CMS能源 (CMS) 2006 Q1 法說會逐字稿

Good morning, everyone.

And welcome to the CMS Energy 2006 first quarter results and outlook call.

This call is being recorded.

Just a reminder, there will be a rebroadcast of this conference call today beginning at 12:00 noon Eastern Time, running through May 10th.

This presentation is also being webcast.

An audio replay will be available approximately two hours after the webcast and will be archived after 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.

Thank you.

Good morning and thank you for joining us for our first 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 webcast are available on our website.

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 also posted in the investor section of our website.

We anticipate 2006 reported earnings are likely to be substantially lower than adjusted earnings because of the expected reversal of mark-to-market gains and losses from potential asset sales.

We are, therefore, not providing specific reported earnings guidance reconciliation because of the uncertainties associated with those factors.

Now, I'll turn the call over to Dave.

Thanks, Laura.

Good morning, ladies and gentlemen.

We are pleased you have joined us today for our first quarter earnings call.

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

Today we reported first quarter adjusted earnings per share excluding mark-to-market of $0.22 a share, down from $0.37 a share last year.

Unseasonably warm temperatures that averaged the 7th warmest in the last 142 years including the warmest January on record, accounted for $0.10 of the variance.

We also did see an impact from customer conservation related to high natural gas prices.

Tom will discuss the details in just a few minutes.

Although disappointing first quarter sales required us to pare back our plans to accelerate system maintenance spending, we're still forecasting adjusted earnings for the year, excluding mark-to-market, at about $1 a share.

This is unchanged from our prior guidance.

Once again, I'm pleased that our employees at both the Utility and Enterprises continued to deliver exceptional operating performance.

From asset management to customer service, their performance ranks among the best and the results are being recognized.

More about this on the next page.

As a result of progress made resolving several major regulatory cases last year, there are only two cases I plan to highlight today; the gas rate case and the 2006 power supply cost recovery case -- I'll do that in just a minute.

Finally, I'll give you an update on a few strategic initiatives to continue reducing business risk and provide long-term growth opportunities for the Company.

This will include a review of the financial impacts of the Midland Cogeneration Venture, or MCV, on the Company.

We get a lot of questions about the MCV issues, which I know are very complex, and I hope to answer many of them.

Since our business is about excellence in operating assets and serving customers, I'll start with operating performance highlights for the quarter.

Again this quarter, power plant availability was strong at both the Utility and Enterprises.

The Utility's generating plants were available 88% of the time and Enterprises' plants 91% of the time, both on plan for the year.

After setting a plant production record in 2005, the best in 34 years, the Palisades nuclear plant was removed from service on April 1st for a planned refueling and maintenance outage.

The outage is running ahead of our production plan schedule and the plant is expected back in service in mid-May.

One piece of good news, by the way, you may recall that we conducted an inspection of our reactor vessel head late in 2004 and made some minor repairs at that time.

We did a required follow-up inspection this outage and found no problems whatsoever.

We recently learned that Consumers Energy won the JD Power award for the highest business customer satisfaction of Midwest gas utilities.

That's the third JD Power award our gas business has won in four years, the other two being for residential customer satisfaction.

We are proud of our employee's ongoing dedication to great customer service and pleased to receive this recognition.

The mild temperatures in the first quarter of the year reduced gas deliveries by 15 billion cubic feet and electric deliveries by 139 gigawatt hours.

Tom will detail the first quarter earnings impacts.

If there's a silver lining, it's that we ended the heating season with about 16 billion cubic feet more gas in inventory, which means we won't need to purchase as much gas this year as we normally would to fill storage.

Now to our regulatory agenda.

On April 24th, initial briefs were filed in the gas rate case by Consumers, the staff, attorney general and two other interveners.

Consumers in it's brief, accepted a number of the staff positions in order to minimize the issues in dispute.

This resulted in a revised revenue deficiency request of $118 million, down from $132 million originally requested.

The staff supported revenue deficiency is $71 million.

Reply briefs are due May 15th and the proposal for decision is targeted for late June.

This schedule should support an final order this fall.

Consumers is currently recovering it's 2006 power supply costs using a temporary power supply cost recovery factor, or PSCR, approved by the commission last December.

That temporary factor did not take into consideration higher transmission or coal cost estimates submitted late last year or increased costs to serve retail customers returning from alternative energy suppliers to Utility bundled service.

While these costs are expected to be fully recovered over time, a continuation of the temporary order for the full year would result in a delay in the recovery of an estimated $169 million until after 2006.

However, in it's April filing, the Michigan Public Service Commission staff recommended final factors that, if adopted by the Commission, would result in the recovery of an incremental $102 million during calendar year 2006.

The balance is largely related to the incremental cost of serving customers who are returning from alternative energy suppliers to Utility bundled service, along with other costs that have changed since late last year.

While the return of customers to bundled service is a good thing, the process may not allow for full recovery of the associated incremental cost until after 2006.

Finally, you will recall that the Michigan Public Service Commission issued it's report of the capacity need forum in December, concluding that the state has a need for new base load generation early in the next decade.

Recently, Governor Granholm issued a directive appointing the Chairman of the Public Service Commission, Peter Lark, to lead the development of a state energy policy by the end of the year.

We see this as constructive and expect to be heavily involved in the process.

Meanwhile, we're developing options for new generation to serve our service territory.

Stay tuned on this issue.

Now an update on a few of our strategic initiatives.

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

We believe the sale will reduce our risk and improve our cash flow, while retaining benefits of the plant for customers through a long-term contract.

The sale process is on schedule.

Bids are due in June and the plan is select a buyer in the third quarter of this year and close on the sale early in 2007.

One of the cornerstones of our plan has been to grow the equity of consumers.

From August 2004 through March 2006, we have invested $1.15 billion into Consumers, resulting in a financial common equity ratio of 43% as of March 31st.

Overtime, we will be working toward a target capital structure including about 50% equity.

The combination of a stronger equity ratio and rate-based growth provides clear path for earnings growth at the Utility.

We have discussed our strategy of maintaining a level of diversification by also looking to invest in our Enterprises business, though only a small fraction of what we're investing in Consumers and only in projects that meet a tight profile, including North American, our current core international sites, long-term contracts with credit worthy counter parties and no significant fuel or market risk.

Some of you have expressed concern about what we have in mind, perhaps thinking we might take our focus off the Utility or reduce our intent to restore a common dividend.

Let me assure you that balance sheet improvement, dividend restoration and investment in Consumers remain priorities.

In our February 23rd call, we talked about the sale of non-core assets at Enterprises.

Although I don't have anything new to announce today, I'll reinforce that we still plan to complete the sale of approximately $150 million of assets this year.

And finally, we continue to evaluate various long-term alternatives regarding the Midland Cogeneration Venture.

The MCV situation is complicated and Tom and I get a lot of questions from investors to try to understand the overall financial implications for CMS.

Let me take a stab at clarifying these issues with a couple slides.

This slide on the left reviews our MCV ownership participation.

While on the right it summarizes the financial impacts on CMS in 2005 and those forecast for 2006.

First the ownership.

We have a 49% general partner interest in the MCV partnership, which leases and operates the MCV and is responsible to perform under the purchase power agreement with Consumers Energy.

We also have a 35% lessor interest in the MCV facility through our ownership in the First Midland Limited Partnership, FMLP.

Both the partnership interest and the lessor interest are nonrate-based subsidiaries of Consumers Energy.

Because our total interest is substantial, accounting standards require that we consolidate some of the interest of others in our financials.

In particular, even though we're not a limited partner in the MCV, we consolidate a little over half of the limited partner earnings in our income statement, equal to our pro-rata ownership of the general partnership interest.

Incidently, at one time we believe that we would have to consolidate all of the partnership interest in our accounting, but have since concluded that only a share of the limited partnership interest must be consolidated.

The right side of the slide shows the various ways CMS earnings are affected by our two ownership interests, the consolidation of part of the limited partnership interest and the relationship with Consumers Energy's Electric Utility as counter party to the purchase power agreement.

The first line is our 49% general partner share of operations excluding, mark-to-market.

The 2006 forecast is $0.05 for this interest, down slightly from $0.06 in 2005.

Next is the consolidated share of operations allocated to limited partners, which is $0.01 for 2006.

The third item is our lessor interest in the First Midland Limited Partnership, which is forecast at $0.05 in 2006, the same as last year.

The first three line items represent the earnings from MCV operations reflected in CMS financials, totaling about $0.11 per share, both in 2005 and 2006.

The two lines below the subtotal reflect the direct impacts of the MCV purchase power agreement on the Utilities' earnings.

The Utilities' share of earnings generated from the Resource Conservation Plan is expected to add $0.05 this year, down from $0.10 last year, due to forecast lower gas prices, higher power prices and an increase from 50% to 70% sharing with Consumers' retail electric customers.

The next item is the continuation of the underrecovery from Consumers customer's of the PPA payments going back to the mid 1990s when the MPSC approved less than full recovery.

The underrecovery is about $55 million in each of 2005 and 2006.

Beginning in September 2007, we plan to claim relief under the regulatory out provision in the purchase power agreement, resulting in a reduction in the underrecovery to about $39 million in 2007 and $0 in 2008 and beyond.

The net effect of these various interests is forecast to be a break even in 2006 versus $0.04 earnings in 2005, both excluding the effects of mark-to-market.

Mark-to-market represented a gain of $0.30 per share last year, but is expected to reverse to a loss of $0.34 this year.

The actual mark-to-market effect will, of course, depend on the market price of gas this year.

These calculations assume an average of about $8.20 per thousand cubic feet.

Last year, we booked an impairment of the MCV of $1.82 a share, so the total GAAP impact on our financials was an after-tax loss of $1.48 a share.

This year, driven primarily by the mark-to-market reversal, we are forecasting a GAAP net loss of about $0.40 -- I'm sorry, about $0.34 per share.

It's important to keep in mind that many of the items shown on the right side of the slide are non-cash from a CMS perspective.

To clarify this, the CMS cash items are highlighted in green.

For 2005 and 2006, the total cash impacts on CMS are a negative $11 million and $12 million, respectively.

You can see that the negative cash impacts are driven by the PPA underrecovery, which we expect to end in 2007.

Let's look now at a few key sensitivities to give you a sense for how the MCV financial impacts might change over time.

As in the prior slide, those items representing cash to CMS are shown in green.

The first column is the 2006 forecast, carried over from the previous slide.

The second column is intended to show how the exercise of the contract regulatory out clause would impact the financials.

Let me remind you that Consumers is precluded from exercising this regulatory out clause until September 2007, and other aspects of the financial forecast will change between now and then.

So this column is intended to simply illustrate how the financial elements are affected, rather than to forecast a future result.

Recall that the exercise of the regulatory out clause would result in a reduction in payments to the MCV to match the recovery that Consumers is getting from its customers, a reduction of about $55 million per year in capacity payments.

As illustrated in column two, the reduction in this payment reduces CMS's earnings from MCV operation by about $0.09 a share, from a positive $0.06 to a negative $0.03.

Earnings from the First Midland Limited Partnership are not affected.

The Utility contribution from RCP is also not affected.

However, the $0.16 share loss to Consumers, due to underrecovery of the PPA, is eliminated and CMS earnings would improve to a positive $0.07 per share.

The after-tax cash flow would increase by about $36 million per year.

The last two columns on the slide illustrate the impact of market price of natural gas on top of the impacts of the regulatory out.

These columns are calculated assuming about 30% of MCV's gas is hedged and about 70% is exposed to the market price.

A much higher percentage, about 80%, of MCV's gas supply for 2006 has been hedged, but the 30% level might be a reasonable estimate for 2008 for illustrative purposes.

The last two columns help illustrate a few key points.

First, the earnings from MCV operations are affected severely by exposure to high natural gas prices, no surprise there.

Second, Consumers Energy share of the benefits from the Resource Conservation Plan improve with higher natural gas prices.

However, I would caution that this simple illustration does not take into account that higher natural gas prices would likely also result in higher regional power prices.

So the actual benefit to the Utility from the RCP would likely be less than shown here.

Finally, the cash flow to Consumers remains positive across the columns.

In fact, because MCV operating losses are non-cash losses to CMS, but the RCP benefits are in cash, higher gas prices actually result in higher CMS cash flow.

A few cautionary notes.

First, the MCV may dispute Consumers right to exercise the regulatory out clause, though Consumers expects that it would prevail in any dispute.

Second, if Consumers exercises the regulatory out clause, MCV does have the option of terminating the PPA.

If gas prices are high enough, that could be in the best interest of the MCS.

In fact, as we've said in the past, gas prices sustained above about $6 a thousand cubic feet, threaten the economic viability of the project under the PPA and could impact the value of CMS's lessor interest.

I'm hopeful these last two slides are helpful in clarifying the MCV issues.

We get a lot of questions on the topic and I'm sure this discussion hasn't answered all of them, it may have even raised a few new ones.

However, this should give us a better basis on which to discuss the issues.

And we will try to respond to any questions you might have in just a few minutes.

To wrap things up before I turn the call over to Tom, I want to remind you that our business plan has not changed.

We're fully committed to growing the Utility through a combination of increased equity and rate-based growth.

Overtime, both will be reflected in our rates.

Our Enterprises business provide a diversified contribution to our earnings and cash flow.

We plan to maintain that balance in the future.

We intend to achieve our growth plan without losing sight of our priorities of cash flow improvement, parent debt reduction and common dividend restoration.

Now let me turn the call over to Tom to discuss first quarter results.

Thanks, Dave.

Welcome, everybody, to the call.

Thanks for joining us today.

Our first quarter loss of $0.12 a share was off the profit of $0.74 last year.

But excluding mark-to-market losses in 2006 and gains in 2005, earnings were $0.22, that's down $0.15 from last year.

As Dave indicated, weather in Michigan was unusually warm.

Temperatures for the quarter averaged 31.5 degrees, that's up 3.8 degrees or 14% warmer than normal.

Adjusting for weather, earnings were $0.30 a share.

Now lets turn to the next slide and look at a little bit of that detail.

For the first quarter, adjusted earnings per share, excluding mark-to-market, was down $0.12 at the Utility and down $0.03 at Enterprises and the parent.

Lower results at the Utility included cost increases of$0.08 and lower revenues of $0.07, offset in part by a $0.03 benefit from the electric rate orders received last December.

Now the cost increases included the planned refueling outage at Palisades, the planned higher benefit cost, and an unplanned storm that interrupted service to about 277,000 of our electric customers in February.

Lower revenue of $0.07 was more than explained by warmer than normal weather and customer conservation.

We estimate that customer conservation reduced our gas sales by about 4%.

At the Electric Utility, the return to our system of retail open-access customers boosted profits $0.05 a share.

Our load loss dropped from 552 megawatts at the end of 2005 to 348 megawatts at March 31.

On a quarter-over-quarter basis, the retail open-access load was actually down 61%.

The decline at the MCV of $0.02 was due to higher gas prices and lower RCP savings.

This was offset, partially, by lower depreciation.

Our primary -- other, primarily, includes the dilution.

Now as Dave mentioned, we're holding our full year adjusted earnings per share at $1 a share for guidance.

The soft results in the first quarter caused us to re-evaluate and reduce planned discretionary spending for the rest of the year from a level over and above authorized levels.

Assuming weather is reasonably close to normal for the balance of the year, we believe our guidance is achievable.

Let's turn to cash flow.

Cash flow continues to improve.

As shown on the right, we expect Consumers 2006 cash requirements to be $530 million, that's $105 million better than our prior guidance.

Operating cash flow of $893 million is $141 million better than our prior guidance.

It's principally due to lower core working capital requirements.

The improvement in core working capital reflects lower gas prices, both compared to our prior guidance, and that's partially overset by lower than planned power supply cost recovery.

Consumers capital expenditures are up $26 million, primarily due to increased site restoration cost at Big Rock.

Due to Consumers' improved cash flow, our financing needs are $107 million lower.

The $200 million equity investment by the parent is complete and it's $50 million larger than what we originally planned.

Now as shown on the left of the slide, CMS plans to have positive cash flow of $190 million, enough to retire approximately $120 million in debt, invest $200 million in Consumers, and build cash reserves.

This includes overhead and gas prepays of $82 million that some of you have asked about.

This is made up of parent and Enterprises overhead of $34 million, gas prepays of $19 million, legacy legal costs of about $18 million, and forecasted growth-related investment.

In total CMS, ending cash balance will be $95 million more than it's beginning balance and our year-end revolver availability will be about $190 million.

Now on this next slide, these are some factors that could change our profitability or our cash flow.

For 2006, we're assuming gas sales will be 295 BCF, that's down 30 BCF from our prior forecast due to the mild weather, energy conservation and sluggish Michigan economy.

We also lowered the MCV RCP benefit from $0.20 to $0.16 due to forecasted natural gas prices that have dropped from $9.77 to $8.20 in our present outlook.

These savings will vary depending on gas and power prices.

The cash flow sensitivity related to a $1 change in the 2006 average NYMEX price for natural gas is about $90 million.

This is down from the previous guidance of $120 million, now that we have locked in more gas at fixed contracts and have less gas to purchase at market prices.

Our original forecast for retail open-access load loss at year end was 375 megawatts.

At the end of the first quarter, the retail open-access load loss fell to 348 megawatts, representing 4% of our total distribution load.

The benefits of customers returning to our service and growth at non-automotive customers help to offset negative developments in Michigan's automotive industry.

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

As Dave highlighted, we continue to focus sharply on our business plan strategy, investing heavily in our Utility.

During the last 24 months, we have injected almost $1.2 billion of new equity into Consumers, enabling us to benefit from our authorized 11% return on that investment.

The Electric Utility performing well, but our Gas business return lags.

Cost reductions and reasonable rate case orders will help turn this around.

Participation in new base load generation construction could add to substantial future growth in our Electric business.

At Enterprises, we continue to benefit from strong results from core businesses and proceeds from the sale of non-strategic businesses, including those in Latin America and India.

Future investment to achieve our growth plans would not distract us from our priorities to improve cash flow, parent debt reduction and restoration of common dividend.

Our 2006 report card, as you can see on this slide, continues to look good, even after a soft first quarter.

We continue to target adjusted earnings, excluding mark-to-market changes, at $1 a share.

We are on track to exceed our cash flow target, our debt-to-capital ratio and total debt is expected to be a bit better than planned, and we are still on track to reduce our parent debt to about $1.5 billion by the end of 2008.

So thank you everybody for listening.

And Operator, we would now like to take questions.

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

Please proceed.

Thanks, good morning, gentlemen.

Good morning, Greg.

When we look at -- you guys still reiterating the guidance for the year and I think about how we make up the lost ground that we experienced in the first quarter.

Am I right in looking at the third quarter and thinking about these customers that have returned to Consumers consuming a lot of -- hopefully consuming a lot of air conditioning load at tariff rates, that will allow you to make up some lost ground versus what you lost in the first quarter?

The reason I ask that question is because -- Dave, at the beginning of the call you said that customers returning might not necessarily be as accretive as they otherwise would, unless you get some rate relief.

Let me clarify that.

I don't know that I said that.

You are right to focus on the third quarter, obviously that will be important from an electric sales perspective, if we have more reasonable weather.

If you recall, on the last call I talked about the fact that customers returning to bundled service from retail open-access created some more margin on the electric side, but that we had planned on accelerating a number of our reliability improvement plans at the Electric Utility and that that would offset some of that benefit.

I also mentioned to you that to the extent weather was uncooperative or other factors came to play that may cause us to exercise some flexibility in that spending, of course, that's partly what's happened so far.

So we are -- we do have some flexibility, particularly on the electric side, to respond to the poor start that we had from a weather perspective.

Obviously, that flexibility is not unlimited, so our reiteration of our $1 a share guidance is oriented toward reasonably normal weather for the remainder of the year.

We don't need a particularly hot summer to achieve that, but we need something closer to normal than what we have seen so far this year.

My second question is your MCV analysis, which is definitely helpful, still a little bit confusing.

So let me ask you a basic question.

It looks to me like, assuming the regulatory out gets implemented and you are successful in holding off any legal appeal of that regulatory out, that the Utility becomes more profitable, but the MCV's P&L in a high gas environment is pretty ugly.

So this doesn't look like a solvent entity to me in an $8 to $10 dollar gas price environment.

What are the ultimate solutions for the MCS, post regulatory out?

Is this thing really a going concern in this type of gas price environment?

If you were to bankrupt it, what would the benefit be for the overall CMS entity?

There's a lot of elements to what you have just said and I probably won't address many of them very directly, because I think there's too much uncertainty, particularly associated with the gas prices.

We have been pretty clear that the economics of the long -- the MCV over the long term are not very favorable when you get above about $6 a thousand cubic feet.

Now, that does depend somewhat on other issues.

For example, what happens to the price of coal at the Utility -- because higher coal prices over time would result in higher energy payments to the MCV and we have not reflect that in this analysis.

But clearly, at very high gas prices the viability, MCV long-term is threatened.

We have continued on a quarterly basis -- really on a continuous basis, to evaluate the viability of the MCV and we have not determined any additional steps to impair our ownership interest in the MCV are necessary at this point in time.

I would point out on slide seven of the package, we talk about what our remaining investment balances are.

And maybe that gets a bit to your question, in terms of what the future exposure might look like.

The First Midland Limited Partnership book interest is $239 million, that's shown in the gray back at the bottom of slide seven, if you have a chance to go back to that.

We actually show that the MCV partnership interest on the books is a negative $108 million, that has to do partly with the consolidation of minority interest on our balance sheet.

That gives you, on a net basis, sort of the exposure from this perspective -- the remaining book basis of the MCV.

I can't predict at this point in time over the long term whether or not those additional interests will get impaired or not.

That will depend on what happens, particularly natural gas prices, but certainly other effects like those energy payments that I talked about.

And I'll assure you that we are continuing to look for ways to restructure that situation.

But I can't be more specific as to what we might be able to do between now and then, we simply just recognize it's an important thing for us to continue to work on.

Greg, as you would expect, as well, we have taken the impairments that we think are appropriate.

So obviously, the full impairment of the MCV, but not the impairment of the less hold interest.

I guess my basic point is, if I look at page eight, and I make my own presumption that the MCV didn't exist anymore, there would be sort of -- on the reg out column, you have a $0.03 loss from MCV operations, $0.05 from FMLP, $0.05 from the RCP; so you get a $0.10 benefit at the Utility.

And what looks like a pretty significant economic exposure to MCV would become zero, the only exposure you would have to that on the liability side would be an incremental write-off of the remaining investment balance.

Is that an extremely simple way of thinking about it?

Well, it's close.

Obviously, if the MCV goes away, the benefits that we show in terms of cash flow from the MCV on that reg out column on slide eight also go away.

And of course, we go out and purchase power from another source or another owner.

We highlighted the fact that if all of those interests also went away that it would result in some additional book harm, based on the summary that I showed you in on slide seven.

We also talk about, in our K's and Q's, that there's contingent liability -- in the sort of worst case that the Utility would have to back-stop the steam supply to [Dow].

We have characterized that at about $85 million.

We have not determined that that's a necessary step.

But if you want to add up all the long-term potential issues, if everything went south, that basically would be all of them.

That's great.

Thank you, guys.

All right.

Thanks, Greg.

Thank you.

Your next question comes from Steve Fleishman of Merrill Lynch.

Please proceed.

Yes, hi guys.

Good morning.

A couple questions to close some of the loop, first, on the MCV data.

Just can you just -- maybe Tom, line up the $0.16 of RCP that's in your guidance for this year relative to what you show on page seven on RCP, on the MCV.

I guess the RCP is kind of mixed between both the MCV earnings and the Utility share of RCP, is that -- ?

Let's take that first.

If you look at slide seven, if all the listeners have a chance to do that, and look at the 2006 forecast column, you see the general partnership share of $0.05 in the top right hand corner, that includes an RCP benefit of $0.11.

And then of course, if you look down further down the slide at the RCP utility share, you see $0.05 and you add that in to get the total of $0.16.

Okay, perfect.

And I guess just on this issue of the viability long-term of MCV, you mentioned, Dave, that there is an ability for MCV to break the utility contract if the Utility reg outs.

One of the clauses in the purchase power agreement is the reg out, but the associated clause is if the reg out is exercised by the Utility that the MCV has the option, basically, to terminate the PPA.

Okay.

But then they could then sell that in the open power market and get a gas-based price instead of a coal-based price?

Well, they would certainly be available to sell the capacity into the open market, that's right.

What price they could command would depend on the markets.

Okay.

Let me put the question another way that -- since you have already kind of reviewed those outcomes and potentially looking at the impairment -- and I think I've discussed this with you guys before, it would seem that your initial assessment of the value of the lessor interest is still money good, based on kind of -- maybe like an asset value view?

Well, it's money good on a view of the accounting requirements, let me just say it that way, you've got undiscounted cash flow type of view when you do that test.

We perform the accounting test, and there's not a need at this point in time to consider impairment.

That could change over time.

Okay.

And then switching gears to the Utility;

I'm curious in the quarter how much industrial -- what industrial sales did without choice -- volumes coming back?

Let us dig that number up.

If you have that number.

I don't have that right at my fingertips, but we will get it and get you an answer before we conclude the Q&A here.

Okay.

I guess my last question is, aside from the unfavorable weather and the storms, is there anything that occurred in the first quarter beyond weather that really impacts how you look at the core earnings of the Company?

Well, we mentioned the year-over-year comparison, and the only item that you left out of that list was the Palisades outage, that obviously drives up O&M expenses on a quarter-over-quarter basis.

Right, but that was kind of expected.

It was planned -- so when you're comparing '05 to '06 it ends up being a comparative downer.

But obviously, it was baked into our plan for the full year.

So keep in mind this way, as you look at those elements on slide 11, you have the Palisades that we planned, the benefits that we planned, and part of the ROA that we had assumed.

But what we didn't plan, as Dave was mentioning, is the storm costs nor the weather or the demand.

We're still looking for a good number on the demand, but I would tell you, remember the weather is $0.10 effect, ROA was return of $0.05 and demand overall was actually off a little bit quarter-to-quarter, $0.02 earnings.

Okay, thank you.

Yes.

Your next question --

If I may, I'll just add -- before we take the next question, that in the Electric business, the gigawatt hour was down 147 gigawatt hours and weather was -- more than explained that at 164.

Okay.

Next question.

Your next question comes from [John Alley] of Zimmer Lucas.

Please proceed.

Morning, guys.

Sorry to get you another question with MCV.

Can we expect any progress on this issue before the reg out date?

Well, that's --

Are you working to restructure it now ahead of that or -- ?

Well, let me just say, that's a year and a half away, so we have a fair amount of time.

And we have been working on this issue for the last year and we will continue to work hard on it.

I can't get into detail on the issues we are exploring.

And I certainly can't predict whether we will be successful.

Can I ask what the hold-up would be, is it the other -- is [Delpaso] or is it the other limited partners, or would it be the leaseholders?

Well, it's --

For MCV itself.

I guess having gone through the whole list of the participants, it's clear that it's a complicated situation with lots of parties that need to be satisfied.

And that's a good summary of why it's difficult to get done.

You couldn't point to a specific class of parties?

I would prefer not to.

Okay, great, thank you.

Your next question comes from Paul Ridzon with KeyBanc.

Please proceed.

Could you just give some sort of indication of the timeline that you consider putting some capital at Enterprises?

Well, we're -- we have been investing a very small amount of capital in Enterprises, basically, in the ongoing businesses.

And as I said, we're continuing to look at where we might want to grow the Enterprises business.

I'll emphasize again, that we're looking at a small fraction of the amount of investment that we're making in the Utility over the years.

But we could see -- in any large projects, of course, of the nature that Enterprise gets involved in tend to be fairly long dated, so they could be several years out.

We have talked in the past about incremental investments in international projects that are relatively minor to expand capacity or improve the output and that sort of thing.

You could see some smaller investments of that nature in the more near term.

And I think it's important to note that we will keep everyone posted on, even our development work, as things continue.

So that I don't think there will be any big surprises.

Because all of these projects take a lot of work and there will be a lot of communication about whatever they are.

Just to follow-up on -- on the dividend.

Is clarity on the dividend highly contingent on ultimate -- an ultimate solution of MCV?

Well, I wouldn't tie the dividend to anything particular of that nature.

We have said before, and I'll reiterate, that the Board continues to look at a dividend, they recognize the desire of the shareholders to see a restoration of the dividend.

And as with any company, earnings and cash flow tend to be strong drivers of the dividend.

Beyond that, I wouldn't take any particular issue, like the MCV, and tie that to dividend restoration.

Thank you.

Your next question comes from the line of Paul Patterson.

Please proceed.

Good morning, guys.

Can you hear me?

Yes.

Most of my questions have been answered, but just on the demand side, that is the demand -- demand decreases associated with gas sales and higher prices there, is that right?

I'm sorry?

The $0.02 that affected the quarter on slide 11.

We're talking primarily about reduction in gas demand as a result of customer conservation in response to high prices.

I mean, frankly, we worked pretty hard to communicate to customers the high gas prices and things they could do to conserve use and things of that nature.

And I guess, thankfully, we were somewhat successful in that regard.

Obviously, that's a long-term benefit to the Utility and its relationship with the commission and the customers, but it's a short-term hit to sales.

But that's what we're really referring to.

We think we saw about a 4%, on a weather adjusted basis, response to high prices.

And how much higher were actual sales on a volume metric basis to customers?

Well, here, the best way I think to look at it is gas sales were down about 3.7 BCF, including that conservation, and electric sales were actually up about 17 gigawatt hours, just so you can get a sense of the quarter-to-quarter look there.

And I guess I'm wondering if the sensitivity to gas prices themselves on the volume metrics decrease?

In other words, how much did gas prices go up that customers were actually experiencing during the period that caused them to reduce their demand?

Again, it's the elasticity idea.

One thing to keep in mind is, do look at slide 14 at our sensitivities.

Okay.

That will give you the overall look at the sensitivity that changes in gas demand or electric demand, those numbers are shown for you there.

It is difficult, I would say, to determine specifically what the conservation numbers are.

We do our best by looking at what we know specifically about weather, what we know specifically about our customers demand and any usage changes.

And then we estimate, as best we can, those conservation numbers that Dave and I talk about to try to give you a feel.

What we do -- are comfortable with, those conservation numbers are a little bit higher than what we have traditionally seen in the gas business.

And we're going to keep watching those each month.

I may comment on that.

Of course, natural gas prices five years ago were a fraction of what they are today.

And so we have seen increases over time in natural gas prices.

And frankly, we have not seen very much in the way of elasticity demand associated with that.

We think we saw that in the first quarter, we will certainly validate that as time goes on.

But at least historically, customer usage patterns sometimes have reacted to conserve immediately with a bump in prices, but then they tend to normalize again over time.

So I wouldn't want to put any stake on trying to calculate elasticity very accurately at this point in time, but we will certainly watch it over time.

Okay.

Then just finally, there was a water craft advisory on Friday with respect to the Bay Harbor, and some new leachate -- I don't know exactly what it was in the water -- that was talked about in the local press there.

I was wondering if you could -- if there's any update or if there's any -- what your initial read is on that?

Well, I would just say, on Bay Harbor in general, we're continuing to work on the agreement that we have that involves both the EPA and the state of Michigan.

I would say -- I'm aware of the situation that was advertised -- or in the press here, recently.

And it's associated with the east end of the Bay Harbor development.

There's actually a park that's -- a township park deeded over to the township by the project in the course of the development.

That's an area we have talked about that needed some work, in terms of reconfiguring the park property and collecting the leachate that runs off from that area.

We think that this area that got some press, which is located directly adjacent to that, may be related to the same issue.

And frankly, the solution may not be any different than what we are already working on.

But that will require some additional work.

This is relatively, I would say, modest increases in natural pH that was detected in the area and something like 18 feet below the surface of the water.

So it may simply be, again, related to the leachate flow to the lake that we have already been aware of and working on as part of the normal plan.

So it doesn't change your outlook or anything -- ?

Not at this point in time.

We don't see it as anything significantly different than what we were already aware of.

But we will continue to update you as time goes on if anything changes.

Great, thanks a lot.

[OPERATOR INSTRUCTIONS] And your next question comes from the line of Clark Orsky with KDP Investment Advisors.

Please proceed.

I still wanted to go back to MCV -- and I think it was Greg's question about sort of the worst case scenario.

Is there any recourse or guarantees back to CMS or the Utility from that?

I mean I think the SMLP debt is nonrecourse, but if you could just remind us, there?

The only one I mentioned earlier is that Consumers back-stops the steam supply to [DOW], remember that's a cogeneration facility that provides steam to [DOW].

And in the event that the project was unable to deliver that steam, overtime there's some recourse in terms of Consumers back stopping that.

I think it's disclosed in our K's and Q's at about an $85 million liability.

I wouldn't conclude that necessarily that Consumers is going to have to do that.

But in the worst case, that could be a possibility.

Other than that -- the book exposure is the one that I have already talked about.

Okay, thanks a lot.

Yes.

And your next question comes from Winfried Fruehauf with National Bank Financial.

Please proceed.

Thank you.

Regarding Palisades, instead of selling Palisades why wouldn't you do a, say lease back with an option to purchase it at some point in the future?

I mean, here's a low cost source of electricity, it's in good shape, it's well run; so why would you part with it and not bankrupt, for example, Midland Cogeneration Venture?

Well, just mention Palisades -- the issue of Palisades is that it requires a lot of capital investment.

We are a single unit plant, and we concluded five years ago or so, that operating Palisades as a single unit plant simply didn't make sense.

We had difficulty attracting employees.

We also had difficulty negotiating large service contracts and things of that nature because of lack of economies of scale.

So our decision to sell Palisades is really around -- largely that issue.

And we think that that makes sense.

The benefit to the customers will be preserved by a long-term contract.

The fact that we won't have a rate base investment in Palisades, on a go forward basis if we're successful, is not of great concern to us, because we are investing quite a bit in rate base in other areas, as well.

So from our perspective, it's simply something that improves our risk profile and does preserve the benefit to our customers over time.

Well, what's stopping you from adding another unit on that site -- perhaps by taking in a partner who is already operating several plants like Entergy, for example ,or anybody else?

Why wouldn't you consider that as an alternative?

Because after all, if you spend money on Palisades, it will still remain one of the -- if not the lowest cost of electricity to you.

Well, let me just reinforce that we are concerned about having the benefit of electricity, which is why we would do a long-term contract.

I can assure you that we explored all of the various options available to us and concluded that the sale made the most sense, at this point in time.

All right.

Thank you.

Your next question is a follow-up from Steve Fleishman with Merrill Lynch.

Guys, can you hear me?

Yes, Steve.

Go ahead.

Can you hear us all right?

Yes, I can now, sorry.

One -- in the gas rate case, have you been able to update at all your sales forecast to encompass some conservation impact?

Well, let me mention that during the course of my comments, I talked about the fact that there was a staff position on brief of $71 million and that our adjusted brief position is $118.

One of those differences is the throughput changes that we forecast.

Since we filed the original case, and we were able to update that through our testimony, that includes reduced usage through February and also expected conservation, as a result of what we have seen.

The combination of those two amounts to about $14 million of the difference between us and the staff.

Now, whether or not the Commission will ultimately consider our updated testimony, we don't know.

It was not reflected in the staff's case.

Okay.

But it is in your case?

At least they will have a chance to address it?

Right.

The Commission -- there are several differences, maybe I could just highlight them.

About $18 million of the differences that we have continued to advocate at 12% rate of return on equity and fully incorporate the capital structure changes -- the additional equity that we have infused, about $14 million of that difference relates to the throughput that I just mentioned.

Then there's some differences in rate base, as well, because of additional capital since the original filing.

Okay.

So that -- all of those issues are before the Public Service Commission, the staff took a more traditional approach and based its numbers on our -- more on our original filing.

So there is an opportunity for the Commission to consider additional relief, based on the issues I just went through.

Thank you.

You're welcome.

Operator, we would like to take one more question, if there's one.

Okay.

Your last question comes from the line of Ryan Watson with Stanfield Capital.

Just a clarification on your slide 14, the commodity sensitivities.

Can you just explain why that after-tax cash flow sensitivity is so large vis-a-vis the EPS?

If you could just explain that.

Sure.

Think of that as core working capital issue with the gas that we have in inventory in the ground.

When we have to pay more for that or less for that, that's a sensitivity for that, because we have, as you know, large storage fields where we buy gas at a constant pace during the course of the year.

We get that back over time, but that's a core working capital issue for us.

We have talked a lot about this in the past as being about a $120 million issue.

But in any one given year, that number actually shrinks.

It's smaller now because we have more of the gas already contracted and paid for.

But we still have an exposure there for what goes in the ground.

Got you, thank you.

You bet.

All right.

Well, thank you for joining us this morning.

Let me just reiterate that our business call -- our business plan has not changed.

We're continuing to work on the issues that we have highlighted on the slide here, I won't go through all of them in detail.

While the weather has been uncooperative so far in 2006, we're maintaining our earnings forecast, working hard on managing our expenses, and still forecasting about $1 per share on adjusted basis, excluding mark-to-market.

Again, thank you for your participation this morning.

This concludes today's conference.

We thank everyone for your participation.