Welcome to the CMS Energy 2016 Third Quarter Results and Outlook Call. The earnings news release issued earlier today and the presentation used in this webcast are available on CMS Energy's website in the investor relations section. This call is being recorded. [Operator Instructions]. Just a reminder, there will be a rebroadcast of this conference call today beginning at 1 PM Eastern time running through November 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. Sri Maddipati, Vice President of Treasury and Investor Relations.

Good morning and thank you for joining us today. With me are Patti Poppe, President and Chief Executive Officer; and Tom Webb, Executive Vice President and Chief Financial Officer. This presentation contains forward-looking statements which are subject to risks and uncertainties. Please refer to our SEC filings for more information regarding the risks and other factors that could cause our actual results to differ materially. This presentation also includes non-GAAP measures. Reconciliation of these measures to most directly comparable GAAP measures are included in the appendix and posted on our website. Now I'll turn the call over to Patti.

Thanks, Sri. Good morning, everyone, thanks for joining us on our third quarter earnings call. For those of you who have not yet met Sri, he is our new Treasurer and Vice President of IR. Sri has been with CMS for a couple years and we're excited to have him in his new role. I'll begin the presentation with an update to earnings and describe our simple but powerful model. Tom will then provide the detailed financial results and outlook and we'll finish with some Q&A. We're happy to report adjusted earnings for the first three quarters are up $0.22 and we have narrowed our guidance to the high end of our forecasted range of $2 to $2.02 or 6% to 7% over last year's performance. As a reminder, we previously announced our long term adjusted EPS guidance of 6% to 8% and we're introducing today specific 2017 earnings guidance of $2.13 to $2.17 a share. It was a strong quarter and that sets us up for a strong finish to 2016. That strong finish will be led by our continued implementation of the Consumers Energy way. We're proud of our consistent financial performance. My coworkers are motivated to serve our families, friends and neighbors. There are many times, however, when those same coworkers, in spite of their best efforts, are unable to serve our customers to our desired standard. Many of our processes are burdened with waste that goes unchecked and the CE way is simply a lean operations model focused squarely on business results through customer-focused standards, implemented by enabled employees working within well-designed and standard processes in a mindset that every day there's an opportunity for continuous improvement. Completing our work safely with high quality, low cost and on time will deliver the same consistent results for…

Thanks, Patti. Third quarter results, at $0.67, were up $0.14 compared with a year ago. Adjusted to exclude the cost of our voluntary separation program, results were $0.70 or up $0.17. In either case, this is substantially better than our original plan even as it reflects meaningful O&M reinvestment, permitted by cost reductions ahead of plan and the warm muggy summer. Now for the first nine months overall, our GAAP earnings were $1.70 per share, up $0.19 from last year. Adjusted for the VSP cost, results were $1.73, up $0.22 or 23% on a weather-normalized basis. As you can see here again, our performance in the first nine months is $0.22 better than last year. Adverse weather hurt $0.10. We blew away our 5% to 7% EPS growth target, growing more than 10%, including the mild winter weather. Improvements included benefit savings, lower uncollectible accounts, cold plant closures, hole-top hardening, higher demand and productivity at dig, to name just a few of the areas. Looking ahead into the fourth quarter, if weather is just normal, we will accomplish a nice uptick of $0.13 compared with 2015. And as you know, we already have a head start on the fourth quarter, with cost reductions well ahead of plan. We also have an electric rate case underway and that was self-implemented at $170 million on September 1. We filed a gas rate case last August which will support 2017. We have plenty of room for reinvesting O&M for our customers this year and we raised our 2016 guidance to the high end of our 5% to 7% range. This has become an investor-favorite slide, where we show our projected earnings per share growth for the full year. And this is as the year progresses. During the first quarter mild winter weather and…

[Operator Instructions]. The first question comes from the line of [indiscernible] with UBS. Your line is open.

It's Julien. Just a couple of questions, can you go over a little bit of what the pull forward poor opportunities for the $0.15 you kind of delayed here. Just give us a little bit of the flavor of each one of those in terms of what they mean in terms of the timing perspective recognition in '17 onward and then I have a follow-up in some policies.

Absolutely. What Julian is talking to if you have all the slides handy it was slide number 12. The slide I called an investor favorite, I know it's my. I just got that curve in it with the little blue box in it, that blue box in terms of what are some of the pull ahead. What are some choices that we have, with all this favorable performance from better cost reductions and we have actually planned and we have a nice toasty summer here at the end with a nice humidity that we don't always get in lovely Michigan which helped us a bit. But in that box you will see a few different items. First one is pull aheads, those are traditional things that we do, if we can take work from next year and pull it into this year it makes the job we have to do next year easier and so some examples are there are some small outages that we are able to pull ahead, a little bit of tree trimming got pulled ahead during the course of the year, things that improve reliability, things that help us be a better company for our customers and make our job a little easier as we go into 2017. The next item that’s listed there is called debt pre-funding. I think everybody knows we're such chickens that we go out and pre-fund our parent debt at least two years in advance to ensure that if there was a nightmarish scenario of 2007 or 2008 proportions we would not have any exposure in the capital markets. This is some of that, this is simply pulling ahead some debt that will mature calling that potentially when it's economic and doing a little more financing for that. It's a little…

Absolutely just real quickly, can you elaborate a little bit on what your thoughts and expectations coming out of this [indiscernible] Michigan deal are? Certainly we heard from your peers yesterday but we want to get your view and specifically can you comment on what kind of rate, what's the ballpark and to the extent that the rate may be higher than what you are seeing out there in MISO capacity. Would that also bode well for your pricing on your big assets at least the ones folks might want to contract with local merchant assets instead of paying the capacity charge under that construct?

There are a lot of things in-flight with the MISO filing and what the implications are. So I'll try and break it down a little bit and then answer completely your question. So first of all MISO is filing for somewhere around November 1. This opportunity for a three year forward-looking auction and we think that’s important addition to Michigan for all of MISO but it's definitely important to Michigan given our hybrid regulatory construct. Therefore their filing has a provision for what's called prevailing state compensation mechanism which the State works with MISO to establish in order for the state to have an alternative in the event that forward showing auction and our forward-looking statements looking capacity shows shortfall so in the event of a shortfall typically the option would go simply to cone [ph] and that would set the price. So to your question on prices yes the capacity prices would go up just with the auction, but if Michigan sees a look at short fall then they implement prevailing state compensation mechanism which requires them the alternative energy suppliers to show that they have owned or contractor capacity for the subsequent three planning years and then their customers pay a capacity charge that the NPS fee will have the authority to set So obviously that charge has an impact on the alternative energy supplier customers but what we think is fair about that is that if additional capacity is required, then the people who are requiring are actually paying for it versus our bundled customers, so it protects our full bundle customers because we know that we will have adequate supply to serve our customers. Now from a DIG perspective I will let Tom address what the implications for DIG might be if that MISO auction.

Naturally, the more people have to turn to find those resources. Now they can't get -- I will call it a free ride that I mean that in a very constructive and complementary way, but they can't get a free ride. They got to go secure their capacity, well there is only so many places to go to get capacity in zone seven and nearby zones. So obviously that could help in and that fits in with why we set this layering in strategy. We try not to be too greedy thinking that we stay out of the capacity markets all of sudden we can get everything at some peak price. We're trying to layer it and just recently we layered in, I mentioned it in the tax, a little more good news we did a little more capacity sales above $4 a kilowatt month, so that’s an opportunity that could help but don't forget DIG can also be just an excellent backup to our own utility if there is a need for that capacity and that’s another reason why we haven't committed all of it so far.

And then Julien I guess I would just add one more implication then for the utility in the event of this implementation. If the alternative energy supplier can't secure additional capacity, then it defaults to and then the NPS can direct the utility to build out that capacity and that then those charges will be assigned to those alternative energy suppliers so that is definitely a potential. Now the timing of all this, the filing for MISO is November of this year. We think there won't be a final ruling from FERC until 2017 and that implies then that it won't be available at -- the earliest it would be available would be in the 2018 auction which is actually for the 20/21/22 planning years. So there's a lot of time and a lot of things that can change between here and there but we know why MISO is motivated because they are concerned about reliability, long term and transparency of the supply and we agree with their concerns. I will reiterate though that our plan and our CapEx forward plans do not require that this MISO provision be in place. We do not require that the energy lobby be past, we really are in a position that our plans is solid with or without either the energy law or the MISO tariff approval.

Your next question comes from the line of Greg Gordon with Evercore. Your line is now open.

So just to be clear, your base plan and the growth rate don’t necessarily rely on or expect significant improvement in financial performance as DIG. So when I look at slide 14, and you’ve said this before so I just want to make sure it's still the case, did that expand potential theoretical expansion in revenues is not necessarily for you to achieve your growth targets, correct?

It definitely is not. What you see in yellow on that slide is all the ability to create more headroom. We do not need any of that to meet our growth targets starting next year at 6% to 8%.

Great. Can I go a little bit further afield and ask a question with regard to the Palisades nuclear contract? It strikes me that when that contract was initially signed, power prices were at a totally different planet than they are today. And it looks like that MISO power prices are significantly lower than what you're going to be paying over time for the power coming from that asset. When you think about both the energy and the capacity that you are getting from Palisades, is there a theoretical construct where it would be in the best interest of the customers to restructure or buy out that contract?

You are always very good at your analysis, but this is a subject that we actually can't talk about today and I hope you will appreciate that.

Your next question comes from the line of Ali Agha with SunTrust. Your line is now open.

Looking at the weather-normalized electrics sales through the nine months, it appears that they are up 0.5%. Does the 1% target for the year still look good? Or what should we be assuming now for the year? Real good, it really does look good. I know you can see the pieces there. When you look at the pieces, I call residential up 0.5 point, commercial down 0.5 point for the year to date September. I call that flat. I just wash those out. Even though net, those numbers were positive to earnings. You'll see the industrial side is up about 2%. We see some good information that is flowing through production plans that people have for the rest of the year. And we are quite comfortable with assuming that residential and commercial will still be flattish. We're not going to try to predict 0.1 or 0.2 or 0.3 up or down, either way. And we still think the industrial side is going to be up about 2.5%, giving us a good 1% growth. Let me give you little color. We have seen some pipelines and other utilities, not us but other utilities, doing pretty well. And we have watched the manufacturing side in chemicals and plastics doing very well. Duh, nice oil prices and gas prices, so they are able to do good business here from Michigan. And even the automotive side continues to be robust. Now, on the negative side we have seen some of the steel fabrication businesses and companies struggling a little bit. So some of that mineral side and steel fabrication, not doing as well. But net-net, some nice upticks in the sector. And when we get a chance to look at where people are scheduling their production for the rest of the year and the things they are going to do, we feel pretty comfortable about where we are. And Tom, remind me, is that the run rate you use when going forward, roughly 1% annual growth?

We probably wouldn't say that. We are so doggone conservative that we like to tell you just think somewhere between flat to 1% growth, that's about how we plan the future, because that's how we look at our business. We try to get a sense that, plan it low. You've heard my story many times about my experiences back at Ford and why that pays out because if you are wrong and it is a little higher than you think, that is a helpful thing as you go through a given year. If you are wrong and it is lower, then that is a struggle and you got to do things that you might not have planned to do to make your commitment to your customers and your commitment to your investors. So we would rather be on that conservative side. So off the top of my head, I would like to think when we run numbers we run them from flat to 1% and anywhere in that zone we feel pretty good.

Separately, when you benchmark your costs versus your peer group, right now where do you think you are? Are you in the top quartile, the second quartile? Where are we in terms of benchmarking what all you have done so far?

Yes, I would say, Ali, total costs were in the top quartile. Those structural changes that we've made, the long-term cost savings that we've put in place, puts us in total. However, where we see the big opportunity is in our distribution operations, both gas and electric are still middle of the pack. And so our pursuit of both the great customer experience and low cost structure, really, we feel like that's where a lot of our headroom lives. That's why we're working so hard on our process improvements.

I see. Last question. I know in both the rate cases you get asked for the investment recovery mechanism. Previously the staff and the Commission has not been very supportive of that. Any sign that this time around they're thinking differently? Or anything you can point to?

We have had good luck with our gas-enhanced infrastructure replacement program, which is essentially an investment recovery mechanism on our gas business. And so I think that has earned some trust and respect with the commission. I think they are more open to it. Their bigger concern is infrastructure reliability in the state. Post Flint, our Commission is very adamant that not on our watch will we have another infrastructure crisis related to the utilities. So it makes the conditions more amenable to these investment recovery mechanisms. Though they do want to -- and they have gone on the record saying they like having annual rate cases where they can see and we can pass on cost savings. So I think it is an opportunity to continue to grow those investment recovery mechanisms, but not necessarily get a flat rider on capital where we don't have to go in for rate cases.

Your next question comes from the line of Travis Miller with Morningstar. Your line is now open.

I was wondering, when you talk about the play between the cost savings that you guys are realizing in a big way and being able to keep customer bills either low or from rising faster. I wonder if you could give a sense for how much of that cost savings you are seeing right now, that $0.32 from the nine months or even the future cost savings would go back to that customer, i.e., through lower bills or through slower rising bills?

100%, here is the point behind that. In the short period of time where we might have a cost reduction this year that clearly will have an impact on our business and our results, right? We look for those annual rate cases that Patti just talked about, and it is one of the key features of the annual rate case. Primarily it is to collect on the capital investment that we are making for our customers, but it's also our mechanism to give back that money to our customers with our O&M cost reductions. The lag is just from the period that there is to the next rate case. So we will share that with them and we set as a goal on our base rates to try to keep that growth at or below the rate of inflation. So pick your number, everyone has a different real inflation number, but let's just say it is 2%. If we can stay under that 2% then that means those base rates are going up -- they're going down negatively on a real basis. So that is our goal and we are constantly doing that work to share with them. Now, I grant you, it gives us more headroom so that we can do more of that capital investment which does then grow the business for earnings. Does that get at your question?

Yes, absolutely.

Thank you.

Thank you very much.

Your next question comes from the line of Paul Ridzon with KeyBanc. Your line is now open.

Can you give your view of what is happening in the legislature and what we can expect before year end?

You bet. As I am sure you have seen a little bit of the press that's been out in the last week or so, the Michigan Chamber has now endorsed the bill package. And that is allowing for some more momentum and there has been a compromise on the renewable portfolio standard at 15% for 2021 that's bringing some more Democrats on board. Therefore, there seems to be quite a bit of momentum. However, we have seen momentum before, so we really are cautiously optimistic. Arlan Meekhof, the Majority Senate Leader, and Mike Nofs, the Energy Chair out of the Senate, are working hard toward a vote post election. With the proper momentum and a good vote count, they will take that vote and potentially move it then into the House. So there's a lot of things that would have to come to fruition to get it to pass in the House. But with the right momentum and bipartisan support and the support of the Michigan Chamber, it is more likely, I would say, than ever, but I still put odds around 50-50 that it gets done before year end. And as you know, Paul, we continue to reiterate our plan doesn't require the law but we think it is good policy for Michigan. We think it is important that energy resource supply be transparent and that the cost allocations be fair for new and additional capacities. This suite of Bills does that work and does a good job of it, so we are supportive of it. But again, our plan doesn't count on it and it doesn't require it.

And none of the compromises that have been made -- or I should say all the compromises have vetted with the governor and he's still okay with it?

Yes. The administration has been very supportive. They have concern about resource adequacy in Michigan, particularly for the power provided by the alternative energy suppliers. They have real frustration that it is not transparent where that power is coming from. And the administration and the Commission and the utilities have been very clear that we want to make sure that it is transparent, that we have adequate supply for the whole state. We know we have adequate supply for our customers. We want to make sure that the alternative energy suppliers also have adequate supply one way or another for their customers.

Your next question comes from the line of Brian Russo with Ladenberg Thalmann. Your line is now open.

Most of my questions have been asked and answered. But I am just curious that the Senate Bill 437 that was just referenced, will that change your capital budget, either by size or mix of investments?

We don't think so. Our CapEx plan and as you saw in our slides, our generation strategy is smaller and smaller bets. We want to make sure that we build for necessary load, that we are focused on a diverse portfolio that can adjust as load shifts and so that we can make quicker, smaller bets rather than long, long-term big bets. So there is nothing in the provisions of the law that would change that strategy.

Your next question comes from the line of Andy Levi with Avon Capital Advisors. Your line is now open.

What was the reason you can't discuss Palisades?

Usually when you make a no comment answer, that's it. Actually it is because my voice is cracking up. I have got nothing left. Truthfully, this just is one of those subjects that we are not able to talk about and you can imagine why.

And then on a bigger picture, if the Palisades contract was ceased, we will just leave it like that, how many megawatts, remind us how many megawatts that would be.

I think about 800 megawatts.

800 megawatts. Obviously number one, it could either be restructured, that could be a way you could also get out of it. One of the opportunities would be to you to replace that power with your own generation? Or with a DIG or what would be the strategy and opportunity for CMS?

It's something that we really can't get into. So we appreciate the question and your patience.

But I will say this. Generally, about our capacity planning strategy, we have alternative options. When PPAs do come off and we have a couple -- we have many PPAs, and as they retire and we decide whether we're going to renegotiate those PPAs or replace them, we do have options to bring in -- to do more bilaterals with other energy suppliers, or to build new capacity, incremental renewables, more demand response and energy efficiency. We are doing a lot of, obviously, capacity planning to make sure that we have adequate supply for all of our customers for all the years to come. It is an exciting time because we have a lot of smaller bet options that can provide for a very diverse portfolio for serving our customers. And that frees up, then, investment room in our electric distribution system and our gas business where we have significant investment requirements. So we really have a good balanced approach right now.

Really the bottom line is whether it is this contract or any contract PPAs that are dropping off, one of the opportunities is to replace it with basically a self-build or some type of capacity that you would be the owner of.

Sure.

Your next question comes from the line of Paul Patterson with Glenrock Associates. Your line is now open.

I just wanted to follow up on the MISO capacity team, or scheme. What I am wondering is that, if an alternative energy provider doesn't buy capacity on his own, he would be assessed the capacity charge, is my understanding, for buying it from you guys or other utilities. Is that correct?

It actually would work as a charge to the customer of the alternative energy supplier, not the energy supplier themselves.

Okay. That actually answers my question. Thank you. And then the second question that I have is, there is this transmission discussion with MISO and the governor about bringing in Canadian power to Michigan as a means of lowering prices. I was wondering if you had any color on that, if you guys might participate in something like -- it's a project or something like that. Or any thoughts you guys had on that.

So the MISO study that the state requested really has several components. One is the feasibility of connecting the Upper Peninsula, which is not our service territory. Zone 2 in the MISO zone to Sault Ste. Marie and between Sault Ste. Marie and Ontario. Then looking at connecting the UP and the Lower Peninsula to an existing transmission project in Gaylord. Or starting a large gas plant constructed up north somewhere up in the UP. So it's a variety of studies and they are all pointing to one situation as trying to be correct, and that is the resource adequacy issue. Because of our regulatory construct in Michigan, there is this loophole in the UP that has caused a major cost shift up there. So they are trying to figure out a way to better serve the people of the Upper Peninsula. We participate to the extent that we are energy experts and the governor relies on us for our input and insights, but the study that they requested from MISO really will help frame up the situation, I would say. And when it is complete, we will certainly obviously take a look and see what the options are.

Your next question comes from the line of Paul Ridzon with KeyBanc. Your line is open.

I recently saw someone's planning a large gas plant in Michigan right on the Indiana border. Do you have any thoughts on that? I don't know if you have seen it or not. I don't remember the name of the plant, unfortunately.

I don't know who you are talking about that's doing that. But people are constantly looking at should we built here, build there? When you are down in that general area, you might be talking about Illinois solutions. And you are probably aware that, for instance, Covert, one of the larger IPPs that is left, is hooked up to PJM, but they are in the process, potentially, of selling their plant. So these things are dynamic but I don't have a lot of specifics on that particular question. But I will tell you what I will do, I will double-check after I am off the call and if there is something of substance we know about, we will share that.

There are no further questions. I turn the call back over to the presenters.

Great, thank you. And thanks for listening to our call today, everybody. We appreciate your interest and definitely appreciate your ownership. Tom and I look forward to seeing many of you at EEI in just a couple weeks.

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