CMS能源 (CMS) 2007 Q3 法說會逐字稿

Good morning everyone and welcome to the CMS Energy 2007 third 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 11 a.m.

eastern time, running through November 8.

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 the 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 go ahead.

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

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.

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

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

We are not providing reported earnings guidance reconciliations because of the uncertainties associate with those factors.

Now, I'll turn the call over to Dave Joos, President and Chief Executive Officer.

Dave--

Thanks, Laura, and good morning ladies and gentlemen.

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

As is our usual practice, I'll start the presentation with a brief update on the business.

Then, I will turn the call over to Tom Webb for a more detailed discussed on the financial results and outlook, and then we'll close with questions and answers.

Operating results are on plan year-to-date.

For the third quarter, our non-GAAP adjusted earnings were $0.13 a share, equal to last year's third quarter after including the effects of mark-to-market and discontinued operations.

Our full-year guidance for adjusted earnings remains unchanged at $0.80 for 2007 and $1.20 for 2008.

It's been a busy year for both regulatory and legislative activity.

We made progress, but there's still more to do.

We're encouraged that the state legislature is currently working on changes to Michigan's electric restructuring law, and we expect to see bills considered in the house soon.

More on both in a minute.

Overall, we continue to make good progress on our business plan and are now clearly focused on the long-term growth opportunities at our Michigan utility.

Since our last call, we've announced our plans to build a new clean coal plan at our [Carn Weddock) site.

I have a separate slide on that as well.

First, let's turn to a more detailed update on the regularity and legislative activities.

The gas rate case settlement was approved by the Michigan Public Service Commission on August 21.

The settlement provided for an annual rate increase of 50 million with an authorized return on equity of 10.75%.

Although the rate increase was slightly less than we anticipated, the timing was earlier than planned.

All in all, we're satisfied with the outcome.

In September, the staff filed testimony generally supporting the acquisition of the 946 megawatt gas-fired Zeeland power plant and recommending an annual revenue increase associated with the plant purchase of 71 million.

They did not support our request for interim relief in our general rate case.

Rather, the staff recommended that the Zeeland plant purchase, if approved by the commission before the final rated case order, be dealt with through a surcharge.

Briefs were filed last Friday and reply briefs are due November 9.

The case schedule will allow for the commission order on our application for interim relief and recovery of Zeeland plant costs by the end of 2007 and a final rate order in the second quarter of 2008.

I've included our 2007 power supply cost proceeding on this list only because it includes an important issue, and that's the treatment of the proceeds from our sale of sulphur dioxide emissions allowances.

We sold excess allowances in 2006 for a total of 62 million.

Because they were earned largely during our rate freeze period, we proposed in our filing to retain half the proceeds and refund half to customers.

The administrative law judge in that case has recommended we refund 100% of the proceeds to customers, but also suggested that the commission consider the issue in a different case, and that's the 2006 power supply cost reconciliation case.

We have reserved the full amount as a regulatory liability, but remain optimistic that we will be allowed to retain a portion of the proceeds.

In September, we exercised the regulatory out provision of the Midland Cogeneration Venture Purchase Power Agreement thereby limiting our capacity and fixed energy payments to the MCV partnership through the amounts we collect from our customers and eliminating contract losses.

As expected, the MCV has objected but has not yet sought to arbitrate the issue.

Instead, the MCV has filed at the Michigan Public Service Commission asking them to increase our cost recovery from customers, an outcome we support.

We expect the commission to consider their request partly because the MCV has the right to terminate or reduce their sales to Consumers Energy now that we've exercised the regulatory out clause.

In September, we filed an update to our balanced energy initiative including the purchase of the Zeeland plant and our proposal to contradict a new clean coal plant in our current [Weddock] site.

The commission has initiated a procedure to consider our plan.

The Michigan legislature is actively working on electric restructuring legislation which is expected to include reform of the states retail open access law, renewable portfolio, and energy efficiency standards, certificate of need provisions and other provisions.

We anticipate legislation to be considered in the house in the coming weeks with consideration in the Senate to follow.

In September, we announced plans to construct an 800 megawatt clean coal plant at our [Carn Weddock] generating complex in Bay City, Michigan.

The site is large, in fact it could accommodate a second unit in the future.

It also allows for fuel delivery by either rail or water, allows for operations savings due to the proximity with the [Carn and Weddock] units, and enjoys strong community support.

The proposed plant would have an advanced supercritical pulverized coal design with the best available control technology to control emissions.

We expect to use by 500 megawatts of the plant's output to serve consumers customers to and to commit approximately 300 megawatts to others.

Our share of the cost is estimated to be 1.3 billion, excluding financing costs, and 1.6 billion with financing costs.

There are several key hurdles that must be cleared for the company to move ahead with major equipment commitments and construction expenditures associated with this project.

They include repeal or significant reform of the Customer Choice Act, the successful Michigan Public Service Commission renewal and approval, and obtaining environmental permits and property tax abatements.

The application for an air quality permit was filed with the Michigan Department of Environmental Quality last month.

To date, we've received strong support from members of the Michigan legislature, local government officials, trade unions and community leaders.

Just a few comments on CMS Enterprises.

In June, we entered into an agreement to sell our investment in Jamaica.

We closed that transaction yesterday, completing our international divestiture plan.

The international center for the settlement of investment disputes issued a decision in favor of CMS in our Argentina dispute, upholding a prior award issued in May of 2005.

In December 2005, insurance underwriters paid $75 million related to the issue.

We recognize the insurance payment on the income statement in the third quarter of this year.

As you know, we are pursuing solutions for our unfavorable contracts at the DIG or Dearborn Industrial Generating Facility that could result in a buyout our restructuring of electric sales agreement with the substantial cash payment.

As an alternative, we are also considering the sale of our interest in DIG.

Due to the confidentiality of discussions, there's nothing more we can really say at this time other than we remain optimistic.

Now, let me turn the call over to Tom.

Thanks, Dave.

Let me add my thanks to everyone on this very busy earnings announcement day for joining our call.

We appreciate the interest.

The third quarter was relatively quiet, keeping us on target for full-year guidance of $0.80 a share.

We reported earnings of $0.34 compared to a loss of $0.47 last year.

Excluding recognition of the Argentina-related insurance reimbursement Dave just mentioned, and restructuring related costs, adjusted non-GAAP earnings were $0.13.

That's equal to last year.

For September year-to-date, adjusted earnings including mark-to-market impacts, were $0.64 compared to $0.18 last year.

Recall that last year we had mark-to-market losses of $0.57 in the first nine months and since then we've discontinued operations worth another $0.13.

Adjusted earnings per share in the third quarter of 2006 was $0.13.

That's down from the $0.31 shown last year to exclude the discontinued operations of a nickel in the quarter and to include mark-to-market losses of $0.13.

From this comparable number, adjusted earnings were up $0.15 cents due primarily to the absence of mark-to-market losses last year and, as expected, off $0.06 at the utility and off $0.09 at Enterprises and the parent.

The utility decline of $0.06 reflects the absence in this quarter of strong earnings at Palisades last year followed -- following weak Palisades results in the second quarter of 2006 during the refueling outage.

Now, recall that the cash received from the sale of Palisades equals the reduction in rate base.

As we invest this cash, the earnings power will be the same.

At Enterprises and the parent, the planned loss of earnings from assets sold are partly offset by reduced interest expense and lower operating overhead.

Remember, too, the full offset occurs in 2008 when we benefit from a full-year impact of asset sale proceeds used both to invest and to reduce debt.

With our restructuring and international asset sales nearly complete, the breadth of risk that impact our earnings and cash flow are substantially narrower than in the past.

With that in mind, here's a few examples of risk that can impact our earnings and cash flow in 2007 and 2008.

Except for the passage of time the sensitivities around the utility ROE, timing of the electric rate case and electric and gas sales have not changed since our second quarter call.

Now some of you asked about the economy in Michigan, so I've added a sensitivity associated with uncollectible accounts.

Historically, consumers on collectibles have averaged less than 0.5% of revenue or about 25% below the industry average.

We've included a 10% increase in our outlook for this year.

A further 10% change in the level of uncollectibles would impact EPS by a penny and cash flow by $3 million.

Now this, of course, could be up or down.

Despite the negative publicity surrounding the Michigan economy, our customers large have kept up with their utility bills.

Since our last earnings call, our 2007 cash flow forecast improved at both the consumers and the parents.

At the utility cash flow of $281 million increased 62 million due primarily to freeing up restricted cash related to environmental CapEx and lower working capital partly offset by an increase in capital expenditures.

Cash at year end is forecast to be $597 million with an available bank facility of $480 million.

At the parent, as shown on the box on the left, cash flow after a $650 million investment in the utilities forecast to be $680 million positive.

This is up 20 million since our last call due primarily to better asset sales results.

Cash at year end is expected to be $141 million with $297 million available at our bank facility.

This provides us with a strong liquidity position at both consumers and the parent heading into next year.

We are putting proceeds from asset sales and retained earnings to work promptly in the form of debt reduction and new investment.

We'd like to complete the purchase of Zeeland and the restructuring of DIG this year if we are able to do so, but we are planning on these investments in 2008.

Our report card remains strong and and is on track to achieve all of the financial targets established at the beginning of the year.

We've changed the orange cautionary check on cash flow to green this quarter reflecting these continuing improvements in cash flow.

We've kept our parent debt assessment in the orange cautionary level.

If we're able to achieve restructuring at dig this year, it would use some of our debt reduction capacity.

So, thanks everybody for listening.

And, operator, Dave and I would now like to open up and take questions.

[OPERATOR INSTRUCTIONS].

Your first question comes from the line of Claude Davis with MFS Investment Management.

Hi, Tom.

Hi, Dave, how are you?

Just a quick question on -- it's been kind of a tough year in terms of stock performance.

The UTY is up about 15%, you're just up modestly and you are trading in a significant enough discount to the group that your cost of equity is quite high.

And I guess we've seen in the mid cap space deals like Ducane and [Puget] and then obviously TXU going private, and I'm just wondering what options you may be evaluating and how open you are with discussions with third-parties and to the extent you can comment on any inquiries you may have had?

Well, Claude, I think you know it's our policy not to comment specifically on those things.

We certainly pay attention to what's going on out there in the sector but it's not something that we like to comment on.

I would remind you that we've talked before about our significant investment plan in the utility and, in particular, over the coming years and that we felt comfortable with our ability to generate the cash to support that investment plan, at least until we get into some major investment associated with a new power plant, which is well out into the next decade.

So that's about all I think I'd say about that at this point in time.

Okay.

Thanks.

Next question, John Kiani with Deutsche Bank.

Good morning Dave, Tom, Laura.

Good morning, John.

Actually, that last question was interesting.

I know you can't comment much, but you all have actually spent a lot of time restructuring the company and I think adding a lot of value and yet the stock is trading at a pretty substantial discount to a lot of your peers, especially considering your NOL value.

I guess what I'm wondering is, what's the purpose of being public and what's the benefit CMS gets from being public when the cost of capital is so high and the market is not rewarding your share price for the hard work that you guys have done?

And in conjunction with that, the disconnect between the evaluation of your stock relative to where the recent Pugit sound transaction and some of the other transactions have been done at is pretty meaningful and I think all of you are probably a much more compelling story relative to even some of the others.

Well, John, again, we're certainly aware of what's going on elsewhere and we recognize that our stock continues to trade at a bit of a discount.

A lot of folks have different views as to why that happens.

I'm sure some of it has to do with the dividend yield and I'm sure some of it has to do with the fact that we're completing a restructuring this year.

And, of course, we have our forecast out for next year.

We never know exactly what causes all those things.

We focus pretty much on the restructuring of the business and the good operation of the business and obviously we, like you, would like to make sure that's recognized in the marketplace and we will continue to work in that direction.

Okay.

Thanks, that's helpful.

Then just one other question I have, as we look forward and we look at the investment plan that you've put forward, are there any other areas that you haven't really focused on recently that you might find as incremental investment opportunities in the rate base?

Well, you know, frankly we had, when we presented the first time our thoughts, and I think it was maybe around the first quarter of this year,

Right.

We presented the fact that we had gone through and looked at all the opportunities within the utility to invest and frankly it was probably twice what we ultimately decided to do put into our plan.

Right.

So we prioritized those again.

Part of our effort was to look at where we could bring the most value to our rate payers, minimize rate increases at the same time we were able to invest and improve our company both from a perspective of serving our customers and also from a perspective of growing our earnings.

And that's how we came up with the list we came up with.

That's not to say we couldn't find other areas to invest within the company to maybe accelerate some of those things, but we are pretty comfortable with the balance that we put in place here.

About half of that new investment or a little bit more is really what I'll call maintenance capital around improving operations at our power plants and maintaining our distribution system.

And then about $2.5 billion worth of that $6 billion investment we talked about over the next five years is incremental investments and further improvements in distribution.

And then technology investments, like advanced meter reading infrastructure that we think not only helps serve customers but also helps to implement energy efficiency programs that are of interest within the state.

And then, of course, New Generation, including the Zeeland plant and enhancements in our existing fleet.

And then eventually more substantial investments in a new coal plant that we've talked about.

So there's quite a bit there.

That's not to say there aren't other things there and I'm sure that they'll come up over the next several years, including environmental enhancements beyond what we already may have into our plan.

But I don't see that the level of investment that we're talking about would vary much from what we've talked about simply because we think that's the right balance of investing in the utility and continuing to pay down parent company debt and our overall company.

Okay.

Great.

Then just one last question.

At your analyst meeting recently you showed excess cash flow of about $1 billion of which only a certain smaller portion, around 250 to 260 million, would be utilized to maintain the current dividend level.

Obviously, the board is going to be contemplating and talking about what the right dividend pay out should be when they meet periodically.

But what are some of the other uses of that cash flow and how do you think about what the right level of pay out, considering the fact that there is some excess cash?

John, just a reminder on that for everybody listening, that slide you're referring to did say that after we made our investments in the utility to grow the business substantially, as Dave just talked about, there was $1 billion during the next five years available for either debt pay down or dividend or whatever, perhaps even more reinvestment.

We didn't actually quantify any numbers regarding the dividend portion of that.

Right.

And I recall that as well.

John, I would just say that as you've indicated, our board would consider on a periodic basis whether or not the dividend ought to be adjusted.

We haven't set any specific dividend policy in that regard, so it isn't something I can comment further on but I think the intent of that slide was to demonstrate that there was some capacity to do that over the five-year period and/or further investment as you've noted.

So, we will keep you informed as things develop in that regard but I don't have more specifics to add at this time.

Great.

Thanks a lot.

See you next week.

All right.

Thanks, John.

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

Hi, how are you?

When do you expect to have legislation on the governor's desk?

And currently what are any potential sources of contention in the house right now that you're seeing, if any?

Well, it's impossible for me to predict when it will get to the governor's desk.

In theory, it's possible this year but I guess looking at the schedules with the holidays coming up, more likely it will happen early next year.

It's got to get through the House.

It's got to get through the Senate.

I don't know that I would say there's any significant problem with processing it.

Obviously, a lot of different issues there.

Frankly, the House and the Senate and the governor in Michigan have been tied up for several months here spending most of their time here on Michigan's budget issues.

I think it was announced just within the last couple of days here they now reached agreement on the final piece of that.

And so that's distracted efforts on the energy side.

But it's been a high priority.

The House committee that's responsible for this has been working hard on it, has a number of subcommittees and they are floating draft legislation.

So we are optimistic that it's going to get considered in those committees with specific language here shortly and get to the house floor.

But it's hard to predict how quickly it will move through that process at the Senate and get to the governor's desk.

It is moving and we are satisfied now that with this budget issue out of the way that it's going to get a high priority.

And then separately on DIG, the language seems to have changed a little bit from possible restructuring and now includes potential sale.

What, given the current market and where that asset is situated strategically, what would the implications of a sale look like?

Well, our priority has been and continues to be on a potential restructuring and I want to be careful that we don't say much here because we do have significant issues and confidentiality agreements around them.

But if, for whatever reason, we're not able to accomplish that, a fall-back position would be the sale.

And we are exploring that in parallel.

Obviously, a sale would have different implications on cash flow than making a substantial cash payment to restructure it, but then again we wouldn't have the asset available on go-forward basis as well.

Both issues or both opportunities are out there.

I don't think it's appropriate for me to comment on what my value might be there.

But I would say that there's interest in the asset.

It is, we've talked widely about the fact that the contract we have is not favorable.

But the plant itself operates very well and the nature of the plant is one of the best dispatched gas plants in the entire region.

So there's value there to that plant.

And that's about all I should say at this point in time other than to say we are exploring both alternatives.

But you would --

For everybody, there's no change of tone in there.

We didn't intend to make anything stronger one way or the other.

Thank you very much.

Bye.

Your next question comes from the line of Greg Gordon with Citi Investment Research.

Thanks, good morning.

So, when we look at the earnings guidance for 2008, it doesn't specifically contemplate a restructuring or a sale of DIG, correct?

Well -- let me just say we are working on it.

The contribution from DIG, either negative or positive, is relatively small in that timeframe, but it's an issue we'd like to deal with for the longer term.

I guess my question really is we don't know, we don't have enough information to get an accurate feed on what the economic benefit would be from either a sale or a restructuring?

We can guess, but we really don't have enough -- what I'm trying to understand what's your baseline assumption on use of cash in '08?

Because if it's continued debt reduction and investment in utility, I would then presume that you only put cash in a DIG restructuring if it's accretive relative to those other options.

Is that correct?

I think the way think about that for you whatever investment is required around a restructuring of DIG will be one that will be economically advantageous to us or we wouldn't do it, but it may not a substantial change and that's why we're not trying to send any signals of big swings one way or the other.

Okay.

Thank you.

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

Good morning.

Hello?

Good morning.

You mentioned the electric rate case could be settled or new rates going into effect in the second quarter of '08.

Can we assume that's the earlier part of '08, possibly April?

Well, I didn't say anything about settlement.

I don't know that that's possible.

Recall there's two pieces to this case.

One is request for interim relief by the end of this year where in we also asked for the commission to incorporate revenues associated with purchase of the Zeeland plant and then the final decision on the rate case.

What we can tell you is the schedule would allow for it to be done in the second quarter.

It's always difficult; it could be early, it could be later, just depends on how long the commission decides to take once the case is ripe, but it's ripe fairly early in the second quarter.

Is an early second quarter assumption built into the $1.20 '08 guidance?

Well, I wouldn't get that precise.

We have some flexibility around spending and we always build contingency plans if we need to make adjustments based on the timing of things like rate cases.

So, I don't think it will have a big impact on our guidance one way or the other as long as it's in that general timeframe.

And secondly, what was the nine months earnings contribution from the Enterprise segment?

We will give you that.

As we are looking as you saw for the quarter Enterprise (inaudible) was zero.

Right.

For nine months, also, fairly close to zero.

Okay.

And that includes the DIG contract?

It does.

Okay.

Thank you.

Your next question comes from the line of Andrew [Levy] with (inaudible).

Hi, guys, how are you?

Hi, Andrew.

Great.

I wasn't going to ask a question, but I guess after the first question I'm compelled to ask this question.

As you guys look into '08 obviously you are looking at various different strategies.

Would going private be one of the strategies that would you exam?

Well.

again that gets into this issue of M&A that we simply have a policy of not talking about directly, so I don't think I would say anything more about that at this time.

I've said before and I'll say again that we are certainly aware of what's going on in the sector and what opportunities are out there and we've never been adverse at looking at whatever is in the best interests of our shareholders, but I won't talk any further about that on any specific strategies.

Thank you very much.

You're welcome.

Your next question comes from the line of Asher [Kaun] with SAC Capital.

David, could you define a little bit better what's happening in the legislature?

I know you made some opening comments to a question, but where exactly are we with bills and everything?

I would say that the effort is focused on the House right now as opposed to the Senate.

That doesn't mean the Senate hasn't been paying attention and holding some of their own hearings, but I think the House really has the lead.

The House Energy and Technology committee is, has been holding hearings really all year long.

They set up three different subcommittees, one to deal with the issue of regulation, regulatory restructuring, retail open access, all of those aspects; a second one to deal with energy efficiency issues and third one to deal with renewal portfolio standards.

They've been actively doing their work and meeting with various constituents and draft legislation has been circulating within those groups.

And we expect that to come together here in the coming weeks into legislation that's considered at the committee and then brought to the house floor after that.

So there is active work going on.

And as I said in my comments earlier, from our perspective, one of the primary issues there is this whole issue of retail open access in Michigan.

I think there's broad recognition, as acknowledged in the former public service commissions chairman's report, on the 21st century energy plan that we need to do something different to support major in base load capacity and I think there's general recognition that we need to do that.

So that's part of it.

Our state like other states are looking at changes that might make sense to support new energy efficiency programs and also renewable portfolio standards.

I think they are looking at it from a reasonable perspective.

And there's other issues that are important to us that they are also look look like our certificate of need process to support new generation, potential consideration of recovery of financing costs during the construction period, potential consideration of restructuring the rate-making process to reduce or eliminate some of the regulatory lag, potential consideration of things like decoupling, elimination of rate skewing.

So, a lot of those issues that have been around for a number of years that are all getting serious consideration as we work through this legislative process.

Are you comfortable because we're now in November and with the holidays approaching in December that all of this will get together by the end of this year with the days ticking by?

I think it would be difficult to get something on the governor's desk by the end of this year.

That doesn't say it's impossible.

but it would be difficult.

I would say because it's coming out of the House first and the Senate, next next year is not an election year for the Senate here in Michigan.

There's time to deal with it if it goes into early next year.

I'm not overly concerned with the timing.

Obviously, we would like to see it move quickly but it's not critical that it get signed by the end of the year.

Okay.

Thank you, sir.

You're welcome.

Your next question comes from the line of Clark [Gorski] with [JDT] Investment Advisors.

Just a quick question, Tom, assuming that the dig restructuring doesn't happen, what's left to do for apparent debt reduction, is it $200 or $300 million or so?

Well, we haven't given that sort of guidance but in that general ballpark.

Remember what we'll be doing is retaining a lot of earnings out of the utility and growing the business with the investments that we are making and the benefit on the tax side from the NOLs which will continue to give us a lot of capacity up at the parent to continue bringing debt down.

I wouldn't look for the sort of reductions we've had over the last few years but we'll continue to bring that down a little bit.

I guess I was just talking sort of here in the by the end of this year.

Probably not a lot.

We've really taken most of the actions for this year.

Okay.

Okay.

Good enough.

Thank you.

You bet.

Your next question comes from the line of John [Ali] with [Zimmer Lucas].

Good morning, everyone.

Sorry if this question has always been asked but I joined kind of late, there are a couple of conference calls going on.

Enterprises for the year nets out to zero, is that correct?

Correct.

What would that number be absent what you've sold?

I know you can't, I know you don't generally pull out the de-equity earnings discontinued ops?

Well, you can get a sense if you look at the quarter for where we are in 2007 by looking at that third quarter slide where you see earnings sold have impacted us by $0.15 downward and then you see a partial offset to that where we have interest reductions, overhead reductions of about $0.06.

You watch that swing around as you move into next year, you will see the green bar going up sharply, more than offsetting, but slightly, those negative earnings.

So 2008 will you see this is an accretive transaction.

Okay.

I'm just trying o get a sense of what's left in Enterprises absent what's going on in the Middle Eastern --

It's not a lot and Dave indicated with the restructuring of DIG that would be one of the more important assets that remain.

Then we have some small renewables in the state and different locations around the country, North Carolina, Connecticut and the like, and those are the businesses that would remain and you should think of them and together we've talked about this before, being in the ballpark of maybe a nickel or so.

Including DIG or absent DIG.

All in.

Okay.

So that 400 megawatts is positive more than a nickel, is that the correct way to read that, the DIG is negative and the other 400 megawatts kind of the tire burning and garbage burning --

Including DIG, think of that whether it's argued and however we do that and however we do offsets elsewhere the total side of the business being worth about a nickel.

Okay.

Thank you very much.

You bet, thanks for calling.

Your next question comes from the line of Steven Wong with Black River Asset Management.

Good morning, guys.

Quick question here just more on operational.

Can you -- was there any given reason why industrial sales was down significantly in the quarter?

Did you guys lose a big industrial site or anything that's more ongoing?

No, nothing like that.

The economy hasn't been real strong in Michigan.

It's starting to show some signs of picking up.

Remember that with General Motors and other autos take a significant break in early July as a normal routine process.

But then there's also been excess production of autos and some inventory issues and whatnot.

I wouldn't say there's anything unusual other than sort of routine economic impacts.

Okay.

And then on DIG, what was the book value on that as a whole?

About $60 million.

60 million?

Yes.

Okay.

And then the last thing, just remind me, I thought mark-to-market was completely gone with MCV now discontinued but had you a $0.02 gain in the quarter.

Can you just remind me what that is?

Remember, we still have mark-to-market around DIG and what we call ERM, the support activity that does the trading to purchase the gas for DIG, and a couple of our very small peakers.

That's about all that's left outside of what we do in the utility but, of course, that's not marked in the income statement.

So DIG is actually a net positive contributor to the P&L on a mark-to-market basis?

It depends on obviously what prices do, but we've got contracts for gas that we mark and sometimes they're up and sometimes they're down.

I mean when you guys look at '07 guidance and '08 guidance do you mark a zero in it?

That's correct.

And when you think of mark-to-market, I think with DIG in place and the ERM support again there's another one where you'd say you're only talking about a few pennies up or down depending on the price of gas.

Right.

Okay.

Thank you, guys.

You're welcome.

[OPERATORS INSTRUCTIONS].

Your neck comes from Raymond [Lung] from Goldman Sachs.

Hey, guys, how are you?

A couple questions.

With respect to some of the financial targets you laid out on page 11, can you talk about going forward what's an idea leverage number for the parent and is that FFO to average debt a good number to focus in on a consolidated basis?

You said with an IPO?

With respect to debt leverage targets, what is an idea target for you?

Where you see that we are going there is in the ballpark of where we want to go.

We will be a little bit better than that.

We haven't set a precise target around the number beyond 12%.

I think you've seen the rating agencies of recent around Moody's and S&P reflect those sort of achievements in their ratings that they've given us both at the parent and at the utility.

So you'll see our parent debt number that's also behind that.

We'd expect to trend that down a little bit.

But, again, that also is going to depend on when we're able to do things like the investment in Zeeland and the restructuring in DIG as to the timing.

But still I think you'll see that number ease down as we go through time.

Okay.

Just update remind me what your CapEx budget is for next year and do you have anything for beyond '08?

And final question also is can you remind me what the test is in Michigan for any potential combinations or mergers, is it a public interest tests or not?

Well, I will take the first part of that.

The overall CapEx for -- the overall CapEx for the next five years is about $6 billion that Dave was referring to earlier, and I will get you the number here for next year that you would also find in our K in just a minute.

Dave, if you want to --.

I will take the second part of it.

In Michigan there's no specific legislation in place that deals with the issue of mergers, no specific laws or tests and that sort of thing.

My view on that has always been in any state, quite frankly, is that those kinds of things are always something that either formally or informally falls under the jurisdiction of the Public Service Commission because they're not in favor of doing something like that, they never were.

But in Michigan there's no formal laws in that regard.

Our CapEx for next year would be about $1.3 billion.

Great.

Thank you very much, guys.

Operator, any other questions?

Yes.

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

Just one more quick question.

On thinking about DIG, is it safe to say that you can't just look at the mark from any hedging activity that's been done and make the simple assumption that that's what the contribution from DIG is because there are some fixed costs associated with the assets and other fuel supply agreements as well that may be recognized under accrual accounting?

It's not quite that simple, John, because obviously we've got about half of DIG, a little less than half committed under long-term contract.

You've got the other part that's available for the merchant markets.

And so its profitability depends on the spreads between gas and power prices in the region.

Right.

So on a consolidated basis, if I'm looking at all of DIG, the contracted portion serves as somewhat of a drag.

So even if there's some type of small positive mark on the unhedged or the uncontracted portion of DIG, DIG as a whole may still contribute a loss?

Right.

It depends on the relative value of all those that we said.

As we look forward into 2008, we are not expecting it to be a big contributor, either positive or negative, but it's something that we need to deal with.

Great.

Thank you.

You bet.

Thanks, John.

There are no further questions.

I will now turn the call back over to Mr.

Joos for closing remarks.

Thank you, operator.

Let me just close by saying we appreciate your interest today.

As I said, the company continues on plan for this year and next.

We've got important work to do and obviously a big focus on this legislative initiative that sets up our longer term investment plan in the state of Michigan.

So we will continue to work hard on that.

We are pleased with the progress we've made to date and we hope to see many of you here next week at EEI.

So thanks for joining us.

This concludes today's conference.

We thank everyone for your participation.