CMS能源 (CMS) 2002 Q1 法說會逐字稿

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.

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.

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.

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]

And our first

question will come from Greg

Gordon with Goldman Sachs.

Thanks.

Good morning, Al.

Good morning, Greg.

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?

That is correct, Greg.

Great.

And then -- but those assets are

currently not held for sale?

That is correct.

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?

Yes, that's correct.

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?

Right.

And that assumes, by the way,

an entire year operation in

the ranges of exchange rate we

show on the table.

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?

That would be a reasonable

statement.

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 --

Yes, let's go to that last

chart.

The current guidance would

indicate $195 million for

electric, gas $45 million.

Gas utility.

Okay.

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.

Okay, great. But most all the financing

for the electric and gas

utility is done at the

electric and gas utility level,

correct?

Correct.

Okay. Thanks, guys.

Up next we'll

hear from Jeff Gildersleeve

with Argus Research.

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?

Dave, you want to --

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.

Okay.

So there were no abnormal

costs in there this quarter?

No.

None.

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?

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.

Great.

Thanks a lot.

Up next, from Lumas Management,

we'll hear from 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.

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.

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?

That would be, uhm, not a

good thing to discuss --

Fair enough.

-- 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.

Great.

Thanks.

Congratulations.

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.

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?

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.

But they haven't indicated

how much is enough?

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.

Alright, thank you.

Up next, we'll

hear from John Olson with

Sanders, Morris, & Harris.

Al, good morning.

Good morning, how are you?

Fine. Listen, what -- in marketing

services and trading, how much

of profit was mark to market?

Net about zero.

We had some gains in electric

I believe, and losses in gas.

Okay.

It netted out about zero.

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?

It's a $19 million annualized

number.

So I think it's ratable over the year.

Okay. Thanks very much.

Moving on, from

Deutsche Banc, we'll hear from

James Dobson.

Al, how are you?

I'm fine James.

How are you?

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.

[INAUDIBLE] I don't know the total on

that deal. Dave, do you have --

: 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.

And they were offsetting.

Okay.

And then on JORF, could you

give us an idea what the

performance incentive was in

the numbers?

About 2 million, I'm

advised.

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

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.

Great.

Thanks for your help.

Up next, from SAC

Capital, we'll hear from

Vidula Morde.

Good morning, Al.

Good morning, Vidula.

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.

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.

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?

I haven't done the math at

5.

I would tell you that we have,

as I understand it about 50

million exposed.

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.

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.

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.

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.

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?

Yeah.

I think it was on one of the

charts, but I'll give it to you

verbally here.

Slide number 14.

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.

Okay.

Thank you very much.

Up next, from

Morgan Stanley, we'll hear from

Kip Conlage.

Hey guys. Thanks.

My questions have been

answered,

thanks to the thorough

questioning from my

colleagues.

Yes.

Well, let's get that last name

right.

That's Conlage.

Yeah, thank you.

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.

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?

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.

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.

Well, we have several

ongoing programs, Terry, that

you mentioned.

Right.

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.

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?

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.

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?

Let me -- that's a very

good question, Terry.

Thank you for asking it.

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.

The figures that are shown

in the table and the ones that

you quoted --

Right.

-- are versus what earnings

would be if we had not

experienced the change in

government in Argentina.

Right.

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.

Will be reduced, but there

will be a permanent impairment

and drag, correct?

Your earnings base has been

lowered.

If the assets are gone,

then they don't add to your earnings.

Right.

But on the other hand, any

cash proceeds would be --

Right, right.

-- offset with interest

savings. So --

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?

Uhm... It depends again on

your assumption whether we

continue to own them.

Right.

If we don't own them, then

we would have an improvement

somewhat in --

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?

You could look at it that

way.

Right.

But you are also making

assumption of what we might be

able to sell it for, and that

could change.

Okay.

Good enough.

Thanks.

Moving on, we'll

hear from Paul Ridzon with

McDonald Investments.

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?

Yes.

We are going to sell $2.9

billion over the two years.

And it does assume that.

And you have not identified

those yet?

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.

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.

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.

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?

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.

Okay.

Thank you.

From JK Utility

Advisors we'll hear from John

Colleney.

Hi Al.

Hi John.

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?

That's right.

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?

Negative

about 50 million.

No recourse.

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?

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.

Okay.

And then, uhm, did you say

this charge in some fashion

mitigates potential operating

losses on a go forward basis?

Yes.

How does that work?

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.

Okay.

Okay, thanks.

We'll hear from

Peter Case with CIBC World

Markets.

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?

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.

Okay.

Thank you.

Up next we'll

hear from Steven Landolt with

Landolt Securities.

Good morning everybody. On that $430

million write-off, is that before or

after taxes?

That would be after taxes.

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?

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.

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.

Right.

So you're basically taking

the worst-case scenario at

this time?

Pretty much.

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.

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 ?

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.

Okay.

Thank you very much.

Good luck going forward.

Thank you.

Our next question will

come from National Bank

Financial's from Fred Fruhoff.

Good morning.

What is the impact of the

implementation of FAS-142 on

your earlier earnings?

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.

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?

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.

Yes.

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.

How many cargos were there

in the first quarter compared

to last year?

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.

And what are your plans

with respect to the expansion

of the LNG terminals capacity.

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.

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?

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.

Okay.

Thanks very much.

That's all I have.

Moving on, we'll hear from

Zach Schreiber with SylCap Investments.

Hi, Al.

It's Zach Schreiber from SylCap.

Can you hear me?

yes, Zach, loud and clear.

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?

Yes.

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?

At present.

We have full equity credit for

convertible, principally

because it's mandatory.

Okay.

Thanks so much.

Moving on, we'll hear from

Eric Olson with Barlow Hanley.

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.

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?

Up next, we'll hear from a

follow-up from Greg Gordon

with Goldman Sachs.

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?

Well, the ongoing level -- first of

all, from Argentina, remember,

is 17 to 25.

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.

That is correct

I'm just trying to make sure, I'm

looking at this the right way.

But with regard to doing

the math you just did, that's

how it works out.

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?

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.

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?

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.

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 --

That's right.

-- on the common stock.

That's right.

Okay.

Great, thanks.

We'll take

another follow-up question

from Devon Geohiggins with Lumas

Management.

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?

Per year.

It's 19 per year.

Yes.

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?

Hold on a second.

[PAUSE]

We don't -- we can get that number,

but we don't have it this minute.

If you'll call Investor

Relations later --

Absolutely.

-- 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?

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.

Great, thank you very much.

And our final

question will come from Vidula Morde

with SAC Capital.

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?

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.

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?

We could.

Depending on developments in

the country.

And in the market.

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?

Vidula, if I could predict

what was going to happen in

Argentina tomorrow, I'd be a

rich man.

It's very difficult.

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.

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.

Okay. Thank you very much.

That concludes

our question-and-answer

session for today.

I will turn the conference back

over to you for any closing

remarks.

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.

That concludes

today's teleconference.

Thank you for your

participation.