CMS能源 (CMS) 2003 Q2 法說會逐字稿

Good morning, everyone and welcome to the CMS Energy second quarter earnings call.

This call is being recorded.

Just a reminder, there will be a rebroadcast of this conference call today beginning at 1:00 p.m. eastern time, running through August 19th.

This presentation is also being webcast.

An audio replay will be available approximately two hours after the webcast, and will be archived for a period of 30 days on CMS Energy's web site, in the Invest in CMS section.

At this time, I would like to turn the call over to Phil McAndrews, Investor Relations Director.

Good morning and thank you for joining us.

With me today are Ken Whipple, Chairman and Chief Executive Officer;

Dave Joos, President and Chief Operating Officer; and Tom Webb, Executive Vice President and Chief Financial Officer.

Before I turn the call over to Ken, let me make the disclosure 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 results of various factors discussed in our SEC filings.

The presentation also includes non-GAAP measures when describing CMS energy's results of operations and financial performance.

We have prepared a reconciliation of each of these measures to the most directly comparable GAAP measure in our earnings release, which is posted on our web site at www.cmsenergy.com.

I will now turn the call over to Ken.

Thanks, Phil and good morning, ladies and gentlemen.

We're pleased you could join us for our second quarter earnings call.

This morning I'm going to review the progress of our back-to-basics strategy since the last call on May 8th.

Our plan continues on track, and I'll share some of the most recent accomplishments with you.

After my remarks, I will turn the call over to Tom Webb to discuss the second quarter and year-to-date financial results.

In terms of highlights of this review which Tom will cover in more detail, our ongoing earnings guidance remains unchanged at 80 cents to 90 cents a share, despite the unfavorable affects of weather in the second quarter.

We have revised our reported or GAAP earnings from roughly break even, to a loss of about $1 a share.

Reflecting completion of the Panhandle sale, and the conditional agreement to sell the Loy Yang operation in Australia.

As we have discussed previously with you.

GAAP earnings in recent periods have been materially affected by asset sales timing and asset valuations.

Tom is also going to cover financing activities since our last call.

And he will review our continuing strong liquidity position.

Following Tom, Dave Joos will update you on our asset sales program and our important regulatory agenda.

The recent development there, as most of you probably know, is the recommendation filed last Friday by the staff of the Michigan Public Service Commission, for about $80 million of interim rate relief in connection with our gas rate case.

Finally, I will end up with a report on the status of the targets this management team has set, and then we'll open it up for your questions as time permits.

We completed the enormous task of re-auditing our financial statements for the years 2001 and 2002.

I'm more than pleased to say that we filed a 2002 form 10-Qa representing the last step in the reaudit process on July 23rd.

Another important milestone behind us.

CMS regained access to the capital markets in July, completing $450 million of the $2.25 billion of financings in the second quarter.

This has provided us with what I've called liquidity peace stretching well into 2004.

We closed more than $2 billion in asset sales during the second quarter and early July, consistent with our goal of generating $900 million in net sales proceeds.

As we look further out this year and next, we will continue to divest non-strategic assets, but retain key contributors that generate good cash flow and earnings.

As I mentioned a minute ago, our original guidance for 2003 ongoing earnings remains on target, despite the lousy weather.

As you know, all utility customers in Michigan are free to choose their gas and electric supplier.

In an industry that has become increasingly competitive, customer satisfaction is one of the most important elements to retain and attract customers.

We're working real hard to continue the high levels of customer satisfaction that were evidenced by recent studies by JD Power and Associates.

In the Midwest, one of four national regions we were fifth in the electric business and first in the gas business.

Not shown on this slide, but also critical to our back-to-basics success, you are some internal priorities.

First, safety, which we emphasize every day.

And the results are showing.

We are better than last year in both frequency and severity of safety incidents.

And finally, we wouldn't be anywhere without the efforts of our best in class employees, who are responsible for delivering satisfied customers and solid results.

Now, I would like to ask Tom to talk about the second quarter financial results.

Tom?

Thank you, Ken, and my welcome to everybody on the call today.

Thanks for joining us.

For the second quarter, CMS lost 31 cents per share, that's an improvement of 24 cents from last year's reported results.

After we eliminate discontinued operations in the gains and losses on asset sales our ongoing earnings for the quarter were one cent.

Discontinued operations primarily reflect the recent sale of Panhandle, in 2003 results, and the sale of the Oil and Gas Company last year.

Now, please turn with me to the next slide for a comparison of last year's results.

Compared with the second quarter last year, currency exchange rates were favorable ten cents, principally from the stronger Argentine peso.

Earnings at our enterprise operations were better, including Tawela, DIG, and Jorf.

Gas rate relief, approved last December improved profits two cents, but profits were down 10 cents because of cool weather; and as anticipated, and Ken mentioned customers shifting to retail open access.

The temperatures in June averaged only 64 degrees or 5 degrees lower than last year.

As expected interest expense was higher, including costs associated with our bridge-to-asset sales financing and that was established in late March and early April.

Costs were up 7 cents for the planned refueling outage at Palisades and storm damage across the state this spring.

And last earnings were lower absent businesses that we sold last year.

For the first half of 2003, our EPS was 24 cents.

That compares with a loss of 24 cents last year.

Eliminating discontinued operations, gain and loss on asset sales, and cumulative accounting changes, ongoing income was 55 cents per share.

That compares with 72 cents for the same period last year.

Ongoing earnings of 55 cents or about 60 to 70% of full-year earnings are a little ahead of our historic pattern.

Usually about 55% of our earnings occurred in the first half of the year.

Compared with the first half of 2002, ongoing earnings were down 17 cents.

As shown on this slide, favorable currency exchange rates, enterprise project earnings, gas rates, and weather were offset by assets sold, higher costs, and interest expenses.

In the assets sold variance of 48 cents mark-to-market gains at MS&T last year were not repeated this year it.

In the cost category, higher costs at the utility include the planned Palisades refueling, higher depreciation, and property taxes.

And last, higher borrowings of utility as well as bridge financing at CMS increased interest expense.

Again, these results are right on track with our plans for the year.

So even with adverse implication of storm costs and a cooler than expected summer, and interest expense from bridge financing; as Ken indicated, we're pleased to confirm our 2003 EPS guidance at 80 to 90 cents a share.

Compared with guidance that we provided last May, we expect costs at the utility to be about 10 cents lower.

This includes lower financing costs and lower taxes, offset in part by the unfavorable weather.

At the parent, shown in the little bar in red at the bottom, interest costs are higher as we pay down expensive bridge financing early.

As you may recall, the timing of our asset sales program influences substantially the outcome of our reported earnings.

For example, if we fully dispose of Loy Yang, this alone would further reduce earnings about 60 cents.

It would require running related foreign currency translation account balances through income.

These, of course already are reflected on the balance sheet.

Also, as previously discussed, lower sales proceeds and higher pension expenses related to the sale of Panhandle, as well as a settlement paid on a CMS reset bond in July will reduce reported results.

Accordingly, our guidance for full-year reported earnings guidance is a loss of about $1 per share.

Now on the liquidity front we continue to strengthen our position, since our last call on May 8th, we've taken advantage of attractive capital markets for both consumers and CMS to reduce interest expense and improve our liquidity.

For example, in May, Consumers Energy completed a seven-year 4% $250 million first mortgage bond.

Proceeds were used to pay down a portion of the $300 million 6% rate term loan that matured this July of 2004.

Another example, in July CMS issued two senior notes totaling $450 million.

Proceeds were used primarily to pay off the majority of the more expensive CMS bridge financing.

Now in our original plan, CMS faced over $1.3 billion of debt due through mid-2005.

Now this is shown in the light blue bars on this slide.

We've reduced near-term debt by over $700 million to just over $550 million and that's shown in the dark blue bar.

Cash on hand at July 31, was well over $400 million.

We also improved the near term maturity profile at Consumers.

We reduced debt due over the next 24 months from about $750 million, shown in light blue to about $500 million shown in dark blue.

The next maturity of $50 million is due July, 2004, and the remainder of the $441 million is due both in March and June of 2005.

Cash on hand at July 31, for Consumers was just about $200 million.

We continue to project year-end cash levels of $400 million for CMS and $200 million for Consumers.

As shown in the left box, CMS asset sales of $900 million, dividends of $340 million, and completed financing actions allow us to retire $1.8 billion of debt, service remaining debt and make a pension contribution with $268 million of cash flow remaining, as you can see at the bottom of that box.

This is right on track with plans that we discussed with you in our first quarter conference call.

At Consumers, we're also on track with sufficient operating cash flow and financing to meet interest and dividend commitment, capital expenditures, and a substantial contribution to our pension fund.

We're not where we want to be on capital structures, but we expect to meet our commitments.

Our forecast has not changed.

As shown on the right side of this slide, consolidated debt will be reduced from $7.3 billion at the end of last year, to $6.2 billion at the end of this year.

This puts us on a plan to reduce our debt-to-capital to 74%, or net of cash, 72%.

Including the accounting change, which requires reclassification of certain preferred securities as debt, the ratio would be over 80%.

Now, of course this accounting change does not impact the way rating agencies will look at us or compliance with our indentured covenant.

During the first half of the year, we've stabilized our financial condition and we're on course toward full-year earnings, cash flow, and liquidity commitment.

Now we still have a lot to do, and with that, let me turn over the call to Dave Joos, for an operational update.

Thank you, Tom and good morning to everyone on the call.

Normally I would also provide an update on any notable events with regard to physical operation of our system.

However, I guess it's good news to say that there's really not much to report in that regard.

Our operations are strong.

We haven't been strained much this summer, because of unusually cool weather.

But I would note that our Palisades Nuclear Plant plant continues to operate well.

We're at full power and we're expected to remain there through the balance of the year.

As to asset sales this slide shows our progress for this year's program.

We continue to be on track for our goal of generating $900 million in net asset sale proceeds by year-end.

You might note that this chart is slightly different than the last one, and the last time we talked about this, we noted that there could be some changes where we would postpone certain asset sales and accelerate others.

We've continued to do that in -- consistent with our goal of generating $900 million.

Notably new on this chart is the sale of the Atacama Transmission Line, the Australian pipelines, and the Marysville gas processing and storage facilities here in Michigan.

The Panhandle sale closed June 11th for $584 million, plus $3 million shares of Southern Union common stock.

The sale of our fuel services business for $113 million, plus $50 million contingent note closed on July 2nd.

With the other transactions completed earlier in the year, the closing of these two sales brings our total gross proceeds from asset sales to $935 million for the year, and net proceeds of $806 million.

These figures include the value of our southern union stock holdings but do exclude any value that may be received from the field services note.

There are five more transactions in the pipeline.

For two of them, the Loy Yang and the Arcadia land, sales agreements have been executed.

The other three, including our Parmelian gold fields pipelines in Australia, our Brazilian distribution utility, and our Marysville processing storage facility are in the auction process.

While I would like to handicap the likelihood of success on the Loy Yang sale, it's largely in the hands of the buyer, GEAC; which is, as you know, Australian Gas, Light and TEPCO.

And the Australian regulators at this point.

Partners and the bank have agreed to a November target for completion.

With the exception of the Australian Pipelines, which I've noted earlier, were recently added to the list; we expect that other asset sales will close in 2003.

The Australian Pipelines could close in 2003, but due to required regulatory approvals it could slip into the first quarter of next year.

As to our regulatory agenda, as Ken noted earlier, we have a rather extensive one this year.

First the commission issued an order in early June authorizing the company to issue $554 million in securitization bonds, about half of our original request.

They declined on our proposal to securitize our planned pension contributions and also the book balance of our Palisades nuclear plant.

In the opinion of our advisors, the surcharge design ordered by the commission would not allow for successfully marketing the bonds.

So Consumers filed for rehearing on July 1st to correct that problem.

There is really no deadline for the commission to respond to a rehearing request but we are optimistic that we will act soon.

Depending on their response and whether any court appeals are filed we could be in a position to market the bonds late this year or early next.

However, to be conservative, I should note that we have not included the securitization in our financing plans at this point.

I included stranded costs on this slide just to note that there's really nothing new to report.

In our last update, I noted that the public service commission had asked the staff to coordinate a collaboration process, which has occurred and we have participated in.

That's currently on hold, however, and there really have been no new developments in that regard.

On the gas side of the business, we are pleased that the commission approved a settlement with all parties in our 2003 gas costs recovery case.

That allows to us adjust our meth monthly factor for changes in the market price of gas.

As a result of that settlement, our current price ceiling is set at $6.11 per mcf.

This has really alleviated the stress on working capital that's resulted from unexpectedly high gas prices this year.

Finally, last Friday, as Ken noted earlier, the MPSC staff filed its testimony with respect to our request for interim rate relief.

In March, the company filed for a $156 million gas rate increase and requested that the commission consider granting the full amount this year, in the form of interim relief.

The staff's filing recommends the commission grant 80.5 million in interim relief, including that the commission should not address at this time our request for a higher rate of return or target capital structure.

The staff also proposes that the commission obtain a commitment from the utility to limit dividends to the parent to $190 million per year in what they call a utility cash flow stabilization plan as a condition of granting interim relief.

It would not be a hard cap under the staff proposal, but would require the utility to match any dividends in excess of the $190 million, with refunds to gas customers.

Obviously we can't predict at this time what the commission will do with the staff's recommendation, but we are pleased with the staff's support for substantial interim relief.

We are not prepared to take a position at this time on the staff's proposal for voluntary limit on dividends to the parent.

Following scheduled hearings in late August and briefs in early September, the interim case will be ripe for decision as early as September so stay tuned on that front.

Now let me turn it back to Ken for final comment.

Thanks, Dave.

Let's conclude with the report card.

This is the same format that I used in our last earnings call.

Last quarter I introduced several specific goals that we think are important benchmarks to measure our progress.

The only change to report since our last call is the completion, as I mentioned earlier, of our financial restatements.

So all of the benchmarks are on track.

Ladies and gentlemen, that concludes our formal presentation today and now we'd like to move to take your questions.

Thank you very much, Mr. Whipple.

The question and answer session will be conducted over the phone.

If you would like to ask a question, please do so by pressing star one on your touch-tone phone.

If you are using a speaker function, please make sure that your mute function is turned off.

We'll proceed in the order you signal us.

Please press star one on your touch-tone phone to ask a question.

If you do find that your question has been answered you may remove yourself by pressing star 2 on your touch-tone phone.

We'll pause for just a second.

And our first question comes from Ali Agha from Burnham Securities.

Thank you.

Just a couple of quick questions.

First, with regards to the numbers could you just walk us through the -- your tax line, you know, the difference between the tax refund that you got in Michigan and the tax credit valuation.

Could you just remind us of those items and what kind of effective tax rate have you assumed in your ongoing guidance?

You are talking about, of course the single -- this is Tom Webb, the single business Michigan tax, and we've gotten some good news, as you can see in our slide for those of you that are looking at it.

You can see that in the ongoing earnings slide, which I'm flipping to now, number 8, I believe.

And inside of that, where we talk about cost of 17 cents good for the full year, that tax actually saved us about 8 cents.

So it gives us a little bit of good news there.

And so, Tom, as you look at that factor, I mean, look at your full year guidance what kind of effective tax rate have you kind of built into that?

You know, I don't have the -- I apologize but I don't have the effective tax rate in front of me and we'd be happy to circle back with that.

Okay.

Separately going back to the regulatory update that you were mentioning.

I wanted to clarify the point on the staff recommendation with regards to the dividend to the parent.

Is that $190 million number, if that is correct, that would be lower than your estimated budget of cash distributions from the utility, would it not, and could you just walk through again what would that entail with regards to the parent getting all of that cash?

Well, we have very little detail at this point in time, of course, because we simply have a staff recommendation.

And, essentially what they said is that if you choose to dividend more than $190 million per year on some period of time -- and, of course the staff hasn't ordered yet so it's not clear what that period of time would look like -- that you would have to match any of the dividends above that with a refund to gas customers.

You're correct in noting that our planned dividend to the parent this year, I think is about $230 million.

As I said earlier, we don't expect at this point in time to take a position with regard to the staff's filing.

We just got it also and don't know what the commission's actions with that regard would be.

I would just say that it's not wildly out of line with what we we have traditionally done or what we would normally do.

Recall that we have over the past ten years normally in agreement with the commission dividend about 80% of net income.

So until we have more specificity on that, I prefer not to comment further but like I said, I don't think it's wildly out of line with what we would normally plan on doing on an average basis.

And final question, I think the operating costs of the utility have gone up year-over-year.

Could you just remind us what was causing that?

Operating costs of the what.

At the utility.

Oh.

And you're looking and thinking about our full year forecast or the quarterly results.

The quarterly results, when you look at the variance.

Right when you see in the second quarter we talk about our costs that are up, really year-to-year, those really are two things that's in that 7 cents.

The main things are the refueling outage at Palisades and, of course that was planned.

In fact that went better and shorter than we we expected, but the other thing was the storm damage we had across the state in the spring.

Those are the two large items that impacted us and both of those, in one way or another are accounted for in our forecast and what we could do, so they really don't hurt our ongoing guidance.

Thank you.

You're welcome.

Thank you and our next question comes from Steve Fleishman from Merrill Lynch.

Please go ahead, sir.

Hi, Steve.

Hi, gentleman, how are you?

Good.

A couple of questions, now that the reaudits are complete, could you comment on plans -- potential plans to issue equity to help further the balance sheet improvement?

I apologize and the question was about your reaudits.

The equity.

Oh.

Actually in our financing plans that we've talked about, we've done a lot of debt offerings and as you know, we just recently done the convertible offering which was very successful and that we were pleased with and we really haven't announced any plans about our future debt offerings or equity.

What I would say is this: It's clear that over time, that we will need to do something on the equity side of the business, but we haven't built anything specifically near term or longer term in our plans at this point in the game.

So that would be a subject of maybe future questions.

Okay.

Secondly, do you have numbers available for the returns on equity at the electric and gas utility, maybe over the last 12 months?

We may have them available.

Let me just comment that in both cases they're in the teens.

The gas utility has been in the high teens because of very strong first quarter weather.

The electric utility is a little closer to authorized but slightly above authorized.

I think -- actually, I just got handed to me the specific numbers ending June, 2003.

And the electric at $14.7 on on an actual basis.

This is regulatory.

And gas actually slightly over $20.

Okay.

And then final question on customer shopping.

I guess in the case of -- I know Detroit Edison, they seem to be having more slippage from shopping than they expected, at least in the way that the mechanism has been set up for stranded cost recovery or lost margin recovery.

Could you comment on how your customer shopping is looking in terms of --

Ours is -- ours is considerably less than Detroit Edison.

Of course, our rates are somewhat lower as well so there's a little bit less room in that regard.

We are between 550 and 600 megawatts of taking choice at this point in time.

That's actually a little less than we expected.

We could see some increases here in the fall season.

But we haven't seen -- in fact we have less than we have in our original plan thus far and we haven't seen any massive changes in that regard.

With regard to the stranded cost issue, of course, I've reported earlier that we are continuing to work on that issue.

We haven't had any new developments to report.

We do have a filing before the commission for our 2002 numbers that adjusted for the various securitization changes would be about $50 million and we would expect the commission to act on that probably in December.

But stay tuned in that regard.

We have not billed stranded cost recovery -- we have not booked any stranded cost recovery at this point in time because we wanted to be conservative with regard to how that gets treated.

Okay.

One other question back to the return on equity answers.

I think, you know the trailing 12 months, particularly at the electric did include some, I think, pretty hot summer last year.

Yes.

So I guess in the guidance you've provided when you looked to full year 2003, what would you roughly expect, you know, rough range that number to be, kind of full year 2003?

At the electric?

I don't have that forecast number at my fingertips.

It's probably not wildly different than where we are year-to-date, maybe slightly lower.

Weather this year, of course has not been nearly as favorable on the electric side as last.

And the gas side of the business, of course the returns sound very high but we've had an extremely favorable winter.

This last winter.

And so that -- you know adjusting for weather, that number obviously would be normalized significantly lower.

Okay.

Thank you very much.

Thanks, Steve.

Thank you.

And our next question comes from Jay Hatfield from Zimmer Lucas.

Hi, Jay.

Good morning.

Just to clarify this staff position with regard to cash flow to the holding company.

Do you think that that number that they quoted on $190 million includes or excludes tax sharing payments?

That would normally exclude tax sharing payments.

We consider that separate from our dividend.

So then from that perspective that would allow you to hit the numbers that you have put in your presentations in the past?

Well, I --

from the utility?

Again, I don't want to comment on it, but if you look historically, just at the 80% of net income dividend levels, again it's not wildly different.

And, again, we also typically make equity infusions from the parent into the utility that if we agreed to some kind of a cap, would be a way to manage that issue.

Right.

So it looks like that number then would be a manageable number, not that you necessarily would accept it, but that it wouldn't be -- let's put it a different way, it wouldn't be significantly than what's occurred in the past?

I think on a general average basis that's an accurate statement.

Just a couple other detailed questions.

Do you know what the EPS weather impact was for the quarter?

I believe it's about 7 cents a share.

Is that right.

About seven.

Okay.

And then finally, I noticed that your fully diluted shares went up.

Are you accounting for the new convert using the treasury stock method or the as-is converted method?

Is that why the diluted shares were higher?

We used as-is converted.

Okay.

Great.

That's all I have.

Thanks.

Thank you.

And our next question comes from Jeff Gildersleeve from Argus Research.

Thank you, good morning.

Good morning, Jeff.

I wanted to ask you, the staff's recommendation on the gas interim increase, when -- you mentioned you think the commission will render a decision September, and when would those rates go into effect?

Well, neither of those are exactly predictable.

I don't know if the commission will render a decision in September.

The briefing process is complete by mid-September so they could act any time after that and choose to put those rates in effect whenever they do act.

We would hope, of course and our expectation, we filed for interim relief is that it would be before the winter heating season coming up but we can't speak on behalf of the commission.

Okay.

And as far as your financial projections, they do not assume an interim increase?

For this year --

correct.

Not for this year that's correct.

Okay.

And moving on to the IPP improvement, could you provide just a little breakdown or detail of what -- what happened differently at those plants?

Yeah.

There's -- we broke that down into a couple of pieces for you where we said in Tawela we had a little improvement in performance.

At DIG, we were able to use more of the blast furnace gas so we have a little bit of performance there; and at Jorf, it's really a deferred tax issue that permitted to us get some good news in the quarter.

But the operations are running well, and good, and we're just seeing some financial benefits for those reasons.

Okay.

And then just going back to the capital structure, the question on equity, the -- it doesn't sound like you're too urgent to get out there, would this be a -- an '04, '05 picture or, you know, could you -- could you potentially use some increase on the regulatory side that, you know, take advantage of that by, you know, offsetting it with some equity?

Well, we have a good financing plan.

Of course, we're taking into consideration for 2003 that doesn't have any added use of equity in any way and as we look through our business plans, the process that we're in now for the future, we'll be looking at alternatives and candidly, it will depend on what the best financing plan is, but what the market is like and what makes sense for all the constituents of the company.

Do you have any credit rating goals at this point, or happy with where you're at?

Oh, we'd certainly like to see the parent work its way back to being a double B company instead of the single B that we're at today and with consumers we're at BBB minus level and we'd like to move that back up to a solid BBB.

So those are our goals as they have been for sometime and we have some work to do in that arena to make more progress.

Okay.

Just lastly, is there any time frame you're trying to make those improvements?

Well, obviously we would like to do them as soon as we possibly can but practically speaking, when you look at our plan and our ratios for this year, we think this is something that as the rating agencies look at us, and look at the work that we're doing, that they'll give some consideration to this as we go into course of next year.

What we're pleased with is that we've had stable ratings at this point and we're taking the operating actions to improve our business so that hopefully we'll be viewed as stronger as we move forward.

Great.

Thank you.

Thanks.

Thank you.

And our next question comes from Carrie Stevens from Morgan Stanley.

Hi, good morning.

Hi.

Could you more accurately say what the O & M impacts from the storm costs may have been on a per share basis?

Like 7 cents?

Was it 5 cents what amount?

Storm costs in millions of dollars that we are looking at here was a little bit over $5 million.

Okay.

So that should give you an estimate compared to the prior quarter.

Okay.

Then looking at the higher financing costs, I was wondering if you could kind of maybe -- looking at the kind of quarterly variances, it looks like you take the higher interest expense at the enterprises, it's about $23 million.

And I know that that's one of the deltas from your original expectations.

On an annual basis, would you expect that to be running at -- I think you gave a delta of like 10 cents.

Is that adjusted for a full year impact or just a -- you know, I guess nine-month impact?

How should we look at that when we look at the '04 potential earnings view?

Well, what you'll see is that we've added in about 10 cents into our forecast for the parent in terms of interest costs, and that really comes from the fact that we had the large bridge financing to the asset sales which we're -- although we're able to pay them down earlier which is good news, that means some of the amortization that normally would have been expected to occur in 2004 is actually being pulled ahead to this year.

That's what we're reflecting in our forecast that you see in that 10 cents.

Okay.

We think it will help us next year but we have to take the hit to be able to pay down those higher expensive loans sooner.

That's really the dynamics behind it.

Okay.

So all things being equal, you should see some decrease of interest expense next year then?

We should.

And we should see it for a couple of reasons.

Okay.

Go ahead.

We should see it for a couple of reasons.

One, because we're actually paying down our debt, so we'll have lower interest expense associated with that.

And we've been able to do some financing over the last three and four months that will permit us to have lower rates as we go forward.

Okay.

With respect to '04 liquidity, I know that you're targeting, like $230 from dividends from the utility and tax sharing for this year.

Is that number consistent for '04.

Well, we haven't provided any guidance for 2004 yet and we're really in the middle of doing our plans and our budgeting, so we aren't really providing that information.

But what I would say is that it's not too far off to use as kind of a rule of thumb of the sort of dividends and tax sharing numbers you see this year towards next year when you put it all together and that includes the enterprise's dividends as well.

Okay.

So you weren't expecting a lot of growth from that in '04.

Not when you put it all together.

Okay.

And then lastly, can you just remind us maybe what asset sale number -- I think previously you were targeting about $400 million in '04.

Is that still roughly consistent?

That's another number part of the overall forecast for '04 that we really haven't talked too much about.

And what we're doing is going through our budgeting process, and I expect as we get closer to the end of the year, we'll be able to give more guidance on that.

Okay.

So by year-end we can get an '04 liquidity outlook?

That would be our thinking.

Right.

Okay.

Great.

Thank you.

Thanks.

Thank you.

And our next question comes from Warwick Busfield from Fahnestock & Company.

A question regarding your IPP operations.

I'm wondering what proportion of your total capacity is under contract, and what is the duration of that contracting?

I don't know if I can give you an exact percentage.

It's a fairly high percentage because we sold most of the assets that are not under contract, or in the course of doing that.

Of course our Loy Yang project is not closed yet and it's largely uncontracted.

And our south American assets are largely uncontracted; although, some of it is contracted.

How about domestically?

Domestically, nearly all of our projects are contracted.

And then, of course, in the Middle East and Africa, they are all fully contracted.

So the majority of the larger assets that contribute to our earnings are fully contracted.

And a ballpark duration, average duration?

Generally, either -- well, sort of 15 years to the life of the contract, depending on the asset.

They tend to be either half or fully contributed depending on the life of the contract.

Indeed, I think it's important that the Middle East and African assets that are so important to us have those long-term contracts in place.

All right.

Thank you.

Thank you.

And our next question comes from Phyllis Gray from Dwight Asset Management.

Please go ahead.

Good morning.

I was wondering if you could give me a cash from operations number for the first half.

Don't have that handy, but you will be seeing that in about 48 hours.

Okay.

Thank you.

Thank you.

Once again, ladies and gentlemen if you have a question or comment, please key star one on your touch-tone phone.

One moment for the next question, please.

Thank you and our next question comes from Ben Sung.

Please go ahead, sir.

Hi.

I was wondering in terms of the cost-cutting measure that you say you will maintain for the second half of the year, could you just describe that a little bit for us?

Well, as you know, we've done a variety of cost cutting and in particular, last year and as well this year.

You will recall some of the cuts last year, which included sharing in our 401k or the elimination of the match that we do here.

Things like kicking out the corporate planes which are all gone and things like consolidating our headquarters into one location.

Those are examples of things that bear fruit for us this year and then in addition to that, we've taken considerable actions during the course of this year that will help us during the remainder of the year and next year.

But then on top of that, one of the cost savings that we are getting in the rest of the year, will be some of the lower interest expense.

And it's a pretty meaningful number inside of that 17 cents that you are probably referring to from slide number 8.

That would be actually a bit more than half of the savings.

And, again, that comes from the better financing that we've been able to do during the course of the last quarter.

Thank you.

Okay.

Thank you.

Once again, ladies and gentlemen if you have a question or comment, please key star one on touch-tone phone.

Operator, I think we will take one more question if you have one.

Okay.

Then we have a follow-up question from Steve Fleishman from Merrill Lynch.

Please go ahead, sir.

Hi, Steve.

Just one clarification on weather.

You had, you know, very cold winter on the first quarter, and a mild Q2 and probably mild Q3 so far.

So when you're reaffirming your guidance and looking at the weather factor, is it pretty much a neutral for the year, or is it -- or is it a net negative?

Even including the very good winter you had?

Let me help you on that.

If you think about the first half look, weather hurt us on the electric side by about $5 million or 3 cents.

And then if you go on the gas side of the business, it actually helped us by about $11 million or 8 cents.

But what we do in terms of looking out for the rest of the year is we plan on a normalized basis.

So you wouldn't see any -- in our plans, in our forecast to you, any uptick expected from favorable weather or to the contrary downtick from unfavorable weather.

Okay.

So to put another way, you're reaffirming guidance with kind of a slight weather benefit in the first half of the year when you look at both?

Right.

Right the gas side of the business we would expect -- remember earlier in the year, we were up in the range of 10 billion cubic feet and we expect by year end if we have a normal winter that's about where we'll end up.

A little bit of benefit on the gas side.

On the electric side we don't anticipate that sales will catch up, assuming normal sales for the remainder of the year.

So it will be a negative impact from weather on the electric side.

But that's just on normal retail sales and we have done a pretty good job selling excess capacity in the wholesale markets and doing other things to manage our overall wholesale costs and the combination of those things we feel comfortable will get us to the year-end guidance.

Okay.

Thank you.

Okay.

Thanks, Steve and thanks once again to all of our questioners for the always good questions.

To wrap up, I would like to say that we are making good progress with this company but we know we have a long way to go.

As we continue to move to a smaller, more focused, more predictable company, we'll look forward to keeping you updated on the goals that we've covered today and we'll do some more of that in our next call on the third quarter results.

Thanks and good-bye for now.

Thank you, sir.

This concludes today's conference.

We thank you for your participation.

You may now disconnect.