Oct 25, 2012
Executives
Glenn Barba - Vice President, Controller and Chief Accounting Officer John Russell - President and Chief Executive Officer Tom Webb - Executive Vice President and Chief Financial Officer
Analysts
Mark Barnett - Morningstar Paul Ridzon - KeyBanc Capital Markets Ashar Khan - Visium Asset Management Ali Agha - SunTrust Robinson Humphrey Jonathan Arnold - Deutsche Bank Leslie Rich - J.P. Morgan Paul Patterson - Glenrock Associates
Operator
Good morning everyone and welcome to the CMS Energy 2012 third quarter results and outlook conference 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 November 1. This presentation is also being webcast and is available on CMS Energy's website in the Investor Relations section.
At this time, I would now like to turn the conference over to your host for today, Mr. Glenn Barba, Vice President, Controller and Chief Accounting Officer.
Please go ahead.
Glenn Barba
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 website. This presentation contains forward-looking statements.
These statements are subject to risks and uncertainties and should be read in conjunction with our Forms 10-K and 10-Q. 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 Investors' section of our website.
CMS Energy provides financial results on both a reported Generally Accepted Accounting Principles and adjusted or 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 the potential to impact favorably or unfavorably, the company's reported earnings for 2012. The company is not able to estimate the impact of these matters and is not providing reported earnings guidance.
Now I will turn the call over to John.
John Russell
Thanks, Glenn, and good morning, everyone. Thanks for joining us on our third quarter earnings call.
I will begin the presentation with a few brief comments about the quarter before I turn the call over to Tom to discuss the financial results and the outlook for the remainder of the year and then, as usual, close with Q&A. Third quarter adjusted EPS was $0.54 a share, up a penny from last year.
Year-to-date results of $1.31 a share, keeps us on track to achieve our full-year adjusted EPS guidance of $1.52 to $1.55. By rightsizing the business over the past three years, we have positioned ourselves to take advantage of increased productivity and system efficiencies reducing the workforce by 7% in those years helps us keep our customer base rates at or below the rate of inflation for the next five years.
In September, we filed electric rate case seeking an increase of $148 million. Tom and I will detail some of the features of this case in a minute.
Operationally, we remain on track to achieve our long-term capital investment plan. I will update you on a few of the major projects as well as our position on a ballot proposal that could result in significantly greater investments in renewable energy.
In just a few years, we see a capacity shortfall. In order to meet our peak load requirements, we will need to fill that shortfall.
I will discuss a few of the options we are considering as well as the impact on our financial plan. As mentioned, we filed a new electric rate case seeking $148 million in rate relief.
85% of the request is made up of capital investments. These investments enable us to deliver safe, reliable energy and keep our O&M cost down.
As you can see on the right panel, we continue to bring capital driven cases to the commission. In the future we believe that annual rate cases may be avoided if there is an adjustment mechanism to recover projected investments.
We are also requesting a 10.5% return on equity, up from our current authorized level of 10.3%. Tom will discuss some of the specific mechanisms we have proposed to help streamline future rate cases.
Operationally, we continue to make good progress on our long-term capital investment plan. As you know, we have a disciplined plan which limits our investments to hold customer rates to an affordable price.
The Ludington Pumped Storage Project is underway. All six units will be upgraded one at a time during an outage that starts in September and runs until May.
The first urban upgrade will be completed in May 2014. When the last outage is completed in 2019, we will have increased the capacity by 300 megawatts and improved the operational efficiency and reliability.
At Lake Winds, we are on scheduled to begin commercial operation of this 101 megawatt wind park later this year, with all of the 56 turbines having been constructed and we are currently in the testing phase. Our smart meter program is underway on the West side of the state.
As we ramp up installations, we expect to have installed 250,000 meters by the end of next year. Of course we are all aware of the upcoming November 6 elections.
In Michigan, we are paying close attention to ballot Proposal 3 that we refer to 25x25. If passed, this proposal would require us to produce 25% of our power from renewables by the year 2025, up from the current requirement of 10% by 2015.
You can see on the right panel the consequences of Proposal 3 passing. Michigan would need at least 5,000 megawatts more wind capacity at a cost of about $12 billion.
Michigan would be the only state in the country to pass a constitutional amendment mandating renewable energy. We believe this is the wrong way to implement a renewable energy policy.
The 2008 Energy Law has provided constructive framework to implement energy policy including renewable energy standards. As we look forward a few years, we anticipate a capacity shortfall with a drop of coal plants being retired due to the natural.
With the probability that our classic seven coal plants will be mothballed in either 2015 or 2016 and MISO increasing its reserve capacity to potentially 18%, our shortfall could be as high as 1,500 megawatts. Our renewable energy expansion in wind farms and at the Ludington Pumped Storage Plant will not be enough to close the gap.
We will need to add more capacity and it appears that gas generation will be the fuel of choice. We will carefully evaluate all options including purchasing assets or building new capacity in Michigan.
I expect we will need to make the decision in 2013. We talk a lot about the flexibility of our investment plan.
Our 2013 to 2017 plan calls for $6.5 billion of investments. With the capacity shortfall on the near horizon, this plan could easily be adjusted to accommodate a new gas generating plant.
If we determine buying or building new gas generation is the most economic option for our customers our investment plan may grow by as much as $800 million. Even with this increase to the plan, average customer base rates would be held below 2%.
Now let me turn the call over to Tom to talk about the results for the quarter.
Tom Webb
Thank you, John, and thank you, everyone, for joining us today for this is our best performance in over 10 years. This represents a decade of consistently improving results and as you can tell it’s a track record that we are proud to deliver to you.
Our third-quarter reported results were $0.55 a share or $0.54 excluding a favorable legacy insurance claim. Adjusted earnings were up a $0.01 a share.
The utility was up $0.03 with stronger sales and regulatory performance more than offsetting planned investments and accelerated reliability work. Enterprises and the parent were down $0.02 primarily reflecting the Michigan state tax benefit in 2011 not repeated this year.
Now here is a slide that’s become a bit more popular than we expected. It's an update of the version we showed to you in the first half of the year during our last earnings call.
As you can see we have offset fully the adverse implications of the mild winter earlier this year. We also have put to use the earnings benefit of the hotter than normal summer by investing more in tree trimming, generating plant maintenance and system hardening.
We have a few more opportunities and are planning those with great care to ensure that our prospects for delivering earnings growth at 5% to 7% are not compromised, while at the same time we reinvest as much as we can for our customers. We don't want to overearn and we don't want to underearn our authorized ROE and we plan to deliver our earnings growth commitment while maximizing every opportunity to improve the conditions for our customers.
Our belief is pretty simple. When our customers win and when you win as investors, we are successful.
So here is our performance, year-to-date. This is the highest level in over 10 years and here is our forecast for the final three months of the year.
Now if weather is normal and modest sales growth continues we should be right on target to deliver earnings in the $1.52 to the $1.55 range. In today's uncertain world some of you ask us about Michigan and its economy.
To provide a better perspective here is a comparison of a few economic indicators for the U.S., Michigan and our service territory. While U.S.
unemployment peaked in the last recession at about 10% it has come down to around 8%. In Michigan unemployment peaked at 14% and we have seen substantial improvement but it's still high around 9%.
If you look at two major regions in the state, the Central and Western regions, which make up a big part of our service territory, you will see that unemployment reached about 11% and has since declined to about 6.5%. Over the last 12 months employment in these regions has improved by about 2.5% which compares with the overall U.S.
growth at 2% and Michigan at 1%. We are fortunate to serve a portion of Michigan that’s economically more attractive than conditions in the state as a whole.
Continuing on with the economy, the Michigan economic index has improved substantially since the middle of 2009. Evidence of the rebound includes U.S.
auto sales, up 15% from last year to about 15 million vehicle sales, non-farm payrolls up 46,000 or 1.2% and manufacturing jobs up more than 3% while Michigan has improved from 18 to 12 in the ranking of tax friendly states. We continue to see signs of further improvement although uncertainty has grown during this election cycle.
Here is another slide with which I think you become pretty familiar and it shows our electric sales, weather adjusted, over the last 35 years. Recall that the worst recession we have ever seen was in the early 1980s but the recovery from the most recent recession has been slower.
In fact, as we stick with our cautionary approach to forecasting sales, we have lowered our outlook for 2012 to 1.3%. Now that’s the same as last year's growth.
For the first nine months, sales were actually up 2%. Excluding energy efficiency work, the underlying economic growth was about 3% and we forecast about 2.5% for the year.
That's about the same growth as over the last two years. Now let's get back to the net numbers.
The net sales improvement forecast at 1.3% for the year includes year-to-date growth of 2%. This continues to be driven by industrial sales growth of 5.7% on top of 3.6% last year and 10% two years ago.
Residential and commercial sales lag. They remain flat.
The primary reason we have lowered the growth rate a bit is because industrial customers that rely heavily on products supplying the renewable energy sector have seen a slowing in their growth rates. These are customers that generate little margin for us because they are provided with special rates.
Unfortunately we can't share more detail with you but suffice it to say their impact on our profit is minimal. On a related subject, most of you are aware that we no longer have decoupling for our electric business following an appeals court decision addressing another utility.
Because the appeals court judge was clear that tracker like mechanisms are permitted we have requested a revenue adjustment mechanism in our recently filed electric rate case. For the gas business decoupling is still permitted and while we suspended its use temporarily with the most recent gas rates settlement we plan to request continuation in the future.
Now John covered the newly filed electric rate case just a few moments ago. I thought I would discuss some of our proposed process improvements that are reflected in that case.
Most of you are familiar with the 2008 Michigan Energy Law that provides for more timely rate making, limited competition, energy optimization and renewable generation. In our new electric rate case, we have proposed some additional steps to make the process even more efficient and effective.
These include a revenue adjustment mechanism consistent with the appeals court decoupling ruling. These also include potential adjustment mechanisms for pension and retiree healthcare as well as uncollectible accounts.
For example, if we are able to make expected progress with uncollectible accounts, this mechanism will permit us to share the benefit with our customers quicker than waiting for another rate case. In addition, we propose a two-year capital investment recovery mechanism, also to provide more efficiency.
Should the commission choose to support this mechanism then it's not likely that we will need to request another rate case for two years. As you know, the bulk of our rate cases are about capital recovery and returning improved levels of O&M to our customers.
The capital investment portion of this request is 85% of total. There are other features designed to improve reliability for our customers.
For example, we are requesting the resources to shorten our tree trimming cycle from about 14 years to around eight years and that's all good news for our customers. All in all, this rate case is intended to minimize customer volatility and provide more certainty to you as investors.
Talking about stability and certainty, here is the latest look at our liquidity. At mid-year, we were at 32% of market cap, almost twice the level of our peers.
S&P and Moody's outlooks for both the parent and the utility are positive and we are grateful for this vote of confidence and the improvement we have made to our cash flow metrics and to our balance sheet. Here is our traditional cash flow forecast for both the parent and the utility.
As you can see, most of the financing is complete and the plants continue on a strong track. This is our earnings and cash flow sensitivity updated for the latest conditions.
You can use this tool for assessing both 2012 and 2013 conditions So we are on track to deliver on all of our financial targets as shown here. We feel good about our prospects for this year and for next.
John and I look forward to seeing many of you at the upcoming EEI conference where we will present on Tuesday, November 13 at 8:15 Mountain Time, 8:15 AM, that is. We would be pleased now to take your questions.
So, operator, would you be kind enough to open the line for those questions. Thank you.
Operator
Thank you, very much, Mr. Webb.
The question-and-answer session will be conducted electronically. (Operator Instructions) Our first question comes from the line of Mark Barnett from Morningstar.
Please proceed.
Mark Barnett - Morningstar
Just a couple of quick questions on the mechanisms that you filed for. Obviously you went a slightly different route than DTE has with the commission and I am wondering if maybe you could give a little bit of detail around how your revenue mechanism might work?
Then secondly, you mentioned that the capital recovery mechanism would be the main driver of whether or not you are going to be a regular filer. Is that kind of a black-and-white situation?
If you don't get the CapEx adjustment but everything else, might that still help you stay up?
Tom Webb
Thanks for those questions. Those are good ones.
Let me just give you a brief background first. We are in the situation where most of our request of the Public Service Commission is all around capital investment.
So as John showed you in one of the earlier slides, which you can go back and look at, in our last three rate cases as well as this one that we are provided for now, the bulk again is capital investment. So to take your second question first, if we had some form of, I will call it a tracker, but it is more like a revenue adjustment mechanism, that permitted us just to have a plan in place where we would have the normal year covered as we wouldn't have rate case and then the next test year also covered and then there would be a good opportunity for the commission and its staff to audit just like it does on pass-throughs at GCRs, and PSCRs the fact that we followed exactly the plan and any changes that were made to the plan would be accommodated in the audit process later.
If we were able to do all of that then there would be no need to come in for a rate case. Basically what we do is we are typically holding our O&M flat to down a little bit and that's the other reason that you might need a rate case, where if we are in that zone of flat to down the only disappointment is our desire to continue to give our customers more rate relief by passing that O&M through to them.
So we are looking at a two year trial. Some people have suggested that maybe a three-year approach would be better.
So we wouldn't have to come in for rate cases for three years. But our view is, let's take it easy.
First step, let's do two years. If the commission supports that approach, then yes.
We don’t see a need to come back on the electric side for a couple years for another rate case and if they support that we would consider that in our gas business as well and look for an opportunity that might permit us to stay out of rate cases there may be for two or three years. Mark, don't think of it like freeze.
That's not what we are trying to do here. We are just trying to be more efficient and more effective with the rate making process and make it easier for everybody who has to administer it but take no exceptions to doing it with excellence and perfection and I think most people would agree that it's probably nice to avoid the detail of a rate case if you got a simple plan on your capital investment.
So yes, it is a little bit of an on-off switch and I think that's a fair comparison. If we get the support from the commission, we probably won't be back for a couple years.
If they would like to us in each year for those capital requests, we would be happy to do that as well. Now your second question on the revenue mechanism.
Do think of it as just a way for us to put something new and different in place now that we don't have electric decoupling. We have it for gas but not for electric.
Though since the commission has full authority over tracking type mechanisms, we are asking for this revenue adjustment which would, it's a very simple, the math looks complicated but it's really a simple request. It just says whatever is in our rate case, if the sales are better, whether it's for energy efficiency or whether it's for the economy or whether it's for the weather.
Whatever might happen there, then we would share that good news back with our customers. Good for them, good for us and good for you.
If it's the other way and it goes down, same thing. We would share that.
So it provides more stability and cost in rates that our customers see and more stability for you as investors. It's really that's straight forward.
Now, when the commission goes through it, I am sure they are going to be thinking carefully about what they would like to do and they have some obvious choices on whether they are going to include weather or the economy or energy efficiency. We are certain though we would look favorably on energy efficiency since they have been strong supporters of what's in the Energy Law on that subject but there will be choices for them and we will share our thoughts and then they will make the final decision and we will be happy with whatever they conclude.
Thanks
Operator
Your next question comes from the line of Paul Ridzon from KeyBanc. Please proceed.
Paul Ridzon - KeyBanc Capital Markets
Have you seen any polling with regards to where this 25x25 stands?
John Russell
Paul, there is some public polling out and it looks like we are ahead of the opposition on this one so far.
Paul Ridzon - KeyBanc Capital Markets
Could you share any numbers from the poll?
John Russell
No, they are public. You can see some of the ones.
We also have some internal polls that we look at which I would prefer not to share with you but if you look at the public polls, yes, we are moving ahead. It's really important that the information is shared with the voters and the more we share the information with the voters more likely we are to get an opposition to Proposal 3.
Couple of things that you should note. Every newspaper that has done an editorial in Michigan so far has been opposed to Proposal 3 and that will influence voters.
Particularly those that are undecided. We think we have got most of the momentum in our favor but there is a lot of undecided voters with a lot of ballot initiatives on the ballot this year.
So they really won't probably make up their mind until a few days before they vote.
Paul Ridzon - KeyBanc Capital Markets
Who is on there advocating it?
John Russell
The opposition to us?
Paul Ridzon - KeyBanc Capital Markets
Yes.
John Russell
There is some third parties. Primarily you have seen some of the ads out there that CARE has put out.
Some heavily funded investors from California were driving this to try to get what they think is important for this state and that's the constitutional amendment for renewable energy. So it tends to be, we like to refer to it as hedge funds in California who want to capture our Constitution and turn it into renewable energy for their benefit.
Paul Ridzon - KeyBanc Capital Markets
So they haven’t destroyed the California economy enough?
John Russell
Yes, well actually, what's unusual, Paul, is that if it passes, as I said earlier, this would be the first Constitutional Amendment in the country. California doesn't even have this proposal.
Paul Ridzon - KeyBanc Capital Markets
I was a little confused by the impact of weather with all the decouplings in and out. Can you just review that?
John Russell
Can you do that, Tom?
Tom Webb
Yes, I am happy to do that. Paul, here's the way to try to think through all of that.
On the electric side of the business, quarter ago we wrote off the decoupling business. So just, you get a nice pure look at that.
Just think of what we have in there, its weather or economy, it's just good and bad. So the big picture on that is, it was really warm in the summer and you see that flowing through all the numbers that we gave you.
Now on the gas side of the business, a little bit different, because we had decoupling in place. When we got to our settlement we agreed to suspend it until the next case.
So you are going to get decoupling for the prior year in your gas numbers and then you won't have it when you come to the new years. Also remember, on the gas side, we never had decoupling for weather.
We had for the economy and for energy efficiency. So this mild weather that we had in the first quarter of the year, even early in the spring, all that flows through.
So when you look at something like slide number 12 and you see $0.13 of bad news it says around March 31 but that's really dipping into April just a little bit. That’s primarily the weather flow through on the gas side.
Then you look at the hot summer there's a lot of ups and downs in there but in the red part through July 23, $0.13 that's really most of that good news of hot weather. If that helps you, I will stop there but we can go further if you would like.
Paul Ridzon - KeyBanc Capital Markets
I think I am good. Thank you very much.
Operator
Your next question comes from the line of Ashar Khan from CMS Energy. Please proceed.
Ashar Khan - Visium Asset Management
First of all, I just wanted to congratulate you. You guys have done a great job meeting numbers expectation.
I think the only thing that’s left, which I think for the last few months, which I believe is to stock, is getting an investment grade rating. Do you really think that is needed for the stock to get to the balance and to the premium?
Can you share, Tom, where we are in that process with the rating agencies? I think that should be a key goal of management and the board.
You guys have done exceptionally well on earnings, guidance, getting to the rate, regulatory things, but that remains the weakness and I just want to get your thoughts where we are. Is that a great focus and going forward can we hear some good news or what?
Tom Webb
Well, thank you for that question because I think you slipped a nice complement in there and we appreciate that. You will have job when you need it.
Just kidding. Let me just remind because I think most everyone on the call has heard us say this, John and I, before, and I want to remind you of our approach.
We have a great deal of respect, as do many, for the rating agencies and we spend a lot of time trying to give them a look for five plus years out on what the business looks like and any time there's anything happening we give them detail on those five years to keep them up to speed. We put absolutely no pressure on them regarding ratings and I know you don't want to hear that others don't like to hear that but here's why.
It's our view, as they do a good job and make they will make the call when they think it's appropriate to make the call. Consequently we are very happy that both S&P and Moody's do have the parent and utility on a positive outlook.
We are grateful for that but we are not pushing them to make a change. We just want them to see the data and do the right thing.
One little pieces of logic is this simple. I would rather have them make an upgrade when they believe they are comfortable with it so that their look is or at least 50-50 in the future then have you is investors be concerned that the rating that we have has little more downside than it does upside.
I would rather be the other way. So, as a board and as a management team, we are very focused on having a strong healthy balance sheet that supports the business today and going forward and we are hopeful that the rating agencies will take a view that that merits having a credit rating that's more positive than it is today but they will get there when they do.
So our job is to run the business well and improve it every day and their job is to assess it and share that with you and I think they have sent you a signal and I have no predictions to offer as to what they might do and when they would do that but obviously they will do that on their own. Hope that color helps you a little bit because we do view it as an important subject.
Operator
Your next question comes from the line of Ali Agha from SunTrust. Please proceed.
Ali Agha - SunTrust Robinson Humphrey
John or Tom, either one, going back to the point you made about the need for new capacity and a decision will be made by you guys next year, especially an $800 million investment. Assuming you do go down that track, when would that $800 million be spent?
How should we think about the rate base and growth implications of that? Then on the financing side, perhaps Tom, does equity come in to the picture or can that still be funded without major equity need?
John Russell
Let me start with the need for it. Ali, the first thing we need to do is we make sure we are still in the valuation process and there's still some uncertainty in our mind about MISO is going to do with the reserve margin requirements.
Also what the future brings as far as environmental rules and how long our units can continue to run. But that all being said, think of '15 or '16 as the timeframe that it is likely to be needed.
Once we do that, yes, then you can think for your modeling that you could at $800 million into the rate base from that standpoint. That’s what we think a unit of the optimal size will be but what I want to make sure and clear and set the tone for everyone, we are still evaluating this right now.
This is more of a heads up for you. We have room to do it.
It will affect the plan somewhat but it is certainly something that we can afford but we need to make sure that we do have the plan in place to know that is the right choice. It change our balance of the portfolio a little bit in our fleet but based on natural gas prices going forward, I think that is the right thing to do which keeps us well balanced but a little heavier on natural gas than we are today.
As far as financing, Tom, I let you take that one.
Tom Webb
I am happy to. I would just preface the discussion on equity with, just add to what john just said that the range of spending he just showed you in the little bubble $6.5 billion to $7.3 is a range because we may be able to offset some of that with other things we would do differently in order to constantly focused on how to keep that number around $7 billion.
So we make sure that our customer rates don't go higher than the level of inflation. That's driver number one and therefore you would have a sustainable growth plan that goes for years and years.
So the first choice is, do we do it or not? The second choice is, can we create some offsets and if we can there may be no need to do anything different on our equity plan.
But the third piece is if it turns out we can put all of this in and go to $7.3 billion and we know we can keep our rates below inflation doing that then we might possibly look at equity. That’s the first time you heard me say that in a while but I don't want you to be too concerned because remember it sort of the backup plan to many decisions yet to be made.
We have always said if we ever had a good business proposition that was accretive out the gate, kept the earnings growing the way you like to see it, then we wouldn't be bashful about coming to you. We are way far away from that.
We don't see the need to change our description to you that there's no need to issue equity other than the continuous equity program we have over the next several years. So we are probably in good shape.
If however we decided that it would be good to issue equity to support this it certainly wouldn't be this year and it wouldn't be next year and then the question is would it be needed in '14 or '15. Uncertain.
So we are still sending the message that we don't need equity. We will be managing the numbers as we go through to see if we can maintain that but if the growth is going to be that much faster and that much bigger we are not bashful about coming to you with a good business proposition.
Ali Agha - SunTrust Robinson Humphrey
And Tom, just to clarify one point from that. So in the scenario, as you said, you manage your CapEx and you may take away some other CapEx from other areas.
So should we think that in case you do spend money on this plant and you decide to go ahead with it, and yet you manage your CapEx, so there is no equity need that the implications for CapEx and rate base would still be the same as they are today with the shifting capital dollars away from other projects to this project. Is that --?
Tom Webb
Largely, yes, but I do what you to know I believe personally, if we have the need and we decide to do in the future the new plant, the $6.5 billion in the base will grow a little bit. It just depends on how much we can offset.
So I think you will see something in that range if it's approved between $6.5 billion and $7.3 billion, still well short of the $10 billion worth of opportunities that we could do and I know that also sound foreign, why not do them all. But we are focused one, don’t let your customer rates spike, make sure you get a sustainable plan, stay below the level of inflation and two, if we can do it avoid the need for equity.
Avoiding that dilution and those are tow major focuses for us as we do the right things for our customers.
Ali Agha - SunTrust Robinson Humphrey
One last question, separate topic. The enterprise business, the earnings that we have been seeing for that through the three quarters of this year have been relatively flat running at cumulatively maybe $0.03 or $0.04 on an annualized basis.
Is this the core earnings power of enterprise we should be thinking about going forward? Perhaps there are swing factors to consider that could cause it to be much higher or lower than what we have seen through the nine months.
Tom Webb
You are seeing a low level from enterprises at this point and you could. As you are doing your models, see a modest growth in that as you go in the future and it's very simple.
We have kept our principal plant there called the Dearborn Industrial Generation facility only partially contracted because we see the market actually turning around over the next couple or three years. As that market gets richer on the energy prices and capacity prices there will be opportunities to lock-in contracts there that would be more profitable than what we might do today.
So we are running along with the market at a pretty low level of results and I think you should anticipate that that’s something that will improve as we go through time. Again, put it in context, it's 5% of our business.
Maybe it will grow a little bit more than that as we go in the future but it's not the core of our business. Our utility is the bulk and will always remain the bulk of our business.
Operator
Your next question comes from the line of Jonathan Arnold from Deutsche Bank. Please proceed.
Jonathan Arnold - Deutsche Bank
On the potential flushing out of the plants, the new capacity. Could you give us a sense of when some of this might translate into actual projects versus just the concepts?
Is that later this year or early next? What's the timing?
John Russell
Jon, that’s the early next. The process we use we are still evaluating it today.
That will be completed, I expect, by the end of the year. If the choice is to build, and that’s an if, if the choice is to build, you would have to get an air permit, we would go through a con process which would allow a more certainty of recovery.
That process would take, I think, legislatively nine months is required. So to put it in scope that's what it looks like.
So if we had a no-go decision it would be well into 2013, if not early in '14, and part of it really is dependent, I think, one of the other people asked the question too, what are the environmental rules going to be? And as Tom talked about our CapEx spend, a lot of our capital expenditures are based on environmental controls for our plants.
If things were accelerated, changed, delayed, that may also, or if new technology develops, it may enable us to use different forms of technology to reach the same outcome. So that will allow us to readjust our capital base.
But the timing wise I give you that time. End of the year, we would pretty much have an idea.
Early next year, we would have an idea, specifically that we would be able to move forward with. Because I think that’s the timing.
If it is a gas plant, we are going to need about three years to get through that process.
Jonathan Arnold - Deutsche Bank
And Jon, I think, we may have misheard you but it seems like you listed, build or purchase an asset as the options. Is PPA type of solution in the mix or is it more something you would own?
John Russell
Yes, I would expect us to own it, although PPA, we are evaluating PPA in the short-term. Not a long-term contract but a short-term contract to fill some of the needs because with the advantage of capacity prices over the next couple years, we may go to the market for some short-term PPAs but long-term expect us to build it.
Whether we build it or buy it, it would be rate base.
Jonathan Arnold - Deutsche Bank
So short-term means basically between now and getting another solution in place?
John Russell
Exactly.
Jonathan Arnold - Deutsche Bank
Could I have just another issue? Like if 25x25 were to pass, and considering the rate implications of addressing this capacity deficit, could you deal with things and keep your rate profile acceptable in the way you want to?
John Russell
It would be more of a challenge because you could almost add a percent on top of what were doing now just for the build of the 25x25. So I think in the five-year plan, we stay below 2% for electric.
I think it's 1.5%, 1.4%, 1.5% for base rate growth. You throw another percent on top of that it would be 2.5%, 2.6%.
So it would be doable but then again part of what I want everybody to understand is that we are opposed to it. It is not a smart way to legislate or to avoid legislation and go through a ballot proposal to ensure renewable energy standards for the state.
The Constitution was not set up, my belief, for renewable energy standards.
Jonathan Arnold - Deutsche Bank
Okay, but if it passes, would it change the rest of your business plan?
John Russell
Well, I will tell you, one thing it would do is, when think about capacity we would be adding capacity through renewable energy which may we need to look at that as we are looking for the capacity we would need for other forms. So let me be very clear.
We would have a 25% target of renewable energy which would be a force fit for meeting our capacity energy needs. Second issue is, we need to have that intermittent fuel source and primarily in Michigan, its when.
So we would need some back up to that to be able to provide our customers the reliability that they expect. So from an investor standpoint, it actually is an investment opportunity both renewable energy and backup for capacity.
From a customer standpoint, though, it raises rates, cause us to raise our rates more than what we want to raise our rates and we are always trying to be most efficient for our customers. So that’s the balance that we are looking at today.
Operator
Your next question comes from the line of Leslie Rich from J.P. Morgan.
Please proceed.
Leslie Rich - J.P. Morgan
Tom, I wondered if you could talk a little bit about the decline in your sales forecast. It looks like amount that you are allocate energy efficiency remains the same but your net sales growth assumptions have declined.
Then any thoughts you might have one 2013?
Tom Webb
Thanks for the question. We brought our numbers down a little bit from the last quarter when we showed you this but what I want to do is offer again what we are seeing so far actually.
Because it's kind of like gas prices and things like that, it's the actuals that are the solid numbers and our guesses are just that. Therefore we try to be conservative.
They are not shown on the slide. I did mention them but I want to repeat them.
For the first nine months of the year the growth compared to the first nine months of the year ago was flat on residential and flat on commercial. So we are staying conservative there.
The industrial side was actually up 5.7% for an overall growth of just about 2%. That's what we are looking at.
But we said, there seems to be some uncertainty in this election period and that makes us want to be conservative. Then there is another event going on that unfortunately we can't talk a lot about but I mentioned that some of our renewable type of customers are struggling in this political environment that's going on.
So their numbers, we think should be a bit lower. I can't say much more than that.
We tried to factor that into our fourth quarter. They get special contracts.
So there is not profit margin to speak of there but we brought that number down to 1.3% in total which is about where we were last year for growth and not that far off where we were for 2010. We are going to give you more in 2013 when we get out to our guidance early in the year and maybe we will talk about it more as we get to the end of the year but we felt for the rest of this year, we just want to be conservative.
We don't want to plan for something that's better than it turns out and if it turns out better, great. Usually that's a help in one way or another.
So those are the facts about the nine months and that's the guidance for the year. So even though the first nine months are up about 2%, we are saying that for the full year we should be about 1.3%, the industrial will still be pretty good in that, and we still think residential and commercial will be following, as people's confidence grow and the economy continues to grow.
Does that help you enough for now?
Leslie Rich - J.P. Morgan
Yes. So the renewable customers could be things like solar manufacturing, wind turbine manufacturing, things of that nature?
Tom Webb
Yes, and I am going to try and not to comment on that because it starts to get close to things we aren’t permitted to comment on but just generally that's the right idea.
Operator
Your next question comes from the line of Paul Patterson from Glenrock Associates. Please proceed.
Paul Patterson - Glenrock Associates
Leslie actually asked what I wanted to ask you guys. I just wanted to just follow-up on a few things.
One is, for the renewable energy standard, for 25x25, does efficiency or combined heat and power qualify for that or is this solar and wind and sort of what we normally think of?
John Russell
Actually, I don’t think we will know until it actually goes through the process. The ballot proposal is fairly general with some broad statements.
If it is passed then it would have to do is go through some of the regulators and maybe legislature would have to define that. So we really don't know today but generally it renewable energy is considered here in Michigan, is solar and wind.
It's not hydro.
Paul Patterson - Glenrock Associates
Okay, then you also mentioned that, some California hedge funds are pushing this through out-of-state interest but one would think if this is as much concern as you guys have mentioned and the others, that there is some underlying demand politically for an increase in renewables above and beyond perhaps what we have right now in your state. So I guess, I am sort of wondering, if there is a potential for renewable generation, how you are putting that you plan?
Do you follow me because like you said, if there is a higher requirement, one would think that perhaps you would focused more on "renewables". Do you follow what I am saying?
John Russell
Yes, let me sure. I am going to answer and then tell me if I don't hit the mark.
We have a law in place today that requires us to get the 10% renewable energy by 2015. It also has energy efficiency standards and other things that are associated with it to reduce, like electric sales by 5%, or gas sales by about 4% by 2015.
We are well on our way to achieve those targets. We have made the investments at Lake Winds.
We are working on Cross Winds, the other major utilities in Michigan are doing the same thing. So we were moving towards that end.
Your point about, is there more political demand for renewable energy, I think was a good way to state it. I think there's certain people that have a political view that want more renewable energy than others.
I will tell you, our view here at the company, my view personally, I like renewable energy. We support it.
But I want to balance portfolio. It is more expensive for our customers, renewable energy is more expensive particularly compared to baseload with gas today.
It's an intermittent resources and with our first wind park that we just built we find that people like to have renewable energy until you actually locate it. Then it becomes a little bit more of a challenge when you start getting into sighting and zoning and some of the issues that we run into and if you are familiar with Michigan we are basically a peninsula and to hit the targets that would be required by 25x25, it's likely we would have to go offshore with wind, which is another issue that becomes a huge political issue and a local zoning issue too.
Paul Patterson - Glenrock Associates
Just finally, it looks like a lot of the demand growth, it looks basically demand growth has been pretty weak, other than really the industrial sector. I was just wondering, combined heat and power, you working with the industrial customers, are there any opportunities there perhaps as a means to deal with the renewable or the environmental desires of some and perhaps a way of meeting your capacity needs or the system capacity needs for your service territory?
Is that something that’s kicking up? We are hearing about a lot of other states pursuing it more aggressively.
I am just wondering if there's anything going on there with you guys?
John Russell
Yes, it is something we will continue to work, particularly, our large customers. The smaller ones, we do some one-off things with our smaller customers, but the bigger customers, you are right.
We have talked to them about it. We will continue to work with them about opportunities to satisfy their need for renewable energy along with our need for renewable energy.
We haven't seen anything come to fruition yet but I do think there's opportunities there. But usually what we get into is it's more smaller scale.
We tend to believe, we would rather have large, a wind farm compared to a turbine on one-off, or solar panels and so forth. But we are working with them.
If we find the opportunity we will certainly advance it.
Operator
Ladies and gentlemen, we have no more questions in queue.
John Russell
All right, great. Well, let me wrap this up.
First of all, thanks everybody for joining us today. We had another good quarter of operating financial performance.
The results for the first nine months were ahead of plan allowing us to accelerate reliability spending and improve value to our customers. As we talked about today were on track to achieve our guidance of the $1.52 to $1.55 a share for the end of the year.
We look forward to hopefully seeing many of you at EEI conference in the next few weeks, Tom and I will be there. I appreciate you joining us today for the call.
Operator
This concludes today's conference. We thank everyone for your participation.
You may now disconnect.