CMS能源 (CMS) 2004 Q4 法說會逐字稿

Good morning, everyone and welcome to the CMS Energy 2004 financial results and outlook call.

This call is being recorded.

Just as a reminder there will be a rebroadcast of this conference call today beginning at 12:00 noon Eastern time running through March 15th.

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 the CMS Web site in the "Invest in CMS" section.

At this time all participants are in a listen-only mode.

We will be facilitating a question-and-answer session towards the end of this conference.

If at any time during the call you require assistance, please press star followed by zero and a coordinator will be happy to assist you.

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

Please go ahead, sir.

Good morning, and thank you for joining us.

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

First, I will read 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 each of these measures to the most directly comparable GAAP measure is posted on our Web site at www.cmsenergy.com/invest.

Now I will turn the call over to Dave.

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

We're pleased you can join us today for our 2004 year-end earnings call.

Our agenda today is pretty simple.

I'll give you a brief overview of the status of the company and then I'll turn it over to Tom Webb to review our detailed financial results and outlook and then we'll wrap up with Q& A.

First the punch line. 2004 was good year for us for all of financial, operational, and regulatory perspectives.

On the financial front we reported today $0.87 per share in ongoing non-GAAP net income for 2004, slightly better than our goal of $0.85 a share.

Notably, we also re reported GAAP net income of $0.64 a share positive for the first time since 2000 and representing a major turnaround for us after several years of reported losses stemming from asset sales and impairments as we implemented our utility-plus strategy.

Tom Webb will discuss the details of both earnings numbers and the differences between them in a few minutes.

We also completed a successful common equity offering last fall and as promised have invested the proceeds in Consumers. 2004 was also a good year for operations with generating plants at both the utility and Enterprises achieving near record levels of availability.

Consumers fossil plants had an exceptional year with 88.4 percent availability.

Our 52-year-old lighting plant produced an all-time record amount of electricity during 2004 and our Palisades nuclear plant completed a continuous production run of 478 days, the longest in its history.

Over at Enterprises plant availability averaged an exceptional 94 percent.

On the electric distribution side of Consumers, we again met all of the Public Service Commission customer performance standards.

On the regulatory front we achieved fair regulatory decisions on nearly all the issues we had pending at the Michigan Public Service Commission last year.

Those decisions and our expectation of continued strong operating performance by our employees have caused 2005 to shape up well and we also forecasted a 2005 ongoing earnings that are equal to or slightly better than 2004, perhaps in the range of a nickel a share improvement.

Bottom line we continue to implement our Utility-Plus strategy and that's resulted in a stronger company with more consistent performance and less risk.

Incidentally, I'm also proud to say we've successfully implemented our ongoing Sarbanes-Oxley compliance program and will be filing our certifications without any material weaknesses.

Our folks took this as a challenging opportunity to further enhance our corporate credibility and really did a great job.

Here's our 2004 report card.

As the green check marks indicate we bettered all of our targets with the exception of one, total debt, excluding securitization debt.

You're well aware we were unsuccessful in gaining PSE approval to securitize $550 million in debt which more than accounts for our $200 million shortfall on this goal.

This is truly a case of a cloud with a silver lining, however, in that there is an attractive alternative mechanism for accelerated recovery of the Clean Air Act cost that represented the bulk of our securitization request.

This is the so-called 10d(4) clause of Michigan's Electric Restructuring law, and I'll talk a little bit more about that in a minute.

The only other point I want to make about our performance is that we far surpassed our target for cash and available bank facilities with $1.2 billion at year-end.

This was due to the renegotiation of bank facilities mid-year and the timing of two offerings completed in December.

Proceeds from these offerings were used to redeem securities in January.

As I indicated earlier, our regulatory agenda was very busy in 2004.

We made a great deal of progress favorably resolving some longstanding issues.

We've discussed the details of these orders in prior calls so I won't take your time to review them again.

I will say I'm pleased that the regulatory environment in the state has been constructive.

As you know, that's important to our strategy of focusing our efforts on our Michigan utility.

A very important order from the MPSE was issued January 25, 2005, approving the MCV resource conservation plan.

You hear the cliche win-win all the time, this order truly is one.

In fact, there are lots of winners, Consumers Electric customers, the MCV Partnership, and CMS Energy.

This diagram's a bit complicated but I think does it a good job showing the flow of benefits from this program.

Before I go through it, let me clarify that the dollar values shown are all pretax.

The key provisions of the RCPR is as follows: The Midland co-generation venture is dispatched based on cost of natural gas rather than being forced to run.

Consumers is allowed to recover capacity payments based on the availability of the MCV rather than on its actual production.

Based on current market conditions this change in dispatch conserves an estimated 30 to 40 billion cubic feet of gas per year and as noted on the chart, the chart assumes $6.59 average NYMEX gas price in 2005, and also makes certain assumptions with respect to the cost of replacement power.

Because the MCV runs less Consumers generates or purchases more power from other sources and the MCV makes a hold harmless payment to Consumers to make up the difference in cost.

These savings are distributed in a pre-defined manner.

Under this example there are cost savings of 104 million after the $73 million customer hold harmless payment.

The first $5 million per year is set aside to promote the development of a new renewable energy resources in Michigan.

21 million goes to Consumers Electric customers in the form of reduced rates, and as a point of clarification, the customer sharing increases from 50 percent to 70 percent after 2005. 49 million benefits CMS, some directly to Consumers and some indirectly through its partnership interest in the MCV.

And the remaining 29 million benefits other MCV partners.

I hope this chart helps and I'll certainly be happy to answer questions about it in a minute.

While we accomplished a lot last year we have some key issues before the commission in 2005.

For the first time in ten years in December we filed an electric rate case seeking $320 million rate increase.

Our filing reflects a $4.7 billion rate base, a requested 12.75 percent authorized return on equity, and a target capital structure of 50 percent common equity on a financial basis.

The schedule for this case has been set and provides for proposal decision in early October and then after, exceptions and replies would be right for decision in early November.

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

Section 10d(4) of the Act explicitly provides for deferred recovery of an 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, January 2000 through December 2005.

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

Last Friday the MPSE staff filed testimony in this case recommending recovery of 323 million.

We're still in the process of reconciling the differences between the two so I can't go into specifics for you.

I can say that the staff took a more restrictive view of the intent of the legislation and also determined that certain of the costs were more properly dealt with in general rate making or power supply cost recovery proceedings.

And finally, the gas rate order issued in October of 2004 provided for a two-year surcharge of $58 million annually.

The order also requires Consumers to file a gas rate case within two years.

We plan to file this case in the middle of 2005.

Our business plan for 2005 has not changed.

We'll continue to focus our efforts on growing the utility, the cornerstone of our company.

As Tom will illustrate later, utility earnings will grow over time as we invest more equity, increase the rate base, and receive recognition of both in rate making.

The other major component of our plan is our Enterprises business.

We'll continue to optimize our investments in key assets such as Jorf Lasfar, Altawhela, Shuweihat, Takoradi and a select number of other Enterprises businesses.

Basically the assets that provide strong contractual cash flow from credit worthy customers.

We expect this plan to generate average annual earnings growth in the mid single digits and provide us with sufficient cash flow to reduce parent company debt by another 50 percent over the next several years.

The complexity of our business model has been reduced over the past three years as we've sold many of our riskier businesses.

And finally, we are committed to restoring a dividend as soon as prudent to do so.

I don't have anything new to announce with respect to a dividend, but I promise you that we haven't forgotten your interest in one.

Now let me turn the presentation over to Tom for more details on our financial results and outlook.

Tom.

Thanks, Dave.

Let me add my welcome to everybody on the call today.

Thanks for showing your interest in CMS.

We do appreciate it.

Our 2004 reported earnings were $0.64 a share.

That's our first year of reported profitability in awhile.

As Dave mentioned, we're pleased to announce ongoing earnings at $0.87, up $0.06, about 7 percent from 2003.

That's a little better than the First Call average.

This excludes the effect of losses on asset sales, the charge incurred for environmental remediation associated with our past ownership in Bay Harbor, and the benefits of prior period regulatory gains.

Now, compared with 2003, the utility was off about $0.05, Enterprises was up about $0.05, plan dilution was $0.12, and interest savings were $0.18.

At the utility, higher interest expense, associated with our investment plan, and lower revenue from mild weather conditions in 2004, were offset partly by favorable regulatory actions including the gas rate cases.

At Enterprises, we more than offset the loss of earnings from businesses sold with better ongoing business results and tax savings.

We'll talk more about those.

At the parent, our de-leveraging plan and lower interest cost from favorable refinancing more than offset the dilutive effect of our equity offering last fall.

We ended the year with strong liquidity at both Consumers and CMS as shown on this slide.

Consumers' cash flow, shown on the right, resulted in a $45 million cash balance at year-end, and an available bank facility of $475 million.

Since our third quarter conference call, free cash flow declined about $33 million due mostly to increased working capital that's associated with higher gas prices.

Now, at the parent, which is shown on the left, free cash flow was $166 million.

That's 66 million higher than at the last call.

This largely reflects a delay until January with making a portion of our equity investment into Consumers.

We invested $250 million in Consumers last year.

In January of 2005 we invested an additional $200 million, and our plan for 2005 is to infuse another $100 million.

This will equal our commitment of investing $550 million in Consumers by the end of 2005.

Cash at the year-end was $486 million.

In addition, we had an unused bank facility balance of $194 million, providing us with good strong liquidity heading into 2005.

Cash and available bank lines at CMS and Consumers totaled $1.2 billion at year-end as Dave mentioned.

Now let's turn to our guidance for 2005.

We expect reported earnings per share of $0.84 to $0.89.

Our guidance for ongoing earnings per share is $0.87 to $0.92.

That's flat to up about $0.05.

We're pleased that reported and ongoing earnings are coming closer to together. $0.90 is the ongoing number that we've established for our company incentive plan target so all salaried employees are aligned with this target.

Let's look at the details, though, behind these numbers.

Compared with 2004, the utility earnings will be down.

Coupled with the full-year impact of dilution, these declines will be more than offset by earnings growth at the Enterprise businesses and continued interest expense reduction from our de-leveraging program.

At the utility, earnings will be down $0.14 a share.

The increased benefit cost of $0.16 include lower discount rates for our retirement plan, resumption of the employee 401(k) match, and rising healthcare costs.

The balance of $0.15 includes the effect of higher investment on the depreciation and property taxes, as well as the full effect of payments to MCV in excess of recovery.

This is offset in part by benefits from the RCP.

Our lower than authorized returns at about 9 percent for both the electric and the gas businesses supports our requests for rate relief.

Revenue is up $0.18, and that's reflecting normal weather for the year and some growth.

At Enterprises, earnings will be up $0.12.

Lost earnings from businesses sold in2004, like Gold Fields and Parmelia are more than offset by the MCV, RCP, mark-to-market, and taxes.

Dilution from 33 million new shares issued last October is more than offset by lower interest expense.

Now let me turn from earnings to cash flow.

As shown in the right box of this slide Consumers will generate over $745 million of operating cash flow to cover most of its capital expenditures, interest, and dividends.

We already completed 250 million of the planned financing shown here with proceeds used to redeem $190 million of high-cost trust preferred securities, and a $60 million term loan that matures in 2006.

As mentioned earlier, we already have infused 200 million into Consumers and we'll add another 100 million later this year.

We expect to end the year with 40 million of cash and 330 million of available bank facilities.

At the CMS parent, shown on the left, dividends from Consumers and Enterprises of $426 million more than cover interest and preferred dividend requirements of $200 million.

We expect to see a shift to positive tax sharing this year of about $28 million, and Enterprises dividends will be stronger this year.

We completed 150 million of our planned financing of the 260 million in January.

Proceeds were used for early redemption of remaining general term notes.

We expect to end the year with over 300 million of cash and unused bank facility of $194 million.

We don't have any parent maturities in 2005 or 2006.

This puts us in a strong liquidity position.

There are many things that can influence our profitability, both good and bad.

On this slide, we've shown some of our key assumptions and how sensitive our earnings are to changes in those assumptions.

Let me highlight just a few of the examples.

Each 100 gigawatt hour change in electric deliveries can impact our earnings by plus or minus $0.02 a share.

A 10 bcf change in gas deliveries could impact profits by $0.06.

We based our plan on average NYMEX gas prices of $6.59 for 2005.

At this level, the operational benefit of the MCV RCP is worth $0.16.

Now each $0.50 change, up or down, in gas prices will impact this amount by about $0.03 in the same direction.

The impact of changes in commodity prices, interest rates, and derivative contracts also are shown on this slide.

We built into our plan an ROA load loss of about 1,000 to 1200 megawatts by the end of the year.

Now as of February 28th this was about 898 megawatts down from the year-end 2004 level of 926, as some of our customers have returned to bundled service.

Now that stranded cost policies have been established by our Public Service Commission we expect to recover stranded costs related to load loss.

Changes in interest rates and gas prices also can influence our results as we mark-to-market certain derivative contracts like gas contracts for the RCP.

Now, here's an overview on this next slide of mark-to-market implications for 2005.

Our plan includes $0.06 of good news, half from rising interest rates shown in the left box and half from rising gas prices shown in the right box.

A 25 basis point change across the full interest rate curve would impact earnings by about $0.02 a share.

A $0.25 move in gas prices also is worth about $0.02.

Over time, mark-to-market impacts net to zero.

During the period 2005 through 2014, our interest hedges and gas contracts combined will result in a small positive mark-to-market of $0.03.

Let's recap results of the MCV approval including mark-to-market on this next slide.

As Dave described, for 2005, operational benefits provide a pretax improvement of $49 million.

Now, this would be $32 million after taxes or as shown here, $0.16 a share.

The mark-to-market benefit is $0.08 for a total earnings gain of $0.24 associated with the RCP.

Of course, there are other MCV gas contracts that predate the RCP.

As we use these, the mark-to-market impact is about $0.05 negative this year.

The total MCV mark-to-market impact therefore is about $0.03 per share positive.

Again, our gas price assumption for 2005 is based on average NYMEX price of $6.59.

Now, in the first quarter, we'll see a disproportionately high mark-to-market for the RCP-related gas contracts.

As we use them during the course of the year, the impact will drop to the $0.08 shown here.

Let's step back for just a minute.

Some time ago we embarked on our back to basics Utility-Plus strategy with the intent to stabilize earnings growth and reduce parent debt.

As you can see on the left of this slide, we're making progress with achieving earnings growth around the mid single-digit pace.

And although reported results are back nicely in the black after several years of losses, future earnings still could be affected by future asset sales.

As shown on the right, we've made progress reducing debt down 50 percent for the parent from 2001 to 2003, and we're well into our plan for another 50 percent reduction by 2008.

We're driving earnings and cash flow growth in four areas.

I'll cover each in the next few slides.

The Consumers regulatory agenda's first.

We received favorable decisions regarding gas rates, stranded costs, and the MCV RCP.

We've filed an electric rate case, as Dave's just describes, and we plan to file a new gas rate case which would reflect our recent equity infusions.

The regulatory asset recovery will provide substantial cash flow if approved later this year.

Remember, the final order will provide for cash recovery over a five-year period.

At Enterprises, good ongoing operational performance and long-term contracts provide sustainable earnings year in and year out.

Now, on the tax front, we were active in the development of the American Jobs Creation Act and will see non-recurring benefits from it in2004.

We anticipate another pickup in 2005.

In addition, our substantial tax loss carry forwards will help generate parent cash flow to reduce debt over the next few years.

Finally, as parent debt and the attendant interest cost are reduced consolidated earnings will improve.

Let's go back to the Consumers, the first point.

Earnings growth above organic growth will depend largely on two things: Growth in the rate base, and a higher level of common equity.

As illustrated on this slide, we expect to see a steady increase in our rate base over the next few years rising about 4 percent a year on average.

The increase in 2004 reflected the $500 million pension contribution in 2003 and the effect on working capital of rising natural gas prices.

The second component of earnings growth at the utility is our equity investment.

Last year we added 250 million of equity, and this year we'll add another 300 million.

Recall, we already contributed 200 of the 300 in January.

We have cash set aside for the next 100 million, and this will improve our equity ratio to about 40 percent.

Each 100 million of equity improves earnings by about $12 million a year.

As shown in the bar on the right, we could raise our equity level to about 50 percent.

This would leave room over time to make accretive investments of another $600 million in the utility.

It gives us a lot of head room.

Now let's look at the Enterprise business.

It will continue to provide important earnings and cash flow.

Detail of both are shown here.

Earnings and dividends are forecast at $130 million this year.

Long-term contracts at most of these businesses provide for stable results.

Dividends at 130 million are up 40 million from the 90 million that we had last year.

This reflects increases at Jorf, Takoradi, and Shuweihat as we have it on stream for a full year.

Now, the fourth leg of earnings and cash flow drivers couples taxes and debt reduction.

Tax sharing enables us to reduce parent debt and interest expense.

CMS and its subsidiaries file a consolidated federal income-tax return.

We're able to shelter cash generated from Consumers with about 1.3 billion of tax loss carry forwards at the parent.

Consumers makes its cash tax payments to the parent rather than the IRS.

Now, in the past, as shown in the red bars, Consumers has been able to use its own tax yields, bonus depreciation is a good example of that.

For the next few years, shown in the green bars, Consumers will make tax payments to the parent which will be sheltered by the parent's carry forward losses.

From 2005 through 2009, we could save about a half a billion dollars.

The savings are a bit back loaded, but they provide important cash to reduce our debt.

As you know, progress with debt reduction reduces interest expense.

The progress is meaningful.

Interest expense is estimated to be down 16 percent from last year compared with 2003, parent interest expense will be down $78 million or 30 percent.

That's worth about $0.25 a share.

We won't see as much progress in 2006 but savings will pick up again as our parent debt reduction continues.

As you can see, all of these drivers help us in one way or another to reduce parent debt.

Utility debt grows as we continue to invest in environmental and customer requirements at a level greater than depreciation.

And that's just good business.

We have, however, reduced parent debt by 50 percent in two years and plan to reduce it as we've said a further 50 percent over the next few years.

Now, let's look again at our plan on how we cut that parent debt in half.

The red crossed-hatch section on this slide represents interest and dividends over our five-year planning horizon.

In it we include an assumption for a common dividend distribution.

In the solid red portion are the operating expenses at the parent in CMS Enterprises.

At the top of the green bar are cash dividends from Consumers and Enterprises.

This amount covers the interest in dividends at the parent.

In the crossed-hatch portion of the green bar we're estimating about $400 million from asset sales and a settlement with the Argentine government.

We already have $200 million in the bark from asset sales last year.

Under project financing we plan to monetize about 100 million from one or more of our Enterprise investments.

As we've discussed, tax sharing also generates sizable cash flow at the parent.

As Consumers taxable income grows over the next few years the parent can shelter these taxes with operating loss carry forwards.

Finally, as our financial condition improves, the parent will be able to reduce the level of cash it carries and use it to retire additional debt.

Well, that's our plan for the next few years, and here are our commitments for this year.

We're targeting ongoing earnings at about $0.90 a share.

Our cash flow from operations before capital spending is forecast at $450 million.

Our incentive plan, which involves all salaried employees, is aligned with our earnings per share and our cash flow metrics.

Our capital structure will continue to improve in 2005 with a debt-to-capital ratio of less than 68 percent, and that's down 10 points from 2003.

Once again, thanks for everybody to joining us this morning, and with that we'd like to open the call to your questions.

Thank you, sir.

Ladies and gentlemen, if you wish to ask a question, please press star followed by one on your touch-tone telephone.

If your question has been answered or you wish to withdraw your question, please press star two.

Again, please press star one to begin.

And our first question comes from the line of Andy Smith from J.P. Morgan.

Sir, please proceed.

Good morning.

Good morning, Andy.

How you guys doing today?

Just great.

Good.

Had a couple questions I just wanted to get some clarification on.

What is the jobs tax benefit you're expecting in 2005?

Well, we've got that.

Let me put it in perspective with two pieces, if I can.

The first piece is, we actually got a benefit this last year in 2004 of $0.12.

And I know it can be a little confusing with dilution.

That's the straight up number.

This next year we would expect something in the neighborhood of about $0.16.

That's what's built into our plan.

And, Andy, I'd have you and other listeners also keep in mind that this is a terrific opportunity for us because we took that $0.12 last year and we used it as an opportunity to retire some interest early and pay some interest sooner than we would have, and to put a little bit more into our operations.

So that was great news for us.

We have same kind of idea with what we're doing this next year.

Okay.

And with that $0.16, I forget which slide number it is, you broke down the dividends expected back from the foreign projects.

Would that $0.16 be included in that 130 million, or would that be incremental to that?

No, that's incremental.

That's incremental.

All right.

And then the other thing, just wanted to get a little bit of clarity from you guys on is, you guys are long gas at the MCV now that you're running it economically, if I understand that right, from contracts that you guys have in place.

That's right.

Am I thinking about right?

Are you guys assuming resale of that gas at the 659 NYMEX price in your MCV analysis?

Yeah, for 2005, and of course, that affects the mark-to-market numbers as well, but for 2005 we'll be using less gas than we have under contract.

We'll sell that excess gas.

And of course, it depends on the various market assumptions for both power and gas.

Sure.

Okay.

No, that's great.

And then around the MCV you have this obligation for the hold harmless payment.

How are you guys thinking about managing that exposure in context with your gas contracts?

Are you looking to sign contracts for that power supply?

Are you doing it a mix of spot and contract?

If you could give me a little color around that, it would be helpful.

It's actually fairly straightforward.

Consumers basically is going to be dispatching the MCV on the basis of the market price in natural gas and then replacing that power.

If the market price of natural gas relative to the price of power means that it makes more sense to run the MCV, it will run.

Other than that, most of the time it probably won't, and when it doesn't make sense to run the MCV we'll either run our own generation or participate in the spot market.

We're not necessarily out there writing additional long-term contracts.

And, of course, the hold harmless payment only occurs if, you know, if it makes sense to use alternative generation.

So it's something that we can control it's not a naked exposure, if you will.

That's fair enough.

But it sounds like you are thinking about filling that obligation on more of a short-term spot basis as you make decisions on the dispatch, not making some assumption about dispatch and then signing a contract for next few months or year.

Well we're certainly not interested in committing ourselves to a lot of exposure on the come.

It makes much more sense for us to manage that on an ongoing basis.

Okay.

Great.

I appreciate the time.

Thanks, Andy.

And our next question comes from the line of Steven Wung from Citigroup.

Please proceed, sir.

Good morning, gentlemen.

I was calling because I just had a question here on that $80 million of foreign repatriation that you guys talk about putting into the utility, is that on top of the 550 million you guys [had] in your original plan?

No, that's, this is actually what enables us to do some of that work.

So as we are able to repatriate this money we want to invest it in a place like Consumers, and that's where we plan to put it all, and that's part of the plan that we've described to you.

Okay.

So it's the 550, it's not going to be 630?

No.

Correct.

And related to the ROA here, you guys said that the staff last Friday came out with 323 million out of 628.

But you guys did indicate that a part of it is that the staff is looking at, hoping that you guys would put that into more of a standard regulatory treatment.

Could you give us a break down of that of how much was actually but the staff disallowed and how much did they actually recommend putting into a regular normal rate treatment?

I really can't do that yet.

As the order or the filing just came in last Friday, we're in dialogue trying to understand it, quite frankly, in more detail, and I think it would be premature for to us give you any detail break down.

It is clear from the staff's testimony, as I said, they took a more conservative view on some of the costs that would be incorporated and we're working through the details on that.

I'll remind you that a lot of this is the Clean Air Act-related costs from the securitization that the commission didn't approve.

That was about 550 million.

And of that 550, about 100 million was associated with implementation costs we're already recovering.

So we're talking about in the Clean Air Act case about 450 million.

The staff's recommendation was 323 but they also recognized a number of expenses that would go into other cases as you've indicated.

I just don't want to get into the details until we're clear on the break down of all those numbers.

The last question I have here was, you indicated that the ROE that you're earning right now at both the gas and electric is 9 percent.

Is that correct?

Is the gas case including the recent surcharge?

That includes all of the rate making, and those two are 2005 plan estimates, if you will.

It's just important, as Tom said earlier, remember that the tax benefits for 2005 have given us the opportunity to accelerate and spend some more money on operations and other issues and still make the kind of numbers that we've talked about, so it's a real opportunity for us.

Obviously spending more money in the utility drives down those ROEs somewhat but it's also what we think is good business and makes sense for us in this rate making environment.

So even with the surcharge from the fall the gas utility portion is still making 9 percent?

Yes.

Great.

Thank you very much.

And our next question comes from the line of David Silverstein from Merrill Lynch.

Please proceed, sir.

Good morning.

Was interesting to see was the large change in distributions that you're expecting from your international businesses, or rather through Enterprises.

Can you give us some help in terms of really kind of a long-term run rate dividend stream that you'd see out of those businesses versus what you have this year of 130 million?

David, I tell you, if you look at the slide on the Enterprise businesses, that talked about going up from $90 million '04 on dividends to about $130 million in'05.

That's a little high.

We have some catch-up this year.

Let me give you one example.

You remember at Jorf, we hurt our dividends a little bit in '04 because of the high coal prices, and we're able to capture that and recover that as we get into '05.

So it's a little catch-up going on in there.

Couple of other things like that.

I would have you think about, as you go through the years, closer to $100 million of dividends.

Now, in addition to that, that slide also showed some other distributions.

As we have the opportunity to do some financings and things like that in some of the projects out there and bring some money back we'll take those opportunities, and that's what that $60 million is about, and that's why we call it out separately.

So bottom line, think of Enterprises as generating a nice basic dividend in and around $100 million as you go into the future.

And there will be opportunities to grow that, but that's where we use our planning base.

And then return of capital through project financings, I think we were looking for 100 million, which has been put off, I think it was Atacama.

We put that off because of our business down in Chili, Atacama where that's something that we'll look to have occur not this year but maybe next year or the year after.

So that's a little bit in the future.

Thank you.

You're welcome.

Our next question comes from the line of Ali Agha from Wells Fargo Securities.

Please proceed.

Thank you.

Good morning.

Good morning, Ali.

Tom, wanted to clarify a comment that you made earlier regarding the remaining 100 million that you plan to infuse into the utility to get to the 550 equity infusion.

Where is the cash going to come from?

Ali, that's a good question.

We actually have the cash in place to make that infusion now.

So we have the cash in our balance sheet and we're able to do that.

I know a lot of people ask us from time to time the follow-on question about any new equity.

Remember, the way we think about that is if there's a good solid opportunity to make an accretive investment we would consider it.

And as long as we think you can get a good return out of our business like Consumers, those can be good opportunities to consider in the future, but to your question the $100 million is already in place to be able to make that infusion a little later this year.

I see.

And sort of on a related note, in your '05 cash flow slide, you resumed about 260 million of financings at the parent.

You've done 150 million as you told us.

So should we think of the remaining 110 million as additional debt issue or what should we think there?

Well, on this particular slide that's just it.

Okay.

And also clarifying the point, and I think Dave you did clarify that the 9 percent ROE for gas and electric that presumes the total 550 million of equity infusion as well as whatever earnings you'll get in '05 to get to that number?

Is that math correct?

Well, it follows, yeah, it follows our equity infusion program.

Remember, we're not anticipating in our plan any additional rate relief in '05, the gas rate relief is in place, and we're assuming that the electric rate relief occurs about the end of the year.

Right.

And one last clarifying question.

Looking at the slide that you had all the time lines on, the gas rate case, if you file by mid-'05, if I saw it correctly, are you assuming you would have it in place by the fourth quarter of '06, or when should we see the impact of that?

Yeah, that's right.

Remember, the surcharge the commission approved was approved in October the last two years, so we're really timing that gas rate case to make sure that there's a smooth transition from the expiration of that surcharge into the new general rates.

I see.

Thank you.

Ali, thank you very much.

Thank you, sir.

Our next question comes from the line of Paul Debbas from Value Line.

Please proceed, sir.

Hi.

This is Paul Debbas.

Regarding the asset sales that you put into your forecast is there anything that's specifically up for sale now?

Did you have any specific assets in mind?

A couple.

Remember that, in fact, we reported a sale of one of our Indian power plants here in the press release this morning.

And we've also mentioned before that we have a collection, or participation in a fund in South America that invests in various assets that we're also in the process of selling.

Those are the two that we had in mind.

And that would bring you to 200 million?

No, oh, I'm sorry, you're talking about the long-term debt reduction?

As you know, in the long-term plan we still have additional assets in South America, we have another power plant in India, and some other smaller assets that we wouldn't consider strategic over the long-term but we're being a bit opportunistic in looking at when it makes sense to sell those.

Thank you.

Our next question comes from the line of Paul Patterson from Glenrock Associates.

Please proceed, sir.

Hi.

Most of my questions have been answered but I wanted to ask you a little bit more about mark-to-market here.

It looks to me that you guys are saying that you're planning on $0.10 incremental in 2005 and then if we go to slide 17, or 15, excuse me, or 17, excuse me, 16, it looks like there's a $0.06 benefit that you actually see coming from the mark-to-market impact of earnings for the interest in gas hedges.

What's leading to the other $0.04?

I guess what I'm trying to get at is, what is the total amount of mark-to-market?

Not just the increase year-over-year, but what's the total amount that's driving earnings in, contribution in 2005?

Sure.

The way you should look at that is, look at the two absolutes that happen to show on that slide 16.

In 2005 you'll see under interest rate hedges $0.03 and then over on the MCV gas contracts you'll see another $0.03.

Put those together, and that's the $0.06 of mark-to-market that we have projected for our plan in 2005.

Then you can make comparisons to the prior year to that in different ways but I think that's the important number to see is the $0.06.

Okay.

And so there might have been a loss in 2004 what have you, and that's--

Correct.

Okay.

And then the $0.12 and the $0.09 in '06 through '11, through the later years that you have as the last columns there, how does 2006 look versus 2005?

Well, we don't actually break that out for anybody yet, and part of the reason is it's very difficult to predict as you go out through time when these are going to occur.

We know that for 2005 throughout 2014 that we'll see a total there that will work out to about $0.03 positive.

It's very hard to predict as gas prices go up and down and the interest rate curves goes up and down when exactly that's going to occur so we don't forecast that.

Would it be $0.3 negative?

$0.03 positive.

Okay.

I'll follow it backwards.

Thank you.

Our next question comes from the line of Ashar Khan from SAC.

Please proceed, sir.

Good morning, gentlemen.

Tom, you mentioned regarding the utility business that you might issue more equity if you found accretive acquisition opportunities.

Could you just elaborate a little bit more on that please?

Yeah, I think the best way to think about it is we don't have anything in our plan of that kind.

We have the cash in place to make our next contribution into Consumers, and that's the $100 million.

That's a plan, and we're going to honor that and we're going to use our cash to make that payment.

What we have is an opportunity that's not in our plan right now to raise more equity if it would be accretive and we had the confidence it would be a good investment for investors into Consumers.

That's something that we're thinking about all the time, trying to arrive at the best decision there.

But our plan is 100 million of cash in before the end of this year and we'll do that from cash we have in place.

Okay.

But just following on your filing gas case so if you put in more equity at least than the 100 that you have planned, or is contemplated, you should be able to get that higher equity into the gas case when a decision comes in at the end of '06, is that a fair assumption?

There's always that opportunity, and there's still a chance if more equity went in you might get it recognized in this electric rate case.

So those are opportunities.

And, when on the current electric rate case, when can you get, be more certain about that?

Is it in the next couple of months, or, you know, when does that time line come to pass?

Well, this is Dave, you're never certain until the commission actually issues an order, but I would say typically, you know, you can adjust your original filings by mid-year when you actually go in and testify.

Tom will be on the stand testifying in that case and we'll talk about exactly what our expectations are in terms of equity.

Obviously that's in by mid-year when he testifies or anything else that might be planned for the remainder of the year.

So typically there's an opportunity to get that reflected in the case as long as you do it by the time you testify.

In some cases it may be even later than that.

And David, can you just mention to us any update on how, I know it's far off, the MCV regulatory out that happens in '07, how you're thinking about it and how should we think about it in the next couple of years?

Well, you'll recall that the regulatory out that occurs, really in the fourth quarter, I think it's September of '07, it represents the mid-point in the 35-year MCV contract, so there's an opportunity under the contract to exercise that regulatory out.

I think you're aware we're under recovering our capacity payments to the tune of about $53 million a year right now, and we would be assuming for planning purposes that that under recovery basically goes away.

Of course, that represents a reduction in the payments of the MCV in 2007.

There's been some dispute as we went through in the late 1990s the open access program discussions in Michigan and some discussion about whether or not there would be additional regulatory out that might be claimed as a result of that, some litigation associated with that, that went on hold.

There may also be some dispute from the MCV as to whether or not we can fully exercise the regulatory out that we have in mind.

But I think it's fair for planning purposes, and it is what we're using to assume that our collections from the customers don't change and we simply reduce our payments to the MCV accordingly.

So that, what would be the earnings impact to the corporation as a whole of that?

Well, it's about half, right?

Right.

Because from cash perspective, at least right now, we don't see any cash distributions from the MCV, and so from a cash perspective, it would be the full 53 million.

From an earnings perspective, it would be about half of that, because obviously it would negatively impact the MCV and we have a 49 percent interest.

Okay.

And if I can just, where's the cash flow part of this, the staff recommendation that came out on Friday, how should we, how should we resume this cash flow coming out of this final decision to be applied, can I ask you?

Well, remember that the law specifically calls for accelerated recovery over no more than five years.

So as we've indicated, whatever the final order is we would expect that we'd be recovering that amount of cash through a five-year surcharge.

We won't know exactly how much that is until the commission order comes out, as I'd indicated earlier.

The staff's recommendation of 323 million has some differences in there.

Obviously you could take that 323 and divide by 5 to figure out what the cash implications of that order is, if the commission adopted the staff's case exactly.

We don't know that they'll do that.

It could be higher, it could be lower.

Okay.

And, Tom, can I end up, could you break us for '05 what the net income is for the gas and electric business?

You gave us the utility net income.

Could you break it down between electric and gas for '05, please?

Give me a minute.

I can give you for '05 just the earnings per share of $1 for the utility, and the split, we're getting for you here in just a minute, but while we're doing that I want to go back, Paul had a question a little while ago, and I noticed he hesitated, and I think I know why it was.

When we talk about the mark-to-market on slide 16 the $0.03 positive includes '05 out through the rest of the contracts.

If you did '06, which he might have been looking at, that would be 9 positive, less 12 negative, or 3 negative.

When you add in the $0.06 this year it would be 3 positive, and that's what we're referring to, so there's no confusion there.

And then we'll be right with you on the splits.

Why don't we take the next question, and then I'll toss that out in just a minute.

Okay?

Okay.

Thank you.

And thank you.

Thank you, Ashar.

Our next question comes from the line of Terran Miller from UBS.

Please proceed, sir.

Good morning, gentlemen.

Dave, you were recently quoted as saying that you didn't think it was important to get to investment grade at the parent.

I was wondering, A, what you think the proper rating for the parent should be over time, and, B what your assumption is if you get to $1.5 billion of parent level debt by the end of '08, what that rating that gets you to.

We've kind of targeted a strong double B for the parent company and we've, you know, obviously the rating agencies make up their minds, but generally we think metrics like something less than 60% total debt ratio is about where we need to be, in the high 50s.

Thank you very much.

Yep.

And our next question comes from the line of Paul Ridzon from Key McDonald.

Please proceed, sir.

When you said you anticipated 9 percent ROE, what's the rate base that that is on, and what's the split between gas and electric?

The rate base we have for 2004, just to give you the precise numbers, is about 4.7 billion for electric and 2.1 billion for gas.

Now, that's year-end 2004.

Right.

And the rate base that we would have looked at as existing November 1996 was about 3.4 billion and as we filed for the electric rate case, around it $4.7 billion.

And then one more question.

What's the trajectory of the jobs tax credit benefit?

I'm not sure what you mean by trajectory, but the benefit was $0.12 per share last year in '04.

It would be about $0.16 per share in '05.

In '04, we actually used most of that gain to help us in the operations of the business and to retire some debt early, pay some interest, penalties early, so we could lower that debt sooner, and then in '05 we have some similar plans.

Does this go away in '06?

It's a one-time thing, so you really, we see the benefit two years, but it doesn't recur.

Thank you.

And our next question comes from the line of Amit Sanghrajka from Banc of America Securities.

Please proceed, sir.

Hi.

Good morning, Tom.

One question on the regulatory [inaudible] on Cap Ex which was 113 million in 2004.

That's part of the $0.87 right that you guys reported?

Well, a piece of that, if I'm picking up what you're probably looking at, some of that is prior year.

So about $59 million of that is prior year, and that's in our reported results, and $54 million is in our ongoing results.

And what are you guys assuming for '05?

I'm not sure of the question so therefore, I'm not sure how to answer it.

Is that something that we'd be seeing in '05 as well?

You could see more in terms of, but it's not a large number for us.

So, no, it's nothing that I would consider to be a big number.

And I think we're ready to also, if you don't mind, answer the question.

The split of about $200 million in 2005 for the utility is 143 million or so for electric and about 60 million for gas.

And thanks for your patience on that.

Sure.

And that's a non-cash item?

The 54 million ongoing?

Oh, yes.

And then the other question I have is on, is for Consumers.

You guys are looking for a longer term equity infusment of maybe 600 million over and above the 550.

Is there a possibility that some of that might happen in '05?

We haven't made any specific plans for that.

I think what Tom was trying to lay out is opportunities to invest in the utility before we get up to a total of 50 percent total ratio.

So we could make that decision when it made sense to do so, and we're not ready to announce any specific plans for any specific time frames.

Okay.

Thanks.

Operator is there just maybe one more question we could take?

Sir, if you'd like, I can reprompt for more questions.

At this time we don't.

No?

All right.

We'll go ahead and wrap up then.

I do have one slide here, and I'll just use that to summarize where we are.

Again, we had a very good year in 2004.

We're pleased that we're able to achieve our financial goals and I'm proud of our employees and the continued strong operations from them.

I think that's a strength of the company that will continue on a go-forward basis here.

We made real progress on our regulatory issues in 2004.

We've got some additional challenges, but as I indicated earlier, we're pleased with the constructive environment here in Michigan, and that should make us, position us well to continue to exercise our plan, continue to work on our plan.

We do have more work to do, as indicated, and continue to bring our debt reduction program to completion over the next several years.

And, you know, obviously to continue to perform well and meet our commitments.

Thank you again for your support and your participation on this call.

We're proud of the company, proud of the people, and we're working hard to continue to deliver results for you.

Thank you.