CMS能源 (CMS) 2006 Q2 法說會逐字稿

Good morning, everyone, and welcome to the CMS Energy 2006 second quarter results and outlook call.

This call is being recorded.

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

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 Web site in the "Investment CMS" section.

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

Please proceed, ma'am.

Thank you.

Good morning, and thank you for joining us for our second 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 Web site at cmsenergy.com.

This presentation contains forward-looking statements.

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

CMS Energy anticipates its 2006 reported earnings are likely to be substantially lower than its 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, and good morning, ladies and gentlemen.

Thanks for joining us this morning.

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

Today we reported second quarter adjusted earnings per share excluding mark-to-market and other adjustments of $0.33, up from $0.20 a share last year.

The increased revenues from the rate orders last December and the return of customers to bundled service from retailed open access, along with the settlement with the Internal Revenue Service that I'll discuss in a minute, more than offset the costs associated with the planned Palisades refueling this spring and milder weather we encountered earlier this year.

Tom will discuss the details in a few minutes.

We're still forecasting adjusted earnings for the year excluding mark-to-market of about $1 a share.

The incremental tax benefit from the IRS settlement will offset the expected loss of earnings from the sale of the Midland Cogeneration Venture interest and reduced earnings from the MCV-RCP program due to lower spark spreads.

As most of you know, last week we announced the sale of our interest in the Midland Cogeneration Venture for $60.5 million.

This marks the culmination of a long process to reduce our exposure to sustained high natural gas prices and allows us to reduce utility debt.

The buyers have also provided a financial guarantee of up to $85 million to back a performance guarantee to Dow Chemical Company for steam and power.

Overall, I'm very pleased with the outcome of this sale and the effect it has on improving our future financial risk profile.

The Michigan Public Service Commission has already set a hearing schedule to review the transaction by the end of November.

The closing, subject to regulatory reviews, is targeted for late this year, subject to various regulatory approvals.

Just three weeks ago, we announced an agreement to sell our Palisades nuclear plant to Entergy for $380 million.

The plant will continue to be a cost effective source of electricity for our customers through a 15-year power purchase agreement that we estimate will achieve significant cost savings for our customers compared to the cost of continued ownership.

The sale will also benefit shareholders by an immediate improvement in our utility cash flow, a reduction in our risk of future operation and decommissioning, and an improvement in our financial flexibility to support other utility investments.

Cash proceeds retained by Consumers will be used to reduce utility debt.

The closing, subject to various regulatory approvals, again, is expected in the first quarter of next year.

Tom will review the earnings and cash flow impacts resulting from both of these transactions shortly.

Last month we settled with the IRS on the industry-wide issue of the simplified service cost method of tax accounting and effectively resolved all tax years prior to 2002.

We made a payment to the IRS of $76 million representing a partial repayment of the refunds we have received during the last five years.

The settlement also restores tax credits and it increases our AMT credit carry-forward, which will be used in the future to reduce regular tax payments.

The net effect of this settlement is favorable for our shareholders, and again, Tom will review the details shortly.

Our operating performance at the utility and enterprises continues on plan for the year.

At the utility, we completed the second shortest refueling and maintenance outage in the history of the Palisades plant this spring.

On Tuesday, we set a new all-time record of 8,994-megawatts on peak, surpassing the previous mark set a day earlier by 2% and a prior record set just last year by 6%.

We also delivered 10% higher volume on Tuesday than any single day in history and our system and people performed very well.

In the most recent J.D.

Power survey we were ranked fourth in the Midwest on electric residential customer satisfaction, which is an improvement from a seventh place ranking in last year's survey.

Now let's turn to the next page for an update on our regulatory agenda.

In May, the Michigan Public Service Commission authorized an interim natural gas rate increase of $18 million and gave the Company the go ahead to continue collecting $58 million from a prior order.

In July, the administrative law judge issued his proposal for decision in our current gas case recommending $74 million in final relief based on the staff's position, plus the recognition of $200 million in equity infusions made in January and March of this year.

The administrative law judge also recommended the Commission adopt 11% return on equity, slightly lower than the staff's recommendation of 11.15%.

Exceptions to the proposal for decision are due August 9th and replies are due August 30, after which the case will be ripe for a PSC decision.

Consumers is currently recovering its 2006 power supply costs using a temporary power supply cost recovery factor 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 $146 million until after 2006.

In its April filing, however, the Michigan Public Service Commission staff recommended final factors that, if adopted by the Commission and implemented in September, would result in the recovery of an incremental $107 million during calendar year 2006.

The final order in the PSCR case is anticipated in the near future.

The gas cost recovery plan settlement filed on July 24th is a good outcome that, based upon MPSC approval, or when we receive MPSC approval, will set our base GCR factor at $9.48 per thousand cubic foot, with the quarterly adjustment mechanism, as we've done in the past.

This resolves all matters associated with our natural gas purchasing and hedging guidelines for the 2006-2007 GCR period.

Finally, as I mentioned, the Michigan Public Service Commission will review the MCV sale transaction on an expedited schedule.

I didn't mention the Palisades case.

We'll be filing that here in mid August.

Now let me turn the call over to Tom.

Thanks, Dave, and thanks, everybody, for joining the call today.

We're very grateful for your interest.

Our second quarter reported earnings of $0.31 a share were well ahead of $0.12 a share last year.

Excluding the mark-to-market losses in 2006 and the gains in 2005, as well as an insurance reimbursement from previously incurred legal expenses, adjusted earnings were $0.33.

That's up from $0.20 from last year.

Despite heat in the last few days, adjusting for weather in the second quarter, which was less favorable than last year, earnings were $0.36, up $0.18 from a year ago.

On a June year-to-date basis, adjusted earnings are $0.54 compared to $0.55 last year.

Now, turn with me to the next page and we'll look at some of the detail of this.

For the second quarter adjusted earnings per share excluding mark-to-market was down $0.04 at the utility and up $0.17 at enterprises and the parent.

Lower results at the utility included cost increases for plan refueling at Palisades for $0.07, and milder weather compared with a year ago.

Partially offsetting these items was the benefit from the rate orders received last December for about $0.03, and the return to our system of retail open access customers that added about a nickel.

Our return on our ROA load loss dropped from 814-megawatts in June 2005 to 311 in June 2006.

That's down 62% in the past 12 months.

At enterprises and the parent we had a tax benefit that largely resulted from a settlement with the IRS as Dave mentioned, and I'll cover that more on the next page.

Lower depreciation expense at MCV added $0.03.

Lower parent interest added $0.02, and a favorable fuel subsidy adjustment at Seneca, our operations in Venezuela, added $0.02.

In July, we reached resolution with the IRS on the simplified service cost method of tax accounting, and that's an industry-wide issue.

Coincident with this, we resolved all open tax audits for years prior to 2002.

We paid the IRS $76 million in July and we were able to restore tax credits that resulted in $0.20 of tax benefits in the second quarter.

That's $0.10 better than expected and $0.10 better than where we were a year ago.

This benefit will help us to offset items like the projected loss associated with the MCV sale and early debt retirement.

The settlement restores tax credits and increases our AMT credit carry-forwards.

The projected year-end net operating tax loss carry-forwards is now $1.2 billion.

We also project AMT credit carry-forwards in the amount of $290 million at year-end.

The combined tax benefits of over $700 million will help to offset future tax payments, which we'll use to achieve the parent debt reduction plan.

Let's turn to the sale of Palisades and MCV.

They're part of our strategic plan to improve cash flow, grow earnings and reduce business risk.

The Palisades sale will provide an immediate improvement in our utility cash flow, providing flexibility to support other utility investments.

Proceeds in excess of book value will be used to benefit our customers.

The transaction will have little effect on future earnings.

We expect to close the sale in the first quarter of 2007.

The sale of MCV is another step to reduce risk and strengthen the Company financially while protecting customers.

If the sale closes later this year as expected, it will boost our 2006 cash flow by about $56 million and reduce earnings by about up to $0.04.

That depends a lot on the date of closing.

Now compared with keeping our ownership, the sale of MCV will result in increased EPS of $0.06 in 2007 and about $0.14 in 2008.

Future cash flow will decline by $35 million in 2007 and $17 million in 2008 due to lost lease payments associated with our lessor ownership.

Proceeds from the sale will be used to reduce debt at the utility.

Now also as Dave mentioned, this sale avoids risk including the financial guarantee of up to $85 million to back up a performance guarantee between Consumers and Dow, as well as other MCV-related exposure like volatile gas prices.

Our full year adjusted earnings per share guidance remains unchanged at $1 a share.

Recall the higher than planned benefit from the tax settlement will offset items like the loss of earnings from the sale of MCV and lower benefits from the resource conservation program.

Enterprise earnings are down as are interest and other losses, which reflects the shift of tax benefits from one segment category to the other.

The record-setting temperatures of the past few days helped to offset milder than normal weather and storm costs earlier in July.

It's still too early for us to change our outlook.

The cash flow continues to improve.

As shown on the right, we expect Consumers 2006 cash requirements to be $380 million, $150 million better than at our last call.

Operating cash flow of $1.57 billion is $164 million better than our prior guidance, principally due to lower gas prices and the proceeds from the sale of MCV.

Total cash uses of $1.437 billion are up $14 million due primarily to increased dividends of CMS and tax sharing, partially offset by lower capital expenditures.

Due to Consumers improved cash flow, our financing needs are $146 million lower.

We expect Consumers to end the year with about $42 million of cash and $740 million of available bank credit facilities, a strong liquidity position.

As shown on the left of this slide, CMS plans to have positive cash flow of $270 million, an improvement of $80 million from our prior guidance.

This reflects tax improvements, insurance reimbursements and asset sales.

Our financing plans include the issuance of $75 million to retire the remaining gas prepayment obligations.

We also plan to take the opportunity to retire additional debt as it becomes economically attractive for us to do so.

Our forecast results in a cash balance of $352 million at year-end, with $190 million of available credit facility.

Now, each call we provide you with some factors that could changes our profitability or possibly our cash flow.

These factors that you see on this slide are the same categories.

Please note that as we work through the year, the sensitivities are smaller, and let me mention a couple of the items that may be of interest.

We've lowered the MCV-RCP benefit from $0.16 to $0.08 due to changing spark spreads and the sale of the MCV.

We've locked in more than 80% of our gas supply for the utility reducing our exposure to changing prices, but it's still a volatile item.

The cash flow sensitivity related to $1 change in gas prices for the rest of 2006 is about $25 million.

This is down from the previous guidance of $90 million when we had more exposure.

With the recent hot weather, gas prices are climbing again.

If they remain at present levels, this could cost us about $50 million.

Let's turn to our 2006 report card.

Our 2006 forecast is on track to meet or exceed the target set at the beginning of the year.

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

Our forecasted cash flow before capital expenditures is $820 million, an improvement of $220 million from our prior forecast.

This is due primarily to the effect of lower gas prices on core working capital, planned proceeds from the MCV sale, and other cash improvements, including lower than forecast tax payments.

Our debt to capital ratio is a bit better than planned at 70%, and our total debt is expected to be about $6.7 billion, down $800 million from our target.

Remember, about $400 million is due to the elimination of MCV and the FMLP debt.

Thank you all for listening.

And operator, we'd now like to take questions.

Thank you very much, Mr. Webb.

The question-and-answer session will be conducted electronically. [OPERATOR INSTRUCTIONS] And your first question comes from the line of Andy Smith with JPMorgan.

Please proceed.

Good morning.

Can you guys hear me?

Yeah, good morning, Andy.

I had a couple of questions for you guys.

The first is on the MCV EPS impact where you talk about better or worse than retaining the asset.

Looking at this Slide 8 from this quarter and it happens to be Slide 8 from the first quarter as well, are the variances you guys presenting today versus your internal plan, or is there some way that I can relate those two slides?

Because using the old slide from the first quarter, we were coming up with different numbers.

Andy, that's a good question.

These are really versus our plan.

So you could see things like on cash flow what we were expecting to get in lease payments, which we won't now, and you can see things on the earnings side that are losses that we expected that we'll be able to avoid now.

So you're precisely right.

Okay.

So certainly your expectation for forward gas pricing and hedging and that sort of thing would all factor into how you guys are looking at this going forward?

Absolutely.

Okay.

Perfect.

Second question, I guess maybe I'll roll two into this, it looks like, and you touched on this a bit in your comments, it looks like your cash flow is looking pretty solid.

If you look at where you were the end of the second quarter, you know, certainly there's about $850 million of cash on hand.

A portion of that is at the MCV, but it looks like you are running ahead there.

Is there some Cap Ex timing that could also impact that or should we largely think about, it looks like about $100 million ahead of plan that would go to debt reduction and other uses?

Well, that's correct.

We are better off than where we were in our performance call at the last call, and what you should keep in mind as well when you're looking at the second quarter actuals and the status of cash and the like, remember, this is a season that we're going into where we're buying a lot of gas to get ready for the winter.

So therefore our forecast that you see on Slide Number 10 give you a pretty accurate look of where we think we'll be at the end of the year.

Okay.

Fair enough.

And then following on the back of the cash question, and hopefully not preempting a bunch of other questions on the call here, you know, Palisades sale is teed up.

MCV sale is teed up, certainly lowers your risk profile as a company, and to your comments today, cash flow looks very solid.

Certainly dividend, I think, is everyone's minds for you guys going forward.

Could you sort of walk through as we go forward here the thought process around, you know, you do have-- should have a very clean company once all of these sales close.

Certainly the decision and ultimately up to the board, but maybe help us understand how you guys are thinking about that and not to put words in the board of director's mouth, but also maybe help us understand what maybe they might be worried about and why or why not we might be looking at a dividend sometime maybe in the next 6, 9, 12 months?

Well, Andy, as you know, we've been fairly consistent in not trying to preempt what the board may or may not do with regard to a dividend.

We've certainly made a lot of progress on some of the key issues that we've talked about in the past to reduce our uncertainty.

We've got some work to do obviously yet to close the MCV and the Palisades sale, but we've continued to improve our cash flow and reduce the risk profile of the Company.

We'll be talking about the dividend in the upcoming meeting, like we do in every meeting, but I certainly am not going to forecast what the board decides to do at this time.

I'll simply say that we've been very consistent in saying that we think it's important for us to restore a dividend and we'll plan on doing that as soon as it's financially reasonable and prudent to do so.

Again, as I say, we discuss this at every board meeting.

So we'll see what the board chooses to do.

I'm not trying to preempt anything in this board meeting.

I'm just suggesting that we do realize that investors are anxious to see a dividend restoration and obviously we are making progress in that direction.

Okay.

Thanks for the questions, Andy.

Thanks, guys.

I appreciate it.

And your next question comes from the line of Steve Fleishman with Merrill Lynch.

Please proceed.

Hi, guys.

Good morning.

Hi.

Tom, maybe you could just help me out understanding exactly what are the kind of variables that have moved off this dollar guidance.

Just first on the tax gain, I think you said it's $0.20, but only $0.10 more than you expected, so it sounds like from the beginning of the year you were assuming a $0.10 tax gain from this outcome.

That's correct.

Okay.

And then this was then another $0.10 bigger.

That then is offsetting negatives from the MCV sale, lost earnings there, as well the RCP being lower.

That's correct?

That's correct.

At some point you also mentioned something about early debt retirement costs.

Yes, to the extent that we can get into the market and buy back some of our debt favorably, we'll do that.

That may have some premiums associated with it and that, we've got to protect for as well.

The other thing to keep in mind is, remember we did have a mild winter, even though we've all, I think, thinking about where you're all calling from, I think we've all had or are having very hot days hereof recent, but those have been nice offsets to what was a mild spring and on top of that, we've had some storm costs that were a little higher than we expected.

You put that all together, we are very comfortable with our guidance at $1.

Okay.

But just to clarify, are you-- when you're saying you're comfortable at $1, are you already incorporating the hot weather the last month, are you already incorporating some early debt premiums?

I'm just trying to understand what is kind of in there or not.

Yep, we--

And then because you also mention that you're still-- it's still early to review this, but you will be, and I didn't know what you were trying to imply by that statement.

Nothing other than guidance at $1 a share.

But I will say, just so you know, we haven't factored in the last couple of days of hot weather, obviously, that wouldn't be in our most recent forecast at this point.

But we have factored in some assumptions that we made regarding debt reduction and what the costs may be during the rest of the year.

Okay.

The weather that we've had in July obviously is going to help us here in the last few days, and then we've got some storm costs that don't help us, but net-net we'll have to see.

Our forecast when we do something, look at rest of the year on a normal weather basis.

So we haven't factored in the last few days and that will be added in later.

Okay.

And then just to clarify for '07, obviously, this $0.20 tax benefit is not going to recur, or is there some-- is the earnings benefit from this onward just the cash value created in terms of your, you know, AMT?

What I'd ask you to consider is that I know each year as we've talked about this over the last two years, three years, including this one, we've always had the situation of some tax benefits that we say are kind of one-time in nature and may not recur.

But we've been able to find a way over the last three years to have roughly similar numbers of tax benefits, and as we go through our restructuring, which we're coming to the end of but we're not fully complete yet, we are able to take advantage of things that actually help us on that side.

There will be a point in the future, though, where those benefits won't be there unless tax laws are changing one way or the other.

Okay.

So yes, to your point specifically, this $0.20 we're referring to does not specifically repeat next year, but we'll be doing things to try to make a reasonable tax profile.

Okay.

One last question on the MCV sale and this proceeding and I guess also, incorporating the regulatory out next year.

Is there an indication from the staff or the Commission on just whether they generally support this sale, and also would support, or not be opposed to a decision of you exercising the regulatory out?

Well--

Is that--

I certainly can't speak for the Commission.

Let me just say that, you know, we obviously sat down with the staff and talked with them about this proceeding in advance of our filing and indicated what we were planning to do.

We weren't clear that even Public Service Commission approval was necessarily required, but we felt it was prudent for us to put it before them and make sure that they agreed.

Think the fact that they set a hearing schedule on this, the day after we made our filing and set a hearing schedule that allowed them to make a decision at the end of November or thereafter, was indicative that they are being supportive in looking at the transaction and I think that's favorable.

We certainly don't have any indications that they have concerns at this point about what we've done in that regard.

When you talk about the regulatory out issue, that's one that the Commission and the staff have been aware of for a long, long time.

They know it's part and parcel to the contract purchase power agreement that is in existence between Consumers and the MCV.

So I don't think there'll be any surprise if and when the Company decides to exercise that regulatory out next year.

Does the Commission need to approve you exercising the regulatory out?

No, that's a contract right that we have under the PPA.

Okay.

Thank you.

Yes.

Thanks very much.

And your next question comes from the line of John Kiani with Deutsche Bank.

Please proceed.

Good morning.

Good morning, John.

Tom, can you go over the incremental future AMT benefit or increase that you discussed in your opening comments?

I didn't catch exactly what you said.

I think the best way to think about that is not to be too attentive to how we reached the levels that we're at, but to focus on what's actually there.

And our year-end balance expected on the two important pieces, the NOLs would be about $1.2 billion and our AMT credit carry-forwards about $290 million.

That let's you sort of figure out when you think we can make use of those and how far they can last, but they couple together with a benefit of a little over $700 million.

That's probably the best way to think about it, rather than going through all the spaghetti that actually goes into such a detailed calculation like that.

Right, got it.

Okay.

And then just shifting over to enterprises for a minute, hypothetically speaking, I guess are you wed to all three of the core enterprises businesses Taweelah, Jorf and Takoradi?

You know, that's a good question.

I'll just tell you what we've always said and I haven't changed a view and Dave hasn't changed a view on this at all.

We're not out seeking anything regarding those core businesses, but we are always open minded in regards to if somebody were to come along and see synergies that permitted them to offer us the sort of cash up front that would be a positive offset to all the cash flow we expect to get from those businesses in the future, we'd be open minded.

We're very humble about what we've done in our restructuring and finding the best opportunities to continue that.

So we're not looking for anything, but our minds are wide open on that subject.

Okay.

That's helpful.

And then one last question.

Can you go over the status of the CPEE IPO in Brazil and talk about when you think that registration period will be completed?

Right.

We shouldn't talk a lot about that when those processes are underway.

I would just say that that's still our intent, as we have mentioned before, to do an IPO and as the timing of the market is right, we'll certainly execute on that.

And I would-- I could be this specific in saying that we still plan to have that process done this year.

Great.

Thank you.

Thank you for the call.

Please stand by for your next question.

Do we have anymore?

Yes, we do have another question.

One moment.

And the next question comes from the line of Robert Howard with Prospector Partners.

Please proceed.

Good morning.

Good morning.

Just was wondering with that tax resolution, was that a CMS, I guess specific settlement or was that industry-wide settlement?

You made it sound like it was an industry-wide issue, did you just settle individually or was it sort of widespread?

We just settled for ourselves on our own.

It is an industry-wide issue, but the settlement we're referring to is unique to our Company only.

Okay.

And how much did that add to the NOL, or you said it was an increase.

Is there a specific increment as to how much?

Yeah, think the best way to think about that, again, is to look at the impact of the credit restorations that occurred because that's what's moved the earnings near-term and that's worth about $0.20.

That factors into all of our NOL calculations to get us to the level we referred to at $1.2 billion by the end of the year.

So the $0.20 is partly related to that, just the increase in the NOLs?

No, think of it uniquely as we actually had some credits that we could have taken or made use of several years ago when we-- but when we went into the simplified service accounting change, we lost access to those credits.

Now today, when we reverse our position on that accounting, those credits are available to us again and that helps us.

Okay.

Okay.

And then lastly, this may be getting way out there, but I have to ask.

With all the talk about, you know, I guess nuclear becoming more of a hot topic and with MCV originally being designed as a nuclear plant, do there happen to be any, you know, old nuclear approval permits out there for MCV that, you know, these guys end up getting permission, or, that are still good?

Well, you're right.

That is way out there.

I would suggest that the middle of nuclear plant construction ended 22 years ago and while I wouldn't completely rule out the possibility it could be converted to a nuclear plant, it would basically be starting from scratch from a licensing and design perspective.

At least that's my view on it.

So I wouldn't want to contemplate what the buyers' plans are, but that certainly would take a lot of work and it's not something you can just pick up an old permit and start building again.

Yeah, okay.

Just thought it would be, it would have been very interesting if that was the case.

That's it.

Thanks a lot.

Thanks for your call.

And your next question comes from the line of Greg Gordon with Citigroup.

Please proceed.

Please remove your line off of mute.

Please proceed.

Gentlemen, can you hear me?

Yes, we can, Greg.

Thanks.

Just I know Steve asked a lot of these questions.

I just want to make sure I understand the moving parts.

You had budgeted $0.10 in tax benefits for the year, you got $0.20 and they all came in this quarter, which is one of the reasons why you had such a big quarter.

And that incremental $0.10 that you got offsets the lower MCV contribution because of the sale, and also a lower estimate of what you get from the RCP.

All things being equal, that's sort of how you're still comfortable with your dollar?

Basically, that's correct.

There are other factors, including weather and storms and the like, but that's correct.

Great.

And you're ahead on the cash flow basis.

And how much bigger is the year-end balance on the AMT tax credits and the NOLs than what was sitting on the books at the end of the first quarter?

I just don't have my notes or my model in front of me.

NOLs haven't changed and the AMT is up about $70 million.

Okay, great.

If you don't in fact reinstate a dividend this quarter, David, can you at least give us a sense of whether or not we'll get a better clarity on what milestones you might be waiting for in order to re-establish a dividend?

I think investors are a little frustrated, not just with the lack of a dividend, but with the lack of a sort of clear path to a dividend.

Can you comment on that?

Yeah, let me clarify again.

I don't set any expectations as to what the board will do.

I simply was reiterating that the board understands the desire of investors to see a dividend restoration, but I don't want to pre-empt just because we happen to have a meeting coming up that they're going to necessarily do anything at this point in time.

I just wanted to reiterate that they do discuss it at every meeting.

I--

We have not set specific parameters.

What we said in the past that obviously the restoration of dividend would depend on improving cash flow and our risk profile, improving our earnings, so that we felt that once we restored a dividend it would be something that was sustainable, and I think those are still the same factors.

Obviously, we've made progress in that regard and we're obviously getting closer by having made that progress, but I don't mean to imply that anyone should read anything specific into that as to what's coming in this meeting or the next meeting, for that matter.

Thanks, David.

All right.

You're welcome.

And your next question comes from the line of Paul Ridzon with KeyBanc.

Please proceed.

You had cash payment to the IRS of $76 million.

Can you just kind of outline again what, I guess, you bought with that $76 million?

You mean how that occurred, Paul?

Just the incremental benefit that we should see because of this.

Yeah, I'm not sure exactly of your question as to sort of how we arrived at the $76 million or how-- what the results are from there.

I guess what I would just go is to the results, that obviously moving to the different interpretation of the simplified service accounting required us to make a payment to the IRS and that's the net payment we're making, $76 million at this point in time.

But then that allowed us to benefit by restoring some earnings credits and, of course, that's the $0.20 that we've been talking about.

The $76 million cash usage, though, has been offset with other opportunities that we've had.

And then incrementally, you picked up $70 million of AMT carry-forwards?

That's correct.

With the Commission now looking at the MCV sale, does that diminish the 2006 impacts given that that won't close until later?

Is that now disc ops?

Well, the MCV sale for accounting purposes actually won't be treated as a sale.

I won't take you through all the detail of that, but the equivalent of that is occurring.

So because it's not technically a sale, it won't go into discontinued operations.

What will happen is the MCV sale itself, or the transaction, when it occurs, is when we'll lose earnings.

So we were trying to tell you a little bit earlier that we're estimating the close date and from whatever point that is to the end of the rest of the year, those would be earnings that we would have to forego.

But we're not foregoing anything between now and the closing.

On the announcement of the MCV transaction, you indicated there'd be $0.04 of lower earnings and since then we've learned that the Commission wants to do an expedited review, which could push it basically to year-end.

So is that $0.04 possibly not going to go away?

That possibly is an upside.

You're exactly right, but we can't predict that exactly.

And that's why on our Page 8, or our Slide 8, we showed you a range for this year of anywhere between zero and $0.04.

And then I guess back to Steve Fleishman's question, you know, the sustainability of your bag of tricks here, how long do you think we can keep getting these things as fundamentals improve and start to offset this?

Paul, we don't think of them as a bag of tricks.

I think the best way to think about this side of the equation is that any time you've gone through a lot of tough years and had a lot of losses, there is that fortunate offset to that from the tax side, whether it's from restructuring or having NOLs, or building up AMT credits and that's something that we've been able to do and through our restructuring, we're taking full advantage of that.

So we've had benefits like this for the last few years and it's difficult to predict, but there's probably another year of some benefits that can occur to us, but as we finish our restricting completely, with the sale of businesses in Latin America and the things that we've told you about, we will get to a more normalized level of taxes and it will be easier for you to follow us.

We're just glad we have those opportunities to make use of.

So is your one year of further optimization potential of the same magnitude that we're kind of seeing here?

I can't predict any magnitude, but there's still a potential of things that we can take advantage of as we go into next year.

And I guess I have to try asking Dave, you know, maybe rephrase the question.

What's the biggest hurdle you see right now to the dividend?

Well, I'm not going to answer the question any differently.

I think as we've said before, earnings, cash, sustainability, comfort on the risk profile on the part of the board when they get to the point where they look at our situation both currently and on a go-forward basis and they feel it's prudent to restore a dividend, then they will.

But I can't speak for the board because that decision has not yet been made.

Thank you.

And your next question comes from the line of Steve Fleishman with Merrill Lynch.

Please proceed.

Hi.

Just a follow-up on the gas case.

Could you comment on your thoughts on the ALJ recommendation with respect to whether, you know, you would be able to earn the allowed return, something in that range, or maybe put another way, how well does the ALJ capture the conservation impacts you've been seeing on demand?

Yeah, let me mention that we mentioned at the end of-- in last call at the end of the first quarter that we had seen some conservation.

I think we estimated it in the range of 4% on the gas side of the business over the winter in apparent reaction to higher gas prices and, frankly, to our own advertising programs to help customers conserve.

We also mentioned at that time that it's a little difficult to predict how sustainable that customer reaction is.

Historically when we've seen that kind of reaction, sometimes it went away and people set their thermostats back to where they were after they kind of got accustomed to the new prices, so it's a little difficult to say.

But certainly we've seen flat to declining sales in the gas side of the business with these higher prices, and we have testified to that effect in the ongoing gas case.

In fact, our testimony suggests that about a 4% decline in sales would be an appropriate level on which to base the future rates.

The staff's filing was at a flat sales level.

There will be discussion with, I'm sure at the Commission level as to what the appropriate sales level is when they ultimately come out with their rates and I can't predict what they'll be.

I would say the administrative law judge's case was a little bit more favorable than the staff's only because he took into account the additional equity that we infused into the Company, into Consumers earlier this year, but we continue to believe that there are other issues that it's important that, for the Commission itself to look at, like the sales issue before they issue a final order, and we're hopeful that they'll do that.

Hard to predict exactly how that will come out.

What did the ALJ use for sales forecast?

Did he use the staff?

That's my recollection, but I'm not 100% sure.

Thank you.

I know that he did not use something lower than the staff's.

Thank you.

Thanks, Steve.

And your next question comes from the line of Stephen Huang with Citadel.

Please proceed.

Hi, good morning, gentlemen.

Good morning.

I had a question here on the gas prepay.

Are you guys basically now done with all your gas prepay?

With this transaction we're referring to, yes.

Okay.

So now that going forward we will no longer see a cash flow drag on gas prepay?

That's correct.

And how big was that in that $62 million negative overhead in prepay this year?

I would say approximately $10 million.

Okay.

And how much more was retired in your new plan?

Of the 236 higher debt retire was that all from gas prepay?

Well remember, we did two-thirds of it last year.

We had about a third of it yet to do this year, so about $70-ish million.

Okay.

And any update on your discussions with the IRS regarding the decommissioning trust position and whether or not you can get that done by year-end?

No, too soon to talk about that, but we actually will begin that process.

Okay.

Is there like an estimated timetable on that, for the $116 million?

No.

In fact, I wouldn't want to tie that down to a timetable.

Clearly, if we could do that before the close, which would be in the first quarter of next year, that would be good, but we can still work on it after that if necessary.

Okay.

And you would pay taxes on that, correct?

Well, that's correct unless we allow it to sit toward the end of the period.

So there's still options available to us on how we do it, but I think we should just keep you posted as we go through the next couple of quarters to see how we proceed.

Okay.

And can you give us an update on The Home Depot sale or the bank sale to Home Depot?

Yeah, just briefly.

Obviously, we have that signed and we're waiting for regulatory approval from the state in Utah and also the FDIC.

The FDIC, as you know, has put out a six-month moratorium on approving changes of this kind or any new charters of any kind.

So I really can't add anything except that the timetable for the closing will probably be more like six months away from now, but we'll watch that carefully and we have people working on that with the regulators.

And with the recent gas spike that we're seeing, the MCV-RCP is going to be higher than what you're forecasting today, is that correct?

Well, remember, that's the spark spread is the important thing.

The recent gas spike has actually been because of high electric demand and we've seen higher electric prices as well.

So it's not quite clear that that will have a big impact on the RCP.

But RCP, spark spreads in general have been down this year from where they were last year and that's why we forecast a lower benefit from the RCP.

Okay.

Last question I had for you, David, is, you know, typically the board not only makes the decision on the dividend on their own, they normally ask for management opinion.

I know you've been talking about how you didn't want to, you know, jump ahead of the board, but I'm curious to know what you and management think independently and how you guys have been recommending to the board, or what you guys are thinking of in that regard.

Well, frankly I'd prefer not to comment on that.

I'm actually one of the board members, so it's important for me not to comment on that.

I will say that I mentioned it's one of the board's priorities, it's obviously one of management's priorities as well to restore a dividend and that's about all I'm going to say.

Okay.

Thank you.

Thank you.

That's all I had.

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

Please proceed.

Hi.

Just had a follow-up.

Someone earlier mentioned with Palisades sold and MCV sold that you'd be a pretty clean company.

I'm just wondering what's left for you guys to do on the restructuring side?

Is there anything that comes to mind?

Well, the way to think about that is a lot of the work that we've already done still has financial implications as we go forward, and then on top of that, we still got a lot of very important things that we may have signed but we haven't closed yet.

We still need to do the work to get to a closing on the sale of Palisades, a closing on the sale of MCV and to continue to do the sorts of things that makes us a healthier company.

One of our priorities is to continue to take our cash as we can and invest it into the utility, which then can be reflected in rate cases as we go forward.

So all of that's part of a restructuring that kind of doesn't happen with one event or two events, but the impacts of what we do flow into our business that permits us to get healthier and stronger as we go forward.

So we knew three years ago we were on a long path and we feel good that we're right on that path, and we've still got a little bit of work ahead of us to complete that good work.

Sure, but I mean assuming you complete Palisades and MCV, are there any other strategic moves that you guys--

We normally don't talk about I think the sort of things that you're hoping I'll comment on regarding maybe M&A activity or something like that.

We just don't comment on it, but I guess I'll throw in another big one.

We still have to close the sale of Enterbank.

Okay.

Appreciate it.

Your next question comes from the line of John Kiani with Deutsche Bank.

Please proceed.

Hi, just a follow-up question.

Tom, did you say that when you all took a look at and reaffirmed your guidance for about a dollar for '06 that there may be some negative impact from debt premium payments or retirements of debt?

Did I hear that correctly?

You did, and we said that we've actually factored that into our forecast.

Obviously that can change on market conditions, one, our ability to do it because we're not going to make-- we're not going to take and make an early debt retirement if it's not economically sensible to do it, but we have factored in some assumptions already into our dollar for that.

Can you give us an idea of approximately how much that is?

No, we actually aren't because that's sort of something that we're just estimating that we'll be able to do.

You can see from our cash flow what we're planning to do in terms of any new debt and debt retirements, but we don't want to talk specifically about the individual ones.

Got it.

And then just one other question on the incremental $100 million, or $107 million for fuel expenses and power costs at Consumers.

Is that potential incremental $100 million of cash flow for 2006 based on the upcoming MPSC staff recommendation included in the cash flow forecast that we see on Slide 10?

No, I don't believe so.

You're referring to the PSCR issue.

That's right.

Right.

The Commission, if we didn't get any change in our power supply cost recovery factors through the end of this year, we would have a deferred recovery, we expect, of about $147 million, but it would not show up in 2006 and it's not currently in our cash flow plan in 2006.

We are hopeful to get an order in that PSCR case that adjusts those factors.

The number that I quoted when I talked about that earlier suggests that if we got such a factor and we were able to implement an increase in September, that through the end of the year we would anticipate a little over $100 million of improvement in cash flow in 2006 as a result of that.

Got you.

So that would be swept forward roughly a year and that would be incremental to what we're seeing on Slide 10?

Correct.

Thank you.

You're welcome.

And I show no further questions in the queue at this time.

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

Thank you.

Just very brief closing remarks.

I know there's a lot of calls today.

Thanks, again, for joining us today.

We've obviously been very busy and we're certainly pleased with the progress we've made of late.

We've talked quite a bit about the recent sale announcements of Palisades and MCV interests.

I want to caution you that we certainly understand there's a lot of work to do in gaining all the regulatory approvals and actually getting those closings completed and that will be high priority for us in both cases here over the next several months.

I also want to close by complimenting our operating employees.

They've done an exceptional job in meeting record demand this year and certainly over this past week.

I'm very pleased with that.

It's been challenging, as you know, across the country and it's been challenging here in the state of Michigan, but we've really had minimal outages and quite good service and I think that's recognized by our customers and our regulators.

Thanks very much, and have a nice day.

This concludes today's conference.

We thank everyone for your participation.

Good day.