CMS能源 (CMS) 2011 Q1 法說會逐字稿

Good morning, everyone and welcome to the CMS Energy 2011 first-quarter results and outlook call.

This call is being recorded.

Just a reminder, there will be a rebroadcast of this conference call today beginning at noon Eastern Time running through May 5.

This presentation is also being webcast and is available on CMS Energy's website in the Investor Relations section.

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

Please go ahead, ma'am.

Thank you, Jeff.

Good morning and thank you for joining us today.

With me are John Russell, President and CEO; and Tom Webb, Executive Vice President and CFO.

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

This presentation contains forward-looking statements.

These statements are subject to risks and uncertainties and should be read in conjunction with our Form 10-K's and 10-Q's.

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

This presentation also includes non-GAAP measures.

A reconciliation of each of these measures to the most directly comparable GAAP measure is included in the appendix and posted in the investor section of our website.

We expect 2011 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 reconciliation because of the uncertainties associated with those factors.

Now I will turn the call over to John.

Thanks, Laura.

Good morning, everyone.

Thanks for joining us on our first-quarter earnings call.

I will begin the presentation with a few brief comments about the quarter before I turn the call over to Tom for a more detailed discussion on the financial results and outlook for the remainder of the year.

Then as usual, we will close out with Q&A.

We started the year with a good first-quarter, reporting adjusted earnings of $0.51 a share, up $0.13 or 34% from 2010.

The increase was due primarily to colder weather this year compared to 2010 and a benefit from electric rate order received last November.

The business model we developed several years ago is working and working well and continues to deliver consistent results.

Our plan to invest over $6 billion in the utility over the next five years creates rate base and earnings per share growth of 5% to 7%.

And by using our NOLs, we avoid the need for any new block equity during this period.

The good news for our customers is that we can grow rate base and earnings while minimizing base rate increases to levels at or below the rate of inflation.

And I will discuss this in more detail in a minute.

I am also pleased to affirm our guidance at $1.44 a share.

Our good first-quarter provides more flexibility to reinvest in customer reliability.

During the February call, I made reference to our plans to upgrade the Ludington pumped storage plant to improve its efficiency and increase its role to support green energy sources in Michigan.

This slide illustrates several of the operational benefits associated with the upgrade.

Due to its proximity to several proposed wind power developments, including our Lake Winds Energy Park, the plant will act as a giant battery to store renewable energy produced during off-peak periods, making renewable energy more affordable and reliable.

This project will increase the generating capacity of the plant by 15% to about 2,200 megawatts.

Plus, the increased pumping efficiency will further decrease the plant's operating cost, resulting in reliable, low-cost power for our customers.

As a reminder, Consumers Energy operates the plant and owns 51% of the facility.

DTE owns the other 49%.

Consumers Energy will spend approximately $400 million over the next 10 years to complete the upgrade.

About 25% of our $6 billion capital investment plan over the next five years will be spent to meet state and federal environmental laws and regulations.

The most recently proposed EPA rules on hazardous air pollutants and maximum available control technology are in line with our expectations and our plan.

We will continue to closely monitor the development of these regulations to determine the potential effects on our operations.

By switching to low sulfur coal and making significant investments in control technology, we have reduced emissions at our coal-fired generating plants resulting in significant improvements in Michigan's air quality.

Since 1990, these investments have reduced sulfur dioxide and nitrogen oxide emissions by approximately 70%.

Through 2015, we plan to spend another $1.5 billion on our five largest coal-fired plants to further reduce emissions, keeping Michigan's air the cleanest it has been in decades.

We expect to fully recover the cost of complying with environmental laws and regulations from our customers and our rates.

The decision to upgrade our seven smaller coal-fired plants will be made after EPA regulations are final, and we have had a chance to evaluate all of the economic factors.

These units have a high utilization rate and generate power at a competitive price in today's market.

Let me give you a brief update on our regulatory agenda.

This slide illustrates the history of our electric and gas rate cases since the passage of Michigan's energy law in 2008.

In February, the commission delayed our gas self-implementation to give parties an opportunity to respond to our proposed $29.5 million rate increase.

Since that time, we have been engaged in settlement negotiations with all of the parties in the case.

Yesterday we reached an agreement in principle with all of the parties and we are in the process of finalizing the settlement's documentation.

We expect to file the settlement with the MPSC very soon.

We also plan to file our next electric rate case in the second quarter, which will allow for self implementation before the end of the year.

We recognize that to be successful we must deliver safe, reliable, competitively priced power for our customers.

This slide lists the results of several cost reduction actions taken over the past few years to minimize the price to customers.

The most significant benefit resulted from converting our plants to burn low sulfur Western coal.

About 85% of the coal consumption is from Powder River Basin.

The price differential has saved our customers about $250 million over two years in fuel costs.

We have taken a variety of actions, listed on this slide, that have resulted in base rate and surcharge price reductions for our customers.

We made changes to our benefits plan and increased the cost sharing from our retirees and employees.

We implemented a new SAP software system that reduced costs and improved efficiencies.

Plus, we reduced the number of employees by 10% over the past five years to balance the workload with the workforce.

And we filed a request with the MPSC to reduce the renewable energy surcharge.

Collectively, these actions have resulted in about $150 million of cost reductions to our customers.

I am pleased with the results of the 2010 benchmarking study by Oliver Wyman, which placed us in the first quartile when comparing our cost per customer with 21 other utilities of similar size and operations over the past several years.

Though we cannot be satisfied with the cost reductions of the past, we have a number of initiatives underway across all business areas that are intended to improve productivity.

Through these efforts, we plan to gain greater efficiencies, reduce costs, and enhance customer service and value in the future.

Customer value is a critical element to maintain good relationships with our customers and the regulators and deliver long-term financial results.

We have a major initiative underway to improve customer value.

A key element of providing value to our customers is to hold rate base increases to levels at or below the rate of inflation.

We plan to deliver competitively priced energy to our customers over the next five years while maintaining base rate increases at about 1.5% for electric and 1% for gas.

Now let me turn the call over to Tom to discuss the results for the quarter.

Thanks, John.

I am pleased to add my welcome to everyone on the call this morning.

Thank you on such a busy day for dialing in.

First-quarter results were solid with reported GAAP earnings at $0.52 per share.

Excluding favorable news around a small legacy legal settlement, adjusted EPS was $0.51 per share.

This is $0.13, or 34% above a year ago, and it's our best first-quarter EPS in nine years.

Weather adjusted, the profit still was strong at $0.47 per share.

We are on track for electric sales to grow by 2.5% this year with residential sales up 2% and commercial sales up about 1%.

This follows, as expected, the industrial sales recovery of 10% last year and about 6% this year.

Combined with the 2% sales improvement last year, with our forecast of 2.5% for this year, the post recession recovery is clear, but it is still below the bounce back experienced after the bigger recession in the early '80s.

We continue to plan conservatively.

Although the 10-year census showed Michigan's population down by 1%, much of the decline was outside of our service territory.

Where we do business, population grew about 3%.

Now onto the results.

With first-quarter results up $0.13 from last year, we are on track to meet our target for the year.

And as John shared, we have reaffirmed our guidance.

During the first quarter, almost $0.06 of the favorable year-over-year performance can be attributed to weather.

That includes mild weather a year ago and colder than normal conditions this year.

We did, however, suffer from unusually severe storms that exceeded our planned storm allowance by about $0.03 per share.

Looking ahead to the rest of the year, much of the forecasted rate relief is associated with the full-year impact of rates ordered last year.

As most of you know, we take advantage of favorable performance when we can to make incremental investments to add value for our customers.

Recently, we have been able to put more financial resources to work at further improving reliability and expect to do more in the rest of this year.

The results are beginning to show up in customer surveys.

We are pleased to see that our score on the recent American Customer Satisfaction Index survey of investor owned utilities was increased for the second year in a row.

We are above the national average, and we hope to be able to continue making improvements for our customers by spending even more on reliability improvements during the rest of this year.

Recently, we bolstered our liquidity further by renewing our five-year revolvers a year in advance; $550 million for CMS and $500 million for Consumers.

We are delighted that the market recovered enough to permit us to renew these revolvers for another five years.

Combined with our $150 million three-year revolver, our ARR and LC facilities and cash, our capacity totaled $2.3 billion at quarter end.

Of that, $2 billion was available at March 31.

This coupled with the strong operating cash flow and use of substantial NOLs allows us to avoid the need for any new equity over the next five years.

We will, of course, continue our dividend reinvestment program and other small tools to grow equity even though at a very modest pace.

It is a nice position not to have to issue any equity avoiding dilution of our 5% to 7% earnings growth over the next five years.

Here is our 2011 sensitivities table to allow you to independently assess our outlook.

Rate cases continue to be our primary sensitivity.

If we are wrong, on our ability to earn that the authorized levels by as much as 50 basis points, our earnings could change by as much as $0.08 per share.

We earned our authorized ROEs in the electric and gas businesses last year, and we expect to do so again this year.

We are fortunate to have a public service commission that has maintained competitive authorized ROEs.

As ROEs have dropped in other states, our commission has sought to send a signal that Michigan is a good place to invest.

Here is our full-year report card.

Earnings, cash flow, and capital structure metrics are all strong and on target.

Thanks for listening in, and John and I would be happy to take your questions now.

Thank you very much, Mr.

Webb.

(Operator Instructions) Our first question of the day comes from John Quealy with Canaccord Genuity.

Good morning, guys.

It's Mark Sigal for John.

Just wondering if you can provide an update on your smart grid and smart metering plans.

Perhaps talk a little bit about the scale and timing there and just an overall general update.

Thanks.

Thanks.

This is John.

What we have done is we have scaled back our smart grid investments, I'd say, over the past year.

We've looked at the business case.

We have eliminated the gas territory, and we are focused primarily on the electric territory.

We are moving forward in the Grand Rapids, which is the west part of Michigan, with about 400,000 meters to test the validity of the business case, the technology.

So far with the installations -- the installation will begin about 2012.

So, we expect that to occur over the next couple years.

Based on the success there, we have a plan to carry that out throughout the rest of the state.

Okay, great.

Thanks for the detail.

Our next question comes from the line of Andy Levi with Caris and Company.

Good morning.

Good quarter for you guys.

Just one thing I saw in your income statement I need to get clarified.

Depreciation was down $10 million for the quarter.

I was curious why and whether we should kind of incorporate that into the yearly number because I just had some other assumptions.

No, if anything, I think what you will see is that's going to grow as you go through the year.

You've got a one point in time here where we have 10B4 benefits that are rolling off, and all that means is some recovery that we have been getting that is over the last five years are in the full choice period.

It's just kind of an anomaly for now.

What you'll see is the investments we are making will continue to grow, so the CapEx will be bigger than depreciation.

You will see that grow as you go through the year and the next five years.

So, was it a timing issue, or is it a one-time benefit?

It's just the end of a program.

End of a program.

Recovery going over five years and this was the last year, so you see that ending.

You can think of that as a one-time as that recovery ended.

You will see depreciation ramping right back up.

Okay.

And how much was that total for that program ending?

For the year it would have been about $40 million.

$40 million on a quarterly basis or annual basis?

Full year.

So, quarterly it's about $10 million or something like that?

Yes, but it's all over.

Remember, that ended at the end of 2010.

That's why you see that --

I'm just trying to figure out what the benefit was for the first quarter, because you didn't put that out.

And then the second thing is, can you just give us an update on the gas rate case?

Are you near settlement?

Is that possibly what is causing the delay in implementing the rates?

Yes.

If you are familiar with it, in February the commission delayed our self implementation in the gas rate case.

What I mentioned a few minutes ago is that we have reached a settlement in principle with all parties.

I missed that.

I'm sorry.

That's okay, that's okay.

Ever since the delay we have been working with all the parties.

Yesterday we were able to reach a final agreement or final agreement in principle with all the parties.

They are papering that deal right now and expected to be filed with the commission very soon.

Great.

Okay.

Thank you.

Thank you.

Our next question comes from the line of Ashar Khan with Visium.

I guess you can elaborate more on the settlement as to what the numbers might be?

Can you, John?

No, what I would like to do is respect all the parties that we've dealt with in this.

They are finaling the deal right now, but I would expect that this would be public very soon, within the next few days or weeks.

I mean, we are very close.

Okay.

And then the second.

Could you just -- I guess with this pick up in extra earnings, are you guys just being cautious for the rest of the year, or is there some stuff, which I guess I saw in the graph, you are going to do something extra to mitigate this $0.03 or $0.04 extra that you picked up in the first quarter?

That's a good question.

And I would ask everyone to kind of keep in mind that anytime we can, if we have a hurt, which is not what we have in this situation, we work hard to figure out how to shape the business and shape our cost structure to address it and deliver on our guidance.

In this case, it goes the other way.

You are right.

We had a little bit of good news.

Now some of that good news weather was offset by storms and the like, so it may not be as big as people think, but we did have some good news.

We are going to take advantage of that and invest in reliability.

You may say, what do you mean?

It could be doing more tree trimming than we had presently planned to do.

There can be a lot of things like that, that are healthy for our customers and if that is a capacity that we can address, we will do it.

That allows us to live within our authorized ROEs and at the same time deliver the guidance that we have shared with folks.

It's not so much being cautious as it is trying to run the business in a manner that is as most effective as it can be for our customers and for the owners.

And if I could end up, when should we expect electric rate case?

Could you just talk about the regulatory calendar for the rest of the year?

I think the next thing after this, obviously, it would start with the gas settlement.

That will be filed and then the commission would move forward I expect since all parties agree with in order.

So that would remove the need for an August order in the gas rate case.

The next issue would be the electric rate case.

We expect to file that in the second quarter, which would allow for self implementation at the tail end of the fourth quarter of 2011.

So, from a regulatory agenda and an impact on the Company for this year, as Tom mentioned, that piece is pretty much behind us.

Thank you so much.

You're welcome.

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

Good morning.

Just given your discussion on the delay in the self implementation of the gas rates, and then the all party pending settlement, just talk more about maybe your strategy when planning this electric rate case in the second quarter of '11?

Obviously, the electric side is much bigger than the gas side.

How do we kind of look at how you or the commission are going to kind of come to terms on self implementation?

I think on the electric site, first of all, the case that we are going to file, as I mentioned earlier, we are doing everything we can to aggressively cut costs to minimize the rate impact to customers.

As I said before, we are trying.

We expect to be at or below the rate of inflation when you take base rates compared to total cost.

That's an important element of what we are doing to mitigate some of that.

Most of the case, I expect, will be capital investment.

Capital investment that we made to clean up the air, to invest in renewable energy, to provide for a safe and reliable system.

The commission has historically enabled us to recover the capital investments we're making, particularly since the increases for customers will not be that great.

At the end of the day, the strategy here though is to follow the law as the law was intended and as the commission confirmed last week in the DTE case.

We will move forward with that piece being very transparent, very open with the commission, the staff, and all parties in this case.

Okay.

And just a question on the $1.5 billion of environmental CapEx you laid out in one of the earlier slides.

Can you just talk maybe more specifically what kind of control technology you are assuming on the various coal plants?

Yes.

In the big five, what we are going to do is we will control everything to meet the EPA standards, as well as the Michigan rule for mercury.

We are talking FCRs, we are talking bag houses, scrubbers.

So, those five large coal-fired units will have all the emission controls to meet all of the environmental requirements, both at the federal level and the state level and should position us well for the next 10 to 15 years.

The thing in question though, Brian, that I think we've talked about in the past is we have seven smaller coal-fired units that we have three options with.

Continue to run, mothball, or retire.

On those we are waiting for final results from the EPA, or at least through final litigation, to determine if those plants with emission controls can continue to be economic.

That's where we are today trying to make that decision.

We have not put money in the plan for those, however, today as I mentioned, they have a very high utilization rate.

When they run, they are called on for energy, not capacity.

And I guess previously, I think you may have stated that your view is that there is an abundance of capacity in MISO, so that if those were to be retired, you feel comfortable in signing PPAs.

Well, PPAs or to invest in natural gas or make investments in some of the other facilities we have like the Ludington pump storage facility.

Yes, capacity costs, my belief is they are going to stay low for the relatively near term, and maybe even longer term, because there is a glut of power in the Midwest right now.

The difference with these seven smaller units though, they run for energy.

They are not just capacity plants.

They are energy plants.

So, when they are available, they tend to be called on to run because they are competitive in the marketplace.

That's the difference between a lot of small plants in the industry and ours.

Understood.

Thank you very much.

Thank you.

Our next question comes from the line of Lauren Duke with Deutsche Bank.

Following up on Brian's question, I was hoping I could get you guys to comment on your view of the commission's commitment to the 2008 energy legislation.

You're kind of focusing on self implementation and if you guys have seen any shifts there or you think things are just proceeding as they have in the past.

I think the commission is fully committed to implementing the energy law as it was intended in 2008.

I will take responsibility for our issue with the self implementation.

We changed the number, lowered the amount at the last minute, which we thought would be perceived as a positive.

It was concerned -- it was perceived more as a question, I think, by a lot of parties, what changed, what happened, and why just a few days before the scheduled self implementation.

That's the lesson learned from us.

I wouldn't blame the commission on that one in any way.

That's something we did.

And the fact that we've been able to settle it says we pretty much knew what we knew going into to be able to get that settled.

The commission acted this week in allowing self implementation for Detroit Edison or DTE.

They had their call a couple days ago.

What it shows right now is the law was implemented in '08 and we have had three self implementations allowed since then.

And if you consider ours a settlement, which will ultimately end the case, there's enough dots there to connect that they are following the laws that were intended.

Okay, great.

And then secondly, I was wondering if you could give any update on potential spending for the gas system with the renewed federal focus on safety after some recent accidents?

When do you think you might get clarity there?

I tell you what, we are watching and monitoring that situation in Washington and Lansing with care, but we are not waiting.

We are already taking a look at plans to see how we can do more for our customers.

We are meeting all the present laws and all the present regulations.

In fact, we are ahead of schedule on all the testing that we are supposed to do for pipeline testing, but we are saying this could be a terrific opportunity for us to see if we can step out a little bit further, so we are evaluating that right now.

Okay, great.

Thank you so much, guys.

Thank you.

Our next question comes from the line of Leslie Rich with JPMorgan.

I wondered if you could walk through the weather differential for the quarter, the $0.12 weather impact?

Looks like part of that is at the gas utility, which does not have decoupling, as I understand it, but I'm just wondering why the electric utility would have a weather sensitivity.

And then if you look forward to the 2011 sensitivities, you show that there is no EPS sensitivity to weather adjusted sales at the electric utilities.

So, I'm just trying to reconcile that.

Sure, that's a good question.

In fact, if you take a look at where we are for weather and particularly gas is the situation here because as you are observing, we are not decoupled for weather.

So, the good news that occurred in the first quarter was $0.04, so it was colder than expected.

And that compares to first quarter of a year ago where we were off $0.02, so you get net good news there of $0.06 when you put it altogether.

So, that's the gas side of the business.

And on the electric side, we do have decoupling for weather, but the scenario there is there is a little bit of leakage that comes through.

It can come through on the good side or it can come through on the bad side because, remember, you are not comparing year-to-year when you are decoupling.

You are comparing to your authorized level in your last rate case.

So it can be sometimes a little difficult for you to see how that works.

And the mechanism itself is such that there can be a little leakage if it's very -- let's do electric, if it's very hot in the summer, it's possible that a little good news can come through.

On the other hand, if it's very mild in the summer, it's possible a little bit of bad news can come through.

That is just simply the model of the decoupling tool that works by customer class comparing to the rate case, so you get anomalies in two ways.

A little bit of leakage because it's not a perfect model, but it's easy to do the math.

So, it's not subjective.

And two, it's compared to the prior authorized rate case not to a prior year, so you can see some differentials in there.

So, for the first quarter that was a full $0.06?

That's on the gas side.

That's a full $0.06.

No, but on the electric side?

On the electric side, it really washes out to be about nothing.

Now, you may be looking at the chart on our slide 13 --

Yes.

That says $0.12.

Remember, $0.06 of that is weather, and the rest of that is just sales and decoupling mix.

So, the weather piece in there is only $0.06.

Okay.

Okay.

Thank you.

You're welcome.

Thanks for the question.

Our next question comes from the line of Edward Heyn with Catapult.

Most of my questions have been asked and answered, but just John, I think you mentioned at the beginning the Ludington pump storage was in part to being expanded to help act as a battery for these wind plants.

Could you maybe talk about the cost of wind on a dollar per kw if you include the cost of the expansion for capacity and what that looks like for the customer and how expensive that is?

Let me start with Ludington.

The primary reason we are doing Ludington is not the renewable energy piece.

That's an ancillary benefit.

The primary driver for capacity -- or at Ludington investment is to increase the efficiency of the plant at a very competitive rate.

Wind power, what we are seeing the wind power rates with the capacity factors we have in Michigan because of the wind regime are about $0.10 per kilowatt hour.

What Ludington can be used for is that I think you know that when the wind turbines run, they generally must run from the MISO, which means that if the wind is blowing the energy is sent into the grid.

For Ludington, the nice thing is that can help pump up the water from the lake to the pond which then can be used later at a peak time to be able to let the water run through and generate electricity.

As far as what that would cost, since we don't have a whole lot of operating wind turbines in that area, I can't give you a specific today on the net impact of the $0.10 minus the impact of what Ludington would provide, but once we get operational, I expect that would benefit and possibly reduce the overall cost of the renewable energy a little bit less than the $0.10.

Got you.

So, it seems like the expansion is not solely for the wind.

I was just thinking if it were then you would have to tack on that cost on top of the dollar per kw for wind build.

Absolutely not.

Be very clear, Ludington is a stand-alone project.

The economic business case for it is very sound to reduce cost to customers based on that investment.

The ancillary benefit is the renewable energy of benefit of doing that.

Got you.

Thanks a lot.

Our next question comes from the line of Dan Eggers.

Please proceed.

Good morning, guys.

This is actually Kevin.

For the gas settlement, should we assume that is bound by the normal one-year block?

Yes.

You mean for when you would file again?

Right, or is there a possibility to settle for a longer-term for when you are at two years out?

That's always possible, but what -- we want to wait and let that unfold when you see the settlement information, hopefully in the next couple of weeks.

Okay.

It looks like you've given your disciplined annual filings on the electric side has driven your [assets down to more manageable margins].

Do you think the willingness by the commission to defer the gas rate case towards settlement defined that Michigan is evolving to the point where an electric case could be settled in a more quiet manner?

This is one that we have settled.

I think historically before the law was passed in Michigan, we did settle rate cases.

In this case -- gas rate gases, we never settled electric, at least in recent time, but we had settled some gas rate cases.

I think the importance on this is the commission confirmed the self implementation in the DTE case yesterday.

And in our case, we move forward, reach a settlement with all the parties, including the staff.

In this case, keep in mind our position on this, of a self implementation amount was $29.5 million on a $2 billion business.

With the increase of those rates, if that's what we self implemented, the overall impact and total cost to our customers, because of fuel costs, the gas cost going down would be about a 6% reduction on a year-over-year basis.

So, I think the reasonableness here is it is a relatively small case.

It could be settled by the parties.

It's an indication of some cooperation of all the parties and the fact that what we are asking for or what we settled to seems reasonable.

And has the delay itself slowed down your ability to deploy gas capital?

Not at all.

And then on the dividend, when will you be reviewing it for 2011 and your updated thoughts on the timing to narrow the gap towards your 65% to 70% long term target?

We will discuss that with the Board, as we usually do, a couple times a year.

I think we've stated publicly that we expect our dividend growth to be in line with our growth from rate base and earnings.

So, that's what we are planning on in the future.

Okay.

Last question.

With the house back for putting your plants into compliance, do you think you can do this within the requisite window?

Yes, we do.

We think we do because what we have done is we have already started some of the work.

When we've started some of the work, we've got contracts in place with suppliers and with labor and we've got a very good relationship with the skill trades.

But there's a lot of talk in the industry right now about the ability to get all this done in a short period of time, and that is a concern.

I'm concerned about that for a couple reasons.

Our plan says we can get it done, but as more and more people try to drive towards that finish line, I think what you're going to see is probably an artificial increase in cost and shortage potentially of labor and/or materials.

So, I share the concerns of the industry, but our plan is that we can get it done on the big five units that we have.

One more question if you don't mind.

With regards to decoupling, I guess with DTE pushing towards more of a narrowly decoupling towards energy efficiency only, do you have a view on I guess the probability of that and how it might impact how you run your business, or your rate filings as well?

We have stated to everyone, I am satisfied with the decoupling process we have on electric and what we are working towards on gas.

I like the certainty, the consistency, which is what our Company is all about.

The energy optimization, if we go to that, we will be satisfied with that because we can measure that through the modeling.

We also have maybe a reasonableness on sales on a forward-looking test year basis.

But, personally what I would like to see is a continuation of the decoupling as the electric business has it today, and there's probably some adjustments, as Tom talked about earlier based on capacity versus energy and class and so forth.

So, the minor tweaks are established, but it really provides certainty for us for making investments and for moving forward, which I like.

But in good times, as things recover, it becomes much less of an issue than in difficult times with the recession.

So, given the forward test year, that significantly reduces your risk.

I guess even if you were to narrow down the decoupling, as long as you can get your one year floor projection, then you should still -- shouldn't be impacted by the swings of Michigan economy?

I would say that, Dan, plus that fact that if you believe that the recession is behind us and we are starting to see some recovery, that's less risk too.

Thanks, guys.

Thank you.

Our next question comes from the line of Ali Agha with SunTrust.

John, I wanted to get an updated brief from you on what you're hearing from the Michigan legislature from the Governor's office.

There is still talk that comes up in the trade rags about potential increase to the retail open access, et cetera.

Any further data points you can share with us?

No, I think we've talked about it in the past.

The Governor has made it clear to us and publicly that changing the energy legislation is not a top priority for him.

He is focused on jobs.

He is focused on the economy, and he's focused on the budget.

Since last year -- this year since the new legislature is in office, there has been no energy legislation bills proposed, so I think there was one last year under the old legislature, but this one, nobody has raised that issue today.

So, I have kind of read -- I have read the same things you have.

There just doesn't seem to be any indication here of raising the cap.

Okay.

And second with regards to your strategy on the annual filings.

I understand there is a lot of capital being deployed, but based on your own stats that you put out in the earnings release, both gas and electric, at least over the last LTM or last 13 month average basis, are earning well above authorized ROEs, particularly on the gas side.

Is that a factor that is coming into your thinking, or do you really feel confident that the way the CapEx is going to go, it's going to come back down to authorized when you come in for the next round?

The issue is you are taking a moment in time on the ROEs right now after a very good quarter, especially with the weather component that we had.

We are going to continue to invest capital in the business, which will drive down the ROEs.

As Tom mentioned too, we are also going to continue to invest in safety, reliability to continue to move this thing forward.

So, those are the big things that we have.

Also, we are looking at part of that as -- you are looking at the ROE potential or what we have.

We did get an incentive for our energy efficiency, energy optimization.

That does not count towards our return on equity.

That was part of the energy legislation law and we were able to successfully achieve about 130% or greater.

We are helping our customers save money.

We are earned the full incentive on that.

That drove up our earnings a little bit, but the customer saved money as a result of that.

And final question.

While you guys still have your hands full over the next 5-year program, the industry around you continues to consolidate given the production that was announced this morning.

I am just wondering, as you are looking at the industry longer term, five years out perhaps, where do you see CMS being positioned, and what are your thoughts on M&A and consolidation?

Perhaps expanding your state exposure beyond Michigan?

I guess let me just take it from my standpoint rather than the industry.

From our Company standpoint, five years from now, my vision what I expect for the Company is we are going to be very successful.

We continue to do what's right for customers, we continue to do what's right for Michigan.

As far as eliminating risk, I think some of the things that the forward thinking legislature has done in Michigan and the Public Service Commission has positioned us well.

When you look at our track record over the past five years, as Tom highlighted in his comments, we've got a pretty good model here that continues to work.

We are committed to Michigan.

As far as anything else, mergers and acquisitions, I cannot even speculate on that.

Okay.

Fair enough.

Thanks.

(Operator Instructions) Ladies and gentlemen, this will conclude the Q&A portion of the call.

I would now like to turn the presentation back over to Mr.

Tom Webb for closing remarks.

This is John.

Let me wrap this up.

First of all, thank you for attending the call today.

The first quarter I think represented a very solid operating and financial performance for the Company.

We are off to a good start for 2011.

As we talked about today, we remain committed to deliver on our promises to you as shareholders and to provide value to our customers.

With that, I appreciate it.

Thanks for joining us today.

Ladies and gentlemen, that concludes today's conference.

Thank you for your participation.

You may now disconnect.

Have a wonderful day.