CMS能源 (CMS) 2004 Q3 法說會逐字稿

Good morning, everyone, and welcome to the CMS Energy 2004 third-quarter results and outlook call.

This call is being recorded.

Just a reminder; there will be a rebroadcast of this conference call today beginning at 12 noon Eastern Standard Time, running through November 10.

This presentation is also being webcast.

An audio replay will be available approximately 2 hours after this webcast and will be archived for a period of 30 days at CMS Energy's website in the Invest in CMS section.

At this time I'd like to turn the call over to Laura Mountcastle, Vice President of Investor Relations. please go ahead, ma'am.

Good morning and thank you for joining us.

With me today are Dave Joos, President and Chief Executive Officer, and Tom Webb, Executive Vice President and Chief Financial Officer.

As usual I will start with our disclosure statement.

This presentation contains forward-looking statements.

Actual results may differ materially from those anticipated in such statements as a result of various factors discussed in our SEC filings.

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

A reconciliation of these measures to the most directly comparable GAAP measure is posted our website at CMSEnergy.com/invest.

A copy of this presentation also is posted on the website.

Now I will turn the call over to Dave.

Thanks, Laura.

Good morning, ladies and gentlemen.

We're pleased you could join us today for our third-quarter conference call, especially since many of you are probably sleep-deprived like I am this morning.

Today I will review some of the highlights of the last quarter.

I'll update you on our operating performance, including the status of our repair work at our Palisades nuclear plant, and I will discuss the recent actions of the Michigan Public Service Commission.

I'll also discuss the application we filed last week to recover over $600 million of costs incurred since the passage of Michigan's Electric Customer Choice legislation in 2000.

I'll then turn the call over to Tom to discuss our third-quarter financial results, our full-year earnings guidance, and our cash flow forecast.

Finally I will wrap up the call with a look at our 2004 financial report card, and then we will open it up for questions.

Today we reported solid third-quarter ongoing earnings of 11 cents per share, up 5 cents from last year.

This positions the Company to achieve its full-year ongoing guidance of 85 cents a share unchanged since the beginning of the year.

Tom will give you more details on that in a few minutes.

Last week at the EEI Conference we announced that we were increasing our 2004 reported earnings outlook to 75 cents a share, up 25 cents from our previous outlook.

This improvement reflects changes in the outcome and timing of asset sales.

Our pipeline sale in Australia resulted in a larger gain than originally anticipated; and we have postponed the sale of a few assets that we expected would result in the recognition of unfavorable currency translation adjustments.

Looking back over the past few months, we've made substantial progress on our strategy of strengthening our balance sheet and liquidity and investing in our utility.

In August we closed on the sale of the Australian pipeline for net proceeds of $147 million, and invested $150 million of equity into Consumers.

Also in August, Consumers Energy issued $800 million of first mortgage bonds.

The proceeds were used to redeem almost $600 million of existing debt with the remainder supporting our ongoing construction program at the utility.

In October CMS issued 33 million shares of common stock at $9.10, raising net proceeds of $288 million. 100 million of the proceeds have already been infused into the utility as equity; and our plan is to infuse the remainder over the next several months.

As I turn the page, I will give you an update on operations, and then I will discuss the latest developments regarding our agenda at the Michigan Public Service Commission where we've seen some real progress.

From an operational perspective, performance continues to be good.

The utility baseload generating fleet has achieved 88 percent availability through the end of the third quarter.

We'll slip a bit from that by year end due to the extended outage at our Palisades plant to repair 2 of the penetrations on the reactor vessel head.

Those repairs, by the way, are moving along quite well, and we're expecting to return the unit to service around the end of November, which is a week or 2 ahead of the schedule we projected last month.

On the distribution side we continue to achieve all 11 of the Michigan Public Service Commission performance standards.

The Enterprises' generating fleet also continues to perform well, achieving 95 percent availability year to date.

And finally the Shuweihat plant in Abu Dhabi has now declared all of the power generation and water desalinization units commercial, meeting our original schedule.

Here's a summary of our Michigan regulatory agenda.

Shown in green are orders that the Michigan Public Service Commission has acted on since the beginning of the third quarter.

In October the Commission issued decisions in our gas rate and depreciation cases.

We've accepted the conditions pertaining to the gas rate case and are billing at the higher rates now.

However, we have also filed petitions for rehearing on both cases to address a couple of issues.

I'll talk more about those on the next slide.

Also in October the Michigan Public Service Commission issued an order that reversed the June 2000 financing order and denied our request to issue additional securitization bonds.

This was not totally unexpected, and it's not really a setback for us in that there are other mechanisms available to recover Clean Air Act costs that would have been recovered through securitization.

In fact the cost recovery mechanism that the MPSC referred to in its order, a regulatory asset filing, would be more favorable than securitization from a utility cash flow perspective.

More about that in a minute.

With respect to our 2 pending stranded cost cases we're anticipating final orders yet this month.

The hearings are now complete in our resource conservation plan case.

This is the case having to do with the operation of the Midland Cogeneration unit; and the Commission has agreed to read the record in that case rather than waiting for an opinion from the administrative law judge.

That would allow the Commission to issue an order in December.

Finally, we are putting the finishing touches on our electric rate case that we plan on filing later on this month.

This'll be our first request for an increase in base rates at the electric utility since November of 1996.

Now a little more detail on the Commission's orders in the gas rate case and the gas depreciation case.

The $58 million rate increase is $39 million greater than the December 2003 interim decision.

The Commission implemented the increase as a 2-year surcharge rather than a permanent rate change.

Along with the rate increase, the Commission required several commitments, including achievement of a $2.3 billion common equity level at Consumers by year-end 2005; refund of any earnings in excess of 11.4 percent return on equity; and specific spending levels in certain areas, including the implementation of the new gas pipeline safety rules.

The $21.3 billion common equity level is a very manageable condition form our perspective.

In fact the infusion earlier this week of $100 million into Consumers, we are already at 2.3 billion and still plan on infusing the remainder of 188 million of our $288 million CMS common stock offering over the next few months.

Incidentally, in applying the commitment to achieve a common equity target at Consumers, the Commission removed the interim $190 million per year limit on dividends from Consumers to the parent that had been in place since last December.

The limit on return equity is also very workable.

We are pleased that the Commission continued to support the 11.4 percent return in their order.

Finally the specified spending levels were largely consistent with our spending plans, so the Commission has provided the revenue necessary to implement those plans.

Simultaneously with the rate adjustment, the Commission closed the long-standing depreciation case without any change to the depreciation rate.

However, doing so had the effect of raising Consumers depreciation expense from an interim level that we've had in place since last December.

We believe that that consequence was unintended and we have asked the Commission for reconsideration on that issue.

We also asked the Commission to address a few other issues on rehearing including our proposals to true up to actual ROE rather than weather adjusted ROE.

Incidentally, the Michigan Public Service Commission staff has filed in support of our rehearing issues in the gas rate case.

They have not yet made a filing in the depreciation case.

And we anticipate that the Commission will act quickly on these rehearing requests, perhaps in late November.

Earlier I mentioned an alternative method to recover the Clean Air Act costs that were part of our securitization filing.

Last Tuesday we filed an application with the Commission seeking to recover $628 million of expenses, including the Clean Air Act costs and also capital expenditures in excess of depreciation, and other expenses incurred since the passage of the Customer Choice Act in 2000.

That Act explicitly provides for deferred recovery of annual return of and on capital expenditures in excess of depreciation levels, and certain other expenses incurred prior to and throughout the rate freeze and rate cap periods.

The Act specifies that the recovery period should be no longer than 5 years.

Consumers has asked to recover the regulatory asset costs through a 5-year surcharge that would increase rates by an average of about 7 percent during the period.

This would obviously also result in a large improvement to utility cash flow during the period.

We would expect the Commission to act on this request sometime in 2005.

So all in all, some real progress on our regulatory issues; but much more to come before year end.

Now I'll turn this call over to Tom for a discussion on our third-quarter results.

Thanks, Dave, and my thanks to everyone listening today, and a special thanks to all of you that participated in our equity offering last month.

During the quarter we made more progress delivering on our multiyear plan.

I will show you the numbers covering earnings, cash flow, and capital structure.

We earned 34 cents a share in the third quarter; and excluding the gain on asset sales, primarily from the sale of our pipelines in Australia, that is 11 cents on an ongoing basis.

Earnings were on target with our expectation, and they were a bit better than the First Call estimates of around 8 cents.

As shown on the right, results were up 5 cents from last year.

Utility and Enterprises earnings were down.

Interest expense was better by 14 cents.

This reflects continued progress on our plan to deleverage the parent.

With unusually cool summer weather, delivering results was tougher than normal.

Adjusted to reflect normal weather both last year and this year, the 5-cents improvement would have been 9 cents.

For the first 9 months ongoing earnings were 68 cents, up 9 cents from a year ago, but let's look a little closer at the quarter.

At the utility, compared with last year earnings were down 2 cents.

Revenue was off 7 cents, reflecting the cool summer weather worth 4 cents, and more electric customers choosing alternative suppliers for about 3 cents.

By September 30, our load loss reached 875 MW, up from 600.

Financing cost increased 5 cents.

This included higher debt to finance Clear Air investment and the higher cost of gas inventories.

Also this includes dilution about 2 cents.

Utility cost improved 10 cents, with gas line losses lower than last year and deferral of certain expenses permitted in the state Customer Choice Act.

These improvements were offset partly by costs associated with the extended outage at Palisades.

Now at Enterprises, earnings were down around 7 cents.

Falling interest rates this year compared with rising rates last year resulted in a marked to market loss of about 6 cents this year and a gain of 5 cents last year, for a net change of 11 cents as you see in the red bar.

This non-cash marked to market change was offset partly by favorable results at Jorf, and the commercial startup of operations at Shuweihat.

Other cost improved by 14 cents.

This included the cost of bridge loans in 2003 not repeated in 2004.

Also, we continue progress with reducing interest expense at the parent; that was worth 8 cents in the third quarter.

Half the improvement comes from debt reduction and half comes from lower interest rates.

Now let's look to the future.

As Dave and I shared with you at the EEI conference last week, the outlook for reported earnings is 75 cents.

This is up a quarter from our prior outlook, reflecting successful completion of our 2004 asset sale program.

We postponed the sale of a few assets that we thought would result in recognition of unfavorable currency translation adjustments.

We continue to forecast ongoing earnings per share at 85 cents.

Compared with reported results, this excludes losses and gains from asset sales; that's losses from the sale of Loy Yang and gains from the sale of our pipelines in Australia in this quarter.

Also we exclude expected favorable costs from stranded costs for years prior to 2004 and certain litigation costs.

Our full-year guidance of 85 cents includes 17 cents in the fourth quarter.

Let's break that down just a little bit.

Utility results at 30 cents includes normal weather; retail open excess at a load loss of about 1,000 MW; and stranded cost recovery of 8 cents.

As Dave mentioned, we expect a Public Service Commission order shortly to permit this.

At Enterprises results are forecast at 23 cents.

This includes a preliminary estimate of 12 cents for the recently approved American Jobs Creation Tax Act.

Although this is contingent upon final accounting guidance from FASB, we expect to recognize deferred tax gains this year.

Last and importantly, if the MCV resource conservation program is approved as expected this year, marked to market gains of 16 cents may occur.

This gain could be higher or it could be lower, depending on the price of gas at the end of a year.

We believe we have been conservative in our estimate in order to account for gas price volatility during the rest of the year and the risk of a possible delay in the RCP.

Of course, if the RCP is approved and gas prices stay high, that would provide upside to our earnings.

Our latest look at profit sensitivities is shown on the right box.

On balance we are comfortable with the guidance at 85 cents.

Let's turn to cash flow.

This forecast includes receipt of $288 million at CMS from our equity sale last month and a capital contribution from CMS to Consumers of $200 million.

This is in addition to the 150 million infused last August.

We will invest the rest of the CMS stock sale proceeds as Dave mentioned into Consumers early next year.

Consumers' cash flow, shown on the right, results in a $50 million cash balance at year end.

Our available bank facility would be $475 million.

Since the second-quarter conference call, free cash flow has actually improved by $55 million.

At the parent, shown on the left box, free cash flow was $100 million, 145 million lower than at the last earnings call.

This reflects the additional $200 million capital contribution to Consumers, offset in part by earlier than planned repayment of loans from our international affiliates.

Remember, proceeds from the equity sale are shown in financing below the free cash flow line.

Cash at year-end is expected to be $330 million; and in addition we will have unused balance of $210 million at our bank facility.

This provides us with ample flexibility to meet all our debt maturities through 2006.

On this next slide, here is an update for our capital structure.

As shown on the right, we have reduced consolidated CMS debt from 8.3 billion in 2001 to 6 billion last year.

That's a 50 percent reduction in parent debt and a 27 percent reduction in consolidated debt in 2 years.

For 2004 we target debt without securitization and the effects of FIN 46 at $6 billion.

This would improve our debt to capital ratio from 78 percent in 2002 to 65 percent this year.

This reflects physical improvements.

But as we've discussed before, our new accounting standards require that certain equity-related financing be treated as debt.

Based on these new accounting standards we have switched $684 million of trust preferreds from equity to debt and consolidated $570 million of MCV debt.

As shown with the dotted lines, this will increase our reported debts for 2003 to $6.9 billion, and for 2004 to $7.4 billion.

Including related equity, our debt to capital improves from 78 percent in 2003, to 70 percent this year.

Although we have much more work to do to reduce parent debt another 50 percent, we know how to do it and we're pleased with our progress.

Now let me turn back to Dave.

Thanks, Tom.

Let me just summarize with our financial report card, as you see here.

With the third-quarter results behind us we remain on track for the year for all but 1 benchmark; and that one as you can see is total debt.

As the footnote says, this measure excludes securitization debt and obviously would have been much lower had the Commission approved our securitization request.

Everything else is on track to meet or beat our original goals.

And that concludes our prepared remarks.

So we would like to move to your questions.

Operator, please?

(OPERATOR INSTRUCTIONS) Ashar Khan, SAC Capital.

Congrats.

David or Tom, could you explain a little bit on this chart how I can model this 8 cents that you have for the fourth quarter from standard costs?

Could you provide a little bit of back?

How do you get to 8 cents, from using what numbers?

Yes, I'd be happy to do that.

I think the way to think about that is this is the stranded cost, of course related to this year; and then we will have stranded cost to prior years that will not be in here.

So that would be in the reported numbers only.

Now 1 of 2 things can happen here. 1, we can either get the stranded cost; or this could happen through third parties sales.

Either way.

So the third-party sales out in front of us could be worth a part or all of this.

So the way I look at this is just modeling for the 8 cents, which is our estimate that we give you for the fourth quarter of this year.

I don't know, Dave, if you want to add?

I would only add to that that we based our assumption here on the staff's filing and what they've provided for.

Of course they followed the methodology that the Commission has adopted in the past.

But we will have to see when the final orders come out, as we expect in November; but we think this is consistent.

How should we look at the tax legislation?

Could there be another favorable amount in (indiscernible) next year?

Or is this what it is for the whole effect? 12 cents?

That is a great question.

This would be our estimate of what the implications would be that we know about that could occur in '05 and we would need to reflect in our deferred taxes this year.

However, as are able to generate more cash overseas during the course of the year next year, there is possible that there could be further earnings gains next year.

Those we will have to look at as we give guidance to you early next year about next year.

How much cash proceeds is this 12 cents tied to, can I ask?

You can, and I will give you a range.

I will tell you it is between 50 and $75 million that we think would occur.

We need to finalize that kind of number as we go through the rest of this year, which we're in the process of doing now.

I'd also caution you to keep in mind that both the IRS in terms of the interpretation, and FASB in terms of the accounting, will be offering some guidance as we get towards the end of this year.

And we will be watching that so that we follow that carefully.

How should we look at this contingency, Tom?

You said MTM 16, and then you put a contingency of 13.

Could you explain how you came to the 13?

Candidly, as we've gotten the good news from the tax legislation, which we did not have in our forecast earlier because we didn't know that the law would be passed or signed into law, as far that goes; we took that opportunity to build a little contingency against this marked to market.

We recognize that marked to market number can be higher or lower depending on the price of gas and interest rates.

In addition to that, although we still expect the RCP to be approved this year, we recognize that that could influence what's going to happen.

We thought though, with the RCP approved this year, and the way gas prices are trending, and the way interest rates have trended, it would be prudent to have some contingency against these numbers.

So we took the opportunity to do that.

If everything works your way, then you might not utilize any of this contingency; and earnings could be higher by 13 cents.

Is that a way to look at it?

Yes, you can probably look at this 2 different ways now.

Let's take 1 just example of what might happen.

If the RCP were delayed, and again we're not expecting or projecting that, then this contingency would cover a large portion of that marked to market.

So we could still have a good opportunity to achieve our 85 cents.

If on the other hand it is approved, and as you just suggested, and say gas prices continue to go higher, interest rates go higher, then we wouldn't need that of course.

And there's a chance we could have higher earnings at the end of the year.

Could you just elaborate a little bit, update on the dividend?

If there was a Board meeting what the Board discussed on the dividend; and what could we expect going forward?

As we continue to tell you, we have discussed the dividend actively at each of our Board meetings.

We did have another discussion about dividend and dividend policy at our most recent Board meeting.

The Board is not ready to specify any guidance at this point in time.

We may or may not be ready to do that when we have our year-end conference call around the first of March next year.

If we were to provide guidance it wouldn't be until then.

Thanks very much, David.

Ali Agha, Wells Fargo.

Just wanted to clarify a couple of points.

First off, on the cash flow items for this year, on one of your charts you noted escrow change in Other of 175 million.

As I recall that used to be 115 million from some of your prior slides.

Can you just explain why that has gone up?

Principally the reason that is up a little bit is because we freed up more letters of credit through the bank lines that we had.

So we had more opportunities to get improvement in the escrow change.

Separately, also wanted to clarify the math as you get ready for the electric rate case filing.

Dave, if I heard you correctly you were suggesting that, with the equity infusion that you put into Consumers, you are already at the 2.3 billion equity mark, with more to come from the remaining cash.

As we think about the implications for the electric rate case, how should we think about the equity ratio, equity base, on which you'll be looking to get your ROE, authorized ROE on (ph)?

As we said, we intend to infuse the entire $288 million that we raised through our equity offering.

As Tom indicated 100 million of that has already moved into the utility.

I think in this cash flow forecast we assume another 100 million by the end of the year; and then the remainder sometime in the few months following that.

We would expect in the electric rate case, even if it's not all actually in the utility by the time we make our rate case filing, that by the time the Commission issues an order that we would get that fully reflected.

If we make additional infusions sometime next year from cash at the parent company, we would also expect that to be reflected.

So just to clarify, at a minimum you are at 2.3 right now; and there should be roughly another 188 million from the stock proceeds that will be going in on top of that.

Right.

That is right.

Now remember though that some of that equity is nonregulatory from a rate-making perspective.

Some of it reflects our investment in the MCV.

So if you are going to calculate utility earnings you sort of have to separate those 2 pieces.

Remind me simply how much I should take out?

I think the best thing to do is go back to the guidance we shared previously, where we were at $1.95 billion; and then go ahead and add this $288 million to that.

That's the way you should look at it.

I see.

Thank you.

Bill Sunyen (ph), Morgan Stanley.

Wonder if you could give us an update on the electric choice legislation that is currently in the Senate committee?

I don't know if you heard the latest.

Senator Patterson, who heads the Energy and Technology Committee on the Senate side, did hold some working sessions.

Dave Mengebier from our Company participated in those working sessions, and I think it was a good exchange of information.

The Senator came out after that and basically said we're going to have a bit of a period here to see what happens the remainder of this year on the regulatory front.

It's not clear at this point in time whether or not any action will be taken.

I don't think you're going to see a lot of movement on that agenda.

It's possible you could see some of the less controversial issues move; but at this point in time I am not sure that I would expect that.

Thanks.

Also, as far as your upcoming electric rate case, I think LTM on the electric side you are earning an ROE of about 11.4 percent; and that's with the weaker weather.

I understand that is probably on a lower equity base also.

But could you maybe talk about strategies going forward there?

And maybe an indication what the utility could be earning next year without rate relief?

We haven't provided any specific projections for next year.

Our goal has been, and will continue to be, to try to earn at our allowable rate of return, which you recall on the electric side is 12.25 percent.

But again we haven't provided any specific guidance on next year.

Our filing in the electric rate case will undoubtedly advocate a higher return on equity than we currently are.

We think that makes sense based on the fact that we're over levered at the utility and need to attract capital.

But we will have to see what the Commission does with that.

Again for planning purposes we've assumed 12.25 percent on an ongoing basis including beyond next year as we think about things.

You think you would look at maybe filing on a forward test year?

That is an interesting question, because the Commission has in some of its recent orders made some statements to the effect that they don't really like the forward test year.

I think that language doesn't really matter one way or the other.

We are making some changes to how our filing is formatted to show a comparison with historic test years and also show the known and measurable changes to those; so that we can show the amount of revenue that we think we need to both earn a fair rate of return and serve the customers well.

Whether you call that a forward test year or a historic test year with adjustments, I am not sure it makes that much difference.

Thanks very much.

Richard Haydon, Omega Advisors.

Obviously there is an awful lot of noise and variables in your earnings forecast.

But I think everybody on this side of the phone and probably that side of the phone is most interested in trying to figure out what the dividend potential of this Company is.

Can you give me a handle if my thinking is right on the following?

That 1 rough guide to the future dividend would be the spread between the dividends upstream from Consumers and Enterprises, less the dividends in preferred going out.

Which has a spread of about 35 million this year, and then increases by about 30 million next year, and perhaps even a greater amount in '06.

Whether that's a proper framework to think about dividend potential of this Company?

Let me refer the listeners to slide 12, the one that says 2004 cash flow.

That is where you are looking, I think.

I'm in Vegas, I don't know what I'm looking at.

Well, good morning to you.

The point is that is 1 good measure.

My comments I am going to make right now is no prediction of what's going to happen to the dividend in the future.

But I would tell you it's something we have talked about in our calls in the past, that the dividend stream coming up to the parent from Consumers and Enterprises, along with the tax sharing, is a measure to look at.

And we call that out here in this particular slide at $270 million, as you recall, Richard.

Then we show interest and preferred dividends at $235 million.

We circle those 2, because they are 2 good indicators to watch.

As that gap grows clearly that gives us more strength, more potential to cover our other costs, and be able to pay a dividend in the future.

So it's one of the many metrics that we look at.

Maybe you don't want to comment on this, maybe you do.

But that the spread between those 2 numbers should increase in a rather dramatic way over the next few years.

Now, we aren't commenting on any guidance for 2005.

But I think we have said in the past, and happy to do here, that when you look at that interest and preferred dividend number that we would anticipate, as we stay on our debt reduction plan to cut 50 percent of the debt from last year over the next several years, that you could expect somewhere around a 10 percent kind of reduction flowing through there.

So that gives you some idea of the sort of improvement that could occur.

10 percent reduction and the other growing, so the gap widening.

The other may or may not be growing.

Actually the dividend you see from Consumers is a good rule of thumb going forward, and the dividend out of Enterprise is a fairly stable level going forward.

It's the tax sharing pieces that walk through time that may grow.

That could grow significantly beginning in '06.

Correct.

Thank you.

Good quarter.

Steve Fleishman of Merrill Lynch.

On this new potential regulatory asset recovery filing, you're viewing this as kind of separate from the rate case, but I assume it would be an additional asset to earn a return on and recover?

That is correct.

There is actually a mechanism to recover these costs either through the rate case or through this mechanism, so I think like your investment in clean air.

But we think it makes more sense to go ahead and take advantage of the rule under the law and improve our cash flow by applying recovery through 10D4 (ph).

So these CapEx and spending, these were already assumed in your CapEx plan, so it's just a different recovery mechanism and potentially to get cash recovery quicker than under the rate case?

Right.

Secondly, what was the parent debt at the end of the quarter and where you expect it at year-end?

Is it just the 2.4 billion difference between the consolidated and the Consumers?

And that's all it is, is exactly that difference between Consumers and the parent and other debt.

That is the year-end target, or is that where it was at the end of Q3?

That's the year-end target that you are looking at there.

At the end of Q3 the parent-only debt was about $2.5 billion; and then related parties a little less than $200 million.

Finally, the tax law change and such, is there any change to the profile of tax sharing that occurs at the parent, given some of these tax law changes?

Or is it pretty much the same path?

For the major items that we're looking at there is no substantial change.

However, there are some other changes in the tax law that we're looking at now, whether it be biomass credits or whatever it may be.

If those are beneficial to us that could provide some small changes to this tax sharing.

Okay.

Thank you.

Nick O'Grady (ph) of Sandell Asset Management.

Just a quick question.

In terms of the equity level at Consumers, if I heard correct that the required amount is there right now, right?

That is right.

What I am wondering is, if you're delivering the parent and maybe a dividend down the road, is there any penalty by the Commission should there be negative retained earnings at Consumers over the years?

If you understand what I'm saying, if you're pulling equity out of Consumers over time?

Let me just clarify that by making sort of a broad statement.

The Commission in its order both asked us to commit to achieving that equity level of 2.3 billion and also to provide to it a plan for continuing to improve that equity level over time in getting to a target level.

They didn't specify that target level nor have we.

But we have thought about it on a regulatory basis somewhere in the range of about 45 percent on equity.

So over time we will continue to look to grow that.

The Commission didn't make any specific statements as to what its expectations were in that regard, or if our retained earnings were reduced or are dividends increased.

But obviously their goals are consistent with ours, which is to continue to enhance the balance sheet at Consumers.

And remember it's a good opportunity for us to grow our earnings because we have an opportunity to invest in the utility.

Great.

Thinks a lot.

Paul Ridzon of Key McDonald.

Have you got any initial discussion with the Commission about recognition of equity as it flows in kind of on a staggered basis?

How confident are you of getting full credit for that?

We've had ongoing discussions with the Commission staff on this issue in general.

We think if you read the Commission's language in the gas rate case they certainly are supportive of continued infusions of equity.

We have certainly made it clear in our discussions with the staff that it's important that that equity be recognized so that investors are willing to commit that equity.

So I think the general attitude is positive toward what we're trying to accomplish.

Obviously the devil is in the details.

But the Commission has a pretty good track record of recognizing equity that's been incorporated prior to putting rates into effect; and we're hopeful that they will continue to do that.

How is the Board looking at the ability -- or the removal of the 190 million dividend restriction with regards to potential for payout?

I know Tom touched on this briefly, but it sounds like it's probably going to be kind of flattish around 190?

I don't think from our Board's perspective, obviously not having that kind of a restriction in place is a good thing.

But it doesn't change our plans any.

We had always planned on increasing our equity investment in the utility, and we will continue to maintain our dividend.

We expect around the same level, 190, 200 million, somewhere in the range.

So it won't change things.

Thank you.

Ben Fong (ph) of Luminus Management.

If I remember correctly there was a request for some clarification on the results of the gas rate case.

In particular one of them being the achievement of capital structure at that utility.

Could you just discuss what the progress of that has been?

Yes, after you make your filing for rehearing there is a 3-week period for others to respond to that filing.

We're in the middle of that period right now.

The Commission staff has filed in the last day or 2 in support of our rehearing request.

There is another week or so, I think, for others to file in reaction to our rehearing request.

So the Commission hasn't done anything with that.

We're pleased that the staff has reported our fling.

We will have to just wait another few weeks to see what happens there.

Thank you.

Paul Debbas, Value Line.

With that tax legislation that you have included in your guidance, what would that make your expected tax rate be foe the full year?

I don't have the estimate on the tax rate that we would have for this year.

But I would tell you the way to think about this as you go forward with us, think about something less than the 35 percent.

Because of some earnings we have overseas, that we would be ongoing more around 30 percent.

That's probably more useful and in the future we will give you the actual numbers for this year.

The 5 cents of legal expenses that was broken out from your guidance, have you recognized that already?

No, that would be something going forward here in the quarter.

Thank you.

Charles Fishman of AG Edwards.

Is there any comment you can make with respect to the net share settlement negotiations on the contingent convertibles?

I think the only thing that I would say right now is, as we have talked about, we're going to make an exchange offer on both of our contingent convertibles.

The terms of that will be made public shortly so that all participants will have a chance to evaluate if they would like to do the exchange.

Candidly, we hope that it's attractive enough that everybody will.

Would you expect that before year end?

Yes. (multiple speakers) do that prior to the December 15 deadline.

Thank you.

There are no questions at this time.

Thank you.

Let me just wrap up by saying we're pleased with our continued progress on our strategic plan, and again had a good quarter from an operational and financial prospective.

And we will keep you updated as things develop.

Thanks very much for your participation this morning.

Bye now.

This concludes today's conference.

We thank everyone for their participation.