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CONFERENCE FACILITATOR
Good morning,
and welcome to the CMS Energy
First quarter 2002 earnings
conference call.
Today's call is being
recorded.
Just a reminder, there will
be a rebroadcast of
this conference today
beginning at 1p.m. Central
time -- I'm sorry, Eastern
time, running through May 7th.
To listen, simply dial 719-457-0820,
and reference the pass code 787019.
At this time, for opening
remarks and introductions, I
would like to turn the
conference over to the Vice
President of Investor
Relations, and the Treasurer,
Miss. Laura Mountcastle.
Go ahead.
LAURA MOUNTCASTLE
Thank you.
Good morning, and
thank you for joining us.
With me this morning are Al
Wright, who will review the
quarter and discuss the 2002
financial outlook, and David
Joos, who will be available
during the Q&A.
Before we start, I'll make the
usual Safe Harbor Statement.
This presentation contains
forward-looking statements
within the meaning of the
Safe Harbor provisions of the
Federal Securities Laws. Our
actual results may differ
materially from those
anticipated in such statements,
as a result of various factors
discussed in our SEC filings.
With that I'll turn it over to
Al.
AL WRIGHT
Thank you, Laura.
Good morning, all.
Shareholders, other investors
and employee shareholders.
CMS is happy to report first
quarter net income of $399
million or $2.92 per share in
total.
After reconciling items
related to the gain on the
sale of our Equatorial Guinea
properties, that's oil and
gas, the cost of Argentine
devaluation and
expropriation issues, and
extraordinary items related to
early debt retirement and
discontinued operations of a
penny in the latter case,
total adjustments of 220 as
shown on the slide,
our operating
earnings are 72 cents per
share.
These operating earnings
reflect a mild winter,
replacement power costs during
the final stages of the
unscheduled Palisades outage
that began last year, reduced
earnings from our Laketrail [INAUDIBLE] facility,
and improved operations at our
Dearborn and Morocco IPP
facilities, all of which I'll
get into in some detail in a
moment.
While these first quarter operating
results are 14% below last
year's operating EPS, they are
consistent with our plan, and
position us to achieve our annual
targeted operating net income
of $2 to $2.05 per share
before the impacts of the
Argentine issues.
These issues -- the Argentine issues, I'll
discuss in detail later in
this call.
In regards to the electric utility --
and by the way, as requested by our investors
and as promised, we will begin
now reporting and discussing
operating net income versus
simply pre-tax operating
income.
And we'll do that by business
unit.
For reference purposes,
operating net income including
the impact of non-operating
income and expenses,
the effect of third party
and/or inter-company financing
and income taxes.
The operating and income does
not include any parent
interest expense allocation.
Also, we have adjusted for
2001 reporting of overhead
between business units and the
parent company, in
order to provide comparability
of results. So we are indeed
looking at apples to apples.
Now having said that, the
Electric utilities operating
net income of $49 million is $11
million lower than last year,
but pretty much on plan for
the year end figure.
Deliveries of 9,190 gigawatt
hours are down 789 gigawatt
hours, or 7.9% due to lower
intersystem and industrial
sales.
Intersystem sales are down due
to generating plant outages,
while the reduction in
industrial sales
year-over-year reflects a
slowdown in the Michigan
economy.
Partially offsetting the
impact from this sales
reduction is an increase in
higher margin commercial
sales.
Higher year-over-year
operating expenses includes
the replacement power supply
costs as a result of the
outage at Palisades I
discussed earlier. Which by
the way, as you know returned
to full-power operation on
January 23rd.
And we did sustain some storm
damage in the first quarter.
These higher costs were
partially offset by reductions
in other operating expenses at the
electric utility.
With regard to the gas utility,
the benefits from the interim
rate relief received in
December of last year, offset
pretty much the impact of an
exceptionally mild first
quarter.
As a result, operating net
income of $28 million is equal
to last year.
Deliveries for the quarter
were down 10.4 BCF, or 6.5%,
principally due to
temperatures that were 11%
warmer than last year, and in
fact were the 11th warmest
since 1864.
We estimate that the weather
impacted our 2002 operating
net income by $11 million.
However, on a weather-adjusted
basis, deliveries were up 1.4%,
which is good news in total.
With regard to the natural gas
transmission business,
operating net income for the
group totaled $33 million, or
$12 million less than last
year. But again, this unit is
still on plan.
The lower earnings at
Panhandle's Lake Charles LNG
processing facility, are the
result primarily from the
fixed rates on the BG contract
that we have discussed at
length versus last year's
higher spot rates
that followed the price for
natural gas.
This shortfall, which was
expected, was partially offset
by benefits from eliminating
the amortization of good will
as required by FAS-142.
Lower commodity prices at our
field services operations
resulted in slightly lower
earnings, which were offset by
gains in other operations.
With regard to marketing
services and trading, we had
net income of $7 million, an
increase of $3 million, or 75%
over the previous year.
Higher electric margins
resulted primarily from
increase mark-to-market
earnings on long-term
contracts, which helped to
offset losses from lower gas
mark-to-market earnings due to
weaker trading results and
lower price impacts on the
overall portfolio.
So net to net, market-to-market
was about a wash.
Byron posted an improvement
based upon the implementation
of various [INAUDIBLE] management projects in the
Washington, D.C. area.
The IPP business had a strong
quarter.
Operating net income was $42
million, or up $15 million or
56%.
This increase is attributed to
lower steam costs at our
Dearborn industrial generation
facility.
As you may recall, last year
this facility was experiencing
construction delays and had to
purchase steam to meet its
obligations to the customer
rather than benefiting from
its own steam by-product.
And we experienced higher
earnings from our INAUDIBLE] investment in
Morocco, due to lower average
cost of debt as well as a
performance incentive bonus
that we did earn for the fine
performance of the unit.
Oil and gas is down.
The unit broke even for the
first quarter, a decrease of
$3 million. But you must
remember that's due to the
reduced production caused by
the sale of -- $1 billion sale of
our interests in the
Equatorial Guinea property.
Realized oil prices in the
first quarter of $12.68 a barrel
net of hedging, and production
of 1,186,000 barrels were down
32% and 24% respectively.
This reduction was partially
offset by lower operating
expenses, including lower
average borrowings due to the
cash proceeds contributed from
the EG sale.
Excluding EG production, on a billion cubic foot
equivalent, sales were 9.5 BCF, or a decrease of
38%, primarily from the timing
of liftings, which is how we
now must account, at our
Tunisia and Congo holdings.
With regard to parent-only
interest expense, that was
about $4 million greater than
last year, and it is entirely due to
lower capitalized interest
expense related to our DIG
investment.
For those interested, which I
assume are many, CMS
consolidated overall average
borrowings are down $175
million for the quarter,
that's on average,
at an average cost of 7.71%,
which is itself 44 basis
points lower than last year.
Again, as a wrap-up, operating
net income was $96 million, or
72 cents per share.
Now, I'll let you reflect on
this table.
It has a lot of information on
it, with regard to the Argentine
impacts, which I know have
captured the interest of the
market.
These are principally due to
the changes in Argentine law
that made it illegal or unable
to meet our contract
obligations as called for in
dollars or in pesos
equivalents, and instead were
reduced to simple collection
in pesos.
You're all aware of the
fluctuation in that economy
there.
For these reasons, CMS has
changed our functional
currency for the Argentine
assets from the U.S. dollar to
the Argentine pesos.
Assuming an exchange rate of
approximately 3 to 3 1/2 pesos
per dollar in April, and I
would tell you that the "Wall
Street Journal" closed the
pesos at 2.98, and we executed
some small forward business at
3.45.
So the actual adjustment will
be somewhere in that range.
CMS will record for the second
quarter a charge of
approximately $400 million to
the foreign currency
translation component,
here-in-after called CTA, of
stockholders equity.
On an ongoing basis, this
charge, the CTA stockholder
equity component, would
increase or decrease based on
weaker or stronger pesos.
We expect that this non-cash
charge, which represents about
80% of the affected assets book
value, combined with
anticipated proceeds from the
international arbitration due
to the abrogation of our
contracts that we are in
progress with right now, plus
political risk insurance and
the eventual sale of these
assets, that thus -- that this
transaction will substantially
eliminate the risk of future
balance sheet impacts.
In terms of reported income,
this charge would reduce
future losses for all of our
equity accounting investments,
pipelines and the El Chacon generating
facility.
However, we will continue to
have some ongoing reported
income risk for additional
changes to the pesos-dollar
exchange rate.
For the remainder of the year,
as shown on this chart, between
13 to 18 cents, for a total for
the year 2002 of 28 to 33
cents. Because we have had a
15-cent effect already in the
first quarter, as I mentioned
on the first chart.
Now, if current conditions
prevail, in the ranges
described above, that is
between 3 and 4, an estimate
of 2003 effects would be in
the range of 17 to 25 cents in
total.
Assuming that these assets are
retained for the entire year,
we will, however, continue to
seek buyers as we had
originally planned.
Because of the accounting
treatment for these
investments, the future
sensitivity of earnings to
exchange rates is
significantly reduced.
With regard to our capital
structure, it is improving as
promised.
As you can see, we have
already made substantial
improvement in our debt-to-cap
ratio.
After the EG sale and other
first quarter's asset sales
activity, this ratio stands at
66%.
An improvement from the 2001
year-end ratio of 71%.
And except for the current
Argentine monitor issue I just
discussed, we would be on plan
to achieve the targeted ratio
of 60% by year end.
After the effects we just
discussed, we are projecting a
debt ratio of 62%.
Still, a large improvement in
leverage in year over year,
down from 71% to 62%.
And that, of course, is really
dependent on asset sale
program, which we are making
great progress on.
I am happy to report that we
are still on target to realize
the 2 point million dollars of
cash proceeds from asset sales
spanning the two years on the
chart.
By the end of this month, we
will stand at 2.3 to 2.4
billion done, which represents
more than 80% of our goal.
The Powder River and Electric
Transmission, sales are
actually expected to close
today.
As it now seems unlikely that
our Argentine generating assets
will be sold this year, we're
evaluating other assets to
replace them.
The remaining balance of
approximately 580 million
should be realized from our
asset pool.
We have 10 more transactions
pending right now
for closure in the third
through the fourth quarter.
Finally, and a very important
statistic that I know the
market is interested in, is our
common dividend coverage ratio.
Even including asset sales, we still
have a 2.7 times cash coverage
ratio. That's cash
distributions from all of our
operating companies, including
consumers to the parent, after
interest, divided by the
parent company's dividend
requirement at the annual rate
of $1.46.
And this is the appropriate
time to say we do not envision --
we are not making any change
in the annual dividend level
of $1.46 per share.
Finally, with respect to 2002
net income guidance, as
promised, we are giving you
that guidance by business unit
on a net operating income
basis as I explained.
We are still at the $2 to $2.05
level excluding the Argentine
effects which as I mentioned
earlier were something like 28
to 33 cents.
So we are on target.
Our forecasted shortfalls at our gas utility and
natural gas transmission units from prior
guidance were, principally due
to the mild first quarter
weather.
These are offset by the
benefits from MST's Viron and
Central Virginia Electric
co-op contracts, as well as IPP
operations at Morocco and
DIG.
We do assume in these figures
the gas utility final rate
order in the second quarter,
and normal weather for the
remainder of this year.
With that, that is a digest of
first quarter activity.
I would like to invite
questions from the audience to
myself or David Joos, who is
seated with me.
CONFERENCE FACILITATOR
Thank you. The question-and-answer
session will be conducted
electronically today.
If you would like to ask a question,
you can do so by pressing star 1 on your touchtone
telephone. We will proceed in the order
that you signal us, and take as
many questions as time
permits.
Once again, that is star 1 to
ask a question.
And we'll pause for just a
moment to give everyone the
opportunity to signal for
questions.
[PAUSE]
CONFERENCE FACILITATOR
And our first
question will come from Greg
Gordon with Goldman Sachs.
GREG GORDON
Thanks.
Good morning, Al.
AL WRIGHT
Good morning, Greg.
GREG GORDON
Just a couple questions.
Just want to clarify that you
-- taking into account the
effects of the accounting
adjustment for the balance
sheet in Argentina, you're
targeting a 62% debt to cap by
year end?
AL WRIGHT
That is correct, Greg.
GREG GORDON
Great.
And then -- but those assets are
currently not held for sale?
AL WRIGHT
That is correct.
GREG GORDON
So if we were going to look
at, you know, if we wanted to
do adjust the operating number
to account for that we would
take the $2 to $2.05 guidance and
then incorporate whatever --
wherever within the total
range of losses at Argentina,
the 15 cents you have already
booked plus the 13 to 18 cents,
so that would really be sort
of a -- an operating number
closer to $1.70 to
$1.80?
If I were to assume those were
operating numbers?
AL WRIGHT
Yes, that's correct.
GREG GORDON
Okay.
And then you are saying
assuming that the assets are
not reclassified as held for
sale in 2003, you have
quantifed what the ongoing
loss would be and that would
be a 17 to 25-cent impact?
AL WRIGHT
Right.
And that assumes, by the way,
an entire year operation in
the ranges of exchange rate we
show on the table.
GREG GORDON
Great.
Would it be fair to say we're
waiting for some economic and
regulatory stability in the
region before you go ahead and
look for an exit?
AL WRIGHT
That would be a reasonable
statement.
GREG GORDON
Okay.
Great.
And then, lastly, would
it be possible for you to
quantify what you are sort of --
total electric and gas utility
targeted, you know, operating
net income is for the year as
a component of the total $2 to
$2.05 that you have --
AL WRIGHT
Yes, let's go to that last
chart.
The current guidance would
indicate $195 million for
electric, gas $45 million.
Gas utility.
GREG GORDON
Okay.
AL WRIGHT
And then if you run
down the chart, the total
operating net income is $285
million, but again that's
after parent company interest
expense.
GREG GORDON
Okay, great. But most all the financing
for the electric and gas
utility is done at the
electric and gas utility level,
correct?
AL WRIGHT
Correct.
GREG GORDON
Okay. Thanks, guys.
CONFERENCE FACILITATOR
Up next we'll
hear from Jeff Gildersleeve
with Argus Research.
JEFF GILDERSLEEVE
Good morning.
I wonder if you could just
clarify with the marketing
services and trading, uhm, I
calculate roughly $105 million
revenue minus cost of power
and gas sold.
How do I work down from that,
that gross margin, to the 7 or
the 10 that you came up with?
AL WRIGHT
Dave, you want to --
DAVID JOOS
Well, I'm not sure I can
answer the details associated
with that question.
We have all of the fixed costs
associated with the operation,
obviously, that have to be
deducted from the revenues. And
some of those are revenues
versus margin that you were
talking about.
We don't provide the detailed
breakdown on all of that data
as you know on a quarterly
basis.
But the -- I guess an overall
basis, as we said, we're a
little ahead on the power side,
a little behind on the gas
side and overall, pretty close
to plan, although we had some
up side on our Viron business
in the first quarter.
JEFF GILDERSLEEVE
Okay.
So there were no abnormal
costs in there this quarter?
DAVID JOOS
No.
None.
JEFF GILDERSLEEVE
Okay.
And then secondly, with the gas and oil.
It seems oil, there was a
fairly low price realized in
the first quarter.
Where do you stand on your oil
and gas hedges?
Can you provide a little on
that?
AL WRIGHT
Yes.
When oil in fact came up, with
the activity in the Middle
East and what not, we were
able to achieve hedges net
above the $22.50 level.
So -- that's based on a WTI.
Now, we net back a different level
depending on the source of
that oil.
But at the WTI level that we
were able to lock in $22.50,
pretty much the balance of
production expected for the
year.
On the gas hedging activity,
we're fully hedged for the
balance of the year.
JEFF GILDERSLEEVE
Great.
Thanks a lot.
CONFERENCE FACILITATOR
Up next, from Lumas Management,
we'll hear from Devon Geohiggins.
DEVON GEOHIGGINS
Hi.
Just had a couple questions,
on the equity issuance that's
planned, and funding in '03 and
'04, and how you guys are planning to make
funding.
AL WRIGHT
We don't plan to get into
long range discussions at this
point.
But in general, we have
ongoing dividend reinvestment
and sort of a continuous stock
offering program that's baked
into these numbers.
And we see no reason at this
point to bake into our plans a
large block offering of common
stock this year.
DEVON GEOHIGGINS
Okay.
Uhm, that sounds good.
And just one last question.
What kind of rate increase are
you guys assuming in terms of
percentage of the
100 that's been asked?
AL WRIGHT
That would be, uhm, not a
good thing to discuss --
DEVON GEOHIGGINS
Fair enough.
AL WRIGHT
-- in a public forum.
It would tend to be a
self-fulfilling or worse prophecy.
So, I would say that we are
continuing to expect
reasonable treatment from
Michigan Public Service
Commission that we have seen
over the last several years.
DEVON GEOHIGGINS
Great.
Thanks.
Congratulations.
CONFERENCE FACILITATOR
And as a
reminder, if you would like to
ask a question, you can do so
by pressing star 1 on your
touch tone telephone.
Moving on, we'll hear from
Bill Bund with Fort Washington
Investment Advisors.
Bill Bund
Good morning. If you could please tell me,
do you have a clear sense of
the rating agencies, what they
expect of you in order to get
an upgrade?
AL WRIGHT
That's a tough question.
They are very supportive of
the company.
We have very good
relationships.
I think they are going to want
to see continued momentum in
our debt reduction program.
As far as statistics, they are
focused principally on free
flung from operation
coverages above 3 -- well
above three times.
And we'll be at above 3 times
this year.
I think they are going to
really focus on momentum and
our continuing commitment to
reduced leverage and increased
coverages.
And so far, so good.
Bill Bund
But they haven't indicated
how much is enough?
AL WRIGHT
I don't know if you have
dealt with my brethren there,
but, uhm, they... It is not a
science.
It's an art.
But as I said, they expect
coverages well north of three
times.
It will be at three times by
the end of the year.
Bill Bund
Alright, thank you.
CONFERENCE FACILITATOR
Up next, we'll
hear from John Olson with
Sanders, Morris, & Harris.
JOHN OLSON
Al, good morning.
AL WRIGHT
Good morning, how are you?
JOHN OLSEN
Fine. Listen, what -- in marketing
services and trading, how much
of profit was mark to market?
AL WRIGHT
Net about zero.
We had some gains in electric
I believe, and losses in gas.
JOHN OLSON
Okay.
AL WRIGHT
It netted out about zero.
JOHN OLSON
Okay, the net effect on the paper
transactions was zero. Okay.
Secondly, what about the
elimination of good will?
How much did that help you?
AL WRIGHT
It's a $19 million annualized
number.
So I think it's ratable over the year.
JOHN OLSON
Okay. Thanks very much.
CONFERENCE FACILITATOR
Moving on, from
Deutsche Banc, we'll hear from
James Dobson.
JAMES DOBSON
Al, how are you?
AL WRIGHT
I'm fine James.
How are you?
JAMES DOBSON
Great, thank you.
Couple of questions.
Just going back to this
mark-to-market a second,
unrealized mark-to-market in
Q1?
So the non-cash portion of
that, I'm thinking probably of
that contract that started
booking sounded like that was
the swing to MS&T.
AL WRIGHT
[INAUDIBLE] I don't know the total on
that deal. Dave, do you have --
DAVID JOOS
: That was significant,
although we don't normally
disclose the specific
mark-to-market gains
associated with specific
transactions.
That was the one unrealized
gain that -- the remainder of
what I refer to particularly
on the gas side were obviously
trading associated as opposed
to significant mark-to-market
swings.
AL WRIGHT
And they were offsetting.
JAMES DOBSON
Okay.
And then on JORF, could you
give us an idea what the
performance incentive was in
the numbers?
AL WRIGHT
About 2 million, I'm
advised.
JAMES DOBSON
About 2 million.
Okay.
And then last question, any
change, uhm, to -- and I think
you were alluding to this
change in sort of the, you
know, portfolio of assets that
are, you know, coming up for
sale or that you are pursuing
for sale, uhm, you know, any
additional revisions to, you
know, maybe adding JORF to
that list or other
international assets to that
list to sort of clean out the
entire international
portfolio
AL WRIGHT
I would say, James, that we
haven't made that decision or
that move yet or nor are we
committing to.
But we are committing to 10
more assets distributed around
the world so that we do
continue to increase our focus
on fewer and fewer countries.
At present, we do not envision
the sale of JORF.
JAMES DOBSON
Great.
Thanks for your help.
CONFERENCE FACILITATOR
Up next, from SAC
Capital, we'll hear from
Vidula Morde.
VIDULA MORDE
Good morning, Al.
AL WRIGHT
Good morning, Vidula.
VIDULA MORDE
Let's see.
I'm wondering maybe a little
bit more philosophically, I'm
wondering why we should not
consider the Argentinian
ongoing currency adjustments
that are flowing through the
income statement as part of
operating results for this
year and potentially for next
when you kind of gave your
guidance.
AL WRIGHT
The reason we segregated it
that way, Vidula, was we began
the year even back in October
saying that it was between $2
to $2.05, excluding Argentine
effects.
Even last fall,
although the currency was
still pegged, there was enough
disquiet that we felt it
necessary to caveat that
figure in that way.
And we're tracking it here
that way just to make sure
that we're comparing apples to
apples.
On the other hand, you can
make your own adjustments.
We have given you the numbers.
We want to continue to compare
ourselves to our original
commitment against which we're
doing very well.
But we are sustaining a -- the
ongoing effects that we
discussed.
15 cents in the first quarter.
But they will be significantly
less in the rest of the year
as shown on that chart.
So... Kind of, uhm, our attempt to
make sure that we're being
comparable from what our
original disclosure was.
VIDULA MORDE
Okay.
If we, uhm, talk about the
balance sheet adjustment that
you took about $400 million,
you indicated that should
resolve most investment.
Can you review for us, then,
what is left and under what
circumstances potentially the
remaining investment would end
up accruing as a charge to the
equity account, whether you
need, you know, whether the
currency has to go to a 5 peg
or what other circumstances we
should keep in mind whereby
there could be another
adjustment to the equity
account?
AL WRIGHT
I haven't done the math at
5.
I would tell you that we have,
as I understand it about 50
million exposed.
DAVID JOOS
I believe the remaining
balance, book balance of the
assets that are exposed here,
which are the TGN pipeline and
generating assets in Argentina,
is about $95 million.
As we indicated in our earlier
discussion, that the reduction
of something on the order of
$400 million results in about
an 80% reduction in the
remaining book value.
AL WRIGHT
And then we have some
project -- U.S. currency debt,
to deal with. But we think
that even at a 5
ratio, that it would not be
another significant hit,
although it would affect the
CTA account.
VIDULA MORDE
Okay.
You had also earlier discussed
the idea of in terms of
financing and that you didn't
see any need for any large
stock blocks given, the
continuous offering and the
drip.
what I'm wondering, can you
tell us how much you're
expected in equity to be
raised by that? And secondly,
you have a fairly significant
preferred layer and I don't
recall precisely -- I think
there are some converts in
there, I think some of them
might convert this year into
common on the diluted shares.
And I don't know whether you
plan on replacing that
preferred layer or whether,
uhm, there is no reason to do
that.
AL WRIGHT
That's a good point.
You're quite correct. $300
million mandatory converts will convert mid 2002.
We do anticipate later on in
the year replacing that with
another mandatory convertible
issue depending on market
conditions.
With regard to the continuous
offering dividend reinvestment
employee stock purchase
programs, for the year we
would normally estimate that
that would pull in about $200
million.
VIDULA MORDE
Okay.
And one last question with
regards to the overall
guidance.
You kind of answered this a
little bit to Greg Gordon's
question, but I think, uhm,
early on last year, you gave
us guidance particularly with
net incomes and you reiterated
the electric income of 195.
You now are looking at
consumers gas being more like
45 versus 50.
I'm wondering, are there any other shuffles
that we should do to the
various segments to add back
up again to the 285 that you
are looking for?
AL WRIGHT
Yeah.
I think it was on one of the
charts, but I'll give it to you
verbally here.
DAVID JOOS
Slide number 14.
AL WRIGHT
yeah, slide number 14, but
I'll read it down here.
Electric utility 195.
Gas utility 45.
Natural gas transmission 85.
MS&T 40.
The IPP business, including MCV 125.
Oil and gas E&P negative 5,
and the after tax parent
interest expense and overheads
of minus 200.
Should sum up if I did the
sums right of 285.
VIDULA MORDE
Okay.
Thank you very much.
CONFERENCE FACILITATOR
Up next, from
Morgan Stanley, we'll hear from
Kip Conlage.
KIP CONLAGE
Hey guys. Thanks.
My questions have been
answered,
thanks to the thorough
questioning from my
colleagues.
AL WRIGHT
Yes.
Well, let's get that last name
right.
That's Conlage.
KIP CONLAGE
Yeah, thank you.
CONFERENCE FACILITATOR
If your question
has been answered, you can
remove yourself from the queue
by hitting the pound key.
Moving on, we'll hear from
Terry Shu with J.P. Morgan.
TERRY SHU
Yeah. Hi, Al.
I know this question has been
asked many, many times, this
whole business about equity
issuance.
Months ago, when you have met
with us, you have said that
for the marketing and trading
operation, their issues about
credit, et cetera, and counter
party concerns and such.
And you were thinking of joint
ventures, whatever, or equity
issuance.
Where does that issue stand?
DAVID JOOS
This is David Joos.
We have continued to look at
various options to accelerate
the credit improvement of
MS&T.
We haven't arrived on anything
specific, and we don't have
anything specific to talk
about at this time.
I will say that MS&T's
business unit is operating
fine.
There is no question on a
long-term basis that credit
improvement would help us to
continue the growth that we
have expected for this year.
We don't think that that's
necessary on a go forward
basis to continue the kind of
growth rates that we have
talked about in the past, and
the range of 25% or so is
going to require credit
improvement.
But we're not going to do
anything that hurts our
progress at the parent level,
and we -- as I said continue to
look at options there, but have
nothing specific to announce
at this point in time.
TERRY SHU
Therefore, it is not
requiring an equity issuance,
all the questions about equity
issuance you do have, uhm, the
continuous dividend
reinvestment and you said the
conversion of the preferred,
et cetera, and no new equity
issuance, is that the bottom
line?
I didn't quite understand.
AL WRIGHT
Well, we have several
ongoing programs, Terry, that
you mentioned.
TERRY SHU
Right.
AL WRIGHT
We have a [INAUDIBLE] continuous offering
program, and you have those others.
Those will continue to
operate.
Conversion will happen.
And beyond that, we do not
currently plan to have any
block issuance of stock.
TERRY SHU
Right.
Because you -- you broached
that subject from time to
time.
And so that's been kind of
shelved because of the
depressed stock price, is that
what it is?
AL WRIGHT
Well, it's a lot of things, one
of which is that.
But also the fact that for now,
the marketing company is doing
quite well as it is, and there
is no -- we didn't need to
issue stock for that reason.
TERRY SHU
Okay. Back to the Argentine
situation.
Let me just understand again,
better, the 28 to 33 cents for
the current year and then 17
to 25 cents for next year, are
these operating losses that
are dragging down the overall
results, and that once -- let's
say that we got rid of it
completely, the Argentine
operation.
Would you still be dragged
down by the same amount
because of debt load?
Can you just explain a little
better when this drag goes
away or does it ever go away
because your asset has been
impaired and you have to carry
a debt load?
AL WRIGHT
Let me -- that's a very
good question, Terry.
Thank you for asking it.
TERRY SHU
I just don't quite
understand.
I have these -- I had these
elaborate models which can't
capture some of this stuff
because we don't have the
disclosure.
AL WRIGHT
The figures that are shown
in the table and the ones that
you quoted --
TERRY SHU
Right.
AL WRIGHT
-- are versus what earnings
would be if we had not
experienced the change in
government in Argentina.
TERRY SHU
Right.
AL WRIGHT
In other words, they are
not, however, losses
necessarily.
In other words, they are
reductions, but not absolute
losses.
That said, if we were able to
sell these assets, those
exposures, those reductions,
would be reduced.
TERRY SHU
Will be reduced, but there
will be a permanent impairment
and drag, correct?
Your earnings base has been
lowered.
AL WRIGHT
If the assets are gone,
then they don't add to your earnings.
TERRY SHU
Right.
AL WRIGHT
But on the other hand, any
cash proceeds would be --
TERRY SHU
Right, right.
AL WRIGHT
-- offset with interest
savings. So --
TERRY SHU
Can you give us a net-net
number?
Or do we have a permanent
impairment of a -- 25 cents
per share, assuming that the
peso never ever comes back?
AL WRIGHT
Uhm... It depends again on
your assumption whether we
continue to own them.
TERRY SHU
Right.
AL WRIGHT
If we don't own them, then
we would have an improvement
somewhat in --
TERRY SHU
Right, somewhat, but not a
huge amount, or some -- right?
Because you still have your
drag, because you're selling it
at very low prices relative to
what you bought it for.
Therefore, you have your debt
load.
Am I not right?
AL WRIGHT
You could look at it that
way.
TERRY SHU
Right.
AL WRIGHT
But you are also making
assumption of what we might be
able to sell it for, and that
could change.
TERRY SHU
Okay.
Good enough.
Thanks.
CONFERENCE FACILITATOR
Moving on, we'll
hear from Paul Ridzon with
McDonald Investments.
PAUL RIDZON
Does your projected 62% debt
to capital assume that you kind of
swap in some other assets to
make up for the shortfall from
Argentina?
AL WRIGHT
Yes.
We are going to sell $2.9
billion over the two years.
And it does assume that.
PAUL RIDZON
And you have not identified
those yet?
AL WRIGHT
We have done, as I said,
between 2.3 and 2.4, assuming
activity progresses today as
we expect on the transmission
sale and Powder River.
And we have 10 assets under
way -- well under way in the
process that we expect in
total to add up to the
difference.
DAVID JOOS
I think it's fair to say
from an identification
perspective that we have set
previously that, for example
our Loy Yang Plant, in
Australia is for sale, our
plant in Thailand is for sale,
we just recently announced the
sale of our plant in the
Philippines.
We have 3 plants in India that
are for sale.
We have the plant in Jamaica
for sale.
The plants, you know, in
Argentina, are for sale.
However, as Al has indicated,
at this point in time it
doesn't look -- because of the
fluidity of the situation down
there, it doesn't look
promising that those assets
would actually be sold this
year.
But we have announced a long
list of things that are for
sale.
Internally, there are a few
things that may not sell, like
I said, like the Argentine
assets.
But collectively amongst that
list, and some other things
that we may put up for sale to
make sure we get to this
program, we plan on getting
the $2.9 billion, and that is built
into our plan.
AL WRIGHT
While I'm at it, Terry,
there is something I forgot to
mention, with regard to Argentina. And
that is that this hit to the
balance sheet eventually could
be mitigated by both
arbitration proceeds that we
have under way under the
international treaty with the
United States, having to do
with honoring these contracts
at the regulated entities. And, of
course, if Argentina doesn't
pay such a judgment, then we
are backed up somewhat with insurance
proceeds for political risk.
So, you forget that in your
equation.
PAUL RIDZON
Would you -- this is Paul
Ridzon again.
Could you indicate what level
of earnings is associated with
the 10 assets that are likely
to close this year?
AL WRIGHT
I don't have that figure on
the top of -- off the top of
my head. But I will tell you
they have been factored out of
our projections.
PAUL RIDZON
Okay.
Thank you.
CONFERENCE FACILITATOR
From JK Utility
Advisors we'll hear from John
Colleney.
JOHN COLLENEY
Hi Al.
AL WRIGHT
Hi John.
JOHN COLLENEY
I guess two areas.
One in terms of the Powder
River and Transmission sale
that you expect might close
today.
Total proceeds in the $400
million area, is that about
right?
AL WRIGHT
That's right.
JOHN COLLENEY
Okay.
And then, I hate to keep going
back to Argentina.
But on -- I guess two questions.
You mentioned there is some
project U.S. currency debt
attached to the Argentinian assets.
Is that recourse to CMS, and
how much is it?
AL WRIGHT
Negative
about 50 million.
No recourse.
JOHN COLLENEY
No recourse.
Okay.
And then, on a -- trying to
understand, on a quarterly
basis, this $400 million
charge that you are taking
will be adjusted up or down,
depending on the peso at close
of each quarter, is that
correct?
AL WRIGHT
That is correct.
And we will be using a base of
between 3 and 3.5 as a
starting point.
And any such subsequent
adjustment will go to CTA, not
through earnings.
JOHN COLLENEY
Okay.
And then, uhm, did you say
this charge in some fashion
mitigates potential operating
losses on a go forward basis?
AL WRIGHT
Yes.
JOHN COLLENEY
How does that work?
AL WRIGHT
In some cases, it reduces
the asset value frankly to
zero.
And therefore, subsequent
gains and losses are excluded.
The second way is it causes
depreciation to be less.
JOHN COLLENEY
Okay.
Okay, thanks.
CONFERENCE FACILITATOR
We'll hear from
Peter Case with CIBC World
Markets.
PETER CASE
Al or Dave, can you talk a
little bit about the long-run
outlook for the E&P business,
given your commitment to the
2.9 billion in proceeds, and
that Argentina probably won't
contribute to that in the
short term?
And with -- now having sold both
Equatorial Guinea and Powder
River, does that business have
critical mass?
Is it a keeper?
DAVID JOOS
Those are a lot of good
questions and ones that we are
working trough right now
internally.
We have been up front that the
E&P business as currently
structured doesn't make sense.
We have a few assets left in
the United States, in West Texas
and Louisiana.
We have a couple of very good
properties in South America
and Venezuela and Colombia.
And then we have Cameroon,
Tunisia and the Congo along
with exploration properties in
Eritrea.
So we are spread fairly thin
at this point in time for a business
of our size.
And frankly, what we have said,
and we continue to say, is
that we plan on either
repositioning and possibly
exiting that business. Though
the specifics of how we'll do
that, when we'll do that, and
even if we do that are not yet
settled.
PETER CASE
Okay.
Thank you.
CONFERENCE FACILITATOR
Up next we'll
hear from Steven Landolt with
Landolt Securities.
STEVEN LANDOLT
Good morning everybody. On that $430
million write-off, is that before or
after taxes?
AL WRIGHT
That would be after taxes.
STEVEN LANDOLT
Okay.
And then also, there's been a
lot of talk about the down
side of Argentina.
What about the up side?
Are there -- is there anything
down there that you people see
to make the outlook more
positive?
AL WRIGHT
Well, I'll tell you, we are
pretty well connected down
there.
We have been to Washington.
We are talking all the time to
people in Treasury, who in turn
are influential at the IMF.
And I would say that we have
made progress in -- with
Treasury and the IMF, such that
any subsequent IMF bailout or
loan program will have as a
condition -- it is likely to
have as a condition
restoration of the viability
of the energy sector in
Argentina.
Including some reasonable
outcome on our contracts.
However, the current
government seems to be trying,
at the moment, to figure out
some way of operating without
IMF support, because the IMF is
insisting on some fairly
painful political conditions
in order to justify loaning
them money.
So if I were to call it today,
I would say the government
seems to be moving away from
the IMF.
Whether they will be
successful in the long run in
that regard is arguable.
I think frankly, as a
collegiate economist, that the
IMF is going to have to play
into that scenario, in which
case I think there may be some
restoration in the energy
sector.
But this is all very
problematic and difficult to
forecast. And that's why, among
other reasons, we decided to
take the steps we have.
DAVID JOOS
I think it is fair to say
that while there is little to
be enthusiastic about at this
point in time, the steps that
we have taken eliminate for
the most part any material
down side.
Not to say there aren't some
minor adjustments that we
talked about.
So what up side -- what change
there is, over the longer term,
is likely to be up side.
It's just difficult to
forecast it or time it at this
point.
AL WRIGHT
Right.
STEVEN LANDOLT
So you're basically taking
the worst-case scenario at
this time?
AL WRIGHT
Pretty much.
DAVID JOOS
It's not the absolute worst
case, but it's pretty close to
it. As we indicated, you know,
we basically, with this charge,
will reduce our book equity to
something like 20% of what was
originally there for the
assets that are affected.
STEVEN LANDOLT
So this is a hit of about
$3.25 a share... So what would
be the book value after the
sale of the oil and gas
properties and then this
writedown?
What would be the book value
of the company roughly at this
time then ?
AL WRIGHT
I don't have that figure,
nor have we published -- well,
actually, we did publish the
first quarter, and you could
make adjustments on that pro
forma.
STEVEN LANDOLT
Okay.
Thank you very much.
Good luck going forward.
AL WRIGHT
Thank you.
CONFERENCE FACILITATOR
Our next question will
come from National Bank
Financial's from Fred Fruhoff.
FRED FRUHOFF
Good morning.
What is the impact of the
implementation of FAS-142 on
your earlier earnings?
AL WRIGHT
So far, it is the
elimination of the good will
in the Panhandle principally, which
runs about $19 million
annually.
We continue to review the
value of all of our assets
under FAS-142, and that will
continue through the rest of
the year.
FRED FRUHOFF
Okay.
I have a couple of questions
on the trunk line LNG business,
if I may.
I take it you don't disclose
operating earnings for -- for
your LNG operations, or do
you?
DAVID JOOS
Not specifically.
We indicated on an overall
basis what our earnings were
at GTS, Gas Transmission and
storage.
As you know, the trunk line
LNG business is something that
we have sold the existing
capacity, under a long-term
contract in excess of 20 years,
to British Gas.
FRED FRUHOFF
Yes.
DAVID JOOS
We announced that earlier.
That doesn't mean that there
is no additional earnings
associated with that. We do
have some opportunities to
move spot cargos through the
LNG business.
Early in this year, we saw
very little of that, because
gas prices were so depressed.
We are starting to see a
pickup in cargo at Lake Charles, so
there will be some earnings
contribution. But the majority
of that basically was
monitized earlier through the
BG contract monization.
FRED FRUHOFF
How many cargos were there
in the first quarter compared
to last year?
DAVID JOOS
I don't have those numbers.
My recollection is there was
maybe one or -- I can't
remember if the first cargo
was even in the first quarter
through April.
And I don't have the numbers
specifically how many cargos
early last year.
We have seen a pickup, and I
think we are looking at
somewhere on the order of 7 or
8 cargos that have already
been committed just within the
last month or so as a result
of the pickup of prices.
FRED FRUHOFF
And what are your plans
with respect to the expansion
of the LNG terminals capacity.
DAVID JOOS
Well, we have -- we are
proceeding with the
preliminary efforts associated
with that, including
engineering, and looking for
contractors to build a
facility.
We are in the process of going
through the FERC licensing
proceedings.
That is going well.
The environmental meetings at
the site have gone well.
There is an option for British
Gas to take the incremental
capacity, and they have that
option through June.
We'll just have to wait and
see if they are interested in
that.
As we said earlier, we
continue to believe that LNG
is going to be a very
important part of the supply
portfolio for the United
States on a go forward basis,
and this is probably the most
cost-effective project in the
U.S. to provide for additional
expansion capabilities.
So we fully expect that we are
going to be moving forward
with that project.
There is a little bit of
uncertainty yet as to exactly
how that will be contracted,
et cetera.
But that should get itself
resolved here in the third and
fourth quarter.
FRED FRUHOFF
Does this terminal lend
itself potentially to a
limited partnership type of an
arrangement, where you would be
the general partner, and you
could monitize, of course,
part of your current
investment to the limited
partners?
AL WRIGHT
We, as you know, or perhaps
not, last year we executed a
transaction that monitized the
existing British Gas contract
for capacity.
And with regard to the
expansion, we have made no
decision yet as to the best
way to finance that.
But it could involve a
partnership.
FRED FRUHOFF
Okay.
Thanks very much.
That's all I have.
CONFERENCE FACILITATOR
Moving on, we'll hear from
Zach Schreiber with SylCap Investments.
ZACH SCHREIBER
Hi, Al.
It's Zach Schreiber from SylCap.
Can you hear me?
AL WRIGHT
yes, Zach, loud and clear.
ZACH SCHREIBER
Just a question again on
the balance sheet and just the
assumptions embedded in the
62% number for year end.
Does that number explicitly
assume that the $300 million
of convert that, uhm, that
mandatory converts into
equity sort of midyear '02 and
then that they get replaced
dollar for dollar with a like
security?
AL WRIGHT
Yes.
ZACH SCHREIBER
And embedded in that number,
that's 62% debt to total capital,
are you guys giving yourself
equity credit for those
converts, the rating agencies
doing that, or do's the equity
credit really only increase on
conversion to common?
AL WRIGHT
At present.
We have full equity credit for
convertible, principally
because it's mandatory.
ZACH SCHREIBER
Okay.
Thanks so much.
CONFERENCE FACILITATOR
Moving on, we'll hear from
Eric Olson with Barlow Hanley.
ERIC OLSON
Good morning.
I was just curious if you
could provide us what
operating cash flow for the
quarter came in at.
If you have given any guidance
for recurring effort in
cash flow for the year.
And also, you mentioned on previous
conference calls, but I wanted
to hear if you're still
committed to the dividend.
Thanks.
AL WRIGHT
I don't have that cash flow
information before me, but it's
huge because of the sale of
EG.
So I'd have to make an
adjustment as to the operating
level, and I don't have that in
front of me.
Now, with regards to the
dividend. We are committed to
maintaining the dividend at
$1.46, 36.5 cents a share. In
fact the next declaration will
be coming along shortly.
So there is no change in the
dividend.
Is that clear?
CONFERENCE FACILITATOR
Up next, we'll hear from a
follow-up from Greg Gordon
with Goldman Sachs.
GREG GORDON
Yeah, just two follow-up
questions, guys.
If I look at your earnings
breakdown, and just sort of do
some basic math, the -- if I
take, assuming that all the
financing for the utility is
at the utility level, and that
that $200 million of parent
operating expense is
associated with the rest of
the assets, and we sort of,
you know, do basic math, you
get for 2002, uhm, you know,
net income after parent debt
or sort of non-utility
investments of about $45
million. Which, you know,
assuming that that convertible
does turn into common midyear,
would be about 30 cents a year
of earnings?
So after taking into account
the Argentina businesses, you
know, the sort of losses there
before you can package them
for sale, would it be fair to
say that you're basically
break even after financing
costs?
On that basket of
non-Michigan-based businesses?
Or is that not an
appropriate way to look at it?
AL WRIGHT
Well, the ongoing level -- first of
all, from Argentina, remember,
is 17 to 25.
GREG GORDON
Right, so that will improve next
year.
I'm just looking at -- and it
will further improve hopefully
when you get out of that
business.
AL WRIGHT
That is correct
GREG GORDON
I'm just trying to make sure, I'm
looking at this the right way.
AL WRIGHT
But with regard to doing
the math you just did, that's
how it works out.
GREG GORDON
Okay.
Now, one other thing.
When you look at the operating
cash flow of just the utility
businesses, and compare that to
the utility CAP-X, plus the
common dividend, are we in a
position where we are sort of
comfortably funding the
dividend and the maintenance
CAP-X of the utility with the
cash flow of the utility?
Or is it, or do we need the
incremental cash business to
support that core business, and
the dividend payout?
AL WRIGHT
We enjoy a dividend stream
from all the businesses that
in some cases is actually in
excess of earnings, because of
the way the project financing
works. A classic example of
that is JORF, where dividends coming in in cash are
higher than the earnings.
Let's go back to the core
question, which is -- with regard to the
utility.
I would say that during the
last several -- couple of
years, that the utility has
been a net needer of funds
after the dividend, simply
because of its environmental
expenditures for nitrous
oxide.
We expect that to abate
somewhat, and therefore, the
utility being pretty much
break-even after paying fairly
a significant dividends.
GREG GORDON
Great.
But at this point,
the utility, after
its capital expenditures, is
not in a position where it
could hypothetically fund the
entire common dividend?
AL WRIGHT
No, I didn't say that. I
said after it dividends
roughly $200 million, that it
still has to raise a little
money.
So net-net, yeah, the utility
dividend does cover the common
dividend.
GREG GORDON
Great.
I mean, so, you know, I mean,
what I'm -- basically, the
framework I'm trying to
understand here, you know,
even though you have
challenges with your basket of
non-regulated businesses, and
you're working through those
and that's, had you know,
you're slogging through it and
that's going to take some time,
this is the core business is
still generating earnings and
cash flow sufficient to
continue to pay the dividend --
AL WRIGHT
That's right.
GREG GORDON
-- on the common stock.
AL WRIGHT
That's right.
GREG GORDON
Okay.
Great, thanks.
CONFERENCE FACILITATOR
We'll take
another follow-up question
from Devon Geohiggins with Lumas
Management.
DEVON GEOHIGGINS
Great, thank you.
Just a couple things.
Just to clarify. The
amortization, I know that's been
touched on a couple of times,
but is it 19 times, you know,
annualized time 4 quarters or
19 per year?
AL WRIGHT
Per year.
DEVON GEOHIGGINS
It's 19 per year.
AL WRIGHT
Yes.
DEVON GEOHIGGINS
Okay.
That's what I was thinking.
And then, as far as the
depreciation from the
writedowns, can you give us
some indication as to the
magnitude of the decrease in
that number?
AL WRIGHT
Hold on a second.
[PAUSE]
AL WRIGHT
We don't -- we can get that number,
but we don't have it this minute.
If you'll call Investor
Relations later --
DEVON GEOHIGGINS
Absolutely.
AL WRIGHT
-- then they
have it. -13:39:56 DEVON GEOHIGGINS: Okay.
Just one last question.
I know everybody is focusing
on the balance sheet issues.
But what are the rating
agencies talking about, and are
they focusing more on the
coverage ratios and sort of,
you know, meeting different
things like that as opposed to
focusing on the balance sheet?
AL WRIGHT
Yes, their main concern,
as it should be, and that we concur with, is
free funds from operation coverages,
and debt to EBITDA, neither of
which are affected by our
non-cash write-off.
DEVON GEOHIGGINS
Great, thank you very much.
CONFERENCE FACILITATOR
And our final
question will come from Vidula Morde
with SAC Capital.
VIDULA MORDE
One last question with
respect to Argentina.
What would it take for you to
conclude that you can, on an
accounting basis, decide that
these are discontinued
operations or assets held for
sale such that the, uhm,
remaining effect that you have
indicated of the 13, 17 cents
that would come through the
income statement would no
longer need to be reflected?
AL WRIGHT
Well, there would still be
some residual effect, Vidula,
but a lot of
it would be eliminated.
I would tell you that I
believe the rule to be that
you have to have a pretty
probable plan to dispose of
those assets within a year.
And we just couldn't make that
determination, given the
state of uncertainty in
Argentina.
VIDULA MORDE
Now, given what you know
about the parties with whom
you have discussions with, and everything like that,
is this going to be a
quarter-to-quarter thing
whereby, come this time three
months from now, in fact you
may be in a position to
reclassify these assets?
AL WRIGHT
We could.
Depending on developments in
the country.
And in the market.
VIDULA MORDE
Just, kind of based on what
you have been watching here,
do you have any expectation
that we should expect
something like that this year?
Or do you think it really is
going to push into next year?
AL WRIGHT
Vidula, if I could predict
what was going to happen in
Argentina tomorrow, I'd be a
rich man.
It's very difficult.
DAVID JOOS
I think, suffice it to say,
that given the timing of this
year, and the circumstances down
there, that there isn't a lot
of appetite on people's part
to buy assets in Argentina.
And for that reason, we are
not at all optimistic that
they are going to sell during
this calendar year.
AL WRIGHT
Right. There's two aspects.
One is the situation in
Argentina, as Dave rightly
points out, you know, there
is no market for assets there.
At present, it could happen
but it isn't likely that both
of those will resolve in such
a way that we'll be able to
classify them as [INAUDIBLE] for sale.
VIDULA MORDE
Okay. Thank you very much.
CONFERENCE FACILITATOR
That concludes
our question-and-answer
session for today.
I will turn the conference back
over to you for any closing
remarks.
AL WRIGHT
Well, again, thank you very
much.
I know you are all busy this
season.
And we appreciate your
continued support and interest
in the company.
Thank you.
CONFERENCE FACILITATOR
That concludes
today's teleconference.
Thank you for your
participation.