CMS能源 (CMS) 2006 Q4 法說會逐字稿

Good morning, everyone, and welcome to the CMS Energy 2006 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 noon eastern time running through March 1st.

This presentation is also being webcast and audio replay will be available approximately two hours after the webcast, and will be archived for a period of 30 days on CMS Energy's website in the Invest in CMS section.

At this time I would like the 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 year end earnings presentation.

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

Our earnings press release issued earlier today and the presentation used in this webcast are available on our website at cmsenergy.com.

This presence 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.

CMS Energy anticipates its 2007 and possibly 2008 reported earnings will be substantially lower than its adjusted earnings due to the expected effect of asset sales.

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

Now I will turn the call over to Dave.

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

Thanks for joining us today.

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

Before I get to my slides, let me just summarize what you're going to hear today.

We had a good year in 2006, including strong operating performance.

We exceeded our goals for adjusted earnings and cash flow and put some important uncertainties behind us.

Our recently announced asset sales will transform the Company, accelerating our financial improvement plan and increasing our focus on investment in Consumers Energy, our Michigan utility. 2007 will be a transition year as we'll lose earnings from asset sales and not replace them until the incremental equity investment in Consumers is reflected in rates.

We expect our adjusted net income for 2007 to come in at about $0.80 a share.

We expect to be back on track in 2008 and are forecasting adjusted net income of about $1.20 a share next year.

Tom will go into more detail on that.

Cash flow in 2007 should be very good due to largely to asset sales but operating cash flow will also contribute.

With our increased focus on the utility, Tom will provide an overview of our utility investment opportunities and projected rate-based growth.

There is still some uncertainty about potential major investment in a new generating plant, but Michigan's recently issued 21st century energy plan is a major step in the right direction.

We'll talk a little bit about that as well.

As I said, 2006 was a good year for the Company on a number of important fronts.

In addition to the good earnings and cash flow results in 2006, we received several constructive regulatory orders from the MPSC that will provide significant cash flow and earnings in 2007 and beyond.

We received high rankings from our gas and electric residential customers in recent J.D.

Power and other customer satisfaction surveys, validating our ongoing efforts to improve Customer Service and operating performance.

We settled the ERISA and securities class auction lawsuits in 2006, and are awaiting court approval on those.

We also settled our dispute with a construction contractor for the Dearborn industrial generating facility.

We made significant progress on our business plan, selling our interests in MCV and investing $200 million in the utility.

We signed an agreement to sell our Palisades nuclear plant which we expect to close by about May 1st.

Proceeds from the recently announced sale of Enterprises businesses, totaling $1.2 billion, will be used to invest in the utility and reduce parent company debt, further improving our outlook.

After the sales are completed, CMS will have essentially exited the international marketplace.

Perhaps the biggest milestone in our financial recovery was the reinstatement of our common stock dividend announced last month.

The reinstatement demonstrates the confidence that the board and senior management have in our business plan.

As we continue to execute our strategy, we expect to move the dividend yield closer to the sector average over time.

Overall we've made good progress since this time last year.

Let's take a final look on the our 2006 financial report card.

Our adjusted earnings per share, excluding mark-to-market, was $1.08, exceeding our target of $1.

Actual cash flow before capital expenditures was $763 million, $323 million better than targeted, primarily due to lower natural gas prices and the sale of the MCV interest.

These were offset somewhat by the delay of planned enterprises asset sales into 2007.

Our debt to capital ratio of 72% was 1 point higher than our target due to the shareholder litigation settlement and gas at a common impairment.

However, our consolidated debt was $900 million better than our target due both to the elimination of MCV debt and the improved free cash flow.

2006 was another busy year on the regulatory front and the Commission's orders were generally favorable.

We were especially pleased with the Commission's December 21st order, setting a temporary factor for the 2007 power supply cost recovery plan case.

That order allows to us roll $155 million of prior year under recoveries into 2007 rates rather than waiting for a later reconciliation case.

That will contribute to expected strong cash flow this year.

The Commission expeditiously approved our MCV sale only four months after our filing.

In late November, the Commission issued its final order in our gas rate case, largely adopting the administrative law judge's recommendations and increasing our rates by $81 million.

The Commission did deviate in a constructive way from the judge in setting our rates based on a lower sales forecast.

We filed a new $88 million gas rate case on February 9th, reflecting a growing rate base and a higher level of equity.

More about this on the next slide.

We also plan to do file an electric rate case in the first quarter and in response to the 21st century energy plan, Consumers plans to file in the second quarter a resource plan that will address both short-term and long-term measures to meet forecasted demand over the next 20 years.

Here is a little more detail on our February 9th gas rate case filing: the case is based on a 2008 test year and reflects the $400 million of equity that the parent plans to infuse this year, bringing the financial equity level to roughly 50%.

You may recall that the commission has encouraged us to strengthen the utility's balance sheet, so we anticipate a favorable reception.

The filing includes a revenue decoupling mechanism for recovery of fixed costs that did not vary with deliveries, and proposes a residential energy efficiency and conservation program.

There is no schedule for the case yet.

It will be set at the March 21st prehearing conference.

However, the staff has already begun reviewing our filing, and we believe the simplicity of the case will support an order in the fourth quarter.

In late January, the Public Service Commission Chairman, Peter Lark, submitted the state's 21st century energy plan to Governor Granholm in response to her request of last April.

The plan forecasts a modest 1.2% load growth which is down substantially from the earlier capacity need forum report.

However, it also proposes an aggressive energy efficiency program funded by a wires charge on all customers to shrink load even further.

It proposes a 10% RPS standard requiring that all loads serving entities obtain at least 10% of their energy supplies from renewable resources by 2015.

Despite these aggressive goals, the plan still recognizes the need for a new base load coal plant by 2015 and several other base load units shortly thereafter.

The last base load plant constructed in Michigan was almost 20 years ago.

Implementation of the plan will require legislation.

We believe that that will require repeal or significant reform of Michigan's electric choice law.

The plan supports preapproval of new plants through a certificate of need process and also supports recovery of financing costs during plant construction.

We expect to file our resource plan in the second quarter.

We've not yet settled on a specific generating technology or site, but I do expect that will be proposed in the construction of a new base load plant.

Stay tuned.

Our priorities for 2007 are very clear.

First, we need to close both the sale of Palisades and the $1.2 billion of Enterprises sales announced over the past several weeks, and we need to complete the auction of our CPEE, Jamaica and Atacama assets as we've announced.

Those steps will allow for the paydown of parent company debt in advance of our earlier plans and also improve our business position.

They will also allow us to reduce our overhead costs substantially, supporting higher earnings in 2008 and beyond.

We plan to invest $400 million of the proceeds in the utility.

We already filed a gas rate case, and we'll soon file an electric rate case both reflecting the higher investment.

We'll work to expedite both proceedings and anticipate orders in the fourth quarter.

Our future will be even more focused on utility investment including the potential for investment in new base load generation, and we'll seek approval for that in conjunction with our second quarter resource filing.

Now let me turn the call over to Tom for more details on the financials and the outlook.

Tom.

Thanks, Dave.

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

Let's get right into the 2006 results.

As shown on the left, we reported a loss of $0.41 a share.

Excluding the impairment of our interest in GasAtacama, the legal settlements for pre 2006 legacies and mark-to-market, our adjusted earnings were $1.08.

As shown on the right of this slide the utility contributed over $1, and Enterprises more than $0.50.

Offsetting interest in other costs were about $0.44.

At a total of $1.08, that's up $0.12 from last year and $0.08 better than our target set at the beginning of the year.

Let's take a look at this in a bit more detail on the next slide.

Compared to 2005, our adjusted earnings per share was up $0.16 at the utility, and it was down $0.04 at Enterprises and the parent.

At the utility, revenue was off $0.05.

Mild weather resulted in a $0.22 decline, offset partially by the return of retail open access customers and modest demand growth.

Rate orders issued in late 2005 and 2006 were partially offset by planned plant outages and other operating costs, resulting in a net increase of $0.14.

It is a coincidence that taxes were favorable $0.07 at the utility and adverse $0.07 at Enterprises and the parent.

At the utility, an IRS settlement helped.

At Enterprises, the variance was due to the absence of 2005 benefits primarily from the American Jobs Creation Act.

This was partially offset by tax benefits in 2006 related to the simplified service cost method of tax accounting.

Last, projects and favorable interest costs were offset in part by shared dilution.

Cash flow ended strong.

Consumers' cash at year end was $36 million, with an available bank facility of $442 and a second lien facility of $300 million, a pretty good liquidity position.

After Consumers dividends and tax sharing of $455 million and capital investment of another $741 million, the cash outflow was $231 million.

This was financed with a $200 million equity infusion from the parent and some short-term borrowings.

As shown on the left, CMS cash at year end was $188 million with an available bank facility of $202 million, which also gives the parent a nice strongly liquidity position.

Cash on hand at the beginning of the year plus cash flow from dividends and tax sharing was used to fund general corporate expenses as well as to invest $200 million in the utility and retire an additional $200 million of debt.

Now we know you're most interested in our future guidance, so let's get at that.

As many of you requested, we're reaching out two years to help see through the asset sales and restructuring under way this year.

While 2007 earnings will fall to about $0.80 a share, we expect earnings to rebound to about $1.20 in 2008.

This will result in an annual EPS growth trend of about 7.5% over the 2004 to 2008 period.

Precash flow before CapEx and dividends of $2.1 billion in 2007 reflects proceeds from the recently announced and planned asset sales.

As we invest asset sales proceeds in our utility, benefit from a full year of debt reduction, and reduce costs associated with the sale of the Enterprise businesses, our capital structure is expected to be restored to target levels at both Consumers and the CMS parent.

Patience around restructuring has been paying off.

We've announced three business sales this month, and the planned auction of our remaining businesses in Latin America, so perhaps it would be good to go back and recap using this map.

The sale of businesses in green represent all of our remaining assets in Africa, Asia, and the Middle East.

These businesses are being sold to TAQA for $900 million.

The sale of some businesses in Argentina and Michigan announced February 1 are shown in gold.

These are being sold to Lucid Energy for $180 million.

On February 13th, we signed a memorandum of understanding for sale of our Venezuelan electric utility called Seneca as shown in brown for $105 million.

We're pleased with this outcome.

Another group of businesses we plan to sell by auction this year are shown in red.

They total about 400 net megawatts, 700 miles of pipeline and our interest in our electric distribution company CPEE, in Brazil.

Last year, we announced our plan to sell a majority of CPEE through an initial public offering in Brazil and will retain that as an option pending indications from the auction.

We expect a majority of these sales to close by this summer.

Once the sales are complete, CMS Enterprises will be essentially a U.S. business with interest in about 10 IPPs totaling over 1,000 net megawatts.

For the past four years, our strategy has been to divest nonstrategic businesses, invest equity in the utility, and reduce parent company debt.

As illustrated on this slide, we've made some progress of a substantial level on both.

Before the end of this year we expect to have invested over $1.5 billion in the utility, raising our financial equity ratio to 46%, but that's the equivalent of 50% when we use cash to pay down debt early in 2008.

We'll have reduced parent debt to around $1.4 billion, just below our $1.5 billion target, resulting in strong credit metrics.

For example, at 17%, the funds from operations to debt measure is up 8 points over five years to a level at the top end of our targeted rating range.

We've kept to our commitments to raise equity at consumers to 50% and reduce debt at the parent.

Looking forward, here is our present utility capital expenditure plan at over $2 billion during the next three years.

Environmental spending drops off in 2008 as we complete the clean air work at our Campbell three plant that was started last fall.

As of December 2006, we've incurred $688 million to comply with Federal Clean Air Act and anticipated spending over $150 million after 2007 to complete the nitrogen oxide emissions work.

The next phase of our environmental work will relate to particulates in mercury which will likely involve somewhere between $500 million and $1 billion over the next decade.

This is not yet in our numbers.

Much work associated with our new SAP base systems will be completed in 2007.

The cost to implement this new software system is about $125 million.

We expect to see a reduction in O&M expenses once the new program is operational in 2008.

Beyond these plans, we'll need to step up CapEx at both the electric and gas utility to provide our customers with improved reliability and capacity needs.

Our present plan is repeated here in this slide with maintenance-related investments shown in light blue, environmental in green, and generation related in dark blue.

These investments will improve capital structure and help fund service improvements.

They result in a rate base growth of 3.5% a year from $7.6 billion today to $9 billion by 2011.

We identified potential incremental investment opportunities of about $2 billion over the next five years.

We're likely to incorporate at least 25% of these in our plan.

Several of the most probable opportunities include advanced metering initiatives, new and upgraded generation capacity, compliance with clean air interstate and mercury rules and needed improvement to our distribution system.

If we invest only 25% of these as shown in gold, the rate base would grow by about 4.5% annually.

Our Enterprises restructuring plans permit us to accelerate investment in the utility, taking advantage of a portion of these growth opportunities we just discussed.

This restructuring will, however, cause 2007 earnings to drop to about $0.80 a share as the benefits of investing in the utility and debt reduction don't offset fully lost earnings associated with the businesses sold in that year.

By 2008, the return from investment in the utility, a full year of interest savings from debt reduction, and associated overhead reductions are expected to put earnings growth back on track at about $1.20 a share.

For 2007, the earnings decline to $0.80 reflects increased utility earnings of $0.33, primarily from the full-year impact of rate orders and normal weather, more than offset by lower Enterprises earnings associated with lost earnings from asset sales and smaller tax savings than in 2006.

For 2008 higher utility earnings of $0.34 reflect earnings on the equity investment of the $400 million made possible by Enterprises sales and the full-year benefit of elimination of MCV PPA contract losses.

Higher Enterprises and parent earnings of $0.06 are associated with lower administrative costs and interest savings from asset sales.

CMS will have less debt, a stronger balance sheet, less risk, and continued strong earnings capacity.

Cash flow for 2007 reflects the last wave of planned restructuring.

As shown on the right, Consumer sources and uses of cash will be at higher levels than 2006.

Cash flow sources of almost $1.6 billion are up $368 million from primarily due to the sale of Palisades, a full year of gas rate relief and normal weather.

Consumers cash uses are up with the increased pension payment.

To help fund Consumers capital expenditures commitments we expect to infuse $400 million of equity from the parent.

As shown on the left, CMS plans to have positive cash flow of over $1 billion, enough to retire660 million in debt, send $400 million to Consumer and pay $44 million in dividends to our common shareholders.

Important sensitivities around our earnings and cash flow targets include the magnitude of cash received from asset sales and the ability to earn on equity invested in the utility.

If we generate an additional $100 million in proceeds from asset sales, earnings would improve about $0.02.

If proceeds are lower by $100 million, earnings would decline by about $0.02.

If the proceeds were used to invest in the utility, the benefit would be $0.04, a better proposition than debt reduction.

Also, a 50-basis point change in the utility return would impact earnings by about $0.06.

And its important that we complete gas and electric rate cases on a timely basis.

Our 2008 guidance assumes that rate orders are effective January 1, 2008.

A three-month delay would reduce earnings by about $0.17 in 2008.

Now, we made a lot of progress implementing our business plan over the past five years, but we still have much more work to do as we transform the Company to predominantly a Michigan utility.

Our growth over the next two years will come from the redeployment of cash into the utility and to reduce parent debt.

By 2008, adjusted EPS should be back on track at about $1.20, up 7.5% each year from 2004.

Free cash flow is returned to a healthy amount, enough to support CapEx and dividends.

Our capital structure and credit metrics are improved to target levels and importantly, our risk profile is reduced while our growth prospects are enhanced with substantial investment opportunity at the utility.

So Dave and I would like to thank you for your continuing interest in the Company, and at this time, Operator, we'd like to open up the calls.

[OPERATOR INSTRUCTIONS].

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

Please proceed.

Good morning.

Good morning, John.

On slide 16 where you show rate-based growth opportunities through 2011 up to 7.5% with the new opportunities at -- 25% of the new opportunities being about $500 million, can you talk a little bit about how you came up with that 25% or $500 million?

Are you just being conservative?

How much of the 21st century energy plan encouraged coal plant is included in that?

John, I would say that at this point in time these are sort of preliminary estimates.

We have of course been looking harder at the utility and opportunities to invest in the utility as we've been able to shift our plan as a result of these significant asset sales, and we have not yet reflected significant dollars associated with the new coal plant.

Of course most of that investment would occur closer to 2015 or in the years immediately preceding that.

We've reflected some of environmental costs but not the Phase II as Tom indicated.

We've still got particulate mercury costs and haven't even got the exact design because some of those requirements haven't been finalized, but we expect those in the range of $0.5 billion to $1 billion.

Those are not reflected in those numbers.

Frankly we're really looking right now at opportunities, for example, in advanced metering infrastructure.

A number of utilities as you know have moved to electronic or remote meter reading.

We've not done that at this point, but we think we can go even further than that and probably will have to to support some of the energy efficiency and conservation measures that are promoted in the 21st century energy plan over time, and we don't even have a good number for that yet, but I would say it is $500 million plus or minus over the course of a number of years.

We certainly have some additional opportunities to shore up our distribution system to address some of the growth over the past decade in Michigan.

There is quite frankly a number of areas where we have opportunities to enhance our investment in the utility.

We're going through more detailed review of that right now.

We are going to sort of follow a standard of trying to keep our rates within the general rate of inflation over time, and so we won't get carried away with the amount of utility investment that we're going to make, but there is a lot of opportunity for growth here, and we'll finalize that and be more specific in future calls on that issue.

That's helpful, Dave.

The $500 million to $1 billion you said is not reflected for Phase II, what was the general time frame for that spending?

That will probably start towards the tail end of the five-year period we show here, but the majority of those expenditures would happen in the five-year period subsequent to that.

Very good.

One other question for either Tom or you, Dave.

Do you have any debt repurchase or tender costs embedded in the 2008 guidance of about $1.20?

No, we don't.

We're assuming we can pretty much do our debt reduction plan on a timely basis with maturities as they come up, pretty close.

What's the remaining capital and operating NOL pro forma for the Enterprises asset sales?

If you're asking for the remaining NOLs, keep in mind you're going to see shortly that the NOL status at the end of '06 will be up to about $1.6 billion as we've gotten some benefit from the simplified service credits.

We're expecting that after these sales that we're going to be in the range in '07 of around $1.2 billion, and then as you go out to 2008 we've got a range it a little bit to say $600 to $800 million, because it will depend on the burn rate in 2008, how much we can use, because remember our philosophy: if we can find shelters like the pension contribution at the utility this year, then we will take advantage of those shelters appropriately at Consumers, and that will slow down the use of the NOLs, which is just fine because we'll put those to use over time as we can.

These sales are going to eat up some of that, and it will depend on the timing of the sale and depend on how these are treated, whether they're ordinary or capital gains and we can't really nail all of that today.

Great.

Thank you very much.

That's helpful.

You're welcome.

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

Please proceed.

Looking at slide 15, looks like D&A is flat in '09.

Wondering what's driving that?

Is that a life extension?

Well, you can see D&A kind of flattening out here as you see our capital expenditures coming down just a little bit, so it is a mixture of affecting the Palisades sale and all the different things that are happening during that period.

What you can see that I think is also helpful for you, is to take a look at slide 15.

There we show what the D&A is as of today, and then we build up from there in a rough scale to give you an idea of what our plan looks like which goes all the way up to that solid blue line and a 3.5% growth in rate base, and then the orange line is the opportunity which could be more than that, but we're trying to be realistic in our projections.

Thank you.

When you file your electric case, is it going to be the same level of complexity or just simplicity I guess I should say as to the gas case which will enable 1/1/08 implementation?

Pretty close.

The electric business can be a little more complicated, and unlike the gas business, it has been a couple years now since we've had an or electric rate case.

It might be a little more complex but not a lot.

We've been working with the staff closely and simplifying our filings, and we think it is pretty close to what we're doing on the gas side and are hopeful it can be processed in the same time frame.

Given the maturity schedule, what level of the debt to paydown will be done during calendar '08?

Well, you can get a little bit of a sense of that from our cash flow that we give you, but let me give you a rough idea of what we expect to have happen.

During 2007 we'll take out a little less than $300 million of the debt -- of the existing maturities.

There is another set of maturities of a little over $500 million in '08 and a little over $400 million in '09.

During the next two years this year and '08 we'll probably address all of that as we can on a timely basis.

We're not giving out the specific schedule of what we are going to retire and when at this point, but we'll try to do those in an optimal economic manner.

You expect to have the $400 million that matures in '09 retired by the end of '08?

Could be by the end of '08, early '09, but probably by the end of '08.

Did I hear $44 million ear tagged for dividends in '07?

That's if we took what our present level is today that we've announced and just extrapolate that.

That's all we've done for you to help you look at our cash flow planning process.

That's no predictions of what will be done with a dividend over time.

And then one last question as we look at slide 16, the impressive rate base growth opportunities, what -- if we went to the 7.5%, what level of that can be done with internally generated funds?

Well, let me start with the plan that we would have is to try to figure out just how to do that within the structure that we have in place today.

We would look for a way to do that without having to go outside.

Obviously beyond some of the business sales that we're doing now.

That would be one of our targets along with the important target Dave talked about of trying to keep our rate growth, revenue growth if you will, to something that's in line with inflation or lower than that, so we're going to be watching out for our customers, and we're also going to be watching out for the need for any new equity.

Our goal would be to try to avoid that if we can.

Paul, I would just say I wouldn't focus on the 7.5% line.

We've identified opportunities at that level.

I don't expect that we'll be investing at that level, but somewhere between the 3.5% line and the 7.5% line, and we've shown you, for example, what the 25% line might look like.

As I said, we're going through that as we speak, this year we'll be laying out a new capital plan at the utility.

And the rationale for not taking the debt down more quickly, is that not worth paying the premium for the short life remaining on the debt?

Yes.

You can think of it this way to help everybody is we've talked about the $400 million that we want to put into the utility to improve its equity up to a 50% ratio, and that's a priority for us.

We're going to do that.

Then we're going to use the bulk of the rest of those proceeds to address the debt, and we're going to do that in the most economic fashion that we can, and I have learned a long time ago to try not to be too predict active about that until the time comes.

Thank you very much and congratulations on the execution.

Thank you.

Your next question comes from the line of Ashar Khan with SAC Capital.

Please proceed.

Good morning, sir.

Good morning.

Just wanted to go through the assumptions.

I guess you have a gas rate base assumption which you just filed.

Could you just mention the '08 forecast, what kind of electric rate base assumption is based on that?

Well, first we'll give you the rate basis that exists at the end of the year.

Electric is $5.1 billion, and gas is just under $2.5 billion.

Okay.

Tom, what do you expect the rate base to be in 2008?

We're not predicting that.

Okay.

If I can go a second, Tom, I am looking at it, what kind of a tax rate should we assume for 2008?

As you go out to 2008, now, this is a new story, and I think it is a good question to ask, You should now look at us on a more normalized basis of around 35%.

Remember, we told you in the past with our international businesses we had the opportunity to invest there, and if you will put off some of the taxes and get a benefit and be around the 25% zone.

That's a very good question because as we become more U.S. denominated, you should think of us as a 35% tax rate payer.

Okay.

Tom, if I do the math, $1.4 billion of debt at the end of '08 with 7.5% coupon apply a 35% tax rate, I am getting nearly $0.30 in interest at the parent.

I am looking at your forecast, which is like around 40.

Is that just because the debt gets out at later end of the year and the full interest savings are not shown in 2008, that we will get the benefit of nearly like a dime in interest savings in '09?

It is primarily timing when you're doing your math.

Of course we're doing it with the precise maturities that would go away.

We're not being descriptive yet about exact timing of the debt reductions.

There is a huge interest savings component which falls in '09, is that a fair assumption?

Absolutely.

Okay.

And then if I can just go to the line item you have taxes and other negative five.

Can you just explain what that is and how we should model it going forward?

I am not sure, what slide are you looking at?

I guess in your -- hold on.

I apologize.

I guess the slide where you give the forecast for 2008 among its different components, right, the utility, interest and taxes and other, tax and other of negative 4 if I am right.

This is slide 17.

Hold on just a second and we'll give you an answer.

Just overhead.

There is a good question.

In fact, that's a good point.

A question I am sure someone is going to ask is where is our overhead going to go with these restructurings that are going on?

We'll be taking out some of the overhead this year which will give us some benefit in 2007, and that's built into our cash flow and earnings projections.

We'll be working very hard during the course of 2007 to get ourselves down to a level where in 2008 there will be very little overhead left, and you should think of something in the range of 10 to $20 million.

All of that will be firmed up as we go through the year because it may also be sensitive to timing as we provide transition support to people who are buying the businesses.

Okay.

This is just overhead and some taxes that's negative 4, which is I guess going to remain ongoing.

Is that the way to look at it?

Well, I think of that mainly as overhead and the parent related level.

And then if I can just add, David, as you look at your -- first of all, congrats on reinstating the dividend.

How should we look at the Board reviewing the dividend?

Is that going to happen beginning of every year or I just want to understand what is the methodology?

Usually companies have a specific quarter or specific time of year.

How is CMS going to look at its dividend going forward?

Well, I think the Board just reinstated the dividend.

I think we're paying it or just paid it for the first time, and I don't want to -- I certainly can't speak for the Board's long-term dividend policy.

We review it periodically on a go-forward basis.

Historically we've looked at it on an annual basis prior to suspending the dividend this year, and I wouldn't be surprised if that's the way the board will do it in the future, but we can't be specific right now.

If I can just end up with, Tom, the proceeds that are in the cash flow statement for 2007 are only from asset sales that are only from the ones that you have announced, right?

Going back to your sensitivity chart, you do expect more asset sale announcements, so anything that is going to be additional asset sale announcements is going to be a positive to earnings -- is that the right way to look at that sensitivity chart?

We've announced most of what we're going to do, but if there is something new and incremental, it would be additional.

Remember, think of what that line says in terms of asset sales.

It is the gross proceeds net of fees, and it is net of any tax considerations that we have and the like.

The number is equal into the three numbers you announced, right?

That was the Abu Dhabi, the Venezuela, and the third one that you announced, the numbers you gave up, if I add all of those, they come up with the 1186, close to that.

Is that the right way to do the math?

That's correct.

Okay.

Thank you, sir.

Thank you.

Your next question comes from the line of Reza Hatefi with Polygon Investment Partners.

Please proceed.

Thank you.

Wondering in your 2008 guidance what kind of assumption are you making for the gas rate case?

We're simply assuming that the rate case gets processed and becomes effective by the start of 2008.

We filed for an 11.25% return on equity.

And are you assuming you get in your $1.20 guidance, are you assuming what you requested or are you kind of assuming something more conservative?

We normally don't give out assumptions of that.

I would say they're broadly consistent with what you see in the filing.

And as far as your earnings guidance and your rate base projections, how is Palisades being treated?

Well, Palisades, we're assuming that Palisades closes this year before the middle of the year, and then we filed with the Commission for the appropriate rate treatment, and effectively what would happen is Palisades operating expenses and rate base would basically be removed from general rates and replaced with a power supply cost recovery charge that would be associated with the contract with the buyer.

So in the rate base guidance that you've given on the slides, that excludes the rate of $400 million of rate base from Palisades?

Basically that rate base would go away.

And I was wondering with tax rate being around 35%, I was surprised, I thought it would be a little higher just because of state taxes.

Is there something offsetting the state taxes?

No, just think about that as a federal rate that we're sharing with you instead of the ongoing kind of 25% level we would expect to be at about 35% as you go forward and reach out now to 2008 once we've gone through this restructuring because there is a lot happening this year.

Great.

Could you give us what the major components of the coming electric case are going to be, the major issues [technical issues] capital structure?

I guess one of the issues could be the overhead, the corporate overhead being reallocated to the utility.

Is that one of the other major issues?

Well, I don't know that that will be a major issue.

There may be some overhead reallocated to the utility over time.

Most of that is likely to happen later on in this year, and there may be some of that in the rate case, but that won't be big.

The major issues in the electric side are going to be the ones you might expect them to be, an adjustment of operating and maintenance costs, which we would expect to be somewhere in the range of inflation as well as changes in the depreciation and the capital investment, that being the biggest one, and the removal of Palisades, as we've said, so there is nothing particularly unusual in that electric rate case.

I noticed on your financial data this morning and the financial slides you released that in 2006 you earned 12.9% ROE at electric.

Is that -- was that influenced by weather or some sort of abnormality that caused it to be high or and/or how should we look at that relative to what you'll be filing because that number seems kind of high?

It is a little high.

Remember that's on a regulated basis, and partly it was frankly because we had a significant amount of returning retail open access load during the year.

We anticipated that early in the year.

We offset some of that by additional expenditures on the electric side.

We did some more tree-trimming and some other maintenance work associated with that, but we had reasonable weather late in the year, and that number probably came in a little higher than we thought it would frankly, but we had lower returns on the gas side and to some extent we were managing some of our costs to get spread to both, and we end up with a higher return on the electric side.

How is that going to be treated with the higher -- with the returning retail open access customers in the coming rate case in that that would boost your returns, so is that sort of going to be -- how is that going to be looked upon in a sense?

The commission -- we've taken the position over the years that our intention is to earn at about our allowable rate of return, and at about our allowable rate of return is what we build into our plans.

Sometimes it can be a little higher, sometimes lower depending on the specific circumstances during the year.

The commission will look at the retail open access sales along with the other retail sales on the electric side in setting the rates, but not much differently than they have in the past.

Okay.

Just finally in your CapEx guidance on slide 16, are those numbers including the cost of removal or the cost of retiring property which generally for you guys is about $70 million a year?

They do.

They do.

Okay.

Great.

Thank you very much.

You're welcome.

Your next question comes from the line of Brian Russo with Ladenburg Thalmann.

Please proceed.

Good morning.

Most of my questions have been asked and answered but just wondering what is the diluted shares outstanding assumption for '07 and '08?

It's 234?

That's correct, 234 million.

And just lastly, any update on --

For 2007.

240 for 2007 diluted shares.

240 for 2007.

Yes, 240.

I would assume that's the same for 2008?

Roughly.

And then just lastly, any update on the Prairie State project?

We haven't provided any update.

As we said I think in our last call, this year is focused on finalizing the engineering procurement and construction costs and going out and seeking contracts for the off-take, and it was expected earlier that we would be doing that most of this year with a targeted financial close sometime around the end of the year possibly into close sometime around the end of the year possibly into next year, and we're working on all of those things right now, nothing new to announce.

Okay.

Thank you.

Thank you.

Your next question comes from the line of Andrew Levy with Brencourt. please proceed.

Just to want know what you're thinking strategically.

There has been a lot written by the sell side, whatever that's worth, just about you guys cleaning your house and selling all of your non-core assets which you've done and done a good job with, and as you look ahead over the next year or two, I am trying to think what you're thinking as far as size and whether CMS stays independent, whether you think CMS should be part of a bigger company, any kind of light that you can shed on that, if anything at all?

We have a policy of not commenting on that M&A kind of activity, and I am not going to deviate from that policy.

Let me just say that we have work to do this year to finish this transition.

A lot of closings to get done as we talked about, and we've tried to demonstrate that we have a significant amount of opportunity to invest in the utility over a long period of time, and that's really what we're focused on.

Thanks.

You bet.

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

Please proceed.

Just a couple quick ones.

Can you tell me in the quarter what was driving the increase in O&M or other O&M up $71 million, I think?

We heard your question.

Hang on just one minute.

Okay.

In the quarter the main item would have been our shareowner lawsuit, and remember that was about $123 million, but also purchase power was up considerably in that period.

Other operation and maintenance line?

Are you looking at our income statement attachment?

Yes, well, just the operating expense detail I guess.

I tell you what, why don't we take another question or if you have another question.

Let me make sure I understand your question.

You're looking at fourth quarter operating expenses?

Yes, other operations.

And you're looking at $1.8 billion in '06 compared to a $1.9 billion in '05, is that correct?

I was looking at 494 this year and 423 last year.

Right.

Okay.

Go ahead with your next question.

The other one is I was wondering if you can remind me how you're defining free cash flow before CapEx and dividends on the financial trends slide.

Free cash flow the way we look at it is before any dividend payment, and basically before any financing is the way to think about it.

Is it just cash flow from operations, then?

No.

It is operations and the like, all cash flow before any financing changes and before dividends.

Okay.

Thanks.

I tell you what, I don't have an answer to the specific first question and we'll see if we can get that later in the call.

Your next question comes from the line of David Grumhaus with Copia Capital.

Please proceed.

Good morning.

Good morning.

A couple questions for you.

When we look at the equity that you filed for in the gas rate case, the 49.9% financial and the 41.1 regulatory, should we assume that that's the level that's sort of the peak level we're going to see or the normalized level going forward?

Or does that have some ability to trend up any higher?

You should think of that financial ratio at about 50% is where we're trying to be in the future.

When you see what we've got there, that's your good rule of thumb to follow.

We won't try to exceed that substantially, but we will try to keep up to that level.

It is possible it could go up a little bit or down a little bit from that level, but that's a pretty reasonable target.

And the regulatory is likely to follow, then, at around 41?

That could change through time with the structure changes with things like Palisades going out of the system and the like, but it is largely deferred tax differences.

Okay.

So when we see the electric filing, those would be good numbers to be using.

You'll see those.

Okay.

Tom, there has been some questions about the taxes, but I just wanted to go through them one more time.

I think you're saying that you got about a $0.19 benefit from taxes this year, is that right?

For 2006?

Yes.

Yes.

About $0.27.

$0.27 this year?

Yes.

And that by the time we get to '08, all that far goes away?

Yes.

It will be very little left in tax benefit there.

There may be $0.01 or so but not a lot.

Okay.

That's helpful.

And then just to clarify Ashar's question on the asset sales, you've had the announced asset sales.

You still have the three or four projects you put up for auction.

In your numbers I am assuming you've got some baseline amount of proceeds that you're expect to go get from that?

And the change of the plus or minus 100 that you gave would be off whatever you're assuming on that baseline?

That's correct, exactly right.

Okay.

We're trying to give you a little sensitivity that if things that haven't been decided yet turn out a little bit better or a little bit worse, what it might be like so you can factor that into your models.

Okay.

We're not trying to be predictive.

We think we have the right levels.

You have some baseline in there, though?

We do.

Last question.

You have a bunch of other enterprise assets, domestic assets.

Any thoughts on what's going on happen with those?

Are those largely just expected to stay?

Will you look at also divesting those assets, or might they be some of the plants try to be put in rate base or be part of the resource plan?

Frankly we've been focused on the international issues and addressing those.

We haven't made any changes or announced any changes to our North American strategy.

Is that something that you're thinking about or will start thinking about or should we just assume status quo on that?

I think at least at this point in time I would assume status quo.

We think about our portfolio on a constant basis and review it every year, and we make decisions in that regard, but we certainly don't have any changes to announce with regard to Enterprises North America.

Okay.

Thanks.

Appreciate all the time.

Thank you.

Before, operator, we go to the next call, let's circle back on the question about other operating and maintenance expenses for the quarter, which were, expenses up about $71 million, and that largely is the shareowner lawsuit as we were indicating before, but it is off set by a little bit of good news and big and some other items that we don't have all the little pieces for here.

At least that gets you the direction there.

Okay?

If we can take the next question.

Your next question comes from the line of Ted Heyn with Citigroup.

Please proceed.

Good morning.

Most of my questions have been asked, just wanted to clarify a little bit on your renewable assumptions for rate-based spend going forward.

Are those included in your generation/environmental of potentially $600 million?

I guess renewables related to the 21st century energy plan and meeting those potential standards?

Let me say that they're included in the 7.5% trend line of all the potential opportunities.

We haven't made any decisions that will make any major investments ourselves in renewables, but there is certainly the opportunity under the RPS standards in Michigan, and that's one of the things we'll be looking at this year in developing our capital plan.

Could you give us maybe a little bit of color about how you're thinking about build versus PPAs and whether you're looking at just wind or potentially biomass or other types of technologies?

You're asking all the right questions.

We have some experience in the wind side in our non-regulated side.

We don't have any investments in that in the utilities side.

We do have some contracts with a couple of the wind generators in Michigan .

There is a lot of focus on wind in Michigan, but we also have investments, as you know, other kinds of renewable plants, and there may be opportunities there.

I think it is premature.

The RPS standard has not been implemented by the legislature, it has just been possessed in the 21st century energy plan, but it does certainly introduce opportunities, and there may be an opportunity to do rate-based investment at the utility or expand some of the things we've done at Enterprises.

We simply haven't made decisions in that regard yet.

Just to touch on David's question about the remaining unregulated assets, I know you do have a couple of biomass plants in Michigan.

Is that feasible to potentially move those over to the regulated side of the business or is that something you haven't fully entertained yet?

Well, I would say it is just not something that we worked on or considered.

We're going to wait and see what happens with the specifics of the renewable portfolio standard.

We have been a leader of renewables, and we have a fair amount of investment in renewables, so we see it as more of an opportunity.

Exactly how we position the Enterprises assets, is not something that we've discussed at this point in time.

Great.

Thanks for your time.

You bet.

Your next question comes from the line of Steven Huang with Citadel.

Please proceed.

I just wanted to clarify on something that Reza asked before.

Should we assume in your guidance that you said that it's consistent, we should assume that the rate cases embedded in the guidance are assuming 11.25 ROE?

I wouldn't get that specific.

As we're not going to forecast what the ROEs are.

Let me just say the Commission has been relatively consistent around that 11%, a little bit higher level in the past, and our plans are relatively consistent with that well.

Okay.

What do you guys assume for organic growth?

Do you guys lower it down to I guess the new 21st century plan of 1%?

Is that how you have embedded that?

We keep is very small.

We keep it flat on the gas side and very small growth on the electric side.

Our real growth opportunities are coming through the things that Dave has just been describing here recently with the one, to date the ability to put equity into the utility and two, to the future to invest for needs for our customers give us a great opportunity for growth.

Looking into 2008, should we assume there is any more equity infusions, or are we basically done and it will just be organic growth or earnings?

I think it is safe to say that we're going to try to maintain over time that about 50% level of equity on a financial basis in the utility.

As we make incremental investment and grow the rate base you can expect to us try to keep it around that level.

Over time.

Okay.

And the last thing I had was regards to Palisades.

Any rulings from the IRS on the tax status relating to the trust?

We're having discussions on that with the IRS, and it would be kind of premature to talk about where we are because we have initial readings from them that will cause us to have more discussions and in fact I can tell you our people are working with the IRS today in Washington, D.C. on that subject so that we can come up with the right answer.

Nothing definitive.

Your guidance assumes that you don't get the special tax treatment, correct?

That's correct.

That is absolutely correct.

Remember this is something going to go to the benefit of our customers, and that's why we're working so hard on it.

That doesn't really matter with regard to our financials because it does go to the benefit of the customers.

Okay.

Thank you very much.

Operator, I think we need to wrap up.

We can maybe take one more call.

Your final question comes from the line of Sam Brothwell with Wachovia Securities.

Please proceed.

Hi.

Just a quick question on the sensitivity of the three-month delay in a 1/08 implementation of the rate case.

Is that just because you have so much volume in that quarter or are there some ancillary impacts like timing on interest savings embedded in that number?

Just think of it as a pretty normal thing.

On the gas side of the business that's a big quarter in the first quarter.

That has a big implication.

On the electric side, it is smooth, so it is just giving you an idea under normal conditions what might that be if we weren't able to get our cases in place until the end of the first quarter.

That is not what our forecast is.

We're just trying to give you that sensitivity.

Understood.

Thank you very much.

You bet.

Thanks for the call.

Again, thank you for joining us this morning for our call.

As we said, we had a good year in 2006 on overall performance.

We're transforming the Company.

We got a lot of work to do in 2007 to complete these asset sales and to infuse the money in the utility and pay down our debt as we talked about, and we'll be working on developing more specifics on our utility growth plan as we go through the year.

Thanks again for joining us.

Bye now.

This concludes today's conference.

We thank everyone for your participation.