CMS能源 (CMS) 2008 Q4 法說會逐字稿

Good morning, everyone and welcome to the CMS Energy 2008 results and outlook call.

This call is being recorded.

As a reminder, there will be a rebroadcast of this conference call today, beginning at 11 am eastern time, running through March 4th.

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

At this time, I would like to turn the call over to Ms.

Laura Mountcastle, Vice President and Treasurer.

Please go ahead.

Thank you.

Good morning and thank you for joining us for our 2008 earnings presentation.

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

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

This presentation includes forward-looking statements.

These statements are subject to risk and uncertainties and should be read in conjunction with our Form 10-Ks and 10-Qs.

The forward-looking statements and information and risk factors sections discuss important factors that could cause the results to differ materially from those anticipated in such statements.

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 included in the appendix and posted in the investors section of our web site.

We expect 2009 reported earnings to be about the same as adjusted earnings.

Reported earnings could vary because of several factors.

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

Now, I will turn the call over to Dave.

Thanks, Laura, and good morning to those joining us today for our 2008 year-end call.

I will start the presentation with a brief update on the business, and then I will turn the call over to Tom Webb for a more detailed discussion on the financial results and outlook and then we'll close with question-and-answers.

Let me begin by taking one final look at the 2008 financial report card.

In a challenging year, I'm pleased to report that our adjusted earnings per share was $1.25, beating our target of $1.20 a year.

Tom will give you a more detailed breakdown of the adjustments from our GAAP results, which was $1.23 a year.

The largest adjustment was the elimination of a $0.07 share noncash charge associated with the mark-to-market of our nonqualified pension plan.

For reference, we have also shown our results here with and without this adjustment.

We also adjusted out $0.05 in gains related to assets sold in the past.

All in all, we are very pleased with our results, especially given the challenging economy and unstable financial market.

Again, Tom will give you more detail.

Free cash flow was less than our goal.

Even though gas prices have fallen dramatically in recent months, the average prices during our purchase period averaged $9, higher than our planned level of $8.

All of our capital structure targets were right on track.

Finally, we raised our dividend in January last year to $0.36, representing an expected 30% payout ratio.

Of course we raised it again this January to an annualized $0.50 a share, reflecting the progress we have made on our growing forward strategy that we expect to result in long-terms earnings growth of 6% to 8% per year.

More on both the dividend and our earnings outlook in a moment.

First, let me mention some of the other highlights of last year.

The most important development was the passage of a package of bills that define Michigan's new energy policy and constructively reshape utility regulations.

These changes support our growing forward capital investment plan, over $6 billion over the next five years.

By now, most of you are familiar with the legislation, but it does bear repeating a couple of the more important elements.

First, to file an implement rate making with a forward test year will allow us to overcome the regulatory lag that would otherwise dampen utility financial results during an investment cycle.

That provision allows us to self-implement a revenue increase six months after filing, and receive a final order in 12 months, a marked improvement over past experience here in Michigan.

In addition, the law puts a cap of 10% on the amount of electric load that can leave our system for third party suppliers, and includes other provisions that together enhance our ability to move forward with our investment plans.

And very importantly, the bill establishes an achievable renewable portfolio standard of 10% by 2015 and sets energy efficiency targets for electric and gas customers.

Both create opportunities for new investment in Michigan.

I will discuss some of the specific aspects of the bills, including our recent renewable energy and energy optimization plans in just a minute.

The topic of greatest interest recently has been the weak economy, especially here in Michigan.

Unemployment is hovering around 10%, and there's considerable uncertainty surrounding the health of the big three automakers.

We think we have incorporated reasonable assumptions in our plan.

In our pending electric rate case we assume a sales decline that reflects our view of the economy, and we've asked the Public Service Commission to approve a sales tracker that would provide a layer of protection in the event sales are materially different than what we expect.

We have also asked for a tracker on uncollectibles.

Tom will talk more about sales, the automotive sector and uncollectibles shortly.

Employee safety and operational excellence are pillars of a good company.

And we had success in both areas last year.

I want to compliment our workers and our union leaders for implementing new initiatives that helped to achieve these goals.

We completed a $500 million project converting our largest coal plant, Campbell 3, to burn 100% low sulfur western coal.

This will result in significant reduction in emissions while lowering our fuel cost and adding the rate base.

Really a win/win for everyone.

I am pleased with the decision of our board of directors to increase the common dividend to an annualized rate of $0.50 per share, up nearly 40% to a payout ratio of roughly 40%.

As we continue to implement our utility investment strategy, we expect to raise our payout ratio further over the next few years to roughly 50%.

Finally, I want to make a few remarks about our 2009 earnings outlook.

Again, Tom will provide more detail.

2009 is a bit of a difficult year to forecast, given all the economic uncertainty.

Having said that, our conservative utility-based strategy, coupled with the constructive regulatory changes in Michigan give us more certainty than most enterprises.

In 2009, we are forecasting adjusted earnings of roughly $1.25 a share, up $0.05 from last year's target and about the same level as last year's adjusted actual.

We continue to believe our long-term 6% to 8% growth target, despite the near term challenges.

Perhaps you already appreciate the significance of the regulatory timelines dictated by Michigan's new law, but I thought I would add this display to make sure there's no confusion.

Here are the high level schedules that apply to our pending electric rate case, and the new gas case we expect to file this spring.

We filed a $214 million rate case in November.

Under the new law, we are allowed to put the increase into effect this May, subject to refund, following a final commission order that must be issued by November.

The amount we choose to implement could be somewhat different than our filing depending on actual experience between now and May, relative to our filing assumptions.

For example, we previously discussed a reduction in our 2009 capital plan, and we will reflect that reduction in our rate self-implementation.

As I said before, our goal is to achieve our allowed rate of return, not to exceed it, and we'll gear our self-implementation to do just that.

We will take the same approach in our gas case which we expect to self-implement in November.

We believe this new regulatory model to be very constructive and supportive of our investment plans.

Last week, we filed our renewable energy and energy optimization plan with the Michigan Public Service Commission, as required under the new law.

The renewables filing includes a plan for increasing the amount of renewable energy we provide to customers to meet the 10% requirement by 2015.

As a reminder, about 4% of Consumers' power supply now comes from renewable sources, including hydroelectric, wind and biomass.

We estimate that we'll need an additional 900 megawatts of renewable capacity, essentially all from wind power.

Our plan is to build about half of this, and purchase renewable energy from third parties to meet the other half.

We have already secured more than 36,000 acres for future wind generation, and are currently collecting data to evaluate site suitability and determine the optimum hardware for these sites.

The estimated total capital investment will exceed $1 billion.

Our energy optimization plan is designed to educate customers, provide economic incentives, encourage them to choose efficient products and take other steps to lower their usage.

We expect to spend in excess of $500 million over the next six years to implement the plan.

Our filing requests approval of surcharges that are designed to recover the cost of the plan on a levellized basis over that six-year period.

To eliminate the disincentive associated with helping our customers reduce their energy consumption we've requested gas and electric revenue recovery mechanisms.

Investment in renewable generation and promotion of energy efficiency and demand reduction are two important elements of our broader plan to meet future customer electric demand.

We call that overall plan the Balanced Energy Initiative or BEI.

This chart is a graphic representation of that plan updated for our latest (inaudible).

The colored bands at the top of slide represent the actions we have planned to reduce demand growth.

Without these actions, we would be forecasting load growth of about 0.3 of 1% per year over the next 15 years.

Incidentally, that's much lower than our growth over the past decade and an economic recovery could push that higher.

With our demand reduction goals, the red line, shown through the middle of this slide, represents what we expect to have to serve in the future.

The lower colored set of bands represents our supply portfolio.

As you can see, it continues to reflect the addition of a new clean coal plant, but we now show it coming online in 2017, delayed from our original plan of 2015.

The need for new coal is not driven by increased demand, rather it's based on the assumption that we'll retire several of our oldest coal-fired units and replace them with newer, more efficient capacity.

Assumed retirement of our oldest units is the reason the existing generation section at the bottom of this chart steps down over time.

It's important to recognize that this plan will result in an overall reduction in our emissions over time, including carbon dioxide emissions.

You may be aware that Michigan's governor recently advocated a target of reducing the use of fossil fuels in the state by 45% by the year 2020.

She also asked the Michigan Department of Environmental Quality to suspend the issuance of air permits until they complete a review of coal plants planned for the state to determine if the plants are needed or if there are alternatives to a coal plant that should be considered.

Last Friday the attorney general of Michigan determined that the governor exceeded her authority in directing that the MDEQ add this step to the process.

It's certainly a bit difficult at this time to determine how all of this will play out.

We continue to believe that our project makes sense for our customers and the state, particularly when you consider the reduction in emissions that would result.

We also believe that our site is ideal for future carbon capture and sequestration and that could result in even further reductions in the future.

We will keep you informed as this story unfolds.

As I will remind you in a minute, however, approval to construct the new coal plant is not critical to our growth plan.

We continue to pursue it because we believe it is in the best long-term interest of our customers.

You have seen a chart similar to this in the past and we will continue to update it for you.

This is an updated look at the utility investment plan for the next five years.

The biggest change is the timing of the new clean coal plant that I just mentioned now targeted to begin operation in 2017.

With that schedule, meaningful investment in the plant would not begin until 2013.

As you can see, we expect to invest $6.3 billion during the time period 2009 through 2013 providing rate-based growth of about 7% a year and projected earnings per share growth at 6% to 8%.

While we believe it is in the best interest of our customers, investment in the new coal plant is not critical to our growth.

Other important investment alternatives exist, if we're unsuccessful in proceeding with that project.

These include extending the life of existing coal generation plants, converting simple cycle to combined cycle gas generation and other reliability improvements.

We simply don't lack for attractive investment opportunities.

We prefer our base plan because it minimizes risk by providing fuel diversity and flexibility.

Our major priorities for 2009 are shown here.

First, achieve our financial objectives in a challenging economic environment.

We will keep a close watch on the economy and try to stay a step ahead.

We have contingency plans in place to address potential issues and we'll be ready to implement them if necessary.

We have a considerable amount of time invested in preparing filings in response to the legislation passed last year.

We presented detailed renewable and energy optimization plans to meet the requirements set forth in the law and expect to move quickly to execute them.

This will involve considerable new investment to reduce energy demand, improve the environment and create needed jobs in Michigan over the next several years.

Finally, we look forward to a successful implementation of the file and implement requirements set forth in the new energy legislation.

This will support the timely execution of our business plan.

Now, let me turn the call over to Tom for more detail on our 2008 results and our outlook for 2009.

Tom?

Thanks, Dave.

Welcome everyone to the call this morning.

I will take a couple of minutes on 2008 results and then spend a bit more time to share some insights on our 2009 outlook.

Our employees navigated lots of challenges in 2008, from severe storms to successfully replacing our aging legacy information systems with a modern system, the game-changing energy legislation for our state, and much more.

Our employees took on big challenges, and they delivered.

More narrowly, financially oriented accomplishments are listed on this slide.

We don't have a crystal ball but our risk management processes, coupled with some very fortunate judgments kept us just ahead of the volatile financial markets.

Despite unusual economic weather and financial challenges, we achieved an EPS of $1.23 with no adjustments.

For our adjusted results at $1.25, we exclude the good news of $0.05 per beneficiary related to assets previously sold, and $0.07 for unrealized losses on our nonqualified retirement plan.

The equity portion of these assets is in the S&P 500-indexed investment.

We have assumed that this loss is other than temporary.

Earnings with and without these two adjustments exceed our guidance.

Our goal, as always, is to provide you with the information to assess our performance as you see it.

Now, compared with the results in 2007, at $0.84, utility results are up $0.36 reflecting investment of proceeds from asset sales.

Enterprises in the parent are up $0.05, reflecting lower debt and overhead associated with the asset sales, somewhat offset by the loss of profits from those businesses we sold.

In 2007, we restructured our business, and plan to resume our five-year trend of EPS growth achieving earnings of $1.20 last year in 2008.

Some doubted our ability to accomplish such a complicated and large restructuring.

We asked you to believe we could sell a wide variety of businesses at prices accretive to earnings even with many of the businesses in less than attractive markets.

We asked to you believe that we could successfully deploy sales proceeds in attractive utility investments, as well as debt reduction.

And we asked you to believe that we could successfully resize our overhead.

Despite a global economic collapse, frozen credit markets and severe storm activity last year, we exceeded the $1.20 guidance.

We judged our cash flow shown here, and continued growth plans to be sufficient to support increasing our common dividend from $0.36 a share to $0.50 on an annualized basis.

This is an important part of our plan to deliver an attractive total share owner return.

As you can see here, we restored our dividend in 2007, boosted it by about 80% last year, and another 40% this year, increasing our payout to 40%.

Our 2009 earnings guidance at $1.25 a share is up $0.05 from 2008 guidance at $1.20, and flat to our adjusted results.

I will show you some profit and cash flow sensitivities in just a moment.

The global economy adds to our challenge, but as we work through the year, we continue to see long-term earnings per share growth in the 6% to 8% range.

We'll update the outlook for 2009, as we go through the year, including checkpoints when we self-implement our electric rate case and file our gas rate case in May and receive an electric rate order towards the end of the year.

The economic outlook continues to look more and more like the 1979 to 1982 recession when sales dropped for us by 7% over a three-year period.

You may recall that this was the last time the auto secured federal loans and support.

Back then, the autos and their suppliers represented 15% of our sales and 14% of our margin.

Today that's down to about 5% of our sales revenue, and 3% of our margin.

Despite our reduced exposure to the auto sector we are planning on weather-adjusted sales to be down 2% for 2009.

Excluding sales growth associated with our largest and our fastest growing customer, Hemlock Semiconductor, our underlying sales growth would be down 3%.

That's on top of a decline of about 3% last year, and that's similar to the decline we experienced in the 1979 to 1982 period.

For 2009, the 3% drop is driven by an industrial sales decline of 7%.

We expect the 3% decline will be about 4% in the first half of this year, and then flat against different comps in the second half of the year.

Results so far this year are broadly consistent with this outlook.

While sales declines are largely industrial related, uncollectible accounts are more residential centric.

They were up from $32 million in 2007, to $46 million last year, and we forecast $48 million for this year, and that's both electric and gas uncollectibles.

Now this may not sound like much of an increase, but low-income energy assistance funds are about double what they were last year, helping us to keep our UA growth down.

Our uncollectibles are 30% to 40% below what we see at the average of other utilities, but still rising.

We've requested a tracker in our electric rate case to help insure timely recovery.

The new file and implement rate case approach that Dave just described is an important part of the process to help us address rate relief in a more timely manner.

Utility earnings growth reflects the investment program that Dave talked about earlier.

Beginning in May, with a self-implementation of our electric rate case, we should be able to recover for lower sales.

We have also requested decoupling for both our electric and gas businesses.

Rate relief represents $0.66 a share of our utility this year.

Please keep in mind that 40% of this reflects the full year effect of the electric rate order issued last July, and the gas settlement at the end of last year.

The bulk of the rest includes our electric rate case to be self-implemented in May and a new gas case to be filed in May and self-implemented in November.

One thing is for certain, our economic forecasts are very likely wrong.

To the extent annual sales are better or worse by 1%, our earnings per share will change in the same direction by about $0.06, as well as cash flow by about $25 million.

Of course, to the extent recovery is reflected in our electric rate case implementation in May, and the order anticipated in the fall, sales declines after May 15th would be offset.

You can see the other sensitivities regarding uncollectible accounts, gas prices and ROEs but I want to mention the impact of an auto wide bankruptcy since it's a subject of some press coverage.

Based on receivables from our automotive OEM customers and their tier 1, 2 and 3 suppliers that we serve, an across the board auto bankruptcy could cause us to write off $15 million to $30 million depending on where we are in the collection cycle when it occurs.

Most of our auto customers stay current and we work with them daily to help insure this.

Under chapter 11 reorganization, we might recover some of this writeoff later, but it's our policy to recognize the loss up front at bankruptcy declaration, should it occur.

A liquidation rather than reorganization would, of course, be a lot more costly.

Now, this slide shows our forecasted cash flow for the next five years.

Cash flow grows by about $100 million a year, primarily reflecting our utility investment program.

Last year, working capital requirements reflected higher than planned gas prices, and contract restructuring costs that adds to future stability and cash flow growth.

Recall from the prior slide, each increase in gas prices of about $1 increases capital requirements by about $120 million.

Each million dollar decline reduces working capital requirements by about $120 million, each dollar equals 120.

This year we expect to contribute $300 million to our pension fund, and you can see that noted in the gray working capital area.

If necessary, we can dial back investments somewhat.

In fact, we have already deferred to 2010 and beyond about $185 million of capital spending slated for 2009.

About $130 million was at the utility, and $55 million at enterprises.

The full year earnings per share impact of deferring the utility portion would be about $0.025 a share or about $0.01 in 2009.

We already have this reflected in our plan.

If, however, the need for additional investment deferrals occurs, we have prepared a contingency plan to reduce spending further in 2010.

We will need to catch up on these investment plans soon in order to accomplish required environmental and reliability actions as well as other strongly desired programs to benefit our customers, like AMI.

Capital investment deferrals help us to protect liquidity and meet the pension contribution of $300 million, if needed, this year.

It's possible to make a minimum contribution of $70 million without the consequences of falling into the at-risk category.

A catch up would be required in 2010, unless the value of the assets begin to recover or temporary relief from the 2006 Pension Protection Act is granted.

Our plan includes making a pension contribution of $300 million this year.

With the planned 2009 pension contribution and bonus depreciation taken last year, our gross NOLs were worth about $1.3 billion.

As we used them, it would fall to $900 million at year end this year, and $400 million next year.

If we choose to elect recently approved bonus depreciation again this year, the NOLs will actually last longer.

At the end of 2008, however, the cash benefit of NOLs is $450 million.

Coupled with AMT credits, our tax benefit presently is worth about $750 million.

All of this results in a good liquidity position, including over $1 billion of revolver capacity, which does not expire until 2012.

On this slide, we provided our forecasted cash flow and remaining liquidity over the next couple of years.

Below the chart, you can see our debt maturity schedule, including about $650 million for the utility that we plan to replace with new first mortgage bonds.

It also shows our next parent maturity, which is due in August of 2010.

Based on our historic operating working capital risk, which largely has been related to gas and coal price volatility, we judge liquidity to be sufficient to meet the short-term needs.

Adequate liquidity also exists to cover the next parent debt maturity in 2010, if no opportunity occurs to refinance it in advance of that.

So here's our report card for 2009.

We've been sharing these with you for the last five years, always including specific earnings, cash flow and capital structured targets.

Better yet, we have been achieving the target.

We'll let you assign the grade.

For 2009, earnings will be up $0.05 a share from guidance for 2008 but flat to our actual results and largely consistent with the average of analysts' estimate.

We hope we can improve upon this but rapidly changing global economic conditions affect our broad customer base, and we'll need to monitor this with you through the year.

Longer term we still project our earnings to grow in the 6% to 8% range and anticipate the opportunity to further enhance our dividend.

Dave and I would be happy to take your questions.

Operator?

Thank you very much, Mr.

Webb.

(Operator instructions) Our first question comes from the line of Paul Ridzon from KeyBanc.

Good morning.

Congratulations on a good quarter.

Hi, Paul.

Thanks.

Looking at slide 16, can you explain at the utility the two right most entries, the cost in other and rate relief.

The hatched part, what are those?

Yes.

That's a great question and let me just remind you what we are doing.

What we are trying to do with the hatched part is show you what's already been approved.

So it represents our electric rate case from last year, last summer, and the gas settlement at the end of last year.

Those are already approved and they are built into our numbers.

What's solid red and solid green reflects what we are doing this year that's new.

Some of the new requests for electric rate increase, as well as the anticipated gas case.

Okay.

You are going to roll about 350 of utility debt this year.

As you get visibility on the coupon on that debt, will you be able to put that in the file and implement?

The stamp is likely to update debt as we go through the process this year.

So there will be that opportunity to reflect any change that we do when we issue some first mortgage bonds.

Okay.

And what was the impact of storms in '08 versus budget or absolute?

I will give you just a rough estimate.

I don't have the exact number in front of me.

I will tell you we had some big storms at the end of June and early July and we coupled that with a big storm that occurred as we got towards the end of the year.

And the pretax number in millions of dollars would be around $20 million.

Maybe just a touch higher than that.

We had some of that budgeted but not all of that, because the storms were just more than we expected.

And if you elect '09 bonus depreciation in the stimulus package, what would that do to cash flow?

There's several ways to do that.

It's not a straight forward number.

I would tell you that we could probably get a cash flow benefit of between $200 million, $250 million and that would give us a nice benefit at the utility, and then we take our NOLs on a consolidated basis and simply push out when we take the benefit.

So it could be a very good thing, but it is complicated as we work through our taxes to make that decision with some care.

Okay.

And just in the effect of an auto bankruptcy, I assume that you are considered a vital resource and you would be pretty much at the front of the line as far as the payments?

That's true.

And the reason we talked a little bit today about what the impact would be is we've had a long-running policy on bankruptcies that we would continue to follow.

And that is whatever is owed to us at the time, which is likely to count all the auto suppliers as well as the OEMs that we serve, it's likely to be between $15 million and $30 million pretax that we would have to write off.

We have a chance to get some of that back as you go through the process, but that process takes time and we very likely would be right at the front of the cue in a Chapter 11 situation to be reorganized, and collect.

As you know, we've had a few bankruptcies and we have a very good process for those companies to be able to collect payments promptly, as they are needed each month.

And then just lastly, your pension contribution in excess of the minimum is just your conservative obligation management driving that?

I wouldn't call it just that.

What it is is, is to make sure we are not at an at-risk level.

There are certain things that would occur to our employees and ourselves in 2010, if we were at an at-risk level, in other words below a certain level of funding, 75% this past year, or this year and 80% next year.

So to meet that level, that would require around $300 million and we treat that just like a debt maturity.

We believe we should stay current and pay it.

That's why we built it into our plan.

If we needed to, though, there's the opportunity to go to a minimum contribution level of $70 million, but even if we did that, Paul, we have to kind of catch that up within the next year or two.

So it's just -- it's a temporary cash flow advantage.

I'm sorry, I did have one more question.

The 10% by 15 RPS, is that energy or capacity?

The 10% by 15 is energy.

There are a couple of other targets related to capacity.

One in 2013, we have to have an additional 200 megawatts of capacity online, and then we have to have 500 megawatts of capacity online by 2015.

Okay.

Got it.

Thank you.

Thanks, Paul.

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

Good morning.

I know you touched on this a little bit, but on slide 14, can you give a little additional color around the strength in enterprises going into 2009?

It looks like it's performing pretty well.

It is.

We guided you through the last year saying $0.05 was about the level we would expect for 2008, and the team came in right on the money for that.

But recall that we did our restructuring around date part of enterprises early last year but we didn't get a full year effect of that.

Getting that full year effect adds a little more than a couple of pennies.

It's a nice add to our business which takes us up to $0.07, maybe as much as $0.08.

Then the big operations have done some good work in improving their efficiencies and big is the main part of the business here.

It is more than two-thirds of the enterprise business.

That would get us up to about $0.09 this year.

That's the kind of number that I look at, not higher than that as we look to the future.

Okay.

That's helpful.

Thanks, Tom.

And then on the NOLs, you may have mentioned this, I had to jump off for a minute.

But can you talk about what the NOL was before and after these recent changes?

Our NOL benefits have gone up.

We talked about something as low as $1 billion in the near term, but we are taking it up to $1.3 billion now for a variety of reasons and the largest one is the ability to take advantage of the bonus depreciation last year.

So that and the coupling of several different things, including the pension contribution plans and the like leave us now at $1.3 billion at the end of 2008.

With the chart you see it going down through time.

What we have not factored into that, John, is taking any bonus depreciation in 2009.

And with the new stimulus programs that are in place, we can do that.

And so we're going to have to assess if that's the right thing to do or not, and we haven't made that decision so we haven't factored that in.

It's real simple.

That could be $200 million, $250 million and if that occurs, we get half of that as a cash benefit and that will push out the use of the NOLs.

So that's a win/win proposition.

Okay.

Got it.

So it sounds like you are saying, Tom, that the incremental benefit including the change that we see here in your disclosures today, could be, on the order of $300 million to $400 million?

No.

Don't want to confuse you.

We ended the year at $1.3 billion, the gross NOL, we are showing you where we think we would be, how we would use that through '09 and '10 down to $900 million and $400 million at the end of 2010, but we still have a decision on the bonus depreciation in 2009.

If we take advantage of that, there could be a couple hundred million dollars gross impact available there.

That's not in these numbers.

Right.

And then I thought you said that the gross NOL line used to be $1 billion and now it's $1.3 billion.

Yes and we used to tell you for the end of 2008, we thought we would end up at about $1 billion.

Right.

But because of the bonus depreciation --

Got it.

We did take and the pension contribution we planned to make which factors into that, that number increased to $1.3 billion.

Very good.

Thanks, Tom.

Thanks, John.

Your next question comes from the line of Jonathan Arnold with Merrill Lynch.

Good morning.

Hi, Jonathan.

A quick question on the sales forecast.

Just comparing to what you had before, you had a plan of, I think, of being flat over the the '08/'09 period, and it's now minus 3% without HSC, or it was minus 3% without HSC so there was a 3% differential from including or excluding the large customer.

And now that seems to have narrowed to just like a 1% difference, your plan down to -- am I thinking about that right, or did some of that growth come in 2008?

How should we explain that shift?

Yes.

We used to show the line with the plan that was about flat and then without HSC, as you said, down about 3%.

As it really turns out, the gap for HSC is really smaller than that, and this is a much more accurate representation of where you should be.

So let me just share the facts as they are.

We expect to be down 3% this year, excluding HSC's worth a little more than a percentage point.

So our plan without any adjustments -- but weather adjusted, I should say but without any customer adjustments -- is down about 2%, or 3% without HSC.

Nothing funny is happening in HSC.

It was just how we represented the numbers before.

And this is more accurate.

So the previous number without HSC of minus 3 is that for both '08 and '09 or was that just the '08 and '09 forecast?

I think that was just '09 when we showed that to you before.

I'm just grabbing that old page, if you just bear with me for a second so I can see how we did that.

Yes we just showed you '09.

We couldn't really see -- I don't think we talked to or said anything about '08.

So now we are down a couple percent for '08, and a 2% for '09 on a weather-adjusted basis but when you take out our fastest growing customer, that decline is 3% in each year.

And the only reason for doing that, by the way, is they are now our largest customer and one of our fastest growing customers and we want you to see the underlying business without them.

So we are not trying to paint it rosy or black.

We just thought it would be useful for you to see without that fast growth customer, how we look.

So net/net for 2009 sales forecast has come off about 200 basis points, is that right?

That's right.

That's what we have seen since I would say early fall of last year to where we are now.

Most of that is industrial driven, as I mentioned in my notes.

Okay.

Thank you.

And then I had one other thing, when I look at the numbers for the choices and the investment plan, obviously, the big decline in the clean coal plant reflects the date of timing, but it also mostly looks like you cut the AMI estimate by about $80 million, and the renewables number came down about $65 million, where it was previously renewables and efficiency.

But some of the other buckets have gone half.

Can you talk about what changed here?

If I may let me help you a little bit on this.

Yes, with he did.

We pushed AMI back just a little bit which really met some of the better timing that we saw for AMI anyhow.

So it is not an issue with the program.

We are still 100% behind it and we are still moving very hard on it with pilots coming up and the like.

That's a good thing.

But, yes, we timed that a little bit different.

So it's timing rather than cost of the meters or anything like that?

The AMI program is going to be around the levels we've been talking to you about for its life time.

Renewables also is pure timing.

We tried to fit in the portion, half of which will be PPAs and half of which we'll build to optimize that, so that it's most beneficial for our customers.

So all of that is timing, as well.

I wouldn't say there's higher or lower costs.

In fact, we are going out with requests around all that now.

So we'll see how that turns out.

Those estimates aren't much different.

But we did add back in some capital spending that we needed to pick up around some of our other programs as we pushed back the coal plant launch period.

Okay.

That's helpful.

So there's a little movement going on in there, but I think the big message is coal plant is back a little bit, added some spending that we really need to get into and the fundamental programs, AMI, renewables, electric reliability, all of those things are still well underway and important things that we need to do for our customers.

Thank you.

And if I may, just one other thing, you have obviously asked for the sales tracker.

Can you just talk about to what extent there the precedent or you have confidence in that, as a concept or anything in the law that would support to getting something like that?

I would differentiate a little bit between the electric and gas.

The law is very specific on the gas side.

It basically says if you commit a half a percent of your revenue in gas to energy efficiency programs, then you basically are eligible for full-blown tracker on the gas side.

It's not quite so specific on the electric side, but I would say that the mood in Lansing is certainly to make sure that utilities aren't harmed as a process of trying to incent them to move forward with these things.

We think the best way to do that is through a tracker, and there's been a lot of discussion at the Commission about the potential application of trackers on the electric side, but no precedent yet as to exactly how far they would go with that.

Thank you very much.

And your next question comes from the line of Dan Eggers from Credit Suisse.

Good morning.

Just following up on Jonathan's question real quick, would the coupling be a Commission-led decision or does this need legislative action as well to make it happen?

No, it's all up to the Commission right now.

There's nothing that could prevent them from issuing trackers, and as I said on the gas side, it actually requires them to provide trackers in the event that the energy efficiency goal of a half a percent of revenue is met.

But they certainly can move forward with that, and we think our request is consistent with some of what's going on up there.

And to understand the volume outlook for '09, the second half, the idea of that kind of leveling out year-on-year, was that just a function of a view that the second half of '08 was so bad that it's hard to imagine getting a lot worse, or is there a view we will have an economic recovery in the second half?

I take that in two pieces.

First of all, we are pretty gloomy about the first half.

We have large industrial sales decline of around 11% in the first and second quarter that's driving that 4% reduction that I talked about in those two quarters.

And then we continue with a lighter but a continued industrial decline inside of our overall business for the third quarter.

And then as you would expect when you get to the fourth quarter, we've got, as some people like to call it some pretty light comps.

With major declines in the fourth quarter of 2008, you don't need substantial declines to get to those lower recession levels.

So part of it is just what you are comparing to, particularly when you are in the fourth quarter.

It's not trying to put any strong optimism out there, but our economic models do suggest that we should begin to feel a little bit of an improvement towards the back half of the year, which just means a slower base of decline.

So still falling but not as quickly.

That's right, but just in total, just falling a bit, but industrials still coming off inside of that mix.

Okay.

Slide 17, when you show the EPS sensitivity to movements in sales volume of $0.06, is that taking into account the interim relief or interim adjustment come May for the electric utility?

Or will that $0.04 for electric actually be less without given the interim relief?

That's a good point.

The gas, of course, we don't intend to have a rate case that we would have implementation on until the back part of the year.

So I would just say the $0.02 sensitivity and the 1% change is pretty clean.

To your point on the electric side, if we are able to implement and later get an order that matches exactly what happens out there, good or bad, in terms of where we are versus our budget, then the impact that you need to worry about would be for January through the middle of May and that equivalent number would be about $0.02 rather than the $0.04.

Does that help you?

Yes, that helps.

And just one last question, as you evaluate with the governor, and the AG has said on the new coal plant decision, you talked about the idea of upgrading existing plants or whether it be the coal plants or the gas plants, can you help us understand the decision tree and what are going to be the mile markers you guys are going to be looking for to help evaluate that decision or evolve that decision, over the course of 2009?

Yes, maybe broadly.

Obviously the major factors that affect the coal plant decision are natural gas price forecasts over the long run and the issue of carbon costs, whether it's a cap and trade process or some sort of a tax.

And, of course, there's a lot of noise in Washington right now about what might be done even this year in that regard and some of those are a bit difficult to predict.

With the schedule we have in place right now, we wouldn't be making major investments in the coal plant until about 2013.

There's work that goes on, on the conceptual side between now and then, and, of course, trying to sort out the permits.

I guess the important thing to understand with our project, which maybe differentiates it with not only other projects in the state but project elsewhere, is we do have about 900 megawatts of coal plants currently operating in our system that are average over 50 years old and we have a choice to make as do we move forward with extending the life of those and making additional environmental investments in those units or planning at some point to phase those units out and replace them with a new unit.

We think it makes more sense because we can get a higher efficiency, better emissions unit across the board with new capacity and obviously have a more reliable unit going forward, as well.

So we think there's a compelling reason to go ahead and make that replacement.

And our mix is such that we need some new base load capacity, and don't want to become overly dependent on gas in the long term.

So there will be ongoing discussions about that, both within the state, of course, and the development of federal policies that could affect that.

And we'll just have to see how all of that plays out and, it's hard to be definitive at this point in time, but I will say there is analysis with our continued look at carbon costs and gas outlook is that it's in the best interest of our customers to proceed with the coal plant.

We think we can make that case.

Great.

Thank you, guys.

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

Good morning, guys.

The bonus depreciation, why would you guys not take it?

We could just put it in two ways.

One, we definitely would take it, even if it pushed the benefits of our NOLs out.

That's not the issue, but there are some complicated tax calculations in terms of how much benefit we can get in the future, as well as how much benefit we can get today.

I would tell you we are very likely to take the bonus depreciation.

It's just that we don't have to decide now and we want to look at our total situation and make sure we understand it.

But there's nothing around saying that we are worried about pushing NOLs out there.

The lives are very long and we are, as I always said, we are actually delighted to get a tax shelter as a utility that lets us use those NOLs later.

So watch this spot and I'm sure we will be able to tell you in our first quarter call exactly what we have done.

Okay.

And then the auto wide bankruptcy, I'm wondering, it sounds like if it's a Chapter 11 situation, what the temporary impact would be with respect to uncollectibles, if I understand that.

What I'm wondering is that, as you mentioned, there's so much stuff in the press about a potential actual liquidation or actual -- one of the big three may be going out of business.

What happens in that scenario, not so much with uncollectibles, just if you could share a little bit in terms of what you see, how the economy has changed in Michigan and how that would impact you guys.

Are you seeing anything, do you have any consolidation in your numbers, and just, in general, how that might impact Michigan?

Well, first of all, I don't think it will happen, but we have tried to give you our best sort of worst case look of what would happen.

The reason why people talk about a bit of across the auto industry bankruptcy, if there's something that's severe and permanent that happens to a major supplier or to a major company it's because they are all in tenuous situations.

You can read in the paper as well as we can.

And if a supplier happens to supply, let's just confine it to the big three, then that's a big problem for all of them which then pushes back on to the other suppliers.

So a lot depends on how they will proceed.

If it's a Chapter 11 -- so it's a reorganization -- we suspect, like many people have already done, that it's a short-term hit.

In fact, they get themselves repositioned and they really do need our business.

So the one-time effect of that is that $15 to $30 million.

Some of which may be recaptured later or not.

If it's a liquidation, and there you are saying that all the jobs and all the businesses of General Motors, Ford, Chrysler, and I won't even start naming the suppliers, but a huge list of suppliers were to liquidate, that's a different scenario.

Then you start thinking about what I suggested to you our margin is.

We have 3% of our margin comes from those customers, and we'd have to do our own restructuring inside of the state to figure out how to restructure ourselves accordingly and work with our Public Service Commission to see what we could do in terms of recovery.

That would be very difficult.

There's no question.

It seems like a real harsh place for the US economy to end up, but I can't predict.

So we are just telling you what might happen.

Now, maybe there's things we don't think about or know about where there could be restructuring permitted for most of those suppliers, and one or two of the big automotive companies, OEMs.

If one company were to disappear, and I hate to ever say this, but I will if it were a Chrysler or Ford, that could have less impact on us because we don't serve them to the extent we serve GM and its suppliers.

That helps a little bit.

We have tried to paint how bad things could be, but we don't anticipate that to occur.

The effect goes well beyond Michigan.

It's all the Midwest and many other locations, if something like that were to occur.

Okay.

And the self-implementation in May, what kind of level of revenue are you guys expecting to get there?

Obviously, we can self-implement under the law all the way up to the $214 million that we filed.

But as I tried to suggest in my comments, we will have actual experience of six months after our original filing here that we can take into account.

We fully intend to do that.

I gave you the example of capital spending program, having been reduced since we made our original filing.

We would certainly reflect that.

We can also reflect our sales experience and upgrade our forecast for the remainder of the year.

I want to be clear that our strategy is to earn a reasonable rate of return as authorized by the Commission.

We don't intend to over earn our rate of return on a continuing basis, and so we'll try to make our best guess at the time of implementation as to what revenue is required to serve our customers well and earn that rate of return.

And that's what we will self-implement.

It's hard to tell what that will be exactly right now.

As of right now, it wouldn't be dramatically different than what we filed, but it could be somewhat different.

So in other words, you are expecting in 2009 to earn something close to what you filed for in terms of your ROE, something around that area.

That would be our intent.

We put that filing together based on what we think we need to provide a reasonable return to our shareholders and I would point out that the level we filed for was 11% on equity, which is the same as was granted recently in DTE's case.

So that would be our intent.

Okay.

Great.

Thanks a lot.

Your next question comes from the line of Mark Siegel with Canaccord Adams.

Good morning.

Can you elaborate further on the status and the timing of the AMI project and address any timing impact a potential federal stimulus-related funding might have there.

I will make a comment, we talked earlier about the fact that the capital program is down a little bit from about $700 million from where we expected it to be last fall, to about $620 million over the five-year time frame.

That's not because we have changed our overall estimate any.

It's really because we have extended the pilot period and the large rollout of meters, I think we would now intend to start around the end of 2010, versus earlier in 2010 in our original plan.

The overall project longer term, we've estimated at about $850 million and we still haven't changed that number.

In terms of the stimulus, yes, we're taking a hard look at the stimulus to try to determine whether or not there's advantages that can be taken of that in our project.

The Commission staff is interested in that as well.

We are having discussions with them.

It's difficult to tell at this point in time, whether or not it fits our project or not, but there certainly could be some benefit.

There was a lot of talk about the smart grid in that plan, as you know.

Okay.

Thanks very much.

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

Good morning.

Hi, Brian.

Most of my questions have been asked and answered.

I was wondering, the increase in the interest in other segment, in '09 versus '08 is that a function of just higher assumed borrowing costs in your refinancing or is it incremental debt on the balance sheet or both?

If you are looking at the consolidated levels, it would be some incremental debt around the utility as we are growing.

There would be no increase at the parent, and we assumed in our planning a little bit higher rates for obvious reasons.

Okay.

Thank you very much.

Your next question comes from the line of James Heckler from Levin Capital Strategies.

Yes, hi, it's actually Neil Stein, How are you?

A couple of questions.

First, what share count are you assuming in your 2009 guidance?

226 million, I think is the --

Yes.

I got it here.

Just a second.

Go ahead with your next question and I will give it right off of our pages here.

In the sources and uses, it shows you have the $300 million debt maturity at the parent, and you are assuming you are going to do a new issuance, I assume, to take it it out.

What's the timing around when you are assuming you will do that new issuance?

What's the interest rate you are assuming in the guidance, and is that going to be just unsecured debt or some other type of security?

And what are the contingency plans if the markets are not available to you.

First our diluted share count at the end of the year was 235 million.

And so it would be up just slightly from that.

In terms of the parent financing, it is our intent -- I will tell you this much because we show it to you in our plans, to do a refinancing during the course of the year.

But remember, that maturity is not due until the fall of 2010.

So we are just trying to get ahead of the game.

What we will do is we will watch what happens in the market, and try to take the opportunities for the right time to do that refinancing.

We are not providing a lot of detail on what the costs are going to be, but I can tell you we are looking at something as we go probably into the second half of the year before we address it and that will put us about a year ahead of when we need to refinance it.

Does that give you enough info on that?

Yes, that's fine.

You said the diluted share count is 235 million you are assuming in the guidance?

No, for the end of the year '08, 234,800,000 shares and then it's up just a little bit from there for the full year guidance.

In 2009.

Remember, the big driver in there, and this is a funny thing, but Neil, I know you and many of the listeners understand this, is at what stock price we are at drives that around a little bit because then we have to do the accounting for our convertible stocks and how that may change the share count.

So it's very hard for us to hammer a precise number in.

What stock price are you assuming on the convertibles?

That's a very good question.

I'm going to tell you that we are making no predictions whatsoever about where our stock price will be and the number I give you doesn't intend to suggest anything about it being higher or lower than what I'm going to say, but for math purposes only, we have used $13.

Good number.

Very lucky.

Thank you very much.

And you have a question from the line of Ted Heinz with Catapult Capital.

Good morning.

Most of my questions have been asked, but just had one follow-up on the earnings walk on page 16, where you talk about $0.40 of new implemented rates.

I'm assuming that the majority of that is electric, and there's not much of a gas file implemented in that number.

The majority of that is electric, with the implementation in May and an order towards the end of the year, but we are also planning to, at this point, budgeted to file a case for gas in May and implement in November.

And so you will get a little bit of effects from that as well from November and December.

So that's built into it.

Okay.

Now I know this gets complicated with the file and implement, but when you decide what number you choose to file and implement, if the ultimate decision comes back and, say, they do not choose to give you an increase in your cost of equity or they don't choose to give you a sales tracker on electricity, would there be an impact to your guidance and the assumption that you put in there, basically for an outcome of a more negative decision than you are assuming?

Well, there's always that potential.

As I said earlier, we made certain assumptions in terms of what we need for the year, what our spending plan is, what our returns would be.

Obviously, if the Commission were to surprise us with a very negative outcome, that would obviously affect what our final year guidance is.

We are reasonably comfortable that what we put in place is defendable, but you can never predict exactly what the Commission will do, when the year is out.

Just to be clear, I think everybody understands this, what we self-implement in May and what we think is appropriate, if in November the Commission comes out with April order, we would be required to refund that amount, which we collected that's over and above what the Commission thought we should have put into place, effectively through their order.

And then there's, for the first 25% of our over-recovery, we pay a carrying charge of LIBOR plus 5%.

If it gets more than that, we pay a carrying charge in our ROE rate.

Got you.

Thank you for that.

And just a quick question on the capital spending, I think Tom, you said the reduction in CapEx in '09 was helping you guys a penny or two.

And that that was in your budget.

Could you talk, is the contingency for '10, if you choose to do that, how much savings could you get from ramping back CapEx if the economy continued to be weak?

It's the other way around.

So let me make sure that's clear for 2009.

By reducing our capital spending, it's about $130 million at the utility.

That actually, as that would then have been factored into rate cases, would not be there.

So that would hurt us.

The impact , the partial year impact of that in 2009 was about $0.01 and that's built into our guidance and our plan.

What I was trying to give you -- and this will work now as you think about other future deferrals, if any.

Let's use the same $130 million and assume you have about $65 million, about half of that equity.

If that were the ROE, and then just adjust that for taxes and share count, and you would be at about $0.025, and so that's the exposure to give you some sensitivity around that.

And so we would have to deal with that.

So reducing your capital spending before it goes into a rate case, obviously will hurt you a little bit.

Another important point is we see most of these, except for the enterprise numbers that we took out as deferrals, because they are all programs that are needed and wanted and so it's a matter of timing rather than a matter of just eliminating capital

Got you.

Thank you very much for that clarification.

Congratulations on a good quarter.

And we have a follow-up question from the line of Paul Ridzon from KeyBanc.

You have you drawn your lines earlier to have some insurance in case you had some converts tendered.

What level of convert was tendered and are you still drawn?

We are not drawn for that purpose so we have actually returned that at the end of the year to our bank because we have no reason to want to put more stress on the banking system than is needed.

We appreciate that.

You are welcome.

So we put that back.

And a very, very small amount was tendered at the end of the year.

So the bulk of it is still there and as I think you know, but for all listeners, the stock price unfortunately was too low at the end of the year to hit the triggers so that a future tender could occur in the first quarter.

And that's measured at the end of each quarter for the following quarter.

At this point, there's no opportunity for folks to tender those back to us.

What's the trigger price?

I knew you were going to ask that and I will give it to you here.

They are different.

We've got on the 150 million trigger of about $12.18 and on the 250, a trigger of about $11.30.

Does that help?

Yes, thank you.

And there are no more questions at this time.

All right.

Well, thank you.

A lot of questions this morning.

Appreciate the opportunity to talk with you this morning and present what we think are pretty good results for 2008 and kind of lay out the details for 2009.

I hope you appreciate from looking at our chart over the past several years and our forecast into the future that we try to be as predictable as possible, and I think we have laid out a doable plan based on a conservative utility approach.

Certainly the legislation that was passed here last year should help us to be more consistent, even on a go-forward basis.

It is difficult to predict what the economy is going to be, but I'm happy with the change in the regulation here in Michigan that helps us weather through that a little bit maybe easier than it would have been in the past.

We continue to believe we have a good investment plan.

I will emphasize again the coal plant is part of that, but it's not essential to that.

We simply are pursuing it because we think it's in the best interest of our customers, but there are a lot of good opportunities, many of which we talked about today for investment that will continue to go forward, like the AMI project, and reliability improvements, and in lieu of a coal plant, if we don't go that route ultimately investments in other generations, including renewables and other energy efficiency.

Again, thank you for your time this morning.

We look forward to talking to you next quarter.

Bye now.

This concludes today's conference.

We thank everyone for your participation.