CMS能源 (CMS) 2005 Q4 法說會逐字稿

Good morning, everyone and welcome to the CMS Energy 2005 financial results and outlook call.

This call is being recorded.

Just a reminder, there will be a rebroadcast of this conference call today, beginning at 12:00 noon, Eastern time running through March 2.

This presentation is also being webcast.

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

At this time, I would like to turn the call over to Laura Mountcastle, Vice President and Treasurer.

Please go ahead, ma'am.

Thank you.

Good morning and thank you for joining us for our year-end 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 webcast are available on our website 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 SEC filings.

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

A reconciliation of each of these measures to the most directly comparable GAAP measure is posted in the investor section of our website.

CMS Energy anticipates its 2006 reported earnings are likely to be substantially lower than its suggested earnings because of the expected reversal of mark-to-market gains and losses from potential asset sales.

CMS Energy is, therefore, not providing specific reported earnings guidance reconciliation because of the uncertainties associated with those factors.

Now, I will turn the call over to Dave.

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

We're pleased you joined us today for our year-end call.

As is our usual practice, I'll start the presentation with a brief update on our business and then I'll turn it over to Tom Webb for a more detailed discussion on on the financial results and outlook and then we'll close with Q&A

By most measures, 2005 was another good year for us as we continue to make progress on our building on the basics business plan.

On the financial side, we reported today adjusted earnings per share excluding mark-to-market gains of $0.96 a share for 2005, $0.01 better than our previous guidance, and $0.11 better than the target we set in March of 2005.

Tom will discuss the details behind this year's earnings in just a few minutes.

Tom will also review the details of our 2006 adjusted earnings goal, which, excluding mark-to-market effects, is $1 a share, and that does include about $0.05 of bad news from unusually mild January weather this year.

We raised 272 million of common equity last year, closed on the sale of $58 million of assets and repatriated $395 million, of which 377 million qualified for special tax treatment under the American Jobs Creation Act.

This allowed us to infuse 700 million of equity into the utility.

There were a few disappointments last year, record high natural gas prices caused a $1.2 billion impairment at the MCV, 385 million net of taxes and minority interest, and stressed working capital at consumers.

And based on the environmental testing and remediation activities at Bay Harbor, we've increased our reserve to $85 million to complete that work up from our original 2004 estimate of 45 million.

On the positive side, we resolved several major regulatory cases in 2005.

The Michigan Public Service Commission issued final orders in our electric rate case, the regulatory asset recovery case, gas and power supply cost recovery cases, our application to implement the MCV resource conservation plan, and an electric restructuring implementation cost case.

In general, I'm pleased with the outcome of these cases, which I believe were fair to our customers and shareholders in this time of rising energy prices.

It was also another good year of operations for us.

Consumers Energy has a proud history of providing low cost, safe, and reliable service to its customers, and 2005 was no exception.

Enterprises also completed an outstanding year, exceeding their performance targets for safety, plant availability, and operating, and maintenance costs per megawatt hour.

I'll give you a few more details in just a minute.

Finally our business plan provides the framework to make our goals possible.

Although we've made a few refinements, the essence of our plan has not changed since it was developed over three years ago.

Let's take one final look at our 2005 report card to see how we finished the year.

Last March, we set an adjusted earnings per share target of $0.90 for 2005.

This amount included $0.05 of expected mark-to-market gains.

In the third quarter of 2005, based on the recommendation from many of you, we began reporting adjusted earnings per share both including and excluding mark-to-market.

For 2005, our adjusted earning per share, excluding mark-to-market was $0.96, exceeding our target of $0.85.

Adjusted earnings per share including mark-to-market was $1.39, far exceeding our target of $0.90, due primarily to the effect of higher natural gas prices on the value of MCV's forward gas portfolio.

Actual cash flow before CapEx was $371 million.

Higher natural gas prices that increased core working capital requirements at the utility by over $200 million relative to our budget were partially offset by higher than anticipated dividends from Enterprises and higher proceeds from asset sales.

Before the MCV impairment, we were ahead of our debt-to-capital target by 3 percentage points, and would have ended the year at 65%, excluding securitization debt.

The impairment, however, caused a 6 point increase resulting in a debt-to-capital ratio of 71% at year-end.

Although we missed the debt target, I put a yellow X next to the actual amount of 7.4 billion, again, excluding securitization debt.

In February 2006, we defeased $129 million of 9% trust-preferred securities at consumers, which puts us back on target.

More on this from Tom shortly.

Now, let's take a look at some of the recent regulatory actions by the Michigan Public Service Commission and what's ahead for 2006.

Last November and December of 2005, the commission issued four very important orders affecting our financial future.

The orders are old news to everyone who follows the Company, so I won't bother going through the details again.

In summary, the orders issued by the commission in the gas cost recovery reopener, the regulatory asset recovery case, the electric rate case, and the 2006 power supply cost recovery plan provide essential cash flow and earnings necessary to achieve our plans.

The one disappointment on this list is the 2006 PSCR case, although the temporary 2006 power supply cost recovery factor approved by the commission in the initial phase of this case allows us to pass along increased costs to our customers, it doesn't include higher estimates for transmission and coal supply costs submitted late last year.

Depending on the final order, this may delay the collection of approximately $85 million until later this year, or even next.

Ultimately, Consumers expects to fully recover these costs pursuant to the process.

On February 13, 2006, the staff and intervenors filed their positions on final rate relief in our gas case.

The staff recommended a $62 million increase with an 11.15% return on equity, a 33.5% equity regulatory capital structure, and included 17 million for the state's low-income energy efficiency fund.

The staff's capital structure recognized the MCV impairment in September, and also adjusted for $150 million equity infusion that we made in December.

As an aside, we infused another $100 million of equity into Consumers in January 2006 which we anticipate will be reflected in the final order.

The Attorney General has recommended a $64 million increase without any funding for low income energy efficiency programs, a little better than the staff's recommendation.

Rebuttal testimony will be filed by March 6, and the final order is expected prior to the beginning of next year's heating season, and it is still possible that we could receive interim relief even earlier.

Consumers Energy and CMS Enterprises, ended the year with exceptional base load availability of 90% at the utility and 94% in Enterprises.

This is especially remarkable for Consumers, given that the majority of its base load fleet is fossil plant with an average age of 46 years.

Our Palisade's nuclear plant had its highest production year in history also.

Consumers Electric Utility set an all time delivery record for 2005, just shy of 39,000 gigawatt hours, and set monthly records in January, March, June, August, and September.

The Michigan Public Service Commission tracks 11 electric performance standards to monitor customer service safety and response time, and I'm pleased to say we met all 11 standards again in 2005.

And finally, we decided to replace our aging stand-alone business information systems with an integrated system.

When operational late in 2007, the new system will integrate the customer billing, finance, payroll, procurement and work management systems all into one.

Just a few comments on Michigan's economy.

Many of you have been concerned about our exposure to the automotive sector, given the announcements last year about cutbacks at the big 3.

There's no denying that the autos represent an important segment of the Michigan economy.

In fact, GM and Delphi are among our top industrial customers.

Combined, they accounted for 2.5% of total electric revenues in 2005, though this was down from 3.2% in 2003.

Including the auto suppliers, the sector represented about 3.8% of our 2005 electric revenues, down from 4.5% in 2003.

I am pleased to say that we have very little exposure to GM's announced plant closures, and no exposure to Ford or Chrysler since their plants are not in our service territory.

In fact, you may have read the good news recently that General Motors announced it was going to invest over $500 million in Michigan to upgrade five assembly and parts plans adding 2 to 300 jobs.

It's too early to know how this will affect the Company, but it's a good sign that General Motors is committed to Michigan.

The chart on the right is represents the amount of load loss to alternative electric suppliers under Michigan's retail open access program.

Price is the principal driver of competition for customers, and as the green line indicates, power prices have increased steadily since 2003.

Over 40% of the retail open access load lost by the end of 2004 returned to consumers bundle service last year, and we expect that trend to continue this year.

This reduced level of open access, and the associated margin improvement provides a good opportunity to earn our allowable rate of return at the electric utility in 2006.

Our gas supply's been contracted for this heating season and is just over 50% contracted for the upcoming 2006/2007 heating season.

Under the plan approved by the Public Service Commission, we expect to have next year's supply at 75 to 80% fixed price coverage by December 1, 2006.

We filed for a 2006/2007 base gas cost recovery factor of $11.10 per thousand cubic feet, with an adjustment mechanism that could potentially increase this ceiling factor up to 13.55 per Mcf.

We don't anticipate any problems obtaining gas supply within this limit.

Beginning in January 2006, our electric generation fuel supply is once again a complete pass-through to our customers under the power supply cost recovery process.

However, the timing to recover costs from our customers could slip into the following plan year, as I mentioned earlier.

Our electric supply is in good shape for 2006 with 101% of the forecast peak load covered.

Consumers owns or controls capacity necessary to meet its projected firm peak load for summer 2006, and is in the process of securing the additional capacity needed to meet its 11% planned reserve margin.

Nearly 90% of our 2006 coal supply requirements have been committed or hedged with transportation contracts in place.

This year, about 70% of our coal supply will come from the Powder River Basin in the west.

The key point to remember is that although some PSR increases have been deferred, we expect 100% recovery of all fuel and power supply costs incurred in 2006.

In December, we announced our plan to sell the Palisades nuclear plant and enter into a long-term purchase agreement with the new owner.

Our decision is partly due to the shrinkage of the nuclear management company with the sale of plants in Wisconsin and Iowa.

We believe the current market for nuclear plants is strong and that a sale at this time is the best option for our company, as it will reduce our business risk and improve our cash flow while retaining the benefits of the plant for our customers by way of a long-term contract.

The Palisades sale is being conducted through a competitive bid process, providing interested companies the option to bid on the plant, as well as related decommissioning liabilities and trust fund assets.

An offering memorandum was issued to potential bidders in late January, binding bids are due midyear, and a buyer should be selected in the third quarter 2006.

Assuming we're satisfied with the results of the bidding, we expect to complete the sale in 2007.

As we discussed on our last call, as a result of rising natural gas prices, the MCV partnership reevaluated the economics of the MCV facility and determined that an impairment of $1.2 billion was required in September 2005.

Since that time, we've been pursuing long-term alternatives with our partners, the lessors, and the MCV management.

Frankly, we've not been able to successfully identify an alternative acceptable to all.

As you know, gas prices have retreated recently, however, further reduction in long-term gas prices will be necessary to avoid further impacts on our MCV ownership interest.

Many forecasters predict such relief, but it certainly can't be assured.

I expect we'll be keeping you apprised of the status of the MCV in our upcoming quarterly calls.

As a reminder, our remaining equity interest in the MCV is $235 million lessor interest in the plant.

Our business plan has changed only subtly since it was developed in 2002.

The change being a shift from back to basics to building on the basics, reflecting growth opportunities in our core businesses.

Consumers energy remains the cornerstone of the strategic plan with solid equity and rate base growth and the core businesses of Enterprise contributes stable cash and earnings.

This phase of our plan continues to focus on the utility and meeting customer commitments while looking to the future.

Our strategy focuses on mid single-digit earnings growth, reducing parent company debt, and continuing to improve our cash flow.

Now, let me turn the call over to Tom to discuss the financial results in detail.

Thanks, Dave.

And good morning everybody.

Thanks for joining us today.

As Dave just mentioned, over the last few years we followed three financial metrics that are important measures of our turnaround.

In 2003, we stated our goal to grow earnings per share at a mid single-digit pace.

We also set out to reduce parent debt to a level commensurate with the size of the Company.

And finally, we established plans to improve cash flow and maintain strong liquidity at both the parent and utility.

We established tough goals and we're on target.

We also improved our risk profile substantially, reducing debt, eliminating guarantees, and exiting risky businesses.

We've made substantial improvements in our internal controls but we have more work to do.

We have, however, identified an income tax-related material weakness in 2005.

The weakness resulted in an unexpected income increase of $4 million in 2005.

We've corrected the weakness, and with testing this year, will validate it.

Our financial statements are not qualified and we are committed to continue strong internal controls.

Let's turn to our results for 2005.

As shown on the left we reported a loss of $0.44, including the MCV impairment of $1.82 in the third quarter, MCV operating profit of $0.06, and a Bay Harbor charge of $0.12 in the fourth quarter, as Dave mentioned.

The cost of remediation at Bay Harbor is higher than expected a year ago.

Our reported loss also includes gains on sale of assets and other, worth about $0.05.

Full-year earnings adjusted to exclude these items and mark-to-market charges was $0.96 a share.

This is $0.01 better than our guidance, and at $0.96, this is $0.11 or about 13% better than our target set at the beginning of the year.

As shown on the right, the utility contributed $0.95, and Enterprises contributed $0.76.

Interest and other costs were $0.75.

At a total of $0.96, this is $0.06 or about 7% better than last year.

So let's look at this in a little more detail.

Compared with 2004, the utility was down $0.15.

Enterprises and the parent were up $0.43, and dilution was $0.22.

At the utility, higher coal prices and purchase power costs that could not be passed fully through to customers in 2005 reduced earnings by about $0.15.

In 2006, we're back on 100% power supply cost recovery.

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

Increased spending on safety, reliability, and customer service also contributed to the $0.25 increase.

Revenue increased $0.25 due primarily to warmer than normal summer weather, and a slightly colder winter.

At Enterprises and the parent, lower interest expense of $0.16 from parent deleveraging, and lower early debt retirement premiums of $0.05 were offset partially by lower operating results of $0.06.

Tax benefits primarily from the American Jobs Creation Act added $0.28, and last, dilution from issuing new equity in March 2005 reduced earnings per share by $0.22.

Now, the American Jobs Creation Act of 2004 created an opportunity for CMS to receive a tax benefit from reinvesting dividends from our foreign businesses in the U.S.

During 2005, we repatriated $377 million of foreign earnings that qualified for the tax benefit.

Including 148 million from financing at an offshore Enterprise subsidiary.

The earnings impact of the repatriated earnings was $0.22 in 2005, and recall $0.12 in 2004.

Now, let's flip over to cash flow.

Many of you have told us that you appreciate having this slide, particularly at the end of the year, so here it is.

As shown on the right, consumers cash at year-end 2005 was $54 million with an available bank facility of $464 million, a good liquidity position.

We added a new line of detail, highlighted with a yellow check, to identify where the effect of natural gas prices shows.

Last year, Consumers core working capital was negative $362 million, primarily to finance higher natural gas prices.

Although not shown, this is $157 million better than what we looked at together in November.

As a general rule of thumb, for every $1 change in gas prices, working capital will change about $120 million.

To finance Consumers cash flow deficit and retire $1 billion of debt during the year, Consumers issued $910 million of new debt, and the parent infused $700 million of equity.

At the CMS parent shown on the left, cash at year-end was $340 million, 180 million more than forecasted when we talked in November, with 204 million of available bank facilities.

Again, a strong liquidity position.

This cash position is stronger than our last outlook, reflecting larger dividends from Enterprises, and lower support for Consumers as gas prices have eased a bit.

Now let's turn to 2006.

Excluding anticipated losses associated with the sale of our investments in India and Brazil, a one-time tax gain, and mark-to-market losses, our guidance is $1 a share.

Now, as Dave mentioned a few minutes ago, this includes $0.05 from record mild weather in January.

Still, the utility will be the growth engine with earnings expected at $1.10.

Without the American Jobs Creation Act benefits, Enterprises should earn around $0.62.

Interest and other overhead costs should be about $0.72.

Let's take a look at the detail behind these numbers.

First let's start with the impact of mark-to-market contracts.

This includes primarily MCV gas contracts, but also includes interest rate derivative contracts and power and gas contracts at ERM.

As expected in 2006, a significant reversal of prior mark-to-market gains occurs as the gas contracts at MCV are either sold or burned to generate electricity.

For the year, we forecast a mark-to-market loss of $0.64.

Of this, $0.27 relates to the minority shareowners' interest of mark-to-market losses at the MCV.

Now, as a reminder, these mark-to-market charges are noncash and are guidance of $1 a share reflects the adjusted earnings without this mark-to-market.

Now, let's take a look at the $1 in a little more detail for 2006 when you compare that with the $0.96 we earned last year.

Working from left to right, let's start at the utility.

At the utility, elimination of the residential rate cap and new regulatory orders net of system reliability improvements are expected to add $0.48.

We expect to make a substantial improvement to our system reliability, and this is made possible in part by customers returning to our service.

Some flexibility in this work still exist.

Increased revenue from growth in electric sales and the return of customers to bundled service, offset by a return to normal weather, adds $0.28.

The load loss associated with customers that left us fell to 552 megawatts at the end of last year.

We expect it to fall down to about 375 megawatts this year.

The absence of 10D4-related cost deferrals following the regulatory orders, higher O&M for the scheduled refueling at Palisades, a larger contribution to the low income fund, and rising employee benefit costs will add another $0.49.

In Enterprises, the absence of last year's benefits from the American Jobs Creation Act will reduce earnings.

Improved operations and lower interest expense will be offset by dilution.

Now, let's look at Enterprises a little closer.

Planned 2006 earnings and dividends from Enterprises are healthy.

Core earnings are up and cash flow is strong.

In the past, we indicated that annual cash distributions from Enterprises top five investments would average about $100 million.

For the last couple of years, we've exceeded that target and for 2006, we expect to exceed it again.

Due to benefits of the American Jobs Creation Act, and other items, Enterprise's annual cash distributions to the parent were substantially higher in 2005 and we expect -- than we expect certainly to happen in the future.

As you can see on this slide, Enterprise 2006 earnings and total cash distributions remain at good, strong levels.

Now, here's the cash flow for CMS and Consumers.

As shown on the right during 2006, we expect Consumers sources and uses of cash to be at higher levels than compared to 2005.

Operating cash flow of $752 million is up 145 million, primarily due to rate relief.

If gas prices ease as we expect, core working capital requirements should begin to ease and potentially a little further.

Consumers cash uses are higher, with increased investments at the Palisades plant and a large tax payment at the parent.

To fund the cash flow deficit at Consumers we plan to borrow $471 million and use $150 million of equity infused from the parent.

Consumers liquidity for 2006 will be enhanced with a planned addition of a new credit facility which will be secured by a second lien.

As mentioned on our last call, Consumers ability to issue first mortgage bonds is limited to $298 million until September 30.

We don't expect to draw on this facility, but it would provide good insurance if natural gas prices rise above our expectations.

As shown on the left, CMS plans to have positive cash flow, enough to retire $120 million in debt, send $150 million to Consumers, and still build our cash reserves.

In total, CMS ending cash balance will be up more than $100 million from its beginning balance and will have a year-end revolver availability of about $200 million.

Let's take a closer look at tax sharing.

Recall starting last year this became an important contributor to parent cash.

Because of a net operating loss and tax credit carry-forwards at the parent, tax-sharing payments made to the parent can remain at the parent.

As a result, the parent can reduce its debt balances and interest expense.

Now, over the next few years, Consumers is expected to make about $500 million of tax-sharing payments to CMS.

As discussed on our 2006 cash flow slide, Consumers is expected to make a tax-sharing payment to the parent of $335 million in 2006.

The parent is expected to pay $90 million of federal taxes this is year, using about 250 million of tax-loss carry-forwards to shield cash at the parent.

At the end of 2005, we had a $1.4 billion of AMT credit carry-forwards and tax loss carry-forwards.

These would expire between 2021 through 2025.

Now, what could cause our results to be better or worse?

Here's some factors that could impact our profitability, and/or our cash flow.

For 2006, we've added the cash flow column and we hope this will help you in your own analysis.

For 2006, we're assuming electric sales and gas deliveries will be about the same as 2005.

As you know, January 2006 was a mild month.

It's too early in the year to adjust our 2006 earnings guidance, we believe we can contain it.

We expect another year of benefits from the resource conservation plan, our share is estimated to be about $0.20 this year.

The savings will vary depending on gas and power prices.

Swings in commodity prices, are not expected to have material impacts to earnings, but natural gas costs will, however, continue to impact our cash flow.

About 30% of our gas prices for the 2006 calendar year already are locked in.

In addition, we're planning for higher LIBOR rates and continued retail open access load loss, presently at 389 megawatts.

A substantial decrease in retail electric competition occurred in 2005, due to changes in market conditions, including increased uncertainty and volatility in fuel commodity prices.

We think these are reasonable assumptions, and will address major changes as we go through the year.

Now, here's our debt schedule.

As shown in the crossed hatch bars, debt at the parent and Enterprises was cut in half by 2003, and we plan to cut it nearly in half again by the end of 2008.

The drivers discussed on the previous two slides enable the parent to continue its deleveraging.

As you know, the parent has about $360 million of debt maturing in 2007, and about $410 million in 2008.

In addition, another 150 million of debt from repatriation financing matures in December of 2008.

The $1.5 billion debt level at the parent and Enterprises has been our 2008 target for several years.

In the meantime, debt at the utility grows in order to enhance its capital expenditures for environmental, customer growth, and maintenance.

Now, here's how we plan to achieve the incremental debt reduction at the parent.

Over the next three years, dividends and other cash distributions from Consumers and Enterprises cover the parent's interest, dividend and overhead requirements.

The proceeds from asset sales plus tax-sharing payments from the utilities, should enable the parent to reach its debt target.

Now, that's our plan for the next few years.

Here are targets for this year.

We're targeting adjusted earnings, excluding mark-to-marketing changes, at $1 a share.

And despite that record mild January weather, we still believe we can achieve this amount.

Our cash flow from operations before capital spending is forecasted $440 million.

Our debt-to-capital ratio and our total debt is expected to be flat compared to year-end 2005.

So thanks, everybody, for dialing in.

Thanks for listening.

And at this time, we'd like to open the call to all of your questions.

Operator?

Thank you, sir. [OPERATOR INSTRUCTIONS] And, sir, the first question is from the line of Ashar Khan with SAC Capital.

Good morning.

Can I just go over some of the assumptions, just going to first on the Enterprises on slide 20?

The Tax Act and other, 22 million for 2006, could you just go over what that comprises of in 2006?

Well, principally, what you're going to see in there, Ashar, and thanks for joining the call, are really just other repatriation items that have nothing to do with the Tax Act like we had in 2005.

So it's really going to be other payments that come from the operations that aren't normal regular dividends.

Okay.

Okay.

And Tom, the way I'm seeing -- we have a 1 billion debt reduction, right, in the next three years at the parent, correct?

If I read this slide correctly?

That's correct.

If I'm right, there's only 100 million in debt reduction in '06, unless I'm missing something from the cash flow statement that you provided.

Is that correct?

That's correct.

Because, remember, the big reductions are going to come as we start to see the tax-sharing pick up substantially, which starts this year and then gets pretty big.

And remember, some of our asset sales, we're not planning on those assumptions to happen real early.

So those are going to happen over the course of that period.

Okay.

So Tom, is it fair to assume then the remaining 900 million, can we assume that they are equally in '07, '08, or is it more in '08 versus '07?

Well, we're not giving any guidance on that.

But I think what you can do is get a sense from the tax-sharing.

That's one of the helpful slides to look at.

So you can begin to see how much of that begins to come in in 2006, and then over '7 and '8, what might happen after that.

Okay.

And what have you assumed for the gas rate case in 2006, in your assumptions?

We've simply built in assumptions of some normal payment that will happen later in the year.

No special items beginning in the year.

And how should we look at Palisades?

I guess the O&M is increasing because of what reason, it's $0.11?

It's a big number.

Well, remember there, we've got a couple things going on, we have a refueling going on and we've got a head replacement that will be going on, and those are going to generate some O&M costs for us.

So as we look at this plant gets sold by next year, right?

So some of these costs are not repeatable, am I correct, as we should look at it going forward?

Well, assuming, of course, that we have a successful sale, and we still have a lot of work to do on that.

Sometime during the middle part of next year we would not have those costs repeating, and we would have, of course, the sale of Palisades.

Now, we would have a PPA replacing that, so that we can continue to give our customers good value and secured service.

What are the interest savings at the parent?

I'm just trying to -- it's only 5 million, the way I guess I'm trying to look at in '06 versus '05.

What is the impact of interest savings in '06 versus '05 at the parent?

Well, I think you can get a good look at that with the handout that we've done this morning where you can see our interest across the line, and a bulk of that is at the parent.

Let me just see if I can read for you a precise number here.

On which slide is that on?

Well, you can see that on our -- for instance the summary of consolidated earnings.

You can get a sense for the 12 months '04 compared to '05--.

No, I was talking about '06 versus '05.

Oh, I don't think we've given the detail on that in terms of the amount of interest savings.

Okay.

Okay.

But there are interest savings in '06 versus '05; is that correct or no?

Say that again, Ashar, sorry?

Interest costs at the parent are lower in '06 versus '05 or no in?

Oh, absolutely, they're coming down, because remember they're coming down for two reasons.

One, we reduced our debt substantially, by let's say about $185 million last year at the parent.

In addition to that, the refinancings we've done have been at a lower rate, and maybe about a 50 basis-point improvement in that.

Okay.

And then Tom, last question, I apologize, is you said you're assuming 977 for the gas for 2006.

Right?

That's right.

And then you mentioned that you have borrowed and hedged a significant amount for the year.

Now, gas stands at a much lower level right now based on that forecast.

So could there be savings in this core working capital number?

Or is it because you've hedged so much we should not look at much savings of gas remaining at current levels?

No, there could be some savings.

If you refer to slide 16, which is the -- let me take you to another one, I'm sorry -- slide number 21, which is the 2006 cash flow, you can see in there we still have a core working capital hit occurring with gas prices at 977.

That's what I'm referring to.

To the extent that those gas prices come down further, at this point in the game, about two-thirds of those prices are not locked in.

About a third of them are.

As we go through the year, we'll keep you up to date, because more and more of those prices will be locked in.

If you look at the NYMEX and follow that, and see the price drop by, say, $1 you should assume that about a third of that at this point is already locked in, so we'd only get the benefit of two-thirds.

By the way, it goes the other way if it goes up.

So we just keep monitoring the NYMEX, if the NYMEX remains at current levels, this is a 12-month strip you're talking about am I correct?

This is the strip for 2006 we're referring to, the calendar year.

So this is a calendar 2006 strip, so I should just follow that, and if it remains at low levels, then I should look at it, one-third is gone, but two-thirds is not locked in and that could vary as the year goes along.

That's true.

And Ashar, thank you very much for your questions.

And sir, our next question is from the line of Paul Ridzon with KeyBanc.

Yes, Paul.

Good morning.

What have you experienced or can you yet quantify demand destruction, I know with the very mild weather, it might be hard to separate the two.

We're very cautious on that.

Because on any given month, it's really difficult to look at the figures weather-adjusted, and assume that what we see is going to continue.

I would tell you in our earnings call at this time last year we were talking that we saw some demand destruction but then it didn't continue.

I can tell you that this year in the month of January we've seen a modest conservation, if you will, very difficult for us to predict if that's going to continue.

So we need to monitor that rather than set that as an indicator of what really is going to happen.

Just to clarify your guidance, how are you treating the nickel that you're starting in the hole here?

We've built it in.

So just to clarify for you, when we tell you our guidance for the year is at $1, that reflects the fact, as Dave mentioned, we've been hurt by about $0.05 in January from the record warm temperatures here in Michigan.

So it's included.

So if you had normal weather, we'd probably be looking at $1.05 guidance?

That's correct.

And then on your '05 to '06 walk-through, what's driving the $0.10 of dilution?

I know we've got a partial year of the March equity.

That's right.

We'll get a full year of what's happening there, and keep in mind as well that when you're in a loss position you're not counting your shares the same way.

We'll be counting fully diluted shares as we go forward in a profit position.

So two pieces.

You lost me.

Sorry.

It's a technical accounting side of what shares you use to divide into your earnings when you're in a loss position, you don't take the benefit of a fully diluted look, but when you're in a profit position, you do.

Which will add year to year, a little more dilution to our numbers, just from the calculation.

But the other important piece is we'll get a full-year effect of the equity issuance that we've done.

Thank you very much.

You're welcome.

Thanks for calling.

And, sir, our next question is from the line of Ben Sung with Luminous Management.

Hi, how are you?

Question on the potential Palisade sale.

I was just sort of wondering mechanically or accounting-wise how any potential gain or loss on that sale would affect your capital structure for rate-making purposes?

Well, Ben, this is Dave Joos.

We made a commitment when we securitized Palisades, that if we ever sold that unit and made the profit above our book value, that any profit would be returned to customers.

We don't know at this point in time what kind of bids we'll get from the interested bidders.

Some of them may give us a closer to book value kind of a bid, and an attractive purchase power agreement, others may choose a higher bid and a less attractive purchase power agreement, we'll just see how all of that come out.

But from a rate-making perspective, we would expect that we will recover our book value in that process, and that obviously that will be reflected, and will convert effectively some fixed costs and O&M costs into purchase power agreement through the process.

Okay.

Great.

And one other question is I think it was Tom who was mentioning something about income tax, I think he used the word weakness in 2005.

And there was a $0.04 adjustment or something like that.

Could you just elaborate on that?

I didn't quite catch that.

I'm not quite sure I'm following the question.

Oh, sorry, material weakness.

I thought you said tax, okay.

We will have, from a Sarbanes-Oxley standpoint, a material weakness we're going to declare in our 2005 10-K.

It's a material weakness around deferred taxes, and we have corrected that at the end of the year.

The adjustment was $4 million to income.

However, by doing the correction at the end of the year, we were very tough on ourselves, and we concluded that we could not count this other than a material weakness, even though it's corrected.

Because now we'll doing the testing and let our auditors also see the testing.

Our auditors are happy with what we've done and they're not qualifying the financial statements.

Okay.

Thank you.

All right, thank you.

Thanks for asking again.

And sir, the next question is from the line of Darrell Clements with Alliance Capital Management.

Yes, hi.

Good morning.

Good morning.

A quick question on MCV.

On page 10 of your slides, you mentioned that there was substantial value or there is presently substantial value in the gas contracts.

Can you quantify that, approximately what that would be?

Let me describe it this way to you, and I prefer not to give you a specific number but give you an idea of what we're talking about when that's mentioned.

We have a lot of hedges available at the MCV, so we've got gas at favorable prices, and we use a lot of that in the resource conservation program, rather than burning the gas, we're able to take some of that value out.

Yes.

That's sort of the big value that we're talking about that sits at the MCV, and that's something that's available that could be used in restructuring that we've talked about in the past, but there's really nothing to report on today.

I know because I believe back in November it was mentioned that there was approximately $1 billion in value there.

So I was just trying to get a sense of since we're three, four months since then, given where gas prices are today in the spot market--.

Darrell, that's a good point.

Because those numbers have come down a little bit.

One, because time has gone by where we've used those contracts.

And, two, because the gas values are lower in the market today.

So that's a smaller number.

Still a very substantial number, though.

Okay.

You mentioned that you cannot find a long-term solution acceptable to all, and you had also mentioned that there was some long-term projections of gas price that seem to indicate I guess gas prices coming in a bit.

Is that what's holding up, do you feel, some of the owner participants in that they're looking at these long-term projections, and saying hey, it may work out in the end, so--?

This is Dave Joos, I'd prefer not to get too specific as to what the various party stance are, I think you're all aware that the MCV is a very complicated situation with Consumers being the off-taker for the power.

Yes.

Consumers and others being equity participants in the project, and then finally having a set of lessors with some debt associated with it that own now the plant and lease the plant back.

So there's just an awful lot of parties involved, certainly various parties have various views as to what gas prices are going to do in the future.

I think we tried to point out the fact that the, of course you recall the MCV's economics are dependent on the price of natural gas, and their energy payments that they receive from Consumers are really indexed to Consumers coal prices.

So at these record-high natural gas prices, their economics are not that favorable.

As I tried to indicate, we do have a lot of forecasters that suggest gas prices should soften.

They do have to soften a little bit more before they get to the range in the long term where the economics at the MCV are acceptable.

That's right.

We'll be watching that and reporting on that on a quarterly basis.

But at least right now because of various interests and various views of all those parties I talked about earlier, we've not been able to come up with any kind of a restructuring plan that everybody was in agreement with.

Okay, very good.

Thank you.

You're welcome.

And, sir, our next question is from the line of Po Chang with Talon Capital.

Good morning Tom.

Could you talk a little bit more about the electric reliability expenses that you have during '06?

Just if that's going to be a run rate going forward or is this a year where you're kind of accelerating expenses?

Let me take that, this is Dave Joos.

There's no question that the amount of dollars that we have in '06 for electric reliability is a fairly high number.

And that's partially related to the fact that we've got returning customers on our retail open access program that's given us a little more margin to deal with.

Some of that margin was used up in January already, because we did see some impact on electric sales as well as gas sales because of the mild weather and it gives us a little bit of room to deal with, if we have summer weather that's not as attractive as we expect.

But what we're planning on doing is increasing our operating and maintenance expenditures at the utility to take advantage of some of that and maybe advance some work that we otherwise would have done in future years.

We probably will not end up spending all of what we've shown in that chart.

It will depend on some of the factors that I've talked about.

But we do have room, we think, to significantly improve or increase our spending in O&M on the electric utility and still achieve our allowable rate of return this year.

Okay.

So it's fair to characterize some of those as being somewhat discretionary?

I would say that's the case.

We are looking at how much work we might be able to accelerate prudently.

We expect we'll be spending quite a bit more, but that number you see in there, I wouldn't characterize as a long-term run rate.

It really takes advantage of the situation that we have now where we've got some returning customers and we want to take advantage of it to spend some more money on maintenance.

Thank you.

And, sir, our next question is from the line of Danielle Sykes with Dalmon Rose.

Thank you.

Most of my questions have been answered.

I was wondering on the returning customers issue, is there any negativity at all?

I mean would you have to, if it became excessive, would you have to buy more power, and would it affect your working capital or is it all positive?

Well, actually, we welcome the return of customers to our bundled service, net-net, it's obviously good news for us to do that.

And yes, specifically, as the business grows it adds a little bit to our working capital requirements.

But that's not a serious issue.

Thanks.

Thanks for your call.

And, sir, our next question is from the line of Reza Hatefi with Zimmer Lucas Partners.

I just have a couple of questions.

What share count are you assuming in your '06 guidance?

In '06 guidance, do you have that?

We'll give it to you in just a second.

And I guess, when you guys do the walk on slide 19 from '05 to '06 and you have these earnings per share, are those based on '05 share count, I think which was 211 million, or is that on the '06?

To answer your questions first, the share count for 2006 is 234 million shares.

And what we do is we use the old shares for doing the walk, and then we put all the shares in the dilution bar that you see the next to the last bar.

Great.

You're welcome.

And what overall tax rate are you assuming in your guidance as well?

Well, it's a little tricky for us, particularly when you look at our 2005 numbers.

You're going to see a very unusual tax rate with the loss and then all the benefits that we got from the American Jobs Creation Act.

The way you should think about our business going forward is somewhere between 25 and 30% effective tax rate.

That's more the natural level that we have with the foreign tax earnings that we're able to get benefits on and not have to pay taxes on.

So as a planning base, you need to think about that.

Obviously, there are big adjustments that occur, though, when we have sales of businesses and the like.

20 to 30 so.

That's a good range to work in.

Good range?

Yes.

And one slide that you have, I think it's slide 26, if I'm not mistaken, where you have the cash flows, actually slide 25, sorry, where you have the dividend to the parent from Consumers, that bar from dividend -- from Consumers to the parent, that looks like it's something like 4 to $500 million.

Does that include any part of proceeds from Palisades?

No, that doesn't.

Those are the normal dividend payouts for Consumers of about 80% of earnings, and then for Enterprises, it's specific by business.

To give you some help on that, the $900 million that you see of cash uses is about covered by the dividends from Consumers and Enterprises.

Those numbers are about the same.

Okay.

And if and when you do sell Palisades, how much of the proceeds will you have to refund to customers versus what you keep?

Well, it's a tricky item because anything that's in excess of book value will have to be returned in some fashion or another.

But that will be, again, complicated.

It will depend on the purchase power agreement that's put into place and several other items that will be considered.

But the way to think about it is the way Dave described it just a little while ago.

We'll be able to take, we think, the cash proceeds that are equal to the book value and use those to retire debt in the business.

Sorry if I missed this, but I'm guessing that your rate base will also be reduced by the Palisades sale.

What is the amount that's built in the rate base for Palisades?

Well, not a substantial amount.

Because you'll remember that this has been used for some time.

We also have a securitization in place.

All right, so really your rate base shouldn't be affected much then?

Well, and just recall that we're spending at a fairly high level at the utility for Clean Air Act and other issues.

I don't expect the rate base will go down in the net because we're still overspending our depreciation rates at the utility.

Absolutely, I was just kind of looking at the incremental, I guess, effect of the Palisades sale on the rate base, just that portion.

I think another way of looking at it that may help you is think about our book value as somewhere in between 2 and $300 million depending on the point of sale, because we are vesting in Palisades as well with the reactor ahead and the like.

Okay, great.

You're welcome.

Thank you very much.

Thank you for calling.

And, sir, our next question is from the line of Jose Amante with Cigna Capital.

Good morning, I just wanted to clarify a couple of things.

When you referred to your sensitivity on working capital, gas prices moving up $1 per MMBTU resulting in $120 million plus or minus cash flow impact, does that incorporate, I guess, the amount you have locked up on the fixed price contracts for this year?

The way to think about that -- that's an excellent question -- is that's the impact of the net change to us.

So if you recall, we said that we have about a third of our gas requirements for Consumers already locked in.

So if the NYMEX moves by, let's say $1, you have to assume that a third of that today is already covered so you'd only have about, say, $0.70 movement that you would put into the sensitivity.

So remember, it's the price we pay.

So the sensitivity would be a third less than 120 we're talking about?

If you were looking just at NYMEX numbers alone, yes.

Okay, all right.

Maybe I missed this, I guess one of the slides you have for '06 cash flow, you have 149 million of asset sales this year?

Correct.

Those asset sales have already been announced or?

No.

Give us a little bit more color on that?

No, what I can tell you is that we have a strategy where we're still exiting markets that aren't key to our business in terms of our long-term strategy.

So we're looking at the businesses in Latin America and in India, for example, we've sold two of our generation facilities in India, and we still own one.

So this reflects continued progress in those markets.

Okay.

And the expectation, I guess, in the press release would be that these sales would be below book value and there would be an impact to earnings as a result?

That's our planning assumption right now, but it's too soon to tell how that will really turn out.

When would we expect a potential closing or I guess further color on these asset sales?

Well, we'll do that as we go through time as we make any announcements about the sales or whatever we're doing, we'll obviously make those available publicly and talk about them in our future earnings calls.

What we are communicating today is we expect of the pool that's the left to be done, there's about $149 million worth that will be completed this year, the specific timing is still up for grabs.

The final question with respect to the international financing that you put in place, can you talk a little bit about how that was structured?

I guess is that something it's short term in nature and goes through September 2008, and if you could do the share pricing on that?

Well, we normally don't go through all the specifics of our transactions exactly like that, but this was just a financing to enable us to bring home some of the foreign earnings for the American Jobs Creation Act some permitted us to benefit from those tax savings.

And then of course we prefer to be able to pay that off as soon as we practically can and we timed that through the terms of that deal to be through the end of 2008.

Okay.

And is that nonrecourse, is that recourse to the parent?

It -- technically, it's nonrecourse, but to get favorable rates, we backed that up with the parent.

Okay.

All right.

Thank you.

And, sir, we have a question from the line of Ashar Khan with SAC Capital.

Tom, could you give the breakdown between electric and gas earnings for 2005, please?

Sure.

The utility is $1, right, reported?

Could you break that down how much is electric and how much is gas?

Sure.

Give me just one second here.

Of the $0.95, $0.72 of that was electric, and $0.23 of that was gas.

And then if I look at the chart which shows ups and downs for '06, can I assume that apart from the gas thing which you mentioned, gas rates $0.05, that all the remaining items except for benefits and others all relate to the electric side?

Or if I was trying to build up what -- unless you could give me what electric and gas is in the '06 guidance to break up?

We don't normally do that breakout, but I can tell you that you have it about right.

After you do the gas rate side, it's principally around electric, but keep in mind when you're looking at things like our O&M expenses for benefits, that's shared proportionately with employees and the like.

Okay.

Okay?

Thank you.

Well, listen, thank you for calling, Ashar and I'll turn it back over to Dave here.

Let me just wrap up quickly here, let me just say we'll continue to work hard to deliver on our plan and to earn your confidence.

I think we had a good year in 2005, a few disappointments but also made an awful lot of progress, particularly on the regulatory front.

We have some issues still that we're working on, and we've made good progress on reducing our business risk.

We've taken some steps to minimize the impact of gas prices, high gas prices are still there, we're still seeing some volatility so it's important for us to make sure that we dealt with this uncertainty, and as Tom reviewed with you, we've built in a number of steps to make sure we have sufficient liquidity, despite that uncertainty.

Thank you for listening today.

Ladies and gentlemen, this concludes today's conference.

We thank everyone for your participation.