CMS能源 (CMS) 2007 Q4 法說會逐字稿

Good morning, everyone, and welcome to the CMS Energy 2007 results and outlook call.

This call is being recorded.

Just a reminder, there will be a rebroadcast of this conference call today beginning at 11 a.m.

eastern time running through February 28th.

This presentation is also being webcast and is available on CMS's website in the investor relations section.

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

Please go ahead.

Thank you.

Good morning, and thank you for joining us for our year-end earnings presentation.

With me today are David 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 www.cmsenergy.com.

This presentation contain says 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 also is posted in the investor section of our website.

We expect 2008 reported earnings to be about the same as adjusted earnings.

Reported earnings could vary because of gains or charges relating to previously-sold assets and business operations or other factors.

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

Now I'll turn the call over to Dave.

Thanks, Laura, and good morning to all on the call.

Thanks for joining us today.

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

As I've stated before, 2007 was a transition year for us.

Our successful restructuring established the foundation for future earnings per share growth, which we expect to average 6% to 8% annually over our five-year planning period.

Early in 2007 we restored the common dividend.

We recently increased it by 80%, demonstrating the confidence that the board and senior management have in our business plan.

We recognize that our payout ratio is still below the industry average.

We plan to increase it over time, but at a slower pace during the period of our aggressive capital investment plan.

We completed the divesture of our international businesses and used the proceeds to pay down parent debt and invest in the Utility.

Due to regulatory lag, we don't expect the earnings loss from these assets to be replaced until the incremental equity investment in consumers is reflected in rates this year.

On the regulatory front we received several supportive decisions last year, which I'll cover in more detail in a minute.

One of these decisions was the expedited approval of our Zeeland gas power plant acquisition.

This acquisition and the announcement of our plan to build a new clean coal plant at our existing [Kern Wedox] site are the first steps in the implementation of the balanced energy initiative that we filed with the Public Service Commission in 2007.

Near the end of the year we reached agreement to to terminate two unfavorable electric sales agreements at the Dearborn industrial generation planted for a payment of $275 million.

We recorded a liability for this termination payment in 2007 and closed the transaction on February 1st.

As of now we've entered into three to five-year tolling contracts for most of the plant capacity, firming up the earnings for the next few years and greatly reducing our risk.

Lastly, we met our financial targets for the year, which I'll review on the next slide, and we're maintaining our guidance for 2008 adjusted earnings per share at $1.20.

Let's look at our final 2007 financial report card.

As you can see, all the targets were achieved.

Our adjusted earnings per share was $0.84, exceeding our target by $0.04.

Cash flow before capital expenditures and dividends was $2.4 billion, almost $400 million above our target, primarily due to the success of our asset sales.

Our funds from operations to average debt and parent debt were right on target, and the Utility equity ratio was above target.

In fact, our favorable asset sales results allowed us to achieve our long-term Utility equity ratio target through an increase in the planned Utility equity infusion to $650 million.

We had a strong year operationally in 2007 and continue to work to improve power plant and system performance.

We completed a major environmental upgrade at our Campbell 3 plant.

This plant now burns 100% western coal, resulting in reduced fuel costs, especially compared to today's higher eastern coal prices.

Although the Michigan economy remains weak, we're still seeing growth in our electric business, setting three monthly peak load records in 2007.

With our investment in the Utility, we've been able to improve our electric distribution reliability by 20% as measured by customer outage minutes.

As you know, reliability is the key to customer value.

Our green generation program continues to grow, with enrollment hitting over 12,000 customers in 2007.

Overall Consumers maintained its strong operation and expects to continue to improve.

On the regulatory front we received some important orders in 2007, including approval of the Palisades nuclear plant sale and associated long-term power contract, with settlement in the gas rate case and expedited approval for our Zeeland gas power plant acquisition.

In September we exercised the regulatory out provision of the Midland Cogeneration Venture power purchase agreement and reduced the capacity and fixed energy payments to the MCV to the amounts we collect from our customers.

This action eliminated our losses associated with the contract.

Because we exercised this contract clause the MCV partnership has the right to terminate or reduce the amount of capacity sold to us under the contract.

The partnership has until late April to notify us if it intends to do this.

The MCV filed at the MPSC, asking them to increase our cost recovery from customers, which if approved would restore payments to MCV.

This proceeding is ongoing, and we can't yet predict when a decision may be reached.

I mentioned earlier that we filed our balanced energy initiative with the commission last year.

The BEI outlines our plans for meeting the growing electric needs of our customers through energy efficiency, demand management, expanding renewable energy, utilizing our existing generating resources, and developing new power plants.

The Commission's review of our plan is ongoing.

Last week we filed a new gas rate case requesting a $91 million increase.

The request assumes 11% return on equity, a 50% equity ratio on a financial basis, and a $2.4 billion average rate base for the 2009 test year.

We also requested that the Commission authorize a revenue decoupling mechanism for residential customers.

The decoupling mechanism would remove the impact of the energy efficiency and conservation programs on revenue, removing the inherent disincentive to the Company to promote these programs, and increasing the likelihood that we'll be able to maintain O&M spending at a level sufficient to meet our customer service goals.

And of course, we are awaiting a decision on our pending electric rate case.

We anticipate a proposal for a decision from the administrative law judge in late March and a final decision in the second quarter.

Overall the regulatory environment continues to be constructive.

On the legislative front several bills have been introduced in the Michigan legislature that address a number of important issues.

The bills have been presented as a total energy package, addressing restrictions on retail open access, improvements to rate-making procedures to eliminate or reduce regulatory lag, energy efficiency and renewables programs, phase-out of existing interclass rate subsidies we refer to as rate skewing, and a certificate of need process to review and approve generating plant investment plans.

The state house has taken the lead on the package, targeting completion in the coming weeks.

The senate will follow, with leadership indicating a desire to get legislation to the governor's desk this summer.

We're very involved in the process and will continue to work hard to ensure that the final package is one that meets our needs.

Our major priorities for 2008 are shown here.

First, achieve our financial objectives.

Tom will discuss those in more detail in a few minutes.

Second, reform Michigan's energy policy to ensure we can make the investments in energy infrastructure that our state needs.

We need to achieve fair and timely orders in both of the pending electric and gas rate cases.

We're frustrated that we haven't been able to make more progress in resolving the Bay Harbor environmental issues that were raised in 2004.

As Tom will cover, in the fourth quarter, we increased our reserve for the Bay Harbor cleanup by $29 million after tax due to unanticipated delays and additional EPA-required remedial actions.

One of our priorities for this year is to reach agreement with the regulators on the long-term remedy for Bay Harbor.

In conjunction with the energy policy reform we will continue to implement our balanced energy initiative and of course will work to achieve excellence in worker safety and operations that set the foundation for our strategy.

Turning to that strategy, our growing forward strag hasn't changed.

We've simplified the story over the past several years, working with our public service commission and focusing largely on our Michigan utility.

Again, safe, excellent operations are the foundation of an asset-based Company like ours.

Utility investments provide rate base growth but also need to deliver customer value, and that means not only good service but also competitive rates.

I believe our public service commission understands that fair and timely regulation is necessary to achieve the consistent attractive returns to shareholders important to financing an investment program that's good for our customers and our state.

We're excited about our prospects and continue to make good progress.

Now let me turn the call over to Tom for more details.

Thank you, Dave.

2007 was another year delivering on our commitments, putting the complex enterprise's restructuring behind us.

We exceeded our earnings and cash flow targets, we rebuilt the Utility and balance sheets, which was recognized by substantial upgrades from the credit rating agency, and we restored the dividend early in 2007 and gave it a boost last month.

Selling our international businesses at attractive prices allowed us to invest $650 million in our Utility, pay down parent debt, and reduce our risk profile in a profound way.

We were able to keep our promises.

In 2007 we reported a loss of $1.02 a share.

Without recognition of the currency translation adjustment from our Argentine investments, the impact of terminating unprofitable contracts, and other legacy costs, adjusted earnings were $0.84.

Now that exceeded our target by $0.04.

At GE they'd probably say this is great.

The Utility contributed $1.20, and Enterprises a nickel, offset partly by interest in other of $0.41.

Let's look at this in a bit more detail.

For the full year 2006 EPS was $0.41 without discontinued operations of $0.16, and with mark-to-market losses of $0.51.

From this comparable number, adjusted earnings were up $0.43, including an increase at Enterprises and the parent of $0.20 and at the Utility of $0.23.

Now at Enterprises and the parent, the absence in 2007 of 2006 mark-to-mark losses of $0.51, earnings associated with assets sold of $0.38, and 2006 tax benefits of $0.21, was more than offset with good news associated with a 2007 reduction in interest expense and overhead of $0.23.

Remember, too, the full impact of lower debt and overhead costs in 2008 -- that occurs in 2008, and that's when we benefit from a full-year impact of asset sale proceeds used to invest and reduce debt.

The Utility increase of $0.23 primarily reflects the benefit of $0.23 from gas rate orders issued in late 2006 and August 2007, as well as $0.17 benefit from favorable weather; mild weather in 2006 and positive in 2007.

These benefits were partly offset by higher operating costs of $0.13 associated with increased capital investment.

Cash flow for 2007 was strong.

At the Utility, cash outflow of $121 million included our $519 million investment in the gas fire generation facility at Zeeland.

Now, we're pleased to have completed this purchase last year.

Cash at year end was $195 million, and today we have about $482 million available at our bank facility.

At the parent, as shown on the left, cash flow after a $650 million investment in the Utility was still $676 million positive.

Now that permits substantial debt reduction.

Cash at year end was $136 million, and today we have about $322 million available at our bank facility.

This provides us with a strongly liquidity position at both Consumers and the parent heading into 2008.

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

Compared with 2005, a year prior to our major restructuring work, earnings in 2008 at Enterprises and the parent will be down $0.78.

This reflects our asset sales.

Reinvesting a portion of the sale proceeds in the utility improves earnings by $0.62.

Using another portion of the proceeds to retire debt reduces interest expense by $0.25.

Eliminating overhead associated with these sales saves another $0.15.

Now, none of this was easy, but is it leaves CMS with a solid growth profile and a lot less risk.

We've grown our earnings by about 8% annually through 2008 and through those restructuring years.

Now, expect to grow, as Dave mentioned, EPS about 6% to 8% on an average annual basis over the next five years.

Our future growth is enabled in part by running a leaner organization and a stronger balance sheet.

Since 2005 we reduced overhead at Enterprises and the parent by $45 million, and that's worth about $0.15 a share.

That leaves us with overhead costs of about $0.07.

This includes a little bit of legacy costs, about $0.02 a share, that we should be able to shed later.

We've reduced parent debt by $800 million over the same period, generating interest expense savings of $0.25.

Over time we may bring this down a bit, but candidly it makes more sense for now to direct our cash sources towards the needs of the Utility where we have an after-tax return of about 11% rather than at parent debt reduction where we have an after-tax return of about 5%.

For 2008 compared with 2007 higher Utility earnings of $0.42 are expected.

This reflects our equity investment of $650 million and the full-year benefit of eliminating MCV PPA contract losses.

Lower Enterprises and parent earnings of $0.06 are associated with the absence of earnings from assets sold in 2007, partly offset by improved operations at DIG and lower costs.

Enterprises will generate earnings of about $0.02 a share.

This will rise to better than $0.05 next year as remaining legacy costs are shed and the full-year benefits of restructuring DIG economics are enjoyed.

For CMS our adjusted EPS is expected to be $1.20.

Right now our GAAP earnings are expected to be the same.

Now this could change, but we're delighted to start from this point.

While our restructuring has allowed us to improve substantially our balance sheet at Consumers and the parent, we also used tax loss carry forward to say offset gains.

At the end of this year we expect to retain cash benefits of more than $600 million associated with NOLs and credits.

By the end of next year we expect to have more than $500 million left.

The new federal economic stimulus act of 2008 provides for bonus depreciation, and we may be able to use that at our utility.

If that's possible, we'll be able to extend the use of our NOLs by another year or two.

Good news for us.

Consumers' 2008 cash flow before capital spending and Palisades' related cash flow is strong in 2007 and 2008.

Capital investments enable needed improvements for our customers and provide stronger future cash flow.

Parent cash flow also will benefit from this investment.

Excluding asset sales, equity contributions to the Utility, and legacy costs, parent cash flow continues to grow, providing stronger capacity for dividend growth and/or debt reduction.

Dividends from Consumers more than cover interest and overhead costs at the parent, as well as common dividends.

In addition to these cash flow slides, I'd like you to please refer to our standard cash flow forecast slide that's attached to this presentation.

We know it's a popular slide for most of you.

In it you'll see our strongly liquidity and financing plans for 2008.

These plans reflect holding parent debt flat in 2008 following the cut by about two-thirds during our restructuring period.

The deleveraging has allowed us to improve our credit metrics and they will continue to improve as cash flow goes.

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

With that in mind, here are a few examples of risks that can impact our earnings and cash flow in 2008.

Except for the passage of time, the sensitivities around the Utility ROE, timing of the electric rate case, and electric and gas sales haven't changed since our third quarter call.

Many of you have asked about the economy in Michigan, so in our last call we added a sensitivity associated with uncollectible accounts.

Historically Consumers uncollectibles have averaged less than 0.05% of revenue, and that's 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 earnings per share by about $0.01 and cash flow by about $3 million.

Now this, of course, could be up or down, but despite the negative publicity surrounding the Michigan economy, our customers largely have kept up with their utility bills.

Looking further to the future, our utility investment program is projected to fuel rate base growth by about 7% a year.

This is up a little from our last report, reflecting in part requests for stronger renewable and efficiency programs.

This could change as energy legislation is finalized over the next few months.

These investments strike a balance between the need for operational and fuel efficiencies, improved reliability, necessary new generation, and environmental goals with the desire to grow earnings, maintain responsible rated increases, and sustain a healthy capital structure.

Management's aligned strongly with these objectives.

Our short-term incentives are built around earnings per share and cash flow, and these incentives are reduced if operating standards are not met.

Long-term incentives are tied to total shareowner return, a combination of earnings growth and dividend yield.

As shown above, the most recent three-year performance plan pays out if the total shareowner return growth exceeds 19.5%, with a 100% payout target at 26%.

The ability for larger incentive rises with total shareowner return performance up to 32.5%.

Our targets for 2008 are shown here, with EPS at $1.20 and cash flow at $400 million.

Capital structure and dividend targets also are shown.

These are essentially in line with previous targets, except to reflect the DIG restructuring payment and nuclear decommissioning refund timing.

Over our five-year planning horizon we expect to grow earnings at an average annual rate of 6% to 8% and to grow our dividend at a pace consistent with aggressive capital investment.

So I thank you for joining us today and thank you for your continuing interest in CMS.

We do appreciate it.

Now we'd be happy to take your questions.

Thank you very much, Mr.

Webb.

(OPERATOR INSTRUCTIONS) Our first question comes from the line of John Kiani of Deutsche Bank.

Please proceed.

Good morning, Dave, Tom, Laura.

Can you talk a little bit about house bill 5523?

I know you touched on it in your opening comments, Dave, but can you talk a little bit about how file and implement rate making would work to reduce regulatory lag and also maybe what the status of the bill is?

Is it out of committee yet?

Sure, John.

There are a whole group of bills, of course, and that issue of file and implement rate making is one of them.

It's not out of committee yet.

In fact, the whole set of bills is being actively debated as we speak.

In Michigan we've had slower than the national average timeframes for processing general cases.

I think that's generally recognized, and there's -- there seems to be a general support in the legislature for shoring that up because I think there's general recognition that fair and timely rate relief is particularly important as you move into a heavy investment cycle that we've got planned here.

The bill as it's currently drafted would actually require the commission to process rate cases within 12 months, would allow the utilities to self-implement after six months their filed increase, and would specify that the utilities may use forward-looking test years in their filings.

We think that's very favorable.

We think they'll have more teeth in the 12-month timeframe than they've had in the past.

Obviously all of these things can change over time, but again, we feel like the draft that's been put together and debated is a reasonable one and there seems to be relatively good recognition by the legislators in the need to address this issue.

That's helpful, Dave.

Tom, I know you've made a couple of comments about this at the end, but do you think a 50% dividend payout ratio by the end of 2010 is reasonable, given your CapEx program?

You did make some comments about dividend growth in relation to the size of the CapEx program.

Do you think 50% by 2010 is reasonable or realistic?

We're not going to comment on payout ratios.

I'll let Dave add into this, but we won't comment on the payout ratios.

I think the way you should think about this is we're really pleased to: One, have restored the dividend;, two, have given it a good boost here at the beginning of the year; and three, will measure -- the board will measure decisions in the future of any increases that we're able to do based on the pace of that capital investment and all the other important measures they evaluate.

I don't know if Dave wants --

Yes, I might comment on the payout ratio but not quantify it, and let me just say this.

We're at about 30% today.

I think that's about half of the sector roughly.

Right.

But I think that it makes a lot of sense not to move up to the number the rest of the sector is at when the investment programs that we have is out there.

Right.

I think the board has said -- they haven't established a specific policy.

I think the board has generally judged that it would make sense to move that payout ratio up over time, but certainly not at the rate that we did in the most recent move.

I wouldn't expect it to get up to anything near the industry average until this major construction cycle is really completed.

So we'll see in future years, but the direction is up, but we're going to be a bit cautious while we're building power plants and doing other things.

Sure.

Okay, thanks.

That's helpful.

Sure.

Thanks, John.

Your next question comes from the line of Samantha Dennison of Credit Suisse.

Please proceed.

Good morning.

Good morning.

Is there any way that you can provide a little bit more color on your 6% to 8% growth rate, specifically what's driving that with respect to growth between the Utility and corporate?

I think if I can start out with Dave on that, the best thing to look at is the slide we showed on the Utility growth, because when you look at that slide you'll notice we showed some of the detail about the different programs on top of our base capital investment, and the fact that those programs will drive us up on an average annual basis of about 7% in our rate base.

That's a key driver here.

So the investments we're making that are needed in our Utility give us a nice boost in the ability to get recovery on that investment, and that's the number one driver in our earnings growth.

Other items are small.

I would just echo what Tom said.

The Enterprises piece of our business has been stabilized, but it's small and it'll continue to be small.

It's really driven by rate base growth at the Utility, and we've laid that out for you.

Great.

Thanks.

You bet.

And can you also give a little bit more color on your CapEx?

I know you spoke briefly in your opening remarks about renewables being up, but also like your base capital was also up a little bit from the prior plan.

They're not up dramatically or different dramatically.

We have a -- I'm looking for the slide here as we speak, but we've talked about a $6 billion investment plan.

I think it actually was a little over $6 billion before and in slide 22 that we laid out for you, the total is now really $6.4 billion over five years.

Now, that does include the Zeeland plant, which was actually completed in December of last year, so we're up a little bit.

I think we're about $6.1 billion when we talked about it before.

Some of those changes have to do with the renewable energy efficiency programs, and as I mentioned earlier, those programs are part of the package of legislation that's going through right now.

We think that we're probably going to be a little bit more aggressive in our own rate base investment in renewables than we'd originally planned, and that's part of what's driving that difference.

Obviously.

all of that could change over time as this legislation settles out and our plans get more crisp, but we feel reasonably good about what we've got there now.

I'm going to just add one comment, if I may, that when you look at the slide that we give on you the Utility growth, you find that it is helpful to see that most of the colors are about programs that are before we get to our coal plant.

So the next few years are driven by these investments that Dave was talking about around environmental, enhanced distribution and the like.

The coal plant really comes in at the back end of our five-year planning period, so think of it in two phases.

Great.

Thanks very much, guys.

Yes.

Your next question is from the line of Paul Ridzon of Keybanc.

Please proceed.

Good morning.

How are you?

Hi, Paul, just great.

Thank you.

Congratulations on cleaning up.

It looks like all the work's done, it was a very successful '07.

Just had a question on the CapEx.

You previously discussed that you hope to keep rate increases at inflation-like levels.

With equipment costs and now the 7% rate base growth, is that still the objective and is it still attainable?

Well, it's certainly in that range.

Even when we talked about it before, we weren't trying to predict what CPI was going to be.

We were probably a little above that, I think, in the 3.5% range when we talked about it before, but certainly not far from CPI.

There's some things that are hard to predict.

Obviously, construction costs for coal plants are up, although a lot of that is late in our five-year planning cycle.

In fact, a lot of that is beyond our five-year planning cycle.

And the other thing is it's difficult to predict where carbon legislation, for example, is going to go and how might that affect our planning cycle.

We have baked some assumptions in there, but those things could change.

I would say broadly, though, as we put together our capital plans -- the discretionary capital plans we talked about, we focused very hard on investments that had the maximum benefit to customers at the minimum cost, and we're still comfortable that we will have competitive rates.

Like I said, it's difficult to predict the exact numbers, but we're not expecting untenable increases.

Okay, thank you very much.

You bet.

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

Please proceed.

Good morning.

I wanted to just go over a couple of the ROE issues.

The ROE that you said on the chart for the reported results, 9.4% for 2007, and 8.4% on the gas, what equity ratios -- common equity ratios were used in computing those numbers, Tom?

I'm trying to do it myself from the data provided.

You've given the rate base, but the ROEs you're saying is based on a rate-making purpose to give the common equity ratio on a financial basis, but I wanted to understand if I was to do those numbers on my own, which equity ratio am I using to get to them?

The way to think about it is we've been able to put enough equity into the Utility to get ourselves up to around 48%, 49% on a financial basis.

I don't have right in front of me here the rate-making basis.

We may be able to get that --

Roughly 43%.

Okay.

This is page 3 of the 11 of -- not on the slides, but of your release.

Yes, and that's where we show 8.4% return on electric and 9.4% on gas.

Right.

And that's based on what equity ratio?

That's rate making, right?

That's based on what equity ratio?

I don't have it right in front of me.

[I think it's about 3%.]

Okay.

Approximately.

And by the way, we're happy to give you that exactly.

Okay.

And then, Tom, the guidance for '08, could you break it down between electric and gas for the Utility business?

Well, we don't do that in our guidance right now, but that's something as we go through the year we'll give you a little more information on our performance.

Okay.

And then -- so the way we should look at it is that -- or if I can ask in '08 what ratio do you plan, I guess, to earn in the electric and gas business on which the $1.20 -- around $1.20 is based on?

You mean what ROEs are we --?

Yes, what ROEs?

Well, we're going to -- as you saw in our just-recent filing here in the gas rate case, we're going to be seeking an 11% return, so remember we also give you the sensitivities here so that you can make some of your own judgments on where you think that would end up, and we try to get ourselves in the parameter of 10.5% to about 11% when we're doing our own estimates and planning.

Your own estimates and planning.

Okay.

Great.

Thank you very much.

Ashar, thank you.

Thanks for calling.

Your next question comes from the line of Reza Hatefi of Polygon Investments.

Please proceed.

Thank you very much.

The $0.08 of 2008 guidance associated with Enterprises and parent operations and taxes, you mentioned $0.02 is Enterprises.

What is the other $0.06 composed of?

A little more detail, I guess.

I think what I told you is that the earnings levels on Enterprise alone would be about $0.05 as we go into the future.

It is actually going to be a little less this year.

We'll probably be in the zone of $0.02 to $0.03 for this year, because remember we didn't complete our contract restructuring around DIG, and there's still a little legacy cost in the overhead, so having the DIG contract done now, but not for the full part of the year, combined with that, we have a little bit lower earnings on Enterprises this year and then think about $0.05 as you go into the future.

Right.

But looking at slide 14 of your slide presentation, the Enterprises and parent operations and taxes is $0.08 of the 2008 guidance, so if $0.02 to $0.03 is Enterprises, what is -- the other $0.05 or $0.06 of positive earnings, where is that coming from?

What you need to do on that slide if you're looking at it is take the operational piece along with the overhead piece that goes with that, and you'll see that we have about a couple pennies of earnings at Enterprises.

Okay.

Okay.

Got you.

Could you talk about -- I guess when you guys originally gave your 2008 guidance and you had the sensitivities around it, and you continued to update that through the third quarter call, seems like with the electric rate case not being effective until the April/May timeframe, there would be something in the order of a $0.10 slippage just from a timing standpoint, yet earnings guidance is remaining the same at $1.20.

Can you talk about some of the positive benefits that have allowed you to maintain this guidance?

Well, I would just say broadly that we had asked for interim rate relief.

We had hoped that we'd get interim rate relief at the beginning of the year, and of course we didn't get that.

We had built an operating and maintenance budget originally that assumed we'd get that interim rate relief, and we put together a contingency plan in the event that we didn't, and so we've had to implement that contingency plan.

We don't feel uncomfortable with it, but frankly, we would hope that we'd get a little bit more revenue recognition in the future so that we can up some of our own M spending in some key areas.

But basically we implemented our O&M contingency plan and that's how we've been able to maintain the guidance.

And Zeeland is also a positive driver?

I can't recall.

The rate increase, did that go effective January 1st or am I forgetting?

No, you're correct.

The Zeeland plant acquisition was approved and the associated adjustment actually was made.

That was part of our interim rate relief request along with the other revenue.

That piece went into effect, and the Zeeland plant, of course, goes into the rate base and helps with earnings on a go-forward basis.

The $5.4 billion of rate base on the slide from the earlier question for electric, does that include Zeeland at year-end '07?

Our rate base should include Zeeland.

Where is the --

It's on the earnings release.

Oh, yes.

And the answer to that is yes.

And just finally, the reg out, obviously that was successful.

Can you maybe expand a bit on that in terms of how we should -- is there any recourse the other parties have or where that stands in terms of are you free and clear basically at this point?

How should we think about that?

Thank you very much.

Well, I wouldn't say that there's no possibility the MCV will contest that and that that might go to arbitration.

We've said before that that was always a risk, and they've indicated that they would intend to contest that at various points.

We've said before that we were comfortable with our position in the contract and that's why we've basically been able to, from an accounting perspective, reflect the elimination of those losses with the regulatory out clause.

I do mention one of the recourses that they clearly have since we reduced their payments under the contract and that is to terminate or reduce the supply to us under that contract, and they actually have now until April to make that decision.

That has been told in the past -- I guess it's February at this point in time but may get extended a little bit because of the fact that the commission has -- or the MPSC is considering the request by the MCV to address this revenue issue.

And of course, there's concern about the overall capacity available to the utility, and this is a significant portion of our current portfolio, so that's up in the air a bit right now.

We're hopeful that will get resolved through this proceeding in the commission and all of these issues will be behind us, but we'll have to wait until those proceedings actually get completed before we can say that with finality.

Thank you very much.

Thanks for your questions.

You bet.

Your next question comes from the line of Paul Patterson of Glenrock Associates.

Please proceed.

Good morning, guys.

Good morning.

Just on the operating cash flow from '07 versus '06, could you just give us a couple of the drivers there that make the big difference?

I'm looking at page ten of 11 of the earnings release.

I know there's some unusual things, I'm just wonder what's cash and what's not, so to speak.

We're just trying to make sure we're at the page that you're looking at.

It's page ten of 11 of the summarized statement of cash flows, and looks like cash from operating activities was $686 million, which is what I remember as well in 2006, but it looked like it's gone down about $27 million?

When you look at the cash flows that you have there, keep in mind you have that substantial swing from all of the asset sales that we've had, which is the single largest driver.

And that's showing up in operating cash flow?

That shows in the investing --

Right.

I'm just talking about the operating cash flows.

I guess the main difference for that line that you're looking at would be accounts receivable financing, which does show up in our operating cash flow line.

That would be more than half of that.

Okay, so that's a working capital issue there?

Yes, and then keep in mind the other item that we have is during this last year we had a pension contribution of $109 million and we had a very small pension contribution in the prior year.

Those would be the two big swings that are in there.

Okay.

When's the actual 10-K coming out?

Later today.

Okay, great.

Thanks a lot.

You're welcome.

(OPERATOR INSTRUCTIONS) Your next question comes from the line of Barbara Chapman of Bear, Stearns.

Please proceed.

Hi, good morning, guys.

Good morning.

Can you give us some color on the trends that you're seeing in kilowatt hour sales?

I noticed that industrial sales were basically flat for the quarter; however, the residential and commercial had declines in the quarter due to, according to your notes, weaker demand.

So exactly what are you seeing there and and especially as it pertains to the economic conditions in your service territory?

Over the past several years we've had fairly weakened, in fact some cases declining industrial sales, but we've had reasonably strong residential and commercial sales.

They have weakened a little bit as of late, I think probably the same as the rest of the U.S.

Overall sales were up a bit for the year.

'Just remember that in our planning process for our balanced energy initiative we've assumed about a 1% sales growth over the coming years, and that's a lot lower than we've seen historically and a lot lower than probably about half of what the EIA predicts for the rest of the U.S.

So our planning and our forecasts are based on relatively modest sales.

We would hope that the economy's going to pick up from there, but we think we've been responsible in a way that we forecast those.

So again, when you look at the page that you're looking at, you'll see that the performance in '07 for total electric sales was a bit stronger than what Dave mentioned we're planning on for the future, so we're trying to stay quite conservative.

So you're saying the residential and commercial is catching up to where industrial has been?

In the past residential and commercial was out pacing the industrial.

Yes, they've been -- they've been fairly strong with continuing air conditioning saturation and home electronics and things of that nature while the industrial sectors lost some of its manufacturing base over time.

And we've seen that over several years now, but it seems to be leveling out a little bit on both fronts.

Now, when you look at the split between residential and commercial, is there one versus the other that -- because it's not clear from the way it's reported, is the demand on both sides or is it on one versus the other?

Well, I'm not sure if I --

Let me help you a little bit there.

Keep in mind, you don't want to base your thinking on the future just on the one quarter.

Exactly.

Take a look at those annual numbers, and that gives you a little bit better look at what's happening.

So you can see there residential was up about 1.8%, commercial 1.5%, industrial flat, so when you take a look at those numbers, you probably get a better sense of a broader time period than just picking any one particular quarter, which obviously can be hit by a lot of things, including weather.

Right.

Well,l that's actually what I am trying to get at.

Is this quarter the beginning of a trend or is it just a one-time -- because weather appeared to be, from your comments, favorable I thought for the quarter, so I'm trying to figure out if the fourth quarter is the beginning of a trend or it's just an aberration and if you can just comment on that, please?

I wouldn't put a big trend on those fourth quarter numbers just yet.

It's just too early to do that.

And on the annual numbers, again it's hard to predict, but our plans are based on something that's about half of what you see in the change from '07 compared to '06.

As far as the growth?

That's correct.

Okay.

And that leads me to, as you go into additional rate increases, are we at a point where the economic conditions could end up being a problem as you go in front for additional rate increases?

Well that's an excellent question.

Again, you remember earlier Dave commented on the fact that it's very important to us as we put the new investments in place that we try to choose those that are beneficial to our customers so they'll either be driving down O&M or reducing our pass-through cost for PSCR, whatever it may be, we'll be looking for the most important priorities for customers in our spending plans so that we can try our best to keep any rate increases in the general range of inflation.

It is very hard to predict in any one year exactly how much it will be.

Yes, let me just assure you that your concern is one that's appropriate to keep track of.

We think that if utilities are planning on dramatic increases in rates year in and year out in the coming years, that that's going to be difficult for the public to deal with.

I think here in Michigan we've obviously got that issue with the weak economy, but we've been very sensitive to that in our planning.

We shared our planning with the commission and the commission staff.

We think it is responsible and reasonable, and as Tom said, focused on particularly investments where we can not only improve service but also make sure there weren't significant rate increases.

I would -- I've highlighted before, but a great example of that is our transition to western coal.

I mentioned that we just finished a transition at our Campbell preplant to 100% western coal.

We spent just shy of probably $1 billion now altogether on our new NOX compliance program and a lot of that was done through converting our units from roughly 20% western coal at one time to, on a combined basis, probably approaching 80% or 90% now, and that basically paid for itself from a customer perspective in terms of reduced coal costs.

We've got similar plans on a go-forward basis.

When we talk about, for example, our AMI or our odd automated meter reading infrastructure program that an awful lot of benefits accrue that will allow us to reduce operating and maintenance costs.

So while we make a significant investment, the overall costs to the customer is very, very modest.

And so, as Tom indicates, we're very concerned and sensitive to those rate increases and we continue to believe that our program can be implemented and maintain the costs, if not at the rate of inflation, not much higher than that.

There are some factors I mentioned earlier, like unknown carbon costs and new legislation, things of that nature, that could ultimately influence those numbers, but of course they'll influence them nationwide.

Okay.

Thank you.

You're welcome.

Thanks for the question.

Your next question comes from the line of Edward Heyn of Catapult Capital Management.

Please proceed.

Good morning.

Good morning.

Tom, just had a quick question on the NOL slide.

I guess first off, in that slide are you assuming the benefit of depreciation from the stimulus act, because it looks like your NOLs don't change from '07 to '08 even though on my math you'd have about a $150 million tax bill based on your $1.20 guidance.

Is that right?

No, we don't, not yet, and remember if we do get that benefit, we do expect to get savings in the neighborhood of what you're describing for the Utility, which then would delay when we take the consolidated benefits of our NOLs.

So those are not baked in there yet.

So we're pretty sure we're going to get the benefit from that.

If we do get that this year, you can add on a year or two to these NOLs.

Okay.

And so why are the NOLs an changing from '07 to '08 even though you're generating probably taxable income at the utilities?

We are using some as you'll see there, but our position for 2008 doesn't really give us that substantial amount that we'll need.

One other thought to keep in mind is the DIG contract transactions actually occurred this year, so that gave us more sheltering due to losses on those.

Okay so there was -- you're consuming NOLs, but you're creating more from the DIG restructuring, and that's why '07 to '08 doesn't change that much?

Think of it exactly that way.

Okay.

You said if you were to get the bonus depreciation, it would extend your NOLs by about two years, so you would have -- you'd be consuming NOLs until about 2011, 2012, is that right?

Yes.

Previously we told you we'd use up our NOLs by about 2011, and so if the bonus depreciation is as we expect it, you can add one year, maybe two to that, depending on the size.

Okay.

And then you also have the AMT -- that 282 of the AMT that you also can offset taxes with?

Absolutely.

Okay, great.

Yes, thank you.

I appreciate it.

Thanks a lot.

Your next question comes from the line of Robert Petrosino of Barclays Capital.

Please proceed.

Good morning.

If the MCV partners decide to reduce supply or terminate the contract, does Zeeland fill that void?

What is plan B for that capacity needed and what's going to be the recovery process?

We didn't purchase the Zeeland plant with that in mind.

In the EEI that we put together there was actually about a 500-megawatt go-forward need for additional combined cycle gas capacity even with the continuation of a contract with the MCV, so that's how our balanced energy initiative is put together.

Zeeland plant actually was an opportunity, though it's a significantly larger plant than what was originally proposed in that BEI, it's about 400 megawatts of additional capacity.

So if the MCV contract were to be unavailable to us that we'd fill back fill that, obviously, with a large portion of the capacity from the Zeeland plant, and then we'd make incremental in the marketplace to offset the remainder in the near term here and just deal with that in an update to our BEI.

Do I recall, is that six months or that's annual, right?

I'm sorry?

Is that six months or annual, the true-up of the purchase power costs?

We have -- I guess I'm not sure what you're asking exactly.

Our PSCR?

Yes.

Power supply cost recovery case?

That's an annual filing with monthly factors and then an annual reconciliation case after the fact.

Great.

Thank you.

You're welcome.

At this time there are no further questions.

I'd like to turn the call back over to David Joos for closing remarks.

well, thank you and thanks again for joining us today.

I suspect you didn't see very many surprises in our presentation today.

We're actually proud of that fact.

It was our intention when we announced our restructuring last year that we would go through a restructuring phase, that our earnings would drop to about the level that we told you that they actually were.

Our adjusted earnings came in a little bit higher than what we'd forecast for you.

And a year ago when we talked about where we expected to be back to in 2008 is exactly where we currently forecast we'll be back to, at $1.20 a share.

We feel very good about the restructuring of the overall financial condition of the Company, the balance sheet.

We've obviously had significant improvement in our debt ratings.

We're at at the Utility now about where we'd like to be in terms of balance sheet strength, and we've got a pretty strong program for investment at the Utility, and responsible rate increases associated with that over time.

I'm optimistic that the legislative package will move forward this year and it'll set us up for the ability to go forward with that investment plan and that's important to us.

And also I'm optimistic that the rate-making processes in Michigan will be improved a bit so that there's a bit more timely as we move into that process.

So I would say the Company is in very good shape right now to implement the plans that we've laid out for you.

I think we as a management and our employee base are pretty excited about it, and we're happy to be where we are.

So again, thank you for joining us.

We'll obviously keep you updated as the year goes on on a number of these fronts, including the regulatory and legislative proceedings that are under way and also any changes to our capital programs as time moves on.

Thanks very much.

We'll talk to you next time.

Bye, now.

This concludes today's conference.

We thank everyone for your participation.