CMS能源 (CMS) 2002 Q3 法說會逐字稿

Good morning.

And welcome to the CMS Energy's 2002 third quarter earnings business and financial outlook conference call.

This call is being recorded.

Just a reminder, there will be a rebroadcast of this conference today beginning at 1 p.m.

Eastern time, running through November 21.

To listen, simply dial 719-457-0820 and reference pass code 370711.

At this time, for opening comments and introductions, I would like to turn the call over to the Vice President of Investor Relations and Treasurer, Miss Laura Mountcastle.

Please go ahead, Ma'am.

Thank you.

Good morning, and thank you for joining us.

With me this morning, I have Ken Whipple, Chairman and CEO, Dave Joos.

President and Chief Operating Officer, and Tom Webb, Chief Financial Officer.

Before I turn it over to Ken, I'd like to 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 Ken.

Thanks, Laura, and good morning, ladies and gentlemen.

And welcome to the CMS Energy third quarter conference call.

As Laura said, I'm Ken Whipple, Chairman and CEO of the company.

We have a number of items to discuss with you today.

We'll try to move as briskly as we can consistent with providing full information.

And we'll leave plenty of time to answer your questions.

David Joos will cover the company's strong operating results for the third quarter and the first nine months.

Our core businesses continue to deliver excellent results.

And as you'll see, our outlook for the year at $1.50 to $1.55 a share in ongoing earnings is unchanged from previous guidance levels.

Following Dave, Tom Webb will cover the financial update.

He'll start with the reaudit program which is nearing completion with Ernst & Young.

As you will see, there will be a restatement of net income.

It will include several non-cash ups and downs, unrelated to roundtrip trading, with the resulting increase in total net income for the two-year period 2000 and 2001.

Tom will also cover some significant potential balance sheet changes in the fourth quarter reflecting likely asset writedowns and a pension fund liability adjustment similar to those being reported by other companies.

Finally, Tom will go over our strong liquidity position including good progress on asset sales, paying down bank debt, and more than a half billion dollars of cash on hand.

So we may start with Dave.

Thank you, Ken.

Good morning to all of you on the call.

Third quarter ongoing earnings from operations improved by 16 cents a share, or 62& over the third quarter of 2001.

The 42 cents of ongoing earnings for the quarter was well in excess of First Call's average expectation of 31 cents per share.

The most significant contributor to the year-over-year improvement was the electric utility which had an exceptionally good quarter in 2002 contrasted with the subpar in third quarter in 2001.

While 2001 was hurt by the extended unplanned outage at our Palisades nuclear plant, 2002 was aided by strong performance of our entire generating fleet.

Our Palisades nuclear plant operated at 99.8% capacity factor for the quarter and the remainder of the base load fleet achieved nearly 95% availability for the quarter, both exceptional.

Incidentally the Palisades plant is currently in its second longest continuous run in the history of the plant, only five weeks away from surpassing its all time record.

It's currently scheduled to operate until its March 2003 refueling outage.

Also contributing to the strong third quarter at the electric utility was strong retail electric sales, partly due to sustained higher-than-average temperatures.

Higher margin residential and commercial sales for the quarter were up 12% over 2001 and despite the economic downturn, industrial sales were up nearly 4%.

Despite the high loads throughout the region, wholesale electric prices remained low through the quarter, benefitting the utility under its rate freeze.

The gas utilities' quarterly earnings were down $7 million year over year due to an after-tax inventory adjustment of $9 million which was taken following the completion of pressure testing of our Michigan gas storage fields.

The negative effect of that issue along with the 4% reduction of deliveries in the quarter were somewhat offset by excellent cost control at the unit and a $15 million interim annual rate release that was ordered by the Michigan Commission in December 2001.

As an aside, the Michigan Commission ordered permanent annual rate relief of $56 million last week for our gas utility.

While this is less than requested, the permanent relief ordered was nearly twice that recommended by the Commission staff and the administrative law judge, which I think demonstrates a continuing support for the company by the Commission.

The order authorized a rate of return on equity of 11.4%.

In total, the ongoing net income for the utility was $70 million for the quarter, up from only $13 million in 2001.

Third quarter results at Panhandle were favorable due largely to cost control and suspension of goodwill amortization, while the remainder of the independent gas pipeline business was negatively impacted by the Argentine expropriation and currency devaluation issues that we have discussed previous to this call.

On going net income at the unit in total was $17 million for the quarter, down from $21 million in 2001.

Quarterly earnings at the independent generation business were down year-over-year due to plant outages as well as lost earnings associated with the situation in Argentina.

Ongoing net income at the generation business was $39 million for the quarter, down from $47 million a year ago.

The total impact of the Argentine expropriation devaluation issues on CMS Energy earnings for the quarter was 5 cents a share.

Finally marketing services and trading earnings were down substantially year-over-year due to credit constraints and our withdrawal from speculative trading.

We are pursuing the sale of our wholesale electric and gas books as well as our performance contracting business Viron.

The year-to-date results reflect many of the same issues I just discussed for the third quarter.

Third quarter year-to-date operating earnings were up 5 cents, or 4% over 2001.

The year-over-year improvement of 60 cents per share at the electric utility and the 36 cent contribution from improved operations at our independent power unit were largely offset by a 31 cent negative year-to-date impact from Argentina and a 49 cent reduction in earnings from MST.

Reported earnings through the end of the third quarter are substantially above last year and $1 per share higher than ongoing earnings.

Large asset writedowns and discontinued operations in 2001 resulted in a large net loss for the first three quarters of the year.

While losses on some asset sales have been booked so far in 2002, they are more than offset by the gain on the sale of Consumers electric transmission system and particularly by the substantial gain on the sale of the oil and gas property in Equatorial Guinea.

As will be discussed later, the reaudit is expected to result in a partial reversal of writedowns taken in 2001.

In addition, the 2002 year-end reported income is expected to be substantially reduced from the 2002 year-to-date number due to additional writedowns that are anticipated in the fourth quarter.

This is quantified on the next slide.

First let me talk about our ongoing EPS guidance that Ken referred to earlier.

Our current forecast for earnings from ongoing operations continues to be within the $1.50 to $1.55 per share range previously provided.

This forecast is in line with the average First Call forecast of $1.50 a share.

However, several non-recurring, non-cash items are expected to result in a reported net loss for the year of approximately $3 a share.

Most of this loss is associated with two items.

The writedown of most of the goodwill of the Panhandle Companies and the writedown of a majority of our equity investment in the Dearborn Industrial Generation facility.

As you know, the write down of goodwill at Panhandle was precipitated by a new accounting standard that became effective this year.

Assuming we choose to move forward with the sale of Panhandle Companies, the final impact on our financials will be determined by the terms of that sale.

As for DIG, a significant increase in natural gas prices and a significant decline in wholesale power prices have had a significant impact on the profitability of the facility.

Now, before I pass the baton over to Tom Webb, who will take you through the financial status report, I just want to spend a minute bragging a little bit about the exceptional operating performance of our various companies.

J.D.

Power and Associates just recognized our gas utility as tied for first place in residential satisfaction among all Midwestern gas utilities, one of four U.S. regions.

In addition to the fact that our gas rates are among the 10% lowest in the U.S. even after our recent rate increase.

I have already mentioned the stellar performance of our utility generating fleet.

Our electric utility has also been benchmarked in the top quartile nationwide for industrial customer satisfaction.

Our independent power and pipeline companies also have strong performance.

As an example, our first year performance at our newest combined cycle generating units, the Altowelah A2 project in the United Arab Emirates and the DIG project here in Dearborn are world class, between 95 and 100% availability for power steam and desalinated water production.

Just a few highlights for you.

We're proud of the great job our operating employees are doing while we're working to improve our financials and with more on the financials, let me turn it over to Tom Webb.

Thanks, Dave.

And good morning to everyone out there.

You know, even in these very interesting times for companies in our sector, it's a real pleasure for me to be here with this management team and with you today.

As Dave mentioned, we had a good third quarter and are maintaining our guidance for the full year.

As shown on Slide 6, operating cash flow at CMS is expected to be sufficient to support our dividend.

Coupled with the recently completed and planned asset sales, we are able to reduce our debt by another $125 million.

At Consumers Energy, cash flow is expected to be sufficient to retire additional debt and to increase our cash balance by $55 million.

This forecast reflects a substantial change in our thinking over the last few months when we planned on accessing capital markets for $600 million with $300 million of new equity at the parent and $300 million of new debt in Consumers Energy.

We were able to introduce a more realistic and reliable plan by reducing our own costs in capital expenditures, implementing an improved tax strategy, monetizing our gas reserves and completing the sale of a few smaller assets.

Most of these actions are in place.

This results in a solid liquidity position for the company and although not shown, Ken mentioned we have over $550 million in the bank today.

Now, as most of you know, we're completing the reaudit of our accounting records for 2000 and 2001.

As the new CFO, I appreciated the opportunity to have a thorough relook of our records.

Our auditor, Ernst & Young, has identified several accounting practices that they interpret differently from our former auditors.

These changes are shown on Slide 7 and are in total favorable to our earnings.

In addition, they have no material cash impact.

Let me start at the bottom of this slide.

We consolidated two loans on to our balance sheet.

An LNG-related loan of $215 million will be consolidated in 2001 and will stay on our books until the potential sale of our Panhandle operations.

Our share of the loan associated with the Atlantic methanol business will be consolidated for 2000 and 2001.

We sold this business a year ago so it is off our books in 2002.

There are three non-cash income-related changes that will improve our net income in both 2000 and 2001, by as much as $171 million in total.

This involves reversing reserves related to the Midland Cogeneration venture and our Dearborn Industrial Generation business in 2001.

This also reflects adjustments at MST, the largest of which involves changes to mark-to-market gains and losses.

These changes are almost complete.

Some work remains to finalize the restatements and discussions with the SEC are actually in progress.

As shown on Slide 8, the reaudit process is nearly complete.

The special committee provided its findings to the Board of Directors on October 31.

As shown on the second timeline, conclusions from the reaudit of 2000 and 2001 accounts are being reviewed with the SEC.

Amended 10-Ks and 10-Qs for consumers and Panhandle should be complete in December.

The 10-K-a for CMS also should be filed in December.

Now, consistent with the thorough reassessment of MS&T records for 2000 and 2001, work on each quarter of 2002 is well under way.

This should be complete in January permitting 2002 10-Qs for CMS to be filed.

In addition to the reaudit, we plan to take several non-cash write-offs at year end.

Some of these we have discussed with you before.

First, a non-earnings and non-cash item related to our pension plan.

Our defined pension plan meets minimum funding requirements.

But we have to take a charge to other comprehensive income at year end.

Now, based on the market value of our pension assets on September 30, we take a non-cash charge of $255 million.

This could be higher or this could be lower depending on asset performance between September 30 and year end.

At present, asset performance actually is better.

This would reduce the charge.

Again this will not affect net income and does not require a cash contribution.

We also are evaluating several write-offs that will affect net income.

Recall in August the last time we talked, we indicated our plan to write down goodwill associated with our Panhandle operation.

This reflects the new accounting standard regarding intangible assets.

We are considering a writedown of a majority of the investment in the Dearborn Industrial Generation facility due to increased natural gas prices and a decline in wholesale power prices.

We're also exploring the sale of the power and gas books of MST.

This could provide substantial incremental cash at the end of the year.

In total, these earnings-related writedowns are estimated at about $750 million, or as Dave mentioned a bit earlier, about $5.30 a share.

Separately, we've reduced debt by $860 million by the end of the year.

All combined these actions could increase our debt-to-capital ratio to 77% at year end.

Now, as you can see here, on Slide 10, we have made progress reducing debt.

For 2002, debt is down $860 million, or 11%, from last year.

If we decide to accept an offer to sell the Panhandle business and complete some other debt reduction actions, debt would be down $1.5 billion, or 21% next year.

This would improve our debt-to-capital ratio from 77% estimated for year end after the write-offs to 72% in 2003.

We'll be taking action, some equity-related and perhaps some debt-related, to strengthen our capital structure as we go forward through time.

Let me turn to liquidity now.

First, asset sales.

As shown on Slide 11, we're on track with nearly $2.7 billion of sales complete.

We're exploring a variety of new sales, including Panhandle, Field Services, MS&T businesses, and international power plant.

Second, please recall our plans to reduce expenses and capital expenditures as a way to pull up our own bootstraps.

This will free cash for deleveraging.

This year, capital expenditure will be down over $500 million, or 37% from last year.

Compared with guidance we have provided in our last call, capital expenditures will be a third lower in 2003 and about 26% lower in 2004.

These reductions reflect efficiencies and deferrals that free up considerable capital.

Now, third, still on liquidity, we're continuing to pay down bank debt faster than expected.

The Enterprises loan is fully paid.

The CMS Energy revolver has been paid down from $296 million to $207 million.

We expect to repay the balance of this loan in the next few months.

As shown on Slide 14, our base plan for CMS uses asset sales, proceeds and earnings to repay debt and avoid the need for accessing capital market.

At Consumers, we plan to refinance certain debt and access the capital markets for $300 million of new debt later in the year.

These projections reflect preliminary budget estimates which will be finalized during the course of this next month.

Overall, our liquidity position is sound.

As of today, we have in excess of $550 million of cash in the bank.

Our bank debt due next March should be repaid with asset sale proceeds even without the sale of Panhandle.

As mentioned already, should we choose to sell Panhandle, CMS will not need to access capital markets in 2003.

Alternative sources of liquidity are available if they're needed.

These include things like additional asset sales, further expense and capital reductions, potential securitization of clean air and other investments or, if necessary, timing of pension contributions and perhaps dividend payments.

Those decisions will be made in the future.

So our priorities are clear.

Maintain strong liquidity, reduce risk in volatility, rebuild our balance sheet, and restore investor confidence.

We have a lot of work to do, and we're well underway.

We thank you all for joining us today, and Ken, Dave and I would be pleased to take your questions.

So I'll turn it over to the operator, Brenda.

Thank you.

The question-and-answer session will be conducted electronically.

If you would like to ask a question, you may do so by pressing star 1 on your touch-tone telephone.

If you are on a speaker phone, please make sure your mute function is turned off to allow your signal to reach our equipment.

Once again, if you do have a question, please press star 1 at this time.

And we will first go to Carrie Stevens with Morgan Stanley.

Hi, good morning.

Good morning.

I had a couple of questions.

First, I didn't know if you happened to have the LTM EBITDA for the Panhandle pipelines available?

We don't normally give that information out.

So, no.

Okay.

Uhm... how about just LTM EBIT?

I think, Carrie in the last, this is Dave Joos, in the last conference call, we quoted that the EBITDA for Panhandle and the Field Services companies are in the range of $250 to $300 million.

That's the number that we quoted in our last conference call and that depends on how you look at them, in which years you choose, et cetera.

But we wouldn't want to be any more specific than that.

Okay.

Uhm, I was wondering if you could provide an update with the negotiation of the cash collateral calls that you were trying to work through?

Absolutely.

Those are all either closed or well under way.

Where just some final discussions were occurring between our legal counsels to make sure all the contracts are fine.

So those are well under way.

We really don't see any issues going forward.

Okay.

When will you be able to kind of -- I mean, are we going to see a press release when you have gotten those -- like, how much, I guess, has been finalized versus how much is kind of, like, pending, you know, workout?

I would just say that they're largely complete.

Whether or not we do a press release, I don't know.

We're pretty satisfied with our partners that we're in a very good position.

Okay.

Uhm, I guess going to '03 and the liquidity analysis which kind of went by quickly so I wasn't able to look at it that much in detail, you know, there's a large number for asset sales in there.

And I was just wondering if there's like specific points in the year where liquidity could get extremely tight if asset sales are not completed?

And, you know, I know you mentioned kind of four possibilities for improving the liquidity, you know, one of them being the reduction in the dividend, uhm, you know.

When would a decision like that need to be, uhm, like contemplated?

When would you first need like kind of a trigger point for '03's liquidity getting fairly tight?

I think what's important when you think about our liquidity over 2003 is to think in terms that we do have a base plan that we made available today.

But what's important to us is we have a variety of alternatives that could come into play at different points throughout the year if they are needed.

So we're pretty comfortable with the alternatives, some of which I mentioned just a few minutes ago.

There are things that will help us through any points where we find a shortfall.

Now, I don't think there's any really particular time except we would highlight when you can look at our debt repayment schedule that in May, we would have some refinancing to do at Consumers.

And we believe that can get done.

But we also have alternatives if there is an issue there.

And next year, if I remember, it's just refinancings needed at Consumers only?

That's correct.

Okay.

Just following up on that, when you mentioned the securitization of the clean air spending, do you have a rough idea of how much that could potentially be, like what the amount of that is?

Carrie, we haven't made a filing associated with that yet.

We have about $400 million that we have spent so far in clean air and the Public Service Commission in Michigan has set for a hearing to consider the establishment of an asset associated with that, that would allow to us go forward with that.

Somewhere in the range of $400 million for clean air alone.

Some other assets as well that may qualify.

Okay.

Great.

Thank you.

Thank you.

Moving on, we will go to Steve Fleischman with Merrill Lynch.

Hi.

Good morning.

Hi, Steve.

Uhm, couple questions related again to some liquidity issues.

With respect to refinancings, at the parent or other of the non-utility subsidiaries, you said there are none in 2003?

That's correct.

What we're planning to do is during the course of 2003 is retire any debt that's coming due.

Is there any significant refinancings in 2004?

There would be some in 2004 both at Consumers and at the parent.

Okay.

And then I guess secondly on this same question on the collateral calls, do you have a -- can you give us some rough range of number on how much liquidity, if any, will likely be used for that based on where these discussions have headed?

Well, I'm sure you're referring to the major item that's there.

We don't want to mention any names.

But we, in the agreement that we have that's about to be complete, there wouldn't be any requirement for any cash or letters of credit or anything like that we have satisfied this in a different way.

Okay.

Third, what is the value of -- on the books of MS&T's trading book at the end of the quarter?

I think the -- about $200 million, I think, Steve.

Okay.

And the restatement that you did related to mark-to-market which, I guess, helped '00 and hurt '01, could you give a little more flavor on that specific restatement?

The restatements are in process.

We're coming close to finalizing what those would be, but I would like everyone to know that work is still under way and the numbers could change a little bit.

But on the mark-to-market side, all we're doing is adjusting, if you will, our accounts to be in line with one accounting convention compared to another.

And to be specific on that, what we had done under proper accounting in the past was essentially we mark-to-market certain revenue sides of the equation and we have used accrual for certain cost sides of the equation when the trading was between Consumers and MST.

This just takes all of this to mark-to-market.

Okay.

Maybe I could add just one thing to that, Steve.

This is David Joos.

The effects of this in total will be zero.

It does spread the numbers a little differently from a timing perspective in terms of the issues of mark-to-market and it has to do with the elimination of intercompany kinds of transactions so that they're treated the same way across the entire corporation.

Okay.

And then I guess one last question.

This 2002 review of statements that's still ongoing?

Do you expect any, you know, significant changes from that related to the -- at least related to the issues you have already kind of identified as being restated items?

No, we don't.

In fact, the restatement that you see for 2000 and 2001 on MS&T is what will sort of continue into 2002.

And remember Dave's point: A little bit of the mark-to-market changes may be offset when you get into 2002.

Okay.

And how about guidance for 2003?

Let me just comment on that we're in the middle of a pretty thorough review, sort of top to bottom.

And we're really not prepared yet because of that budgeting process to provide guidance for next year.

What I can say is that our earnings outlook will reflect our continuing strong core businesses and obviously that includes a good gas rate order from the Public Service Commission.

I would expect we'll be prepared to address this in a fair amount of detail in our fourth quarter conference call.

Great.

Thank you.

Thanks, Steve.

And now we will go to Don Olson with Sanders, Morris, Harrison.

Good morning, everybody.

I hope you're freezing up there! [ Laughter ]

I hope so, too.

Listen, uhm, I wanted to ask you about the progress on the sale of PEPL.

When will you make the decision on who the lucky person will be or whether you take it off the table?

This is David Joos.

Let me take that.

Obviously, that's a very attractive set of assets.

And not surprisingly, we have a lot of interest in them.

The bidding process is under way and we will be receiving bids here later on in November.

We haven't made a decision whether we'll move forward.

Obviously, that will hinge greatly on whether or not those bids are attractive to us.

We'll take a look at that, decide whether it's in the best interest of the shareholders and draw a conclusion.

Probably sometime in the December and even early December time frame as to whether or not we move forward.

Okay.

So that's next two or three weeks, then.

Okay.

Uhm, secondly, what was DIG's on the books for, Dave?

Well, it's actually on the books for around $360 million, though the restatement that Tom referred to is likely to increase that back up to about $530 million.

Okay.

And then let me ask a dumb question if nothing else.

Tom, you're not going to be investment grade for some time to come, it would look like, given all the write-offs that are happening in the fourth quarter.

First of all, is it going to really matter to you whether you ever get investment grade again?

And/or what is the difference in financing costs in terms of hundreds of basis points you have to pay with the 77% leveraged balance sheet versus, say, a single A rating at 50% or so?

Let me remind you first and everyone that Consumers, our utility, is investment grade.

And that's important and that allows us to do things when the markets are -- are reasonable and also when we have all of our books back in place that we hope will be a bit more normal than what you're describing.

On the parent side, it will be our goal to improve our credit rating as we go through time.

And so we would like to see that go up a couple of notches as we work through time and improve our capability to access markets and do appropriate financing.

And, yes, there is a bit of a penalty involved as there is for anybody in that kind of condition.

And it ranges.

It depends on the sort of market that you're in and the time that we're in the market as to whether there could be a penalty for us of whether 200 or 300 or so basis points.

But importantly, we're not planning to do any refinancing for the parent this year coming up.

We are planning to access capital markets for Consumers and if there are issues there we do have alternatives as a backstop.

Thank you very much.

Thank you.

And now we will go to Paul Ridzon with McDonald Investments.

Good morning.

Hi, Paul.

Lately there's been talk, uhm, about Abu Dhabi assets for sale and there's been kind of a pullback from that.

Could you kind of clear the table here and tell what you're thinking with regards to that?

Well, yeah.

Let's -- this is David Joos speaking.

I think there was more of a correction than a pullback.

When we announced our strategy late last year, we said we were selling many of our international assets but we specifically excluded the assets in the Middle East, including Abu Dhabi and in Africa, Morocco and Takoradi plans there.

That really hasn't changed.

It's not in our plans to sell those assets at this time.

I think there was some confusion in the press, the exact source of which I'm not sure.

And just give a sense of your comfort with your '02 guidance of $1.00 to $1.55 given the fluid nature of the restatements of 2002 quarterly results?

Is there just something that's going to wash through by year end or....

Well, this is David Joos again.

I think what we said was this probably would be early January before we finalize the impact of some of these issues on the quarterly results for 2002.

I could just speak to the ongoing operations.

Obviously, we are getting close to the end of the year.

Weather continues to be favorable.

We're pleased with the rate increase that we got at the Public Service Commission.

And I can't postulate anything based on what I know today that suggests that we won't be able to achieve those numbers.

Okay.

Thank you very much.

Thanks, Paul.

Moving on, we will go to Kurt Launer with Credit Suisse First Boston.

Good morning.

Two questions if I might.

Any early view you can give us relative to EITF 9810, if you would follow that up with an answer relative to the total size of the trading book right now?

I think you described the net asset position prior at about $250 million, but what's the total asset and liability numbers there?

And secondarily, if you could run us through the pieces of the expected fourth quarter charge, especially related to the goodwill account on Panhandle Eastern.

That would be appreciated.

Thanks.

Well, kind of a long question.

I think in the Q, we describe in detail the situation MST.

I think the fair value of the trading book's about $100 million as we have identified in the Q. And I don't think -- and I said earlier, $200 million on the book for MS&T in total.

I don't think I really comment on that much more at this point in time.

Again, we are pursuing the potential sale of those trading books.

With regard to the fourth quarter charges, we did indicate that the majority of those charges was associated with two things.

I must emphasize that these are estimated at this point in time.

We haven't concluded the work on the determination of the Panhandle writedown associated with the goodwill, nor have we concluded the writedown evaluation that we may take in the fourth quarter at DIGs.

So the numbers we have provided are based on what are preliminary estimates.

Okay.

That's fair.

If I could just follow up by asking, at the end of the second quarter, the asset positions in the trading book were about $800 million, liabilities about $650 million.

Should we expect the Q to show larger or smaller numbers in those areas?

I don't have those numbers right offhand.

We are continuing to shrink that book and I don't expect that we'll see significant changes in the Q as of right now.

As I said, we are pursuing the sale, however.

Okay.

Thank you very much.

Thanks, Kurt.

And now we will go to Jay Hatfield with Zimmer Lucas Partners.

Good morning.

Could you give any quantification of the impact of weather during the quarter?

On the utility?

Not right offhand.

Perhaps I can get it here in just a second.

It obviously is positive.

We had sort of the best of all worlds because we had very warm temperatures fairly consistently through the early part of the quarter and we got to October, it was warm and all of a sudden it got cold virtually overnight. 2002 third quarter, on a degree day basis, the weather was actually 31 percent warmer than 2001.

Is it possible to give a per-share number or gross number, how that impacts operations?

It's certainly possible to do it.

I can't do it right offhand.

On a per-share basis?

I think -- 5 or 6 cents.

Okay.

Estimate.

Great.

Thank you.

And now we will go back to Carrie Stevens with Morgan Stanley.

Hi.

I was just curious on the writedown of DIG.

What specifically drove that?

Because we haven't -- I mean, was this plant completely merchant?

Because we haven't seen a lot of the other industry participants taking writedowns yet on a lot of their merchant units, and I just kind of want to understand what precipitated that.

Carrie, David Joos again.

This plant is not completely merchant.

It's a 700-megawatt plant.

About 300 megawatts are committed to serving on-site loads and the remainder is merchant.

When the project was originally developed a couple of years ago or more, gas prices were probably a third lower than they are today.

Wholesale power prices as you recall in '98, '99 were quite a bit higher.

So the original project economics simply haven't held up in this environment and we have taken another look at it.

Okay.

And so how much -- I know you gave the total project cost of $530 million.

Can you approximate how much of a writedown you are taking on the unit?

We can't at this time.

As I indicated earlier, we're in the process of finalizing those numbers.

We'll be including those in the fourth quarter financials after we do finalize them.

But we do expect, as we said, that's it's going to be much of that equity investment.

So the equity is the 360 or is the equity the 530?

Well, it's a little confusing, I know because the 360 is what's on the books today as we have talked about the restatement proposes that we would put the writedown that we took earlier back on the books that would increase it to 530.

Okay.

And so it would be 530 prior to taking this writedown we just talked about.

Okay, great.

Thanks.

And now we will go to John Olson with Sanders, Morris, and Harrison.

Good morning again.

Argentina and Australia, is there any hope in both of those lovely places, is the first question.

Secondly, I wanted to raise the issue of Tami Pallas.

Tammy is a very gracious nice lady down here in Houston.

She caused you a world of pain with all the restatements and wash sales and so forth.

And you paid her a major sum of money to go away.

I'm wondering if there is any recourse on getting that money back?

And what do you plan to do about it?

Well, this is David Joos.

Let me take the first half of that question.

I think Ken Whipple will want to comment on the second half of the question.

With regard to Argentina and Australia, certainly there's always hope that conditions change.

Argentina, as you know, is in a situation a bit of turmoil yet.

Things are not changing perhaps as fast as we would like down there.

We're continuing to watch that situation very closely.

We don't believe it's likely that our assets in Argentina will sell very quickly down there until things sort of clarify.

But in the meantime, we're continuing to operate the assets and they operate well and we'll continue to watch that situation.

In Australia, things are moving along.

The various investors in Loy Yang, including CMS, I think are now all interested in pursuing the potential sale of that asset.

And I probably can't comment any more than that, although there is obvious continuing interest in that plant.

If I can pick it up, this is Ken Whipple.

The short answer on Tami is that we don't have any present plans to do anything further there I think you probably saw the whole report on the special committee.

The good things were that the facts were completely consistent with what we had released before.

We're taking this very seriously and we're moving ahead full speed to implement the recommendations as a result of that investigation.

One follow-up if I may and that is on Argentina, Dave.

Is the carrying costs still around 25 or $30 million pre-tax?

I'd hate to right off the top of my head quote a number in that regard.

Thank you.

And now we will go to Devon Gaughan with Luminous Management.

Thanks for the time.

Just wanted to start off with a couple of questions.

One, if I saw the presentation that, uhm, cash on hand was as of 9/30 was 337, is the increase solely due to the gas refinancing?

Our cash on hand as of this morning is a little over $550 million which does reflect the monetization of our gas reserves and it does reflect the tax strategy that we put in place which helped improve our position and it also does reflect the better operating results of the business.

So it has all that in there.

And then our forecast simply reflects what we anticipate will happen from here through the rest of the year.

Okay.

And then can you tell me how much cash is at the parent, currently, how much of that 550?

Give you an estimate of that here.

It would be around a quarter of $1 billion.

Okay.

Great.

Then next question on the -- I think you said you have about $125 million of debt coming due at the parent over the next quarter, is that right? 100 at the utility and 125 at the parent?

That's right.

On my monthly, I've got only -- can you just tell me where that 125 is coming from?

It's not what I have and I was -- I have about $12 million coming due in October, 17.5 in November.

Here, let me correct what I have said.

In the fourth quarter, our debt retirements would be $125 million at the parent, some of which is behind us, and $107 million at Consumers and most of that's behind us or no?

Actually, in about two days.

In about two days.

Okay.

Just couple more questions.

Can you update me on how much or the size of the loan from CMS Panhandle to CMS Capital Corp.?

I'm just asking the experts here if it's something we talk about.

It's in the 10-Qs for Panhandle usually.

$250 million.

Is that just the long term, does that include the short term as well or has that been repaid?

That's the total amount.

Total.

Okay, great.

So it's decreasing.

That's good.

And then just in terms of the 75%, I guess, 77% debt-to-cap.

What covenants does that trip and does that put you in violation of PUCA at all?

I guess Xcel is in violation.

I don't know if you guys are still under the same sort of system.

We stay very close on all of our covenants.

We're watching everything as we go forward and we are keeping the rating agencies involved.

There is really no PUCA issues here of any kind.

There is potentially an issue with some of our 1994 general term notes if we do go over 75% debt to capital and again that's just projected at this point.

But it also is curable if we come right back under it.

Importantly, for that kind of covenant, it just has some limitations on new debt at the parent and at Enterprises.

And there is no limitation on debt at Consumers.

And there is no limitation on refinancing at the parent or Enterprises or Consumers.

And we can also have bank debt up to $1 billion so we have room to move there and then importantly, there is no limitations on the dividend.

Okay.

So there is nothing's going to be accelerated and come crashing in?

Nothing we're aware of.

Okay.

Then just two more questions if you don't mind.

In terms of, uhm, just I guess accessing capital and saying that you don't need to going forward, it looks like in '04 you have $500-ish million due at the parent excluding utility debt and Panhandle debt.

I guess one of my issues as a bondholders is that when companies wait to when they need company and they wait to do it and they end up doing it really expensive, you know, I mean, why not just get it out of the way in '03?

You what I'm saying?

And then it seems like you do need capital in '04 in a big way.

I'm just trying to figure out what the rationale for waiting to get that capital is.

It's important to note that what we have shown you is our base plan for 2003 so far.

We haven't done any projections on our plans beyond that at this time for you.

But in that plan, we don't see any issues because at the parent we're able to pay down all of our debt that comes due and at Consumers, we are planning to be in the market as we mentioned before with $300 million of new debt later in the summer.

Now, as you go forward to 2004, we're looking at those plans and considering the smartest thing to do.

What's important is that we have alternatives to our base plans so that we have lots of options we can take and we'll try to do what's most efficient for the company.

All right.

Fair enough.

Last question.

You mentioned that you might be writing down, you know, the vast majority of the Panhandle goodwill.

I think you said last time it was $700 million of goodwill?

That's correct.

Uhm, if I do that and I just go with about, let's say, call it 270 of EBITDA for the entire pipeline which I think LTM it was 232, it's in the back of your press release, but 270.

If your book value is $1400 million and you are going to write down 700 of that or let's just call it 700, it could be less, and then you add in the 900, 950 of debt it looks like you're selling the pipeline for about six times EBITDA.

Am I thinking about that correctly?

Well, this is David Joos again.

I wouldn't say that you necessarily are, but we are not going to comment on the details of the numbers.

Again, we're in the process of looking at that sale.

And we'll make a determination whether or not it makes sense when we get the final bids in.

In that sale, can you sell I guess Centennial and Guardian given that they're liened and pledged up to other parties?

The Centennial and Guardian are part of that sale process.

We can sell the assets, yes.

You can?

Okay, thank you.

Please remember if you have a question you may do so by pressing star 1 at this time.

And moving on, we will go to Steven Landolt with Landolt Securities.

Good morning, everybody.

With the need for cash and the fact that you have cash at this time and we're still paying the dividend, it would almost seem to me that it would be better off to eliminate the dividend like you did in the 1980s and put that towards our cash and ramping up our book value and, uhm, and, uhm, then also, uhm, is, uhm, then maybe you wouldn't have to sell stock.

I assume that you are looking at selling stock maybe in '03.

But it looks like if I eliminated the dividend from here would save about $25 million of cash per quarter.

Could you comment on that?

Yeah Let me comment on the dividend.

This is Ken Whipple.

Thank you.

First of all, CMS is the kind of a company that has to pay a dividend long run, I think you would you agree with that.

Yes.

It is an important part of our total return to shareholders.

Obviously, we look at it carefully and a lot.

We cut the dividend 50% in July.

The board keeps on looking at it.

Paying down debt, as you said, is also important.

And we have laid out a liquidity plan that we think lets us do both.

The board is going to keep looking at this real carefully every quarter and deciding what they are going to do.

But both are important for a company like ours.

Ken, I understand that and I do recognize the need for a dividend long term.

I'm not looking at long term.

I'm looking at the next year or two.

With the dividend of about $100 million a year, if we did not pay a dividend for a couple years, that would give us $200 million of cash back into the company and it's more important for the company's health than it is for us to have a dividend.

And maybe some people might disagree with me on that but I think in the -- even the short term, if people saw that you bit the bullet on this thing, and said, hey, the health of the company is more important short term, long term we'll pay a dividend, I think that would auger very well for the company stock.

As you know, Steven, there are lots of opinions on this.

Sure.

And it is a subject that we talk about every quarter, both sides of it.

Sure.

Thanks.

And now we will go to Ted Olshanski with Bank of New York.

Yes, good morning.

Can you hear me?

Yes.

Yes, hi.

First question is, uhm, what is your debt balance at CMS the parent today as of today?

I saw it was about $3.2 billion I think at the end of the third quarter?

Uhm... the long-term debt balance is about $2.9 billion.

At the parent, short term about $364 million.

Okay.

So it really hasn't come down at all since the end of the third quarter?

Those are third quarter numbers.

That is third quarter.

But I was asking, what is the debt balance today?

I don't know.

Okay.

What is your target for total debt at the parent by the end of '03?

I don't think that we talked about that with anybody yet.

But you do know in our plans we are talking about substantial reductions in debt and in total, we're looking at bringing down our debt another $1.5 billion.

And so that would be if my eyes could read it from here exactly....

One of our slides, I'll just interject, one of our slides showed what our debt plan is.

Obviously, this plan can change.

But the plan shows $5.6 billion in year end 2003.

Right.

Okay.

But that's a total.

How about at the parent, though?

That's consolidated.

Right.

We would be reducing our debt at the parent by $770 million.

Okay.

And that's from the end of the third quarter until the end of '03?

Right.

So approximately from $3.9 billion at the end of last year and then with that reduction.

Okay.

I'm a little confused on the issue of asset sales.

You know, right now, obviously, you are not committing to selling Panhandle.

And I'm wondering if there is another scenario or if there is some other alternative if you don't sell Panhandle, or there's some other assets you are looking to sell or, what is the total amount of proceeds you expect to bring in, say, between now and the end of '03 in asset sales?

Well, we're actually not saying what that is, obviously, because of declaring what a value on Panhandle or Field Services might be.

And those are going to be important decisions that we have in front of us.

So we do know that as Dave mentioned we'll be selling the books of MST which could likely happen this year and we're looking at the sale of Field Services operations which is a material number that could likely happen early next year and then we'll be taking a decision on Panhandle.

Right.

Okay.

But I guess it's fair to say that, uhm, you'll be looking to bring in, you know, a significant amount of proceeds to pay down your bank debt during '03?

Yes.

In fact, you would have seen in Slide 14 that we talk about asset sales and some refinancings of a little over $1 billion.

Right.

How much debt is at Loy Yang?

And now we will go back to Devon Gaughan with Luminous Management.

Yeah.

I think there is a last question before me.

Sorry.

Do we know answer to that?

I don't offhand.

We can check that.

I just have two follow-up questions.

One, if you sell the MS&T books, would that effectively deal with the surety issues?

That seems like that would be a home run for you guys.

As we mentioned before, what we're doing on the surety issues as you referred to them is actually a different solution.

And so the largest part of those are being satisfied in a way that doesn't require any letters of credit or cash.

So that is sort of a separate issue.

Okay, great.

And then the second question was just on the dividend.

I mean, it seems like the -- cutting the dividend doesn't really -- it's not even a drop in the bucket.

I don't even seen -- I don't even see that as an issue.

It seems like at this point just doing the equity at some point and maintaining the dividend would be better for your shareholders currently.

I mean, people are holding this for the dividend.

That was I guess back to my original issue was just doing some equity in the long run.

And trying to maintain, you know, your current investor base.

I think you just underlined my earlier comment.

I said there are strong opinions on both sides of that question.

Sure.

Thank you.

Thanks.

We will now go to Warwick Busfield with Fahnestock and Company.

Yes, good morning.

Three questions.

First is I might have missed this where are you at with the second credit facility that limits dividends next year?

Actually, that is one of the slides which you can look at later, but we have taken that $296 million of bank debt and have paid it down to $207 million.

And then of course we have a lot of options available to us to satisfy that the -- remainder of that balance over the next few months.

Do you plan to do that?

Did you say when?

Over the next couple of months.

So you are going to do that?

That's our plan, yes.

Okay.

Second thing, is with Argentina, I understood it was before the World Court or something.

Where are you at with that and how much was the loss this last quarter?

I think I quoted earlier that the loss this last quarter associated with Argentina was 5 cents a share.

We have filed for international arbitration as a result of the actions in Argentina.

There's actually two pieces to that, the original piece was a dispute over some gas tariffs in Argentina and to that, we have now added a dispute over the expropriation and currency issues.

We can't really contemplate how quickly the international arbitration will happen.

We're obviously very interested in that, as well.

Are we talking months or years here?

Well, it's always hard to predict these kinds of things.

I don't think it's months.

It may not be years.

But it's certainly -- I would say it's certainly more than a year but that's my opinion based on what I know.

Okay.

And lastly, with selling your natural gas transmission business, what guidance have you given to prospective purchasers as to the price you're looking for?

We haven't provided guidance to prospective purchasers.

We are in a competitive bidding process.

I would say the guidance we're giving to prospective purchasers is we would like the highest price they're willing to give us.

All right.

We would like to take just one more question if we can, given our time that's left.

If you would like to ask a question, please press star 1.

And our final question will come from John Woodbury with Cobalt Capital.

Hi, guys, great quarter.

Question.

In terms of maintaining your guidance for Q4 -- I mean for the year, obviously, you have exceeded guidance for Q3.

How should we think about Q4?

Well, I guess I could comment in general.

We talked about that in the slides.

The guidance for the end of the year on a operating basis is consistent with what we've said previously.

So you can add up the numbers from the prior quarter, that is for the end of the year on an operating basis.

We're still looking at $1.50 to $1.55 a share.

Our slide also talks about the year-end guidance on a reported basis for the first three quarters of the year, my recollection is we're at $1.42 per share.

And we've estimated -- again, I have to say "estimated" -- that at year end on a reported basis we would be at a $3.00 loss so the difference obviously would represent the fourth quarter.

That may change depending on the outcome of some of these tests that we are doing, for example, the Panhandle impairments and the writedown at DIG.

But that's our estimate at this point in time.

Just a follow-up to an earlier question, so we can complete the -- the question regarding Loy Yang's debt is about $1.7 billion of non-recourse debt.

That's total of the project.

That's right.

Thanks, Tom.

Let me just take one minute to wrap this up.

We have presented a lot of material relative to past meetings, I know.

We wanted to try to be as clear as we can about our plans.

Points I'd like to leave you with we have a continuing strong operations.

Our liquidity program is solid and it's on track.

Our reaudit, maybe you can say finally, but our reaudit is coming to a conclusion with a good result.

We have some significant adjustments to net worth in the fourth quarter but no material cash effect.

I'm proud of the team that you have heard this morning.

And I think we're well on our way to having this place on a sound financial footing.

Thank you very much, ladies and gentlemen.

That concludes today's conference.

Thank you all for your participation.