Apr 26, 2012
Executives
Laura Mountcastle - VP and Treasurer John Russell - President and CEO Tom Webb - EVP and CFO
Analysts
Kevin Cole - Credit Suisse Paul Ridzon - KeyBanc Paul Patterson - Glenrock Associates Mark Barnett - Morningstar Research Ali Agha - SunTrust Brian Russo - Ladenburg Thalmann Steve Fleishman - Bank of America Jonathan Arnold - Deutsche Bank Andy Levi - Avon Capital
Operator
Good morning, everyone, and welcome to the CMS Energy 2012 First 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 May 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 Ms. Laura Mountcastle, Vice President and Treasurer.
Please go ahead.
Laura Mountcastle
Thank you. 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 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. CMS Energy provides financial results on both a recorded GAAP and adjusted 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 a 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 provided reported earnings guidance. Now, I’ll turn the call over to John.
John Russell
Thanks, Laura. And good morning, everyone.
Thanks for joining us today on our first quarter earnings call. I'd like to being by first congratulating Laura Mountcastle on her upcoming retirement, which was announced yesterday.
Laura will be leaving us effective July 1, having served as a key financial officer of our company for 18 years. Laura has held the role most familiar to those of you on the phone as Vice President of Investor Relations and Treasurer since 1999.
I know you will join me in wishing Laura the best and Laura, I'll tell you, I've always enjoyed working with you and I want to publically thank you for your great years of service to the company and on behalf of everyone of the company, we'll miss you.
Laura Mountcastle
Thank you, John.
John Russell
Good luck. Let me begin the presentation today with a few brief comments about the quarter before I turn the call over to Tom to discuss the financial results and outlook for the remainder of the year.
Then we'll close with Q&A. First quarter adjusted earnings per share was $0.37, down $0.14 from 2011.
The results were impacted by the warmest winter on record in Michigan, reducing earnings by $0.13 this year and $0.18 compared to the colder than normal weather a year ago. The good news is, we've identified a number of actions some of which have already been implemented to offset the adverse weather.
Tom will discuss several of these with you later. As a result, we are reaffirming our full year adjusted EPS guidance of $1.52 to $1.55 a share.
On the regulatory side, our electric and gas rate cases are proceeding on schedule. I'll give you an update on these two in a minute.
In early April, the Michigan Court of Appeals ruled in a DTE case that the Michigan Public Service Commission lacks statutory authority to adopt a revenue decoupling mechanism for electric utilities. As the result of this decision, we wrote off a $59 million regulatory asset covering the period from December 2009 through November of 2011.
The Court's ruling does not affect our 2012 adjusted earnings guidance since the electric decoupling mechanism was only authorized through November of last year. And I also am going to talk about the bill to raise the retail open assess cap in Michigan and give you an overview on the operations for the quarter.
Many of you are familiar with our rate case timeline. We are nearing the deadline for the Commission to issue a final order in our electric rate case.
All of the testimony and briefs are filed and the staff in ALG have filed their recommendations. The final order is due no later than June 8.
The gas rate case is scheduled for a final order by August 31. Because of the limited size of the case, there's a chance we could settle this case.
In March, a bill was introduced to raise the retail open access cap. We are opposed to this bill, which would benefit a relatively small number of business customers at the cost of all other customers.
There is wide spread opposition against the bill including the Chair of the Senate Energy and Technology Committee and the Chair of the House Energy and Technology Committee. Both have publically voiced their opinion that the 2008 energy law is working with regard to the cap and have no intention of taking action on the bill.
If enacted, it would allow all customers on the waiting list to go to ROA, retail open access, and then permit further annual increases in the cap to about 40% by 2016. This would shift up to $400 million of cost to our remaining customers.
We will continue to inform key members of the legislature and the administration of the consequences to our remaining customers if this bill is passed. Let me give you a brief update on operations.
Major construction continues on our 100 MW Lake Winds Energy Park. Concrete foundations are nearly complete and wind turbine components are being delivered.
The facility is scheduled to begin operations later this year. Low natural gas prices have resulted in record monthly send-out at our Zeeland natural gas power generation facility.
In February the combined cycle portion of the plant set a record capacity factor of 86% compared to 11% for all of 2008. The acquisition of the Zeeland plant in 2007 has been a great addition to our generation fleet and has helped us to maintain a balanced energy portfolio.
Low natural gas prices will also generate savings for our gas customers. Starting in April, the commodity portion of our customers' bill was reduced by 13%.
We project our customers will save more than $100 million over the next 12 months and $300 million over the next two years. Ironically, many of our customers who have switched to an alternative supplier are paying more for their gas than our bundled customers.
This month, we offered a voluntary separation program to all salaried employees similar to the programs we offered in 2006 and 2009. This decision was driven by our goal to ensure that we are properly staffed to serve our customers effectively and to run our business efficiently.
We have informed the union leadership of this program and are in discussions with them to explore a similar program for our union employees. Our business model has been working well for several years.
It relies on good regulatory and legislative framework and a disciplined execution by the management team. This supports a customer-driven investment plan with customer rate increases that are affordable at about the rate of inflation.
With this model we have delivered consistent cash flow and earnings growth in the past and we expect it will continue for many years. Now, I'd like to turn the call over to Tom to discuss the first quarter results, if he can get through it with his cold.
Tom Webb
My apologies to every – thanks, John. But my apologies to everybody.
I'm coming through with a little bronchitis today. Let's go right to the next slide and talking about our results.
Excluding the decoupling write-off that John just talked about, adjusted earnings were $0.37 a share and this is down $0.14 from last year reflecting the record warm winter. On a weather-adjusted basis earnings were $0.50 and that's up $0.04 from last year.
Now, we are writing off our electric decoupling regulator asset because we no longer assess recovery as at least 80% probable. Two weeks ago the Michigan Court of Appeals found that the Michigan Public Service Commission does not have statutory authority for electric decoupling.
Although gas decoupling is expressly addressed in the 2008 energy law and the intent may have been to include the electric business as well, the Appeals Court judge found that in a plain reading of the law, electric decoupling was established. This appeals case brought by ABATE against the Michigan Public Service Commission regarding the DTE rate case order reduces our confidence in recovery.
The standard to maintain such a revenue regulatory asset is high. Please recall that for planning purposes we had assumed that present and future electric decoupling for the economy and weather was discontinued in any event.
We were however surprised by the Appeals Court order and have taken the one-time write-off of the anticipated $0.14 recovery as you can see on this chart. Now importantly, gas decoupling continues and you see the numbers on the chart for that.
And energy optimization incentives also continue for both electric and the gas business as shown above. In our service territory, the first quarter weather was the warmest on record.
Personally, I'm hoping the graph shown here that looks like half an ice cream cone, will look more like a full cone later. But kidding aside, we take this very seriously and we do not dismiss weather as an excuse to miss our earnings or our operational goals.
A few weeks ago we estimated the adverse weather impact at $0.16 when we gave you a look ahead. But as you can see here the final data came in at $0.13.
We have a plan in place to offset the $0.13 of adverse profit associated with the warm winter weather. Some of the actions are natural offsets.
For example, with lower sales, pressure on customer bills eased and uncollectible accounts declined a bit. With less gas flowing through the system, less gas was lost.
On the other hand, hard work is also paying off. Our major multi year effort to improve employee safety has resulted in more employees going home safely each day and therefore we have fewer injuries.
Fewer injuries reduces the size of our injuries and damages reserved too. More good news.
And you can that, all this detail, with the earnings numbers on the right hand side of this slide. Although the weather is not the reason we are reshaping and resizing our team with a voluntary restructuring program to better meet the needs of our customers.
In total, our recovery actions offset adverse weather of the $0.13 a share. $0.08 or 60% of that work is complete, done, and $0.05 is underway including the voluntary restructuring program.
Now as you can see here, strong cost discipline, the continuing sale recovery and rate cases help us keep right on track to earn our $1.52 to $1.55 a share for this year. The Michigan economy continues to recover at a faster pace than the nation with unemployment for example down six points from the recession peak but still above 8%.
The US unemployment levels are down two points from the recession peak but also still a bit above 8%. US auto sales provide an indicator of recovery in Michigan.
Sales were up sharply. US production also is up; 18% so far just this year.
Finished vehicle inventories remain low at 54 days supply and a 60 to 90-days supply is more normal. This and continuing used car prices bode well for the new car sales ahead.
As you can see here, the economic recovery in our service territory in Michigan continues in its third year with industrial sales at pre-recession levels last year. Industrial sales were up 10% in 2010, 4% in 2011 and we expect another lift of about 6% this year.
Total weather adjusted sales were up 5% over the last three years. As shown at the top of the bar sales were of course higher excluding energy efficiencies and that may be a clearer measure of the underlying economic growth in our service territory.
The recovery over the same three-year period was about 8% instead of 5%. Perhaps many people including us have been under calling the resiliency of the economic recovery in Michigan.
A key aspect of our recovery includes our passion about maintaining responsible customer rate increases at or below the level of inflation. Our earnings and cash flow growth is based primarily on capital investment and rate base growth.
Our forecast of spending over the 2012 to 2016 period continues at $6.6 billion. We've had lots of opportunities to increase the size of this but have continued to prioritize in a manner to fit in more content without increasing the total.
With faster than planned replacement of pipes and poles, quicker implementation of the smart grid and a modest increase in gas generation capacity, we easily could be spending $10 billion. This would however require increases in base rates of more than 4% a year, which we don't believe is reasonable or sustainable year in and year out.
The precise spending level of $6.6 billion is not critical but the general goal of holding down base rate increases is important to us. Our liquidity as a percent of market cap continues at a strong level and it's nearly twice as thick as most of our peers.
In fact, I'm pleased to report that we just renewed our $150 million revolver for five years at more attractive terms maturing in 2017. Keeping a thick level of liquidity, pre-funding our parent debt maturities a couple of years in advance and maintaining a strong backup plan continues what some of you have called our healthy belt, suspenders and sky hook approach.
Recently Fitch upgraded our utility ratings with secure debt rated at A-, up a notch. Moody's has moved the utility and CMS from stable to positive outlook.
And we welcome these votes of confidence in the plan. And here's our cash flow for the parent and the utility.
These continue at healthy levels. This is our sensitivity ready-reckoner chart for 2012.
With three of four convertibles now retired, the dilution exposure has been reduced substantially. So we'll drop the sensitivity in the next quarter's chart.
With more gas requirements contracted our cash flow sensitivity to changes in gas prices is minimized from what we showed you a quarter ago at $60 million per dollar of gas price to $25 million as we show here. Now, we are however adding coal inventory with the shift of economic burn from coal to gas.
We expect that higher than planned inventories will adversely impact working capital by about $50 million compared with planned. We've taken steps to mitigate this but we do have more work to do.
We are on target for all of our financial report card measures as shown here. This is a good reflection of the health of our underlying business, operationally and from a regulatory standpoint.
Now let me sort of end the formal part of the presentation before we take questions with my own good wishes to Laura and my deep appreciation for her being my business partner over the last decade. With her leadership, we avoided the abyss of bankruptcy, totally restructured both consumers and CMS balance sheets and helped restore consistency and integrity.
Few companies have been on such a steep roller coaster and then delivered nine years of consistent earnings growth. We thank you, Laura, and we will miss you.
So, thank you all for joining us today and John and I would be happy to take questions now. So, Grant, if you'd open the lines, we'd appreciate that and apologies again to, everybody, for coughing at you during the call.
Operator
Thank you very much, Mr. Webb.
(Operator Instructions) Our first question comes from Kevin Cole from Credit Suisse. Please go ahead.
Kevin Cole - Credit Suisse
Hi. Good morning, guys.
John Russell
Morning.
Tom Webb
Morning.
Kevin Cole - Credit Suisse
And thank you, Laura, for all your help over the last couple of years and keeping me up to speed. I guess – so I guess the first question would just be just on the change of decoupling.
And so as I understand it the ruling even restricts very narrowed decoupling that would be focused on energy efficiency only. And so from here do you expect the MPSC to take this back to court or to abandon decoupling totally?
Or can they just simply call it a tracker instead of decoupling and call it a day?
John Russell
Kevin, it's really up to them to decide what they want to do. The unique position about us in this is that it is a DTE case.
I mean, ABATE has also sued us and our case is pending. So we are a bit of an observer in this rather than an active party.
So it's really up to the Commission to decide what they want to do. They have issued a request for parties to submit by I think the middle of May, comments about this ruling.
So that's the first step that they've taken. They'll have to decide along with ABATE and DTE what they want to do in the next steps.
So we'll kind of follow their action. It's hard for us to lead on this one because we really – it's not our case.
Kevin Cole - Credit Suisse
Okay. And then I guess on the – on your weather slide where you list the recovery actions.
Should I read it as of the categories under complete, those are for the most already locked in for year and we should see them probably more so in the third quarter? And then the underway is – are still yet to be seen but are on your goals?
Tom Webb
Good description. The complete categories are done.
Decisions are done and actions have either been taken or completed. But you will see those roll into the second quarter and third quarter.
Most of them, like the low cost financing, you're going to see that soon. The pension cost is actually one that is already been picked up upon.
So there's a lot of good things happening there. The underway would be your interesting side because under efficiencies includes the restructuring program that John just described that we're doing.
And on the economy, we are seeing a stronger tick-up in sales so there's a little piece of sales that's flowing through that we just didn't anticipate and we're still using our approach of being pretty conservative. We'd rather be wrong and surprised on the favorable side on this sort of thing.
But it looked so good that we pretty much had to pick it up. So we feel pretty good about what's on the underway as well.
But, yes, good characterization. Complete, we finished.
Underway, coming events that are being worked on now.
Kevin Cole - Credit Suisse
Great. Thank you, guys.
John Russell
Thank you.
Operator
Thank you. Our next question comes from Paul Ridzon from KeyBanc.
Please go ahead.
Paul Ridzon - KeyBanc
Good morning.
John Russell
Morning.
Tom Webb
Morning.
Paul Ridzon - KeyBanc
Congratulations, Laura, and again thank you for all your help over the years.
Laura Mountcastle
Thank you.
Paul Ridzon - KeyBanc
Can you give a sense of maybe a headcount or FTE count on the early out?
John Russell
Yes. It's still early.
I mean, Paul, we've – the request closed Tuesday of this week, Tuesday evening. And just for everybody's benefit, we do this a little bit different than most companies.
It's not based on everybody that submits gets this. It's basically we select who gets it based on the fact can we do business without that position in the future.
Right now, I'd say though we would probably be anywhere, it could potentially be anywhere from 5% to 7% of our salaried workforce, which is around 300 people. That doesn’t include the union results because as I said we're still in negotiations with them.
Paul Ridzon - KeyBanc
And is there – I guess the first question touched on this. But is there anything – legislative approach to getting decoupling reinstated?
John Russell
There may be but, I mean, the fact that the Appeals Court looked at the law and what they ruled, even though it's disappointing for us particularly because of the write off, the word electric is not in the law. So it's hard to argue with a fact that if it was intentional they should have included it in there and since it was excluded their judgment seems logical.
But there are other ways that we can get around this and I don't really want – and we're not getting around the law, but other things the regulators can do and I think that's why they're asking for the utilities to respond back to them in the next few weeks to decide what approach do we use. As Tom said, they resolved the – they ensured that the trackers – they supported trackers so there's ways you can track revenue.
There's way you can track other things, which is fine. And I'm glad to see they endorsed that during the hearing so that'll be a published case, which means that that should have a lot of substance in the future for how we actually go about looking at this.
So there are opportunities. We'll have to see what the Commission decides to do, what DTE decides to do and then we will certainly support what we can in that case.
Paul Ridzon - KeyBanc
And you just kind of touch on a big topic this quarter has been coal to gas switching and potential forced burns, just kind of where CMS stands on that regard?
John Russell
Yes. We've seen the same thing.
As I mentioned, our Zeeland plant, which I'm really glad we purchased a few years ago has gone from a peaking plant to a base load plant. We've even seen at times that the – certainly the combined cycle is dispatched ahead of coal at times, particularly some of our coal plans.
But even peaking, even the simple cycle has dispatched some coal on a certain, some certain timeframes. So we're seeing that as an advantage that we have the gas plants.
A disadvantage that we're really cycling the coal plants a lot more than we have in the past and right now some of the coal plants are out market. So it kind of fell in line with the strategy that we've had is to take some of these older units and mothball them in the next couple of years anyway.
Tom Webb
There's another little benefit that comes with this. The downside is those coal inventories that I mentioned are a little high but a benefit is our PSCR costs are dropping sharply benefiting from these low gas prices.
So you remember we talked a lot about keeping our base rate increases at or below the level of inflation. But we said GCR cost and PSCR costs were important to us.
GCR cost are obviously negative each year creating lots of headroom for our customers. And PSCR costs, which we've been worried about, they're now half the size we were looking at maybe the last time we talked to you, everyone in New York.
So there's a lot of benefits that come through this.
John Russell
And, Paul, that’s the headroom we're looking for.
Paul Ridzon - KeyBanc
Got it. Thank you very much.
John Russell
Thank you.
Operator
Thank you. Our next question is from Paul Patterson from Glenrock Associates.
Please go ahead.
Paul Patterson - Glenrock Associates
Can you hear me?
Tom Webb
Yes. Welcome.
John Russell
Yes.
Paul Patterson - Glenrock Associates
First of all, congratulations, Laura. It's hard to imagine that it's kind of – I don't know.
I'm surprised to hear it. So anyway, congratulations.
So as I'm getting over that, let me – most of the questions have been asked but I want to sort of follow-up on and I'm sorry if I missed this. The weather adjusted numbers in the release, does those include leap year?
Tom Webb
They do. So when you read our numbers we have a little lift for leap year this year and you'll have a little fall off from that next year.
And I'll give you just a rough rule of thumb for us on the electric side. It would be – I'd round it up and call it 0.3% of sales.
Does that help you?
Paul Patterson - Glenrock Associates
Okay. So in other words wouldn't it be 1.7% of total system sales.
It would be 1.4% more or less?
Tom Webb
Yes. If you were to – if we looked at electric sales and I took you to our chart, which was Slide 14, where the weather-adjusted number was about 2% and I'm talking about the full year.
You'd take about 0.3% off of that or if you went to the number without energy efficiency, more an economic look, would be about 3% and you'd take 0.3% off of that.
Paul Patterson - Glenrock Associates
Okay. So the plus 2% that you have for 2012 would be – I guess what would the number, I'm sorry, what would the number be if we were to basically back out the impact of the leap year?
Tom Webb
You'd take the full year number of 2%, which is just the weather-adjusted number and you'd make it 1.7%. Or you'd take the number that we show on the chart that says 3% without energy efficiencies, so more of the economic growth number and you'd make that 2.7%.
Paul Patterson - Glenrock Associates
Okay. And then the number for the quarter itself – I mean, that's a full year number.
Is that correct?
Tom Webb
Same thing.
Paul Patterson - Glenrock Associates
Okay. That makes it look like residential weather adjusted numbers would be considerably lower.
I mean, it looks like commercial and what have you – how do you explain what's going on weather adjusted with respect to those – do you follow me?
Tom Webb
We're seeing – I do. We're seeing good growth in the first quarter with residential up even if you took the leap year out.
We are seeing industrial continuing up where we're talking about full year numbers in that 6% plus area. We already saw that again in the first quarter.
But the commercial is the drag and it has been the drag for some time for us. We are watching our commercial customers hold back.
So before they add on any headcount or add on another location or put back a location that they took out. Of if they're stores, reopening a store that’s in a mall or whatever.
They're holding back. The industrial recovery leads big.
We're not seeing a good residential turnaround, which lagged. And the commercial hasn't yet made that big turn.
That's ahead.
Paul Patterson - Glenrock Associates
Okay. So the residential would be about 0.6% basically?
Is that how we should think about it?
Tom Webb
And I don't know that I have – that number I gave you, that rule of thumb. I don't know if it's precise by class but it probably is close.
Paul Patterson - Glenrock Associates
Okay. Listen, I appreciate it.
Tom Webb
You're welcome.
Paul Patterson - Glenrock Associates
And thanks a lot, Laura. Have a great one.
Laura Mountcastle
Thank you, Paul.
Operator
Thank you. Our next question comes from Mark Barnett from Morningstar Research.
Please go ahead.
Mark Barnett - Morningstar Research
Hey, good morning, everyone.
John Russell
Morning.
Tom Webb
Morning.
Mark Barnett - Morningstar Research
Congratulations, Laura. Just real quickly, you had kind of touched on this a little bit but with the voluntary separation program, I know your guidance assumes some cost reductions.
I'm just wondering does that include also some assumption of charges for severance for the year in addition to the headcount reductions?
Tom Webb
Yes. Before we get the final numbers in and we're only in the middle of that process as John mentioned.
Our estimates would be that the upfront cost of this will be somewhere between $5 million and $10 million. And that's all based on the number it takes that we approved.
Because as people come in we have to say yes or no. And then the savings that we would get from that, we think will probably give you about a 12-month payback.
So we will take the upfront one-time piece, call that out so that you can see that separately not let that impact your future if you choose, and then we will give you the ongoing savings that we get. Obviously a half a year this year and then the impact for the full year next year and tell you about that.
And I would tell you that the savings this year probably be over $5 million and on a full year basis probably closer to $10 million. Now those are rules of thumb just at the moment and we will know more the next time we're with you in an earnings call.
We'll have it all complete and lay it out for exactly what it is.
Mark Barnett - Morningstar Research
Okay. Thanks for that.
Tom Webb
You’re welcome.
Mark Barnett - Morningstar Research
And I know that you like to look over the long-term and a little bit further over the cycle with big investment plans, but with your environmental CapEx where you [ph] sold (31:16) out. Given the current dispatch fundamentals, are you taking another look at any of your plants and investment decisions you started to make already?
Or how is that affecting your thinking?
John Russell
Yeah, Mark, we looked at that carefully. The – we're comfortable and confident the decision made with a small seven to mothball those and maybe ultimately retire the right move.
The big five coal plants, the work that we’ve done already makes sense because they are competitive. Although as I said earlier, we're moving them around a little bit, cycling them a little bit more than we have in the past.
But the – also the belief we have that by 2015 when we see some of the environmental rules, math’s and others go into effect, what we’re going to see is capacity prices rise, gas prices begin to trickle up at that point and at that point, there's – we believe that these high efficient coal plants will be in the money. So as far as the decision we’ve made, the decision we made to put full environmental controls on the big five coal units makes sense in the short term and the long term, mothballing the small seven makes sense in the short term and the long term.
Mark Barnett - Morningstar Research
All right. Thanks.
That’s all for me.
John Russell
Thank you.
Operator
Our next question comes from Ali Agha from SunTrust. Please go ahead.
Ali Agha - SunTrust
Thank you. Good morning.
John Russell
Good morning.
Tom Webb
Good morning.
Ali Agha - SunTrust
Tom, going back to your offset that you laid out for us for the – and through the quarter, could you give us a sense of what your interpretation was for the ELJ recommendation on your electric rate case? And some sense of what may have been assumed by you guys to keep you on your guidance track?
Any color or thoughts there?
Tom Webb
Well, Ali, you know by now that we don’t usually predict rate cases. We talked about our self-implementation, and where we are.
For me to start giving you numbers that we've assumed is kind of self-defeating. So I won’t add much to that except to say that we try to self-implement the appropriate numbers so that there isn’t a large refund of any kind and just do the right thing there.
But all the other assumptions you'd look at, we plan on normal weather, for example, and last year we were cooking. So there would be an upside if that were to happen again.
On the other hand, if it were a very mild summer, we'd have to take a hard look at what we’re doing. That would be a big challenge on top of this mild winter.
So I would say look for normal things not extraordinary things. Normal weather, reasonable recovery in our rate cases and the like, as you look for the future numbers.
We've tried not to be aggressive anywhere here. One thing that John and I probably didn’t make really clear is that none of the recovery items we've shown you today cause us to do anything to the business that we think is unusual or make any sense.
Sometimes you’ll hear us talk about if we got some upside we'll put some more money in tree trimming or even the other way around. We haven’t touched our forestry program.
We haven’t touched our outage program, because we want all of those things to hold their own if we can. We've worked at the things that are all good business decisions.
So I hope that helps a little bit.
Ali Agha - SunTrust
Sure. But I guess from another perspective, let me ask you this.
Were you folks surprised by the number that the ELJ put out there? And relative to what your interim rate increase had baked into them?
Tom Webb
Well, I don’t know if surprised is an important kind of view, but it’s inconsistent with what we think the ultimate recovery should be.
Ali Agha - SunTrust
Okay. Okay.
And separately, John, to you. There have been rumblings that in Michigan at some point the governor himself is planning to lay out an energy plan or an energy vision.
Which side do you have on that? Do you have in your mind any implications as far as whether it’s open access or any other electric-related issues are concerned?
John Russell
Yes. I expect something to come out this fall.
We’ve talked to the administration. They’re going through their plans right now for this.
Most of the focus I think he is going to talk about, and it’s still being developed right now so let me say that, is it doesn’t have anything to do with retail open access or anything like that. It has more to do with infrastructure.
And so, how do we have electric and gas infrastructure in place for the future of this state. And I expect, and this is my assumption, I expect he’ll also look at some of the natural resources that we have here in the state with some of the best storage facilities for gas in the country.
The gas plays that we have, particularly up north. The Great Lakes that we have with water, I mean, we’ve got some incredible natural resources here in Michigan and how do we position those for the future success of Michigan.
He tends to be looking at the impact both from a financial impact to the state as well as an impact to the residents of this state in a favorable way. So that’s what I think the focus is going to be.
But we’ve got a lot of work to do with them between now and then, and again I don’t think he's landed on it yet. He's got some budget issues, which he's dealing with right now.
Ali Agha - SunTrust
I see. And last question just to keep a track of this bill you referred to retail open access.
My understanding, it’s still in Committee, hasn’t come out. Is that where you think it basically ends up?
And I mean is there a particular cut-off date by which we know that this bill is pretty much dead?
John Russell
Year-end.
Ali Agha - SunTrust
Year-end.
John Russell
Yes, you’re right. I expect it’ll stay in Committee.
It doesn’t have any traction and year-end it'll die if nothing is done with it.
Ali Agha - SunTrust
I see. Thank you.
John Russell
Thank you.
Operator
Thank you. Our next question comes from Brian Russo from Ladenburg Thalmann.
Please go ahead.
Brian Russo - Ladenburg Thalmann
Hi. Good morning.
John Russell
Morning.
Tom Webb
Morning.
Brian Russo - Ladenburg Thalmann
Congratulations, Laura, and best of luck.
Laura Mountcastle
Thanks very much.
Brian Russo - Ladenburg Thalmann
In terms of the timing of the electric rate case final order, I think it’s ripe for decision. Do we expect the Commission to rule on that by June 8?
Or is there something that we can expect kind of any day now?
John Russell
No. Usually they make the decision close to the deadline.
I mean with the new Chairman they may advance it a little bit, but at the end of the day there isn’t a lot of motivation to make the decision earlier rather than later. But yes, I expect it just before.
I don’t think they'll go beyond the deadline because then as you know the law indicates that we can move forward and their rates are final. So expect just close to it.
Although as I mentioned – I’m sorry.
Brian Russo - Ladenburg Thalmann
No, go ahead.
John Russell
On the gas side, I’d – maybe a little bit different on the gas side.
Brian Russo - Ladenburg Thalmann
Understood. My other questions have been asked and answered.
Thank you.
John Russell
Thanks, Brian.
Tom Webb
Thanks, Brian.
Operator
Thank you. Our next question comes from Steve Fleishman from Bank of America.
Please go ahead.
Steve Fleishman - Bank of America
Hi. Thanks.
Good morning.
John Russell
Morning, Steve.
Tom Webb
Morning.
Steve Fleishman - Bank of America
Laura, 18 years, oh my gosh.
Laura Mountcastle
I know. Hard to believe.
Steve Fleishman - Bank of America
Congratulations. Couple of questions.
First, on the – I believe there was another provision in the DTE order about smart grid spend and potentially not allowing that. Can you just talk about the order there and how you're thinking about it and implications?
John Russell
Yes. The one thing that came out there is the courts ruled that there wasn’t a sufficient record in that case to move forward.
I think as you know, we’ve been pretty slow and methodical in our rollout of smart grid and implications to us; we’ve already done what the court is asking DTE to do. And I think you’ll have to ask them, but I think they’ve already done it too.
So we’ve got the full business case reviewed with the staff and it’s in our plan. So it really was that first case, that 2009 case they were focused on for them.
Steve Fleishman - Bank of America
Okay, great. And then, second kind of a high-level question.
Obviously you guys did that nice additional dividend hike earlier this year. Should we assume now that you have the payout ratio in line that you’ll grow dividends kind of in-step with the earnings growth?
Tom Webb
That would be a good assumption.
John Russell
Yes, that would be a good assumption.
Steve Fleishman - Bank of America
Okay. One last question.
On – I don’t know if you have handy the data on capacity factors of your coal fleet this quarter versus last and maybe also of your combined cycles. Or your – or otherwise your mix?
John Russell
Yeah, I can get – I don’t -- let me try to find it right here. I don’t know.
Do you guys have it real quick? We don’t – yes, I don’t think we have it by quarter, Steve.
We can give you...
Tom Webb
Okay, no we can do it.
John Russell
Did you do it by quarter? Good.
Okay. I don’t have it here.
Tom Webb
So let me just make sure I'm getting this read right. Campbell 1 about 68% capacity factor in the –
John Russell
That’s coal.
Tom Webb
First quarter. And Campbell 3, another big coal unit, about 50% and then the KARN units run about 35% and 50% in the first quarter.
There’s two of them over there, coal units. And then jump down to like Zeeland, the combined cycle is 71% in the first quarter.
So if that gives you a little sense as to what you’re seeing.
Steve Fleishman - Bank of America
Do you by any chance have what those would have done last year’s first quarter as a comparison?
Tom Webb
I tell you, Steve, I mean Laura's stepping down and now you're asking all the detailed questions. All right.
Here you go. Let me do Zeeland first.
So the 71-ish percent in this quarter, same quarter a year ago was 27%. And the – let me use the Campbell 3 unit because it's the big coal unit that’s up on the west side of state where it was about 50% in the first quarter.
It was about 77% in the first quarter a year ago.
John Russell
Tom, let me just on that one, though, we had a large outage on that plant this year in this quarter. So Campbell 3 would – because it’s efficient, very efficient it would normally run.
So that is one exception, Steve, when you look at it –
Tom Webb
So let me round the Campbell units out just in my way of doing it because there was an outage on one of the other units last year that I was going to skip. I'd say that coal, the big coal units on the west side of the state were around 70-plus percent and what you’re seeing now if I kind of average them out and think about some changes, well Campbell 1 was running at about 68%.
So you can see that transition. But the big deal is to see the shift on the gas side.
Because remember even though they're big coal units, they're still big efficient base load units. Zeeland going from 27% capacity factor in the first quarter of last year up to 71% in the first quarter of this year.
That’s probably the best indicator for you to see what we're looking at. Does that help?
Steve Fleishman - Bank of America
That’s great. Thank you so much.
Tom Webb
You are very welcome. Thanks for joining.
Operator
Thank you. Our next question comes from Jonathan Arnold from Deutsche Bank.
Please go ahead.
Jonathan Arnold - Deutsche Bank
Good morning. My questions were asked and answered but, Laura, congratulations and good luck.
We’ll miss you.
Laura Mountcastle
Thank you, Jonathan.
Operator
Thank you. Our next question then comes from Andy Levi from Avon Capital.
Please go ahead.
Andy Levi - Avon Capital
Hi. Can you hear me?
Tom Webb
Yes. We can.
John Russell
Yes.
Andy Levi - Avon Capital
Hi. Good morning.
And, Laura, I thought it was 20 years I knew you.
Laura Mountcastle
(inaudible)
Andy Levi - Avon Capital
Yeah, so I think still have that San Francisco 49ers hat you sent. So I wish you luck, Laura and I’ll miss you.
Just three very quick questions. Could you just talk a little bit more about you mentioned a possible settlement in the gas case.
Any other details you can give us on that as far as kind of –?
Tom Webb
Why don’t I just jump in and say that kind of thing, it's really too soon to talk about. You can imagine if settlement discussions are ahead people don’t like talking about them.
So I think John described it well saying it’s small. It's a good candidate for that.
So it’s something we’ll talk about later.
Andy Levi - Avon Capital
Okay. And then as far as the employee reductions.
Is there kind of a rule of thumb that we can use as far as cost per employee savings wise?
Tom Webb
You can but I will tell you, the real issue there will be our choice on how many we actually replace and how many we take that savings on. So even though I give you a number like that, I think it'd be better to see sort of the whole millions and that indication I gave earlier that the upfront cost for the size of the pool we’re talking about, $5 million to $10 million.
And then the savings being a little over $5 million for this half a year, closer to $10 million for a full year, so one year payback. If you don’t mind, I'd rather leave you with that instead of employee indicators because the incrementality will have a big factor.
Andy Levi - Avon Capital
Okay. Thank you.
Tom Webb
Okay. Thank you.
Andy Levi - Avon Capital
And one last question. On the decoupling case are you guys going to make comments on that too?
John Russell
On the DTE case?
Andy Levi - Avon Capital
Yes. File comments or are you going to leave it to everyone else?
John Russell
Yeah. Depending on what the parties that were sued decide to do.
So it is really their lead and it was ABATE bringing the case to DTE with the Commission. So it really will follow – we'll work with DTE and the Commission to decide what they want to do and then, yeah, we can file amicus briefs and other things to support that.
But it really is their lead because we are not a party to this case.
Andy Levi - Avon Capital
Right. Okay.
Thank you.
Tom Webb
Thanks Andy.
Operator
Thank you. Our next question comes from Paul Ridzon from KeyBanc.
Please go ahead.
Paul Ridzon - KeyBanc
I have a follow-up on the coal. Can you talk about your rail contracts and your coal contracts and is there any take or pay risk we have to worry about?
John Russell
No. We've got multiple contracts – we got contracts that are laddered in over several years, Paul.
Right now though as Tom said, we’ve got a lot of capacity in our coal and so what we’re working with is to burn that coal whether it's Eastern or Western, to work with the rails, to try to improve the delivery, maybe delay the delivery to do the best that we can from that standpoint. But, no, it's not really take or pay.
I mean we’ll take the coal. We would just rather not have the inventory if we can avoid it.
Tom Webb
So I think a lot of companies are facing this right now and therefore the rail companies and the coal companies are talking to everybody about the right thing to do. And recall we used to have a lot of long-term shipping contracts.
Today, they're more short-term in nature. So there’s actually an opportunity to address this economic issue maybe for the benefit of our customers here.
So we'll be working in a cooperative way with our suppliers to do the best we can.
John Russell
And just one thing that may separate us from others is that we do have the barge. I mean because we are in the Great Lakes.
So we have both rail and barge so we're not fully dependent on the rail.
Paul Ridzon - KeyBanc
Okay. Thank you.
John Russell
Thanks.
Operator
Thank you for your question there. We've got no further questions currently in the queue.
John Russell
All right. Well let me wrap it up.
Thank you all for joining our call today. I do appreciate the questions.
They were very good and also the recognition for Laura who we will all miss as everybody else will. And it does seem odd only 18 years with us.
I mean, geez, too early, Laura. First quarter weather presented a challenge for us, I think we covered that.
We're taking a number of steps, recovery actions to keep us on track and to deliver our 2012 financial goals. We remain committed to delivering on our promises, providing value to our customers and to you, our shareholders.
So thank you for your interest in CMS Energy. We look forward to seeing you at our next meeting.
Operator
This concludes today’s conference and we thank you, everyone, for your participation.