatts of coal plants will reduce O&M by $25 million.

This simply reflects the fewer number of workers needed to run gas plants compared with coal plants. With the responsible decisions already taken regarding benefits, we'll save another $75 million over the next five years.

As we replace retiring workers with new employees and achieve reasonable levels of productivity, we'll save another $75 million, and although we have one of the slower rollouts of smart meters as we prioritized our capital, these smart meters provide new levels of productivity and service and we've counted only $25 million for that.

We're comfortable with projecting net savings of $100 million or 10% over the next five years but there may be room to move. Sales may provide additional upside. Michigan continues a robust recovery and is among the top 10 states in GDP growth. Grand Rapids, one of the major locations in our service territory, has an even higher pace of GDP growth.

Its growth is in the top 10% of all U.S. cities. Michigan has done pretty well compared to U.S. averages and economic performance in our service territory has been even better. We may not have factored fully this level of economic performance in our sales outlook.

As you can see in the box on the right side of this slide, industrial sales have been strong, up 8% this year. Residential and commercial growth has lagged but still up 2.5%, or 3.5% if you exclude energy efficiencies.

Our outlook for 2015 to 2018 may be somewhat conservative with industrial growth at about 2% a year and total growth at about 0.5%, and that's fine with us because we'd rather be surprised on the upside than the downside.

In fact, here's a listing of some recent announcements by various companies making substantial additions to their business or entering Michigan with new business. These examples alone add 155 megawatts or about 2.5% of sales growth. These will happen over a couple of years and we expect there are a few more announcements yet to be made.

On top of that, the Ferrari in the garage is winding up its engine. As capacity prices in Michigan rise, there's an opportunity for our Dearborn Industrial Generation plant to realize profit improvement between $30 million and $50 million higher than what's in our plan.

Over the last few months, we've seen good signs including a new long-term energy contract for 250 megawatts at over $4 a kilowatt/month. We also are seeing near-term bilateral transactions for capacity at prices in excess of $3.

In addition to that, the DIG plant bid successfully into our competitive utility capacity auction for 25 megawatts in 2015 and 50 megawatts in the 2016 planning year and all at good prices. These are all excellent signs regarding additional upside.

Now that's a lot of upside including utility capital investment, cost reductions and sales growth as well as the Ferrari in the garage. As a reminder, we have an active gas case that should permit us to recover $144 million of investment for the 2015 test year. That would be $88 million after cost reductions.

This is a simple small case and it's possible it could be settled. We still plan to file an electric rate case at the end of this year for three reasons.

First, this is the mechanism to authorize improved rate design that will provide more attractive rates to large job providers without losing our competitive position for our residential customers' bills at about 10% below the U.S. average.

Second, this is the process to authorize the purchase of the 540 megawatt combined cycle gas plant in Jackson [inaudible] [lower] (ph) than any other over the last six years and near record.

Last, this permits us to recover investment in the 2015 test year, substantially offset by continued cost reductions, and with a roll-off of the 2001 securitization charges of $80 million the rate impact will be smaller. This rate case is a real win-win for our customers and our investors.

As we continue with our capital investment program, our CapEx levels at 19% of market cap now exceed the average of our peers. Importantly, our liquidity and operating cash flow levels also exceed the average of our peers.

And it's shown on the left side of this slide, our financing work continues to benefit from attractive markets and smart use of good tools. For example, our 2014 securitization lowers cost for our electric customers by $22 million next year and provides more resources for investment in our gas business.

In addition, we recently issued a 50-year First Mortgage Bond and it's a first for us and that's the lowest 50-year bond rate for any utility in my lifetime. So coming back to today, we're pleased to share our financial sensitivity table. You can see the impact of changes in sales, gas prices, ROE, and interest rates in 2014, no worries here.

And here's our report card for 2014 as well as the new outlook for 2015. We're on a target to meet all of our goals by continued caution that with a need to replenish our fuel inventories from low levels at year-end 2013, our operating cash flow target may be at risk in 2014. It's a temporary issue, recovery occurs in 2015.

As you can see, our targets for 2015 show another year of strong consistent growth. I hope you were not surprised by our initial EPS guidance of up 5% to 7% again in 2015 and growth in operating cash flow up another $100 million.

I know that some of you believe that regulated utility models have increasing risk, but we hope you're beginning to see just the opposite at CMS.

Our efforts to improve our cost, our reliability, customer rates and bills, as well as customer satisfaction actually improves our ability to deliver consistent earnings and dividend growth at a level that you've become accustomed to from us over the last 12 years.

Here's our outlook of the overall earnings and dividend growth showing our mindset around consistent good performance at the high end peers for our customers without jeopardizing our consistent high end performance for investors. We're proud of the track record, we're humbled by your interest and we're committed to improving performance every day.

So thank you again for taking time to listen to our call today. John and I would be delighted to answer your questions.

So, Janet, would you please open the line?.

(Operator Instructions) Our first question comes from Dan Eggers at Credit Suisse. Please proceed..

John, I guess as we're moving into the winter season, you covered a lot of topics on the call, but can you just talk about where you guys see the system operationally going in the winter given some of the challenges we saw last year and kind of your comfort on the MISO regions for us, reliability concern with fuel, and all those sorts of issues?.

Dan, you're talking about the electric side?.

Probably both sides actually..

Okay, I guess we're well-positioned. I mean the storage is full which is great after a very cold winter the beginning of this year, so the team has done a nice job replenishing the field. So I'm comfortable on the gas side. On the electric side, we're good as far as capacity for this year. The real issue in MISO and particularly in Zone 7 becomes 2016.

That's when you begin to see the falloff of the retired plants, there will be capacity needs there. The debate going on today is, MISO is looking at their forecast thinking Zone 7 could be anywhere from 2,000 megawatts to 3,000 megawatts short. So from our standpoint, that's something that we're looking at.

We've got plans in place so that we need to add capacity, we can, and like everybody is familiar with the plant that we were going to build, the gas plant that we decided not to and instead bought the JP Morgan plant for a much lower cost, everything is in place to move ahead with that one, expansion of the existing plants could take place.

So there's lot of opportunities we have here. The big thing is we just need to see where this kind of shakes out with if MISO's predictions are right and what happens with the energy law.

As Tom mentioned, there are some – if the markets begin to tighten, which I expect they will, what you may see is a return from customers who were taking their supply from third-party suppliers today return to us, and at that point that's an opportunity for us to execute some of the plans we have to build the capacity to serve their needs.

So that's kind of in summary what the next two years look like, but we're in good shape for next year, the following year is the one that I think a lot more [will tell what happens] (ph)..

I guess, John, on that point, if you look at Slide 16 where you guys continue to show the prospective need for a lot of capacity to service customers coming with open access coming back and PPAs went away, when do you guys get comfortable enough to put that into your CapEx program and what milestones should we be looking at for you guys to get there?.

One of the things, Dan, that we're doing, our plan is not to build above the growth. So at the end of the day what we do is we look at our forecasts for five years out, 10 years out, but our planning and our construction will really follow where the load goes.

So what we will do is, in the short term probably buy from the market and in the long-term build, and that may be different from most regulated utilities that build large incremental projects that go above the growth rate and then wait for several years for the growth to catch up to that.

With the hybrid market that we have today, that is a disadvantage to us because if we do that we simply put what seems like free capacity on the market for the third-party suppliers to take advantage of.

So ours is to build to that level of capacity, and the good news is, since most of our growth in the future will be renewable energy or growth as far as a fuel source for generation, it will be renewable energy or gas, you have a lot more flexibility in building to that level and not building above it as we did in the old days with coal and nukes..

But I guess, John, should we assume that if choice goes away in early '15 with new legislation, would that advance at least the need to address the 800 megawatts of potential load coming back with the change in CapEx plans?.

Absolutely, absolutely, when they come back we're going to have the power for them..

Okay.

And then I guess one last question just on the renewable front here with potential expansion of the renewable energy target, how do you guys see the mix of kind of wind and solar in the next cycle given the fact it was a pretty wind heavy first kind of renewal investment?.

I mean I expect that to continue, Dan. The one thing that Michigan has proven with the way the team's built the plants here, the wind regime in Michigan is clearly the most cost advantageous renewable energy source in Michigan. Solar, although it's getting a lot of play in a lot of other areas, it really hasn't taken hold here.

Part of it is our conditions here, the lack of huge incentives like you see in some other places throughout the country. And really if you want renewable energy here, wind resources are the way to go. So that's definitely the plan of the future here. Although I think distributed generation to some extent will take off.

I think you'll probably see us doing some pilots in certain areas, because if customers want that we want to provide it for them but there isn't the great demand like we see or the economic benefit like we have for the large wind scale projects..

Very good. Thank you, guys..

And the next question comes from Paul Ridzon at KeyBanc. Please proceed..

I know that that is all permitted, but do those permits sunset at any point?.

Yes, they do, Paul. We've got about another I think a year and a half, something like that, 18 months as it is today. So if we move forward with it today in a combined cycle, we could do it, otherwise we'd have to re-permit it. But as we've talked about before, everything is in place.

The sites there, we own it, we have generation on-site, electric facilities there are good, the gas facilities are good, and as we talked earlier in Dan's question if there was a need to drive and build that plant soon, I expect that the permitting process would go along very quickly..

And just remember the policymakers really will be driving for it, not against it..

Right..

Great.

And how long would that take to re-permit you think?.

Less than a year, could be nine months..

And then construction is what, pro month 18 months?.

Yes, start to finish probably say three years between permitting and final construction. So nine of that would probably be, 9 to 12 permitting but we'd be doing the engineering during that time, and then 24 months for construction..

And how should we think about balancing rates with CapEx if a plant is needed, would you defer some of the other capital to keep the 15.5 intact?.

No. Great question. We talked about this I think on some of the other calls, is that if the return, if the ROA customers return, that's about $150 million more in revenue to us and it's about a 4% discount for all of our customers across the board if they return.

So we would probably, one way to think about is, eat into that 4% reduction to a small percent but all of our customers would benefit from that plant being built, not only in having the reliability in Zone 7 but also the fact the rates would go down not up..

And lastly just an update on what's happening in the UP and the discussion around that..

Yes, what do you want me to say?.

I guess it's still a mess, right?.

Yes, I mean again let's just for everybody on the call, we're not involved in the Upper Peninsula in Michigan, we don't serve there. But I think what it does, Paul, is demonstrate to a lot of people in Michigan the unintended consequences of what I would call full deregulation.

I mean even though it's not but basically 80% of the load shifted from WAC to Integras and right now at least for everybody listening it looks like the impact to 50% of the customers in the [inaudible] increase in rates on December 1, and that is not what we should be in as far as a business.

So, yes, I think it's going to change, it changed people's outlook about deregulation..

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

I think you mentioned earlier that the $15.5 billion of CapEx can increase to $16 billion to $17 billion.

Is that encompassing the potential for only CCGT if ROA is eliminated, and would that impact your EPS CAGR?.

First of all, the first part of that question is, yes, it assumes – a lot of the capacity that we're talking about is not in the $15.5 billion. So as John just described, we'd have to pick up some of that.

Remember, this addition, what we're doing here with the purchase of a plant is one of the cheapest adds of capacity that you'll see, and then building a Thetford is going to be a very efficient approach to what we would do as well. So the answer to point one is, it would increase our cost a bit, so we've left those out.

And then question two, I kind of leave it to you to think about what the answer is in regards to what we would do with our earnings guidance, because we look for every opportunity we could. You would naturally think that, let's raise the 5% to 7% to a higher number.

We'll stick to the 5% to 7% and look for ways to put that benefit to work for our customers if we can, so we still deliver for them and for you..

Okay, great. My other questions were asked and answered. Thank you..

At this point, there are no further questions. So there are no further questions..

Oh, great, alright, good. Well, first of all, thank you for joining us today on the call. First nine months were good months, they were good position for us, we're in a good position to meet our guidelines. Obviously we appreciate your continued interest in the Company and we look forward to seeing many of you at EEI over the next week or so.

So with that, we'll close up the call. Thank you..

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