CMS能源 (CMS) 2005 Q3 法說會逐字稿

This presentation is also being web cast.

An audio replay will be available approximately two hours after the web cast.

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 now like to turn the presentation over to your host today,Ms Laura Mountcastle, Vice President and Treasurer, please go ahead.

Thank you.

Good morning and thank you for joining us for our third quarter earnings presentation.

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

Our earnings press release issued earlier today and the presentation used in this web cast are available at our web site at cmsenergy.com.

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 Securities SEC filings.

This presentation also includes non-GAAP measures when describing results of operation and financial performance.

A reconciliation of each of these measures to the most directly comparable GAAP measure is also posted in the investors section of our web site.

Now I'll turn the call over to Dave.

Thanks Laura and good morning ladies and gentlemen.

We're pleased that you have joined us today for our third quarter earnings call.

As is our usual practice I'll start the presentation with a brief update on the business and then turn I'll turn over to Tom Webb for a more detailed discussion on the third quarter financial results and the outlook for the remainder of the year and then we will close with questions and answers.

Last quarter, I spoke about the impact of rising gas prices on the long-term financial viability of Midland Cogeneration Venture partnership.

We were concerned then, that if gas prices didn't retreat far enough the value of our MCV equity could be at risk.

Since that time gas prices have risen by about 20%, not only in the near-term due to the hurricane activity, but in the longer-term as well.

After an extensive evaluation of the MCV economics.

The MCV determined that an impairment charge was necessary and wrote down 1.2 billion of the MCV property plant and equipment that now totals about $ 200 million.

Tom will review the impact on our financial statements in just a few minutes.

I can assure you that were exploring every alternative to modifying the MCV business model to improve its long-term prospects.

Over the past three years, we have included the effect of mark-to-market earnings and losses in our adjusted earnings.

Up until this year mark-to-market earnings were not substantial, however with the passage of the resource conservation plan in January and the unprecedented rise in natural gas prices this year mark-to-market has become significant to earnings.

It has also become extremely volatile and unpredictable.

For example three months ago, we expected a mark-to-market loss of $0.04 in the third quarter related to the MCV gas contracts, the actual result was a gain of $0.29.

Many of you have commented that it is difficult to model the effect of mark-to-market earnings and had asked that we break out the effects of mark-to-market in our report.

Therefore, beginning this quarter we are reporting our adjusted earnings both including and excluding mark-to-market.

Our third quarter adjusted earnings which exclude the MCV impairment was $0.54, compared to $0.11 a year ago.

Excluding the effects of mark-to-market our third quarter adjusted earnings was $0.20 compared to $0.17 last year.

The full year our guidance excluding mark-to-market effects is $0.95.

Adjusted earnings which include mark-to-market benefits of $0.42 is forecast at $1.37 for the full year.

Tom will review the details behind the quarter and full year guidance in a few minutes.

Our operating performance both utility and CMS enterprises was commendable this past quarter.

Our plants performed exceptionally well during the warmer summer in Michigan in the last 142 years.

More on this if a minute.

Finally, the several major cases we have before the MPSC continue on schedule.

Just yesterday afternoon, the staff filed their position on our request for interim relief in our gas rate case, more on that shortly as well.

Year-to-date, base load availability averaged 89% at the utility, down slightly from out target of 90% due to minor outage at our Palisade in Campbell Free Plants.

At enterprise the plants were available an exceptional 93%.

Considering all the disruption to the natural gas infrastructure in the Gulf of Mexico due to Hurricanes Katrina and Rita, I'm pleased to say that we're in good shape to meet our gas demand heading into this heating season. 97% of our gas supply, 231 billion cubic feet is under contract with 83% of that at fixed prices.

Our targeted storage inventory of 120 billion cubic feet has been met.

Michigan public service commission has established certain performance standards to monitor customer service and safety.

We are on track to meet all 11 and all six gas performance standards.

Due to the extremely warm weather this summer third quarter electric deliveries were up 7% compared to last year.

However, on a weather adjusted basis third quarter sales were actually down 4% due to continued weakness in the Michigan economy.

I'll show you more detail on sales in just a minute.

We set peak load records in June, July, August and most recently in October.

On August 3, we set a new all time record peak of 8,473 megawatt.

These records include deliveries to ROA customers, that's retail open access, that have been declining since the ends of last year.

As of October, alternative suppliers were supplying 754 megawatt of generation service down from 926 megawatt at the end of last year.

It appears that we could see a further reduction in ROA load by year-end based on current trends.

The Midwest Independent system operator, MISO began operating the Midwest Energy Market on April 1, 2005.

MISO is responsible for the reliability and economic dispatch of generation throughout an area that covers parts of 15 states, including Michigan.

All in all, MISO did a commendable job maintaining supply reliability through a challenging summer.

This slide shows our sales experience for the first nine months of the year.

I mentioned earlier that electric sales were strong for the third quarter and the affects of the strong third quarter are evident in the year-to-date results which are up 4.4% from the same period last year.

This was driven largely by strong weather related sales in the residential and commercial sectors.

Industrial sales continue to be soft.

The bottom part of the chart shows our first nine month experience for net write-offs associated with customer uncollectibles.

Our experience continues to be favorable relative to our industry peers on a percent of revenue basis, but it is up lightly from 2004 when our net write-off for the same period was 11.2 million.

We will be watching this trend closely through the winter.

Now to our regulatory agenda.

On October 4th, the Administrative Law Judge filed her proposal for decision in the electric rate case.

She adopted the staff's position on most aspects of the case, but did support a higher revenue requirement to reflect the Company's higher health care costs and employee savings plan contributions.

In total, she recommended a $112 million revenue increase with an 11.25% return on Equity.

Exceptions were filed October 28, with replies due November 11.

We continue to anticipate a final order around the end of the year.

Yesterday, the Michigan public service commission staff filed their recommendations on our request for 75 million of interim gas rate relief.

The staff has recommended interim relief of 38 million.

We have not had enough time to fully analyze the staff's filings, so I'll reserve any comments for now.

Cross-examination of all witnesses on the interim is scheduled to begin November 14, with briefs due December 2.

With respect to the regulatory asset recovery filing, the proceeding is complete and right for commission decision, which we anticipate soon.

The Administrative Law judge and the staff, both recommend recovery of 322 million over a five year period.

In September, we filed a motion to reopen our gas cost recovery plan for the 2005/2006 heating season to reflect the recent significant increase in natural gas prices.

We're requesting an increase in the rate we bill our customers from $8.73 to $9.11 per thousand cubic feet and the latitude to adjust upward to as high as $11.21 if NYMEX prices continue to climb.

The star is supportive of an increase to reflect the impact of current market prices but has proposed a ceiling of $10.10.

The staff's position, if adopted, would be adequate to allow full recovery of our gas costs during the heating season at current prices but wouldn't leave as much room to accommodate potential further increases over the winter.

Reply briefs are due November 21, after which time the MPSC is expected to issue their order.

Now, I'll turn the call over to Tom for more details on our financials.

Tom?

Thanks Dave and thanks to everyone out there for dialing in and joining our call today.

Let me get right to gases prices.

Rising gas prices have had two substantial impacts on us.

First, at consumers rising prices impact our working capital.

An increase in gas prices of about a $1 per Mcf increases our working capital requirements by a little over a $100 million.

A decline of course, saves the same amount.

The price of gas of course is passed through with our GCR.

Second, the MCV is paid for electricity based on the price of coal, it's primary cost is tied to natural gas prices.

As you can see on this chart here, both near-term and gas prices and long-term forecasts have increased substantially in the last couple of months.

With the average five year NYMEX curve rising more than $3.50 or about 65% in just over a year , the MCV reassessed its viability and determined the need to impair it's assets from $1.4 billion to $219 million.

This impairment reduces our GAAP net income by $385 million or about a $1.75 a share.

For 2005, the charge is noncash and will be reduced by lower depreciation in the fourth quarter for a total impact of $378 million as shown on this slide.

Our year-end consolidated debt to capital ratio will increase by 6 points from 65% to 71%.

Consumers debt to capital will rise from 54% to 61%.

We have a net earnings coverage test in our first mortgage bond indenture.

This will limit our ability to issue first mortgage bonds to only $298 million during the next 12 months.

This also will effect the utility equity level.

It is possible that in the future this could reduce consumers earnings by up to $0.11.

Lower annual depreciation provides a partial offset at about $0.09.

We're exploring restructuring alternatives as Dave mentioned, but it's too soon to outline any of these.

Including the MCV impairment charge of $1.75, our third quarter results are a loss of $1.21 a share.

Excluding the noncash charge, third quarter adjusted earnings were $0.54 a share, with mark-to-market gains of $0.34 included.

Excluding the mark-to-market gains, earnings were $0.20, as you can see in the far green bar on the right, that's up $0.03 or about 17% from last year.

For the nine months, our adjusted earnings per share, which includes mark-to-market were $1.39.

Without mark-to-market, earnings were $0.77, up $0.13 or 20% from last year.

Let's look at the third quarter in a little more detail.

Compared with the third quarter of 2004, better results at the utility of $0.03 and at the enterprises of $0.06 were offset partly by dilution of $0.06.

At the utility, the portion of increasing coal prices and MISO transmission costs that cannot be passed through to cap customers reduced earnings by about $0.08.

We will be able to pass through this kind of cost beginning in 2006.

Rising health care and employee benefit costs caused most of the increase in O&M expenses.

Increased spending on safety, reliability, and customer service also contributed to the increase.

Warmer than normal weather added $ 0.17, favorable mix another $0.07.

Partially offsetting the warmer than normal weather and favorable mix was decline of 2% in electric industrial demand.

At enterprises, the increase was due largely to tax benefits from the American Jobs Creation Tax Act.

And last, dilution reduced earnings per share by $0.07.

Lower interest expense from parent deleveraging of a nickel was offset partially from early debt retirement expense.

On the next ,we show the impact of all the mark-to-market contracts that are reflected in our earnings.

This includes the MCV gas contracts, Interest Rate derivative contracts and power and gas contracts at ERM.

Although, mark-to-market gains and losses usually equal zero over the life of their contracts, they can as you know, result in large earnings swings in any given quarter.

The third quarter 2005 gain, from mark-to-market contracts was $0.34.

You can see that in the second green bar.

For the year, we forecast mark-to-market gains of $ 0.42, as shown on the right we expect gains in 2005 to reverse in 2006 because the MCV will either burn or sell the natural gas contracts being mark-to-market.

A detailed schedule of the historical mark-to-market impacts by quarter has been posted to our web site.

In the past, we have included the impact of mark-to-market earnings and losses in our adjusted full year guidance.

In August, our 2005 guidance of $0.95 included $0.05 of mark-to-market gains.

You may remember that there was an additional $ 0.10 of mark-to-market gains that we were not counting on then to meet our guidance at $0.95.

As Dave indicated earlier, we have decided to provide adjusted earnings both including and excluding mark-to-market.

Our focus however, will be on meeting our earnings per share guidance excluding the large favorable mark-to-market this year.

As shown on the left, of this slide our 2005 guidance excluding mark-to-market has increased from 0.90 to $ 0.95.

The additional benefit from the American jobs creation act of about $ 0.04 was the primary factor driving this increase.

In total, our guidance includes $ 0.24 of earnings from the act.

Although weather has been favorable this summer was reflected in the guidance given during our call in August.

On the right side of this slide we forecast a full year GAAP loss of $ 0.39.

After adjusting for the MCV impairment and other related issues our adjusted forecast including mark-to-market would be $1.37.

Excluding mark-to-market gains of $0.42 our full year guidance is at $ 0.95.

Now, here's some topics that could impact our earnings yet in the fourth quarter.

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

A 10 bcf change in gas deliveries could impact profits by $0.04.

Our present forecast of NYMEX gas prices for the remainder of the year averages $14.26.

You have probably seen recently that's coming down a bit, but each $ 0.50 change in gas prices, up or down, will impact operational savings from the MCV RCP by just under a penny.

Excluding the MCV, the impact of changes in gas prices at the utility is less than a penny.

As Dave said earlier, 97% of gas required for the winter already is under contract and 83% of that is at fixed prices.

Remember the gas commodity that pass through to our customers, our exposure is to the carrying cost and working capital and this recover in future rate cases.

With most of our coal contracts for 2005 now complete, sensitivity to changes in coal prize at the utility are small.

Most of your aware of industry wide western coal transportation issues.

We don't expect this to impact dispatch of our coal units.

We have talked about mark-to-market, but keep in mind the further change in gas prices of $ 0.50, up or down. will impact the mark-to-market of gas derivatives by $ 0.06, in the same direction.

A 50 basis point change in the interest rate curve has a $ 0.03 impact in mark-to-market.

We have revised our retail open access load production downward from over 900 megawatt to the 600 to 675 megawatt range at year-end.

You can see this at the bottom of our left box.

This reflects the trend of customers returning to bundled service.

In October,the load loss was 756 megawatt, down from 811 in July.

We expect additional customers to return to bundled service by year-end.

Now let's switch to cash flow for 2005.

As shown on the right of this slide, consumers cash at year-end is still forecast to be $40 million with an available bank facility of $475 million, a pretty good liquidity position.

Since our last call, the key change at consumers is operating cash flow.

At $459 million shown toward the top of that right box this is down $218 million, which is more than explained by higher gas prices.

To alleviate this reduction, the parent will loan 250 million to consumers.

We expect consumers will be in a position to repay this loan next year as we begin to recover high gas cost from our customers.

Excluding core working capital changes, primarily from increases gas prices consumers operating cash flow would have been almost a $1 billion instead of our forecast $459 million.

When gas prices level out or fall off this capacity will allow us to further reduce debt.

Now, since the last call we also issued $175 million of first mortgage bonds at consumers and retired 125 million of 9% toppers.

At the CMS parent shown on the left of the slide cash at year-end is forecast at $180 million, down 8 million since our last forecast, with 200 million of available bank facilities.

Consumers dividends and tax sharing increased by $42 million.

In addition, a $150 million financing to provide funds for repatriation act under the American jobs creation act and reduce debt purchases provide the flexibility to make a working capital loan to consumers.

Let's check our report card.

We're on track to exceed our earnings by $ 0.90.

Cash flow is lower with higher than planned gas prices.

We expect to recover most of this from our customers through the GCR process in 2006.

This will however leave us short of our 2005 target.

Before the MCV impairment we were ahead of our debt to capital target of 68%.

The impairment however caused a 6 point increase and we are now forecasting a ratio of 71%.

We are however, right on track to meet our debt target of $ 7.2 billion at year-end.

Thank you very much for listening and operator we would now like to open to questions.

Thank you very much, Mr. Webb. [OPERATOR INSTRUCTIONS] Our first question comes from the line of Greg Gordon of Citigroup Investments.

You may proceed.

Hi guys, It's actually Greg, how are you doing?

Good morning, Greg

Two questions.

One, can you spend a little bit more time explaining the methodology you used to come up with the $ 0.11 potential earnings impairment at the utility because of the MCV write-off, then the $ 0.09 offset that leads to the negative $ 0.02, then a little discuss a little bit more the illusion to restructuring activities which might then in fact, change that dynamic.

Absolutely Greg and thanks for joining the call.

At the utility when we reduce our equity from the MCV impairment we will see our total consumers equity go down and that will effect the capital structure upon which the return is calculated.

Of course we have to have a rate case for that to occur and it's unclear when that might happen and that's how you get to that approximate $ 0.11.

There could be a bit of offset because with the impairment we have actually written down the asset level so there is less to depreciate.

That lower level of depreciation would be $ 0.09 less than what we would have expected before.

It's a little premature to talk about any improvements we're looking at for MCV, but it is something we're very much focused on to make sure we end up with a good viable situation of some kind and we will talk more about that in the future.

I don't understand the comment you're currently in a pending electric rate case, so would you file an amended filing or would the rate case continue on based on balance sheet prewrite down then you would file again, I'm unclear as to what you're talking about there

We wouldn't make any changes to our rate case we have filed now.

There are many things of course that have changed from the time we filed the rate case.

This could end up being factored in, it might not be, but certainly it's something that we will draw to everyone's attention, which would be addressed in the future.

Okay.

My second question is on cash flow.

It looks like the cash flow short falls here are purely timing issues presuming you get constructive and timely recovery of your fuel costs.

And then looking at repatriation of cash coming from overseas, at the end of the day after this all flows through, I think you were inferring once consumers get money and pays off the loan to the parent you would actually be ahead of the game, because of incremental cash repatriation from over seas.

Is that the right entrance?

Let me take those in two pieces.

First, let's talk about the cash flow and maybe it's best to focus on slide number 14, which shows the cash flow for the parent and consumers.

Consumers is the main issue there and we highlighted that the operating cash flow was $459 million.

Now that's down, more than a $ 200 million from where we were in our last guidance and that's attributed all to gas prices.

So it is working capital hit and for those listeners who may not have followed this in the past, as gas prices go up, we will see a little hit of something over a $100 million for each dollar of Mcf.

If gas prices stay flat, year-to-year than will see no change in working capital and that means there would be more cash flow than what we're showing here in this year.

Then on the other hand, if gas prices come down we get a benefit in working capital.

So yes, we have had a short-term hit to cash flow.

Again though if gas prices continue to rise next year, you could see that happen again.

There is a note that I made here that's probably worth sharing, the $459 million of operating cash flow at consumers, without those working capital hits we have had throughout the year, basically on gas prices, but a little bit on coal prices, would have been almost a $1 billion.

That gives you some indication of what the future could be like.

And then your second question?

You're basically financing the near-term working capital needs in part through funding from the parent and the parent is getting that cash in part from the repatriation of cash from over seas.

My point is assuming this all flows through and it's zero balance at the end you have actually wound up repatriate more cash or netting with a bigger cash balance at the end, because your repatriating more cash from oversea than you had expected to, prior to this call.

Is that --

That's correct.

We are looking at doing a financing that would permit us to repatriate more cash and that's factored into the material we're showing you here today.

So there will be a benefit from that, that's a benefit on the earnings side and of course, that's accelerated cash flow.

Now, that cash flow also is a portion of what helps us have the flexibility that we can make a loan over to consumers.

But you can see our liquidity situation for the parent and that we're in pretty good shape for being able to make that loan.

That's just the efficient way of handling the near-term cash needs.

Greg, thanks very much.

Your next question comes from the line of Paul Ridzon of Key McDonald's, you may proceed.

You talked about a $ 0.05 decline because of debt retirement costs, are those -- what are those costs, debt premiums and if so why wouldn't you add those back to operating earnings.

Well, we will pay a penalty for retiring some debt early which is what we have been doing during the course of this year, gets us ahead -- sort of liquidity needs, so we're delighted to do it as long as they make good economic sense for the life of the debt that we're retiring.

You may recall, that we have actually been retiring some of our 2007 maturities early this year.

There's a little penalty from doing that this year, but long term that's a benefit for us over next year and the year after.

So when you see the interest savings that we showed of about $ 0.04 to $ 0.05 there, that's something that continues and of course the payment penalty that we pay is a one time in nature.

How much is that prepayment penalty been year-to-date?

Well, you can see it in the earnings per share of about $ 0.04.

I don't have the exact millions of dollars here.

And then just with regards to MCV, what are the plans for kind of rebuilding the utility balance sheet?

Well, we will continue to generate earnings through the utility, that will allow us to restore and build up the balance sheet.

But we county have any plans if you're an alluding to anything at this point regarding new equity, we don't have any plans at this time.

We will over time, continue to build the equity up in the utility as we have been doing over the course of the last couple of years in part through retained earnings, then in part through if we have surplus cash flow being able to invest that in the utility.

We still consider that an excellent place to invest our cash resources.

And have you had any initial discussions with the commission to get any lead as to how they will treat this write down in the pending rate case?

We obviously have not informed anybody until we have made the release of this information this morning.

So the commission is being made aware of the issues as well.

We can't as Tom indicated earlier we can't contemplate how and when they will treat this in current and future rate cases.

Okay, thank you.

Your next question comes from Andy Smith of J P Morgan.

Morning guys

Morning.

How are you guys doing today?

Good.

A couple questions following up on this equity write-down, forgive me if I missed the number.

Is the right way to think about in terms of the equity amount the $1.2 billion write-down about 32% of that belongs to consumers, so about a $ 300 to $ 385 million equity write-down.

The way I would look at this Andy is take it in two steps, so that $ 1.2 billion write-down you need to take our share of that, 49%, and then tax that and that's how you get to the $385 million.

Okay.

But the 385 is the right equity write-down?

That's correct.

Maybe you can help me with simple math here, forgive me if I missed something obvious, but you mentioned an $ 0.11 impact from the loss of the equity layer.

If I take let's assume an 11% ROE and I walk through that that's about a $ 0.20 impact, if I'm doing the math right.

You mentioned there's a $ 0.09 impact on DNA, what am I missing in reconciling just taking 385 times the 11% and doing the math versus what you guys are saying

You need to look at the total capital structure, you need the debt mix as well as the equity mix that results in -- let me give you sort of a rule of thumb.

Let's say something like about $10 million for each $100 million is a rough rule of thumb.

Okay.

All right, great, I think that will answer that.

Then just on the MCV, it sounds like it was really the long-term curve that caused the write-down at the MCV.

Is there any point at which sort of two parts to this question, is there any point at which you get concerned that the MCV is not capable of performing on its contract because, as I understand it, consumers benefits from the [INAUDIBLE] provision that allows consumers to have a voided coal costs, power purchase if you will.

Is there any concern that the MCV doesn't ultimately perform on that in the long-term and does the regulatory out have any impact on that.

Well, yes-and-yes, I suppose.

Remember, we have a long-term contract with the MCV and in September of 2007, reaches the halfway point of that long-term contract.

Consumers currently is flowing through losses under recoveries related to that contract of a little over $50 million a year, we have talked about that in the past.

And in September of 2007 consumers believes it has the right to exercise these regulatory out that would effectively reduce those payments assuming nothing changes with regard to recovery from our customers by that equivalent amount.

So obviously, that impacts the MCV's financial health, subsequent to that event.

More importantly though, and you put your finger on it, is the long-term gas prices over the remainder of the contract that really have the largest effect here.

Tom showed a slide, that showed not only the NYMEX curve for the five year- period, but also longer term forecast.

Of course there's lots of long-term forecasts from lots of different experts and we have done a pretty good look as has the MCV, at all those different forecasts and put together what we think was a reasonable assessment of those prices and certainly not only the short-term prices gone up recently but on so has the long-term curve to the point where we determined that it was appropriate or really MCV determined and we concur that it was appropriate to take this charge as a result of those long-term curves.

Now, the future of the MCV is something that needs to be discussed in terms of -- what its economics look like between now and the September, 2007 date and what it looks like beyond that.

And clearly how that plant operates under our current program, what gas prices do short and long-term are going to dictate the financial viability of the MCV.

In the near-term of course, they have gas contracts in place for the next several years that cover the majority of their gas requirements, but longer term they will have to fill in behind that.

So it's a bit difficult to answer at this point in time and will depend on what happens to gas prices, but we are looking hard with our other partners and with the MCV at what options are available to restructure that business model and see if we can't make it work over the longer-term, but it's too early right now to term what we might be able to do in that regard.

Okay, great, thanks for the info.

All right.

Thanks Andy.

Your next question comes from Steve Fleishman of Merrill Lynch.

You may proceed.

Yes, hi guys.

Good morning Steve.

Just one more clarification.

You mentioned you're notifying the commission about this change in the equity ratio and you just don't know how they're going to react to that.

I mean what's the typical practice, if there's a notable change when the equity is filed in the rate case.

Typically the commission acts on the facts before them and things change, you know, in all aspects of the business from the time you make an initial filing, from the time you provide your testimony.

During the course of a rate case.

And it's not clear at all that they would reflect any change in the current rate case, which is basically complete at this point in time.

I think it's safe to say the impacts on equity would be considered in future rate cases and it's possible the commission would want to take some at the step to reflect it right now, but I would say it's not certain.

Okay.

Secondly, on the -- Dave, you talked a little bit about the weak industrial sales, any more sense on both industrial demand as well as impact on maybe residential commercial from higher commodity prices, higher end use prices, and how that might compare to the sale that you used in your sales forecast in the rate case.

Yeah, I think all of that is a bit uncertain.

Let me comment on electric and gas separately, I'll start with gas.

The majority of our sales and margin on the gas side of course comes from the residential sector.

We have seen spikes in gas prices before, but certainly not to the level that we're currently seeing them.

And frankly a bit surprised historically when we saw spikes in gas prices that we didn't see much change in residential demand on weather adjusted basis.

We will continue to watch that.

I guess I would be a bit surprised if we don't see some elasticity of demand because of these unprecedented high gas prices, but it's difficult to say and we haven't seen that kind of response in the past.

On the electric side of the business, as we showed we have continued to see reasonably strong residential growth this summer of course a lot of that was related to weather, but even on a weather adjusted basis we have seen residential growth and commercial growth as well all though it's been a little bit slower.

Industrial sales which are of course by far the lowest margin sales have been declining reasonably consistently for the past several years and -- one would have to believe over the longer-term if the economy in Michigan doesn't strengthen a bit that eventually that will be reflected in residential and commercial sales as well, we just haven't seen that so far.

So it is something that we're concerned about about and we're watching, but so far residential and commercial health has been pretty good on the sales front.

So generally speaking you should be pretty close to all things being equal what's kind of in the rate case sales forecast and the like.

I can't comment on an educated basis on that.

I don't believe that there's any significant differences, but I can't comment directly.

I would say that -- when we file the rate case we did expect a continuing increase in retail open access of a significant amount.

Of course as we reported we have actually seen a decline in retail open access and indications it may continue to decline through the end of the year.

And that's clearly driven by higher power prices in the region that are related to higher gas prices as well.

And I guess I would expect that that change in retail open access sales may very well offset any change in or any shortfall in economic growth that might otherwise affect our sales.

Sure.

One last quick question, Tom, what do you expect the year-end parent debt to be and could you just reiterate the long-term target again, I assume that hasn't changed.

The target hasn't changed at all, that's the important part, we are still on track to cut our debt in half a second time, down to about $1.5 billion and for the year- end levels, I'll give you here, just bear with me just a minute.

We will be looking at a parent debt of about $ 2.2 billion in our numbers now, that would be off slightly, down slightly from that.

So we're right on track for what we have been telling you along the way for our parent debt.

Thank you.

Your next question comes from Lee Cooperman of Omega Advisors, you may proceed.

Thank you.

Just a quick simple question.

I think back over two years ago when I first met with you folks you said it was a priority of management and the board to as quickly as possible restore dividends, since utilities have historically been dividend paying utilities.

I've been kind of surprised it's not yet been restored.

Where do you think, what is the timeframe before we will become a dividend paying corporations would you guess.

Let me reiterate what we have been saying for the past couple years, we believe a company like ours should pay one and it's a priority for us to restore one.

It's something the board has considered virtually every time it meets and discussed the issue of dividends.

It's clear the board wants to make sure when it restores one that it's meaningful and also that it is one that can be sustained.

And that it's supported appropriately by earnings and cash flow.

As I've said in the past, we did just recently have a board meeting, we did discuss the dividend issue and I would say that there's concern about the cash flow implications of gas prices this year and continuing perhaps on to next year, some uncertainty related to that.

As a result of that I wouldn't anticipate the board will be considering dividend restoration any time soon, perhaps not even until beyond 2006, until this whole cash flow situation clears up.

Okay.

Thank you.

You're welcome.

Your next question comes from Tom Hamlin of Wachovia securities, you may proceed.

Yes, good morning.

Hi Tom.

I hate to go back to the impact of the write-down on earnings, but just to help me out, the $ 0.11 that we talked about from the impact on equity, that would require a rate case.

Does the $ 0.09 offset from lower depreciation you're going to be taking that, I mean your depreciation is going to be $ 0.09 a share less regardless if you have a rate case or not, is that right ?

That's exactly correct.

So if the commission decides to not look at the change in the cap structure we could look at a $ 0.09 benefit from this write-down going forward.

Well, noncash on a short-term basis I think that's right.

Okay.

Secondly, then has to the with the gas price that you used for the long-term for the valuation change.

We have seen certainly a big change in what the long-term curve looks like.

In terms of sensitivity to a future write-up or write-down can you give us some indication of what the basis price you're using for the long-term valuation of MCV.

You will see in our curve we showed in the slide looking at 2011 out through about 2025 average number of $6.49.

In our cue, we have been saying for the last quarter or so that something that doesn't retreat below $6, is a problem.

So given the near-term prices that we see with NYMEX coupled with people now raising their long-term forecast, remember this is our best knowledge from an average of the best people that we know that do this, we are now seeing that that gets to a level where it doesn't leave a viable MCV and we do need to have an impairment.

So if we were under $6 long-term and I guess you would have to couple with the NYMEX wasn't as high today it could have been a different story.

Look at the left side of the chart where you can see the NYMEX prices have been doing more than creeping up over the past year too.

We show you the number for the average of the four or five years and it's gone up from $5.37 through July 04 to average $ 8.98 as of September 30.

Of course that in part is driving where the long-term forecasters are going.

Keep in mind once we take an impairment we can't actually reverse that.

Okay.

It would have to go meaningfully higher for you to write-off the remaining 200 whatever million.

Right.

There's $ 219 million in assets remaining or a total $ 135 million of equity, that's the total MCV, our share would be 49% of that.

Okay, great, thank you.

Thanks Tom.

Your next question comes from the line Amit Sanghrajka of Bank of America Securities.

You may proceed.

Hi, my question has been answered, thanks.

All right.

Thanks.

Our next question comes from Ben Sung of Loomis Management , you may proceed.

Good Morning Just a quick question on the write-down.

What's the implication for your essentially your NOL balance as a result of this write-down.

This write-down doesn't actually affect the NOL at all, but those are risen to $1.4 billion.

So the capacity if you will that's out there to assist us in tax sharing that we have talked about in the past is stronger than it was before.

But that's unrelated to this write-down.

Okay, thank you.

Your next question comes from Terran Miller of UBS, you may proceed.

Good morning.

Just to go back to the operating cash flow change at consumers this year.

If you get the GCR updated by the commission will you have an increase in cash flow next year?

Or is it a timing issue or is that a permanent impairment of the $200 million?

What we should do is separate the two pieces into the gas cost recovery program that we have where we get a pass through of the price of gas so that what the commission is doing is looking at helping raise the cap so that we're able to pass through all the costs we incur.

Separate from that there is a working capital implication here, and that's regarding the inventory that we hold on the price of gas.

For each dollar change in the price of gas that has an impact on us of a little over a $100 million.

In the consumers cash flow that you see on the chart we showed today, which shows the $459 million of operating cash flow at consumers, there's over $300 million of negative working capital associated with gas prices.

Now, if gas prices were to stay flat next year, we're not predicting that they will, but if they were you wouldn't have that repeat so there would be a $300 million benefit to the cash flow we see next year.

If they fall, for each dollar they fall that over a $100 million benefit on top of that.

Then if they rise of course, as we expect they will in our forecast, that's a $100 million penalty to cash flow in the future.

So I guess the question is on what basis should we gain, look at that $1 change, can you give us some indication of approximately what the costs of your gas inventory is on an average per Mcf?

Yes, I think the best way to look at the working capital implications is we're looking at a number that's around $9 for 2005, in our gas prices.

And next year if you just look at the NYMEX as of September 30 and just stuck to that for a minute that would be almost $12.

So you would have that extra impact to core working capital next year.

NYMEX is already backing off, I'm looking at figures of $11 as an average as of this morning and it seems to be coming down from there.

So we have to watch where those prices go for 2006.

So right now you have another $200 million of working capital needs next year.

That's correct.

Okay thank you

Think of those as short term.

Yes, I understand.

Then we will go to the future, okay, thanks.

Thank you.

You have no further questions at this time.

I would like to turn the call over to Mr. Joos for closing remarks.

All right, well thank you.

We have a wrap up slide here just to summarize.

We had pretty good third quarter performance again from an operating perspective, but that's been a bit overshadowed by the impairment we have taken on the MCV related to these long-term gas price forecasts.

For full year our adjusted earnings guidance including the mark-to-market affects is $1.37 and if you were to exclude those $ 0.95, again that's a little better than what we forecast in the past.

We have a couple important regulatory cases that will be ready for decision later on this year, both our electric rate case and a regulatory asset recovery proceeding and I add to that as well the interim gas rate case.

Thank you, for listening to our call today, and Tom and I will look forward to seeing many of you next week.

Thank you.

This concludes today's conference, we thank everyone for your participation, have a great day.