CMS能源 (CMS) 2011 Q2 法說會逐字稿

Good morning everyone and welcome to the CMS Energy 2011 Second 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 August 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 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 today.

With me are John Russell, President and Chief Executive Officer; and Tom Webb, Executive Vice President and Chief Financial Officer.

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

This presentation contains forward-looking statements.

These statements are subject to risks and uncertainties 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 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 Investors section of our Website.

Reported earnings could vary because of several factors, such as legacy issues associated with prior asset sales.

Because of those uncertainties, the Company isn't providing reported earnings guidance.

Now I will turn the call over to John.

Thanks Laura and good morning everyone.

I appreciate you joining us today for our Second 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 the outlook for the remainder of the year.

Then we will close with Q&A.

Second-quarter adjusted earnings per share was $0.26, the same as last year.

The benefit from electric and gas rate relief was offset by higher rate-based investment costs, storm restoration costs, and accelerated investments in system reliability.

The first half adjusted earnings per share was $0.77, up $0.13 or 20% over last year, primarily reflecting rate relief and favorable first quarter weather.

Tom will review the details with you in a few minutes.

We remain on track to achieve our adjusted earnings per share guidance of $1.44 per share.

Let me give you an update on the Michigan Public Service Commission before I talk about our regulatory agenda.

Commissioner Monica Martinez's term officially ended July 2.

However, she has agreed to remain a Commissioner for a while.

The Governor has been interviewing several candidates, but I can't comment on the timing of the appointment.

It's his decision.

Moving to the regulatory agenda, there are several important orders and filings during the second quarter.

In June we filed a new electric rate case, requesting a $195 million increase based on a 10.7% return on equity.

I will review the details of this filing on the next slide.

The Commission approved the reconciliation of our Energy Optimization Plan costs for 2009 and approved a $6 million incentive for exceeding the planned targets.

We also requested approval to collect an $8 million incentive for exceeding the 2010 targets.

More than 200,000 customers have participated in our energy efficiency programs.

Also in June, the Commission approved our amended renewable energy plan authorizing us to reduce the surcharge by $54 million annually.

This will provide headroom to minimize the customer rates going forward.

On the gas side of the business, the Commission approved a rate case settlement authorizing us to increase our natural gas rates by $31 million effective May 27 based on a 10.5% return on equity.

We anticipate filing a new gas rate case in the third quarter of this year.

In keeping with our plans, we filed a new electric rate case on June 10.

The request seeks to recover new investments in system reliability and environmental compliance.

We've lowered our O&M cost by $31 million to reflect employee benefit plan changes and increased productivity.

This was partially offset by a proposed $13 million increase in forestry expense and a projected $14 million increase in uncollectible accounts due to the expected reduction in [LIHE] funding.

We also adjusted our sales forecast to reflect a higher level of sales to retail open access customers.

We plan to self-implement a rate increase in December with a final order in June of next year.

From our customers' perspective, the renewable energy surcharge reduction and the DOE settlement refund, which Tom will discuss in a few minutes, are expected to provide over $75 million to help offset the impact of this case.

Let me give you an update on some recent operational highlights.

We received a favorable vote on our special land-use permit for our first wind park, the 100 megawatt Lake Winds Energy Park.

Construction of this $232 million project is planned to start this fall.

By the end of 2012, about 8% of our power will come from renewable energy resources developed in Michigan.

State environmental regulators approved an 18-month extension of our air permit for the construction of the 830 megawatt clean coal power plant at our Karn/Weadock Generating Complex.

This extension keeps open an option to make meet further -- future customer demand.

The recent Cross-State Air Pollution Rule will require us to meet a federal mandate to reduce emissions starting in 2012.

Our plan includes installing [SCR] scrubbers and fabric filters at our large coal-fired plants as part of our $1.5 billion environmental CapEx plan.

We're still analyzing the impact of the rule on our plan as it relates to our older, smaller coal-fired plants.

We expect recovery of all environmental investments.

On the operational front, our Campbell 2 coal plant set a new record for a continuous run of 325 days and counting, a notable achievement for a plant that is over 40 years old.

Safety is something that we work on every day.

It is our number one priority.

And I am pleased that Consumers Energy received the American Gas Association 2010 Safe Driving Award.

Our employees drove more than 40,000,000 miles in 2010.

Another significant safety milestone was achieved at our Dearborn Industrial Generation Complex.

The employees completed five years without any recordable incidents.

We've incurred a significant number of storm-related outages and costs during the first of this year.

Our crews have done a great job restoring service on nine different occasions to over 800,000 customers.

In the first six months, there were 219 severe weather warnings -- almost twice as much as last year.

The frequency and widespread damage led to a 60% increase in customer outage minutes compared to the first half of 2010.

Despite our efforts to harden the system, there is little we can do to prevent damage incurred by ice, tornadoes and windstorms.

And, as you would expect, the storms had an impact on our earnings, reducing earnings per share by $0.07 in the first half, $0.05 more than last year.

Everyone has been talking about the extreme temperatures across the nation over the past couple of weeks.

Although this is not a second quarter event, I do want to talk about how our electric system performed last week.

On July 21, we set a new peak load record of 8885 megawatts, slightly greater than our previous peak of 8883 megawatt set back in August of 2006.

As you can see on the slide, the annual peak dropped during the recession.

Our generation and distribution systems performed very well last week.

We had a 50% reduction in heat-related customer outages on this year's peak day compared to 2006, and of the customers who did lose power, 99.5% were restored within eight hours.

The doubling of our capital investment in our electric distribution reliability system since 2007 has made a difference.

It allowed us to meet the highest level of customer demand in our history with the fewest number of interruptions.

The infrastructure investments are paying off for our customers and our investors.

Now, I would like to turn the call over to Tom to discuss the results further.

Thanks John.

I'm delighted to add my welcome to everyone on the call this morning.

I know it is a very busy morning and some of you are just now dialing in, so thank you for that.

Second-quarter results were solid with reported GAAP earnings at $0.38 a share, up $0.06 from last year, primarily for a one-time, non-cash state income tax benefit of $0.12, offset partly by a one-time insurance benefit in 2010.

Excluding the one-time favorable news in both years, adjusted EPS was $0.26 in each year.

For the first half, as John mentioned, earnings were up 20% from last year.

And this is our best first half result in almost a decade.

In May, Governor Snyder signed a new Michigan corporate income tax into law to improve the attractiveness of Michigan to business.

The overall future implications to us were minimal.

The new law did not, however, continue our provision in the old Michigan business tax that permitted the tax impacts of timing differences between cumulative book expenses and tax deductions to be recorded on balance sheets.

Specifically for us, this results in a utility liability of $134 million that will be recorded as a regulatory asset for recovery later.

Outside the utility, this tax results in a $32 million tax benefit, a gain we recognized in this quarter.

As you can see on this slide, adjusted earnings were equivalent to last year despite unusually severe storms that John just described to you.

Recall that in the first quarter, results were substantially better than planned.

We used some of this [space] to increase our efforts to further improve customer reliability.

We are still on course to do this, but with a little bit smaller step up in order to address the severity of the recent storms.

Now, as many have, we have been seeing a bit of a slowing in the economic recovery late in the second quarter, but overall growth for the year is still good.

It is clear now that some of our customers suffer from the supply issues associated with the tsunami in Japan.

This, and the desire by automakers to accelerate some of their model changeovers, resulted in a little slower industrial electric sales growth than we anticipated.

Still, industrial sales were up 3% on top of the 12% growth in the second quarter of last year.

And that is a stronger growth in the second quarter this year than we saw in the first quarter.

Residential sales growth continued at about 1%.

Commercial sales, however, were down 3%.

The federal deficit debate in Washington and gas prices also appear to be dampening consumer confidence.

How that plays into sales is always hard to predict.

For the year, we anticipate weather-adjusted electric sales to be up about 2%, a little softer than the 2.5% that we shared in our last call.

We anticipate returning to pre-recession industrial sales this year.

And for total sales, we expect to be back to pre-recession levels next year.

This forecast reflects a recovery at less than half the amount experienced after the big recession in the early 1980s.

We continue to plan in a conservative manner.

Now let's recap the storm and weather impact for the first half.

In 2011 storms were favorable at our electric business, impacting earnings by $0.07 a share, offset partly by favorable weather at our gas business.

Total storms and weather were unfavorable by $0.02 so far this year.

Last year, however, storms hurt $0.02.

Mild weather was adverse $0.04.

Altogether, weather and storms hurt 2011 earnings by $0.02.

We've managed this in our total plan.

Last year weather and storms hurt $0.06, leaving a favorable year-to-year comparison.

In July it has been hot and it was pretty hot in July of 2010.

We're over 400 GW hours ahead of the forecast so far in July.

This will certainly help us continue to reinvest in actions that improve reliability.

So far the first half of the year earnings were up $0.13 or 20%, and that is well ahead of our plan.

With the exception of storms, our cost plans are expected.

We continue to take advantage of favorable overall results to accelerate work to make meaningful improvements in reliability for our customers.

Now, looking ahead, most of our rate increases for the second half are already in place from existing orders.

Coupled with scheduled investments, this keeps us right on plan to deliver earnings at $1.44 a share.

And that is up 6% from last year.

In July we completed settlement of spent nuclear fuel obligations with the Department of Energy.

First, we paid off a loan of $44 million plus interest of $119 million to close out any obligations remain being remaining for spent nuclear fuel prior to 1983.

Second, as shown on this slide, the DOE satisfied its financial obligation for 1983 and beyond with a payment of $120 million.

This resulted in proceeds of $35 million in excess of book value.

A portion of this $35 million could be provided as a refund to customers.

We have proposed that $23 million be shared with customers and about $12 million with investors through earnings.

This latter portion represents recovery of costs that we have incurred over the years.

In the near future we'll file this proposal with our Public Service Commission, another step toward meaningful rate mitigation.

We expect an order sometime in 2012.

Our 2011 cash flow metrics both for the parent and the utility are on target as well.

Financing plans for the year are complete, including a new continuous equity program that we initiated in June.

We raised $15 million from this program and do not plan to issue more this year.

This is one of the tools we said that we might use to supplement our DRIP and our direct stock purchase plans.

Combined, these programs provided about $29 million a year.

We still have no plans to issue large blocks of equity during the next five years.

At the utility, you can see the $44 million repayment of our pre-1983 DOE loan, net of the post-1983 DOE payment to Consumers Energy.

Now stepping back, you can see here on this slide that we have strong liquidity with a level at well over one-third of our market value.

Peers average about 20%.

Today we have $2.5 billion of capacity with about half of it in the form of long-term revolvers and about 40% in cash.

As of the end of the first half of the year, $2.3 billion of this capacity was available.

Here is a list of items that provide you the opportunity to assess possible changes against our earnings and cash flow.

We're comfortable with our outlook and guidance.

But like many of you, we constantly measure performance in a manner to deal with issues should they arise.

Our earnings growth rate has been 8% over the last seven years.

We continue to project future earnings growth in the 5% to 7% range, along with a healthy dividend payout.

Now, here is our 2011 report card.

Earnings, cash flow and capital structure metrics continue to be strong, all on or better than target.

So, thanks again on this very busy day for dialing in to our call.

We appreciate your interest and support.

And John and I would be happy to take your questions at this time.

Operator, if you would open the call please.

(Operator Instructions) Daniel Eggers, Credit Suisse.

Hi, good morning guys.

This is Kevin.

With the rate case filing, what is your expected volumes for 2012?

Sales volumes delivered?

Correct, yes.

Do you have that?

We're planning on something that is really just kind of in the ballpark of what we're talking to you about now.

Let's see if we can get you a volume number here.

Hold on just a second.

So, we're looking in that case at something that would show about a 2% growth year-over-year if you think of that as '11 over '10, and then apply that to our test [year].

Okay.

Thank you.

And then what do we think about the change in decoupling?

When will we get greater insight from the Commission and the staff with regards to moving away from the 10% [cap in choice]?

That is a great question.

And if the first answer will come when we get it sort of what I call the second part of the gas rate case after the settlement.

The Commission is due sometime within this next month to talk to us a little bit about how they would handle decoupling.

I think there we will see a signal when that direction comes out as to whether they want to modify the process a little bit going forward, and we will just wait and see.

I know there are different views in the states about how the decoupling should be handled.

Some people feel that it would be better just to make it energy efficiency.

And others, like us, feel we like the more full decoupling approach for the economy as well as the weather.

But let's all wait and see what happens.

Okay.

And then my last question with regards to your dividend, it still looks like you're below your target dividend payout ratio of 65% to 70%.

How -- would you like to step that up in one big increase at the end of this year, beginning of next year?

Or would you like to do it through several years?

Let me take that one.

We've not given guidance on our payout ratio.

We know we are below the peers in that.

We grow little bit faster than our peers and our payout ratios have been a little bit less.

But that is something we look at an annual basis compared to the industry and see what we need to do to be competitive with our peers and satisfy our shareholders.

Greg Gordon, ISI Group.

Good morning gentlemen.

You might have touched on this and I missed it in your scripted comments, but you clearly had a lot more expenses related to storms than you have planned for.

And yet you are still on track to hit your targeted earnings for the year.

So what have you done to modify your operating budget in order to stay on track?

A couple of things we have done, as Tom and I both said, what we have done is we have accelerated expenses above and beyond the rate case levels this year.

One of the key areas is forestry expense.

Our focus is to improve the reliability to our customers.

So what we've been able to do, because of the success in the first half of this year, is to continue to accelerate investments.

Some of those investments, though, we will slow down a little bit based on the storms that we have had and paying for the storms and the recovery of those storms.

So we were in position pretty well to do that.

And as I mentioned earlier, we did have some favorable weather early in the year in the gas business to offset some of those storm costs.

And what is not in there now, that Tom covered, is how hot it is in July.

Yes.

And let me give you, if I may, (multiple speakers) color on the tree-trimming to help everybody, because I know that is one area that we're able to do things effectively in short term.

So our plans for this year had nearly a $10 million increase in tree-trimming.

After the first quarter was so good, we moved that up substantially by around another $10 million.

And we pulled that back just a little bit, not a lot, and with this very hot July that John just mentioned we may not need to pull that back much at all.

So the important message here, I think, is not only through tree-trimming but through the entire business we manage our costs to fit what our business needs.

And so we work the reliability and we work the results as well.

Okay.

So the storm costs are really -- functionally been offset by a strong first quarter and what looks like a strong third quarter in terms of topline.

Then you've been able to sort of flex your reliability spending as well?

(multiple speakers)

(multiple speakers) That's a good description.

But I wouldn't even think about the third quarter.

We've been able to flex through the first year, first year to date to handle it.

Great, great.

And at $1.44 a share for the year, if we isolate just the electric utility, are you earning at your authorized return or below your authorized return?

Where do you think that puts you?

When you look at the data you're going to see us up a little bit for the trailing 13 months.

And don't let that kind of get in the way.

A little bit of that may be a weather adjustment.

But for the year we anticipate to be fairly close to those authorized levels, both electric and gas.

And I can't predict; it could be a one-tenth or so above or one-tenth or so under, but in that range.

Great, thank you guys.

Ali Agha, SunTrust.

Wanted to get, John, a sense from you.

There were some rumblings in Michigan about a bill that was going to be introduced to support more retail open access for schools.

And you continue to hear marketers and others talk about a push towards retail open access beyond the current limit.

Can you just provide us the latest of what you are gathering in terms of focus on that issue?

Yes, sure.

There has been a bill that has been introduced, but it has not gone anywhere.

It is to provide an exception to the 10% cap for schools only.

There is -- what we see is no traction in the bill, very little interest in the bill.

But you said it right.

It was promoted by out-of-state third-party marketers.

And there seems to be little interest in the legislature to move forward with that.

Okay.

And nothing else from the governor's office, any anecdotal data point that gives you added comfort on this issue recently?

Yes.

We met with the governor several times.

And he has made some public statements.

He is very supportive of the law.

He likes the law the way it is.

He doesn't have any plans to change the law.

I don't think the Senate or the House Energy Committee Chairmen have mentioned it, but they have talked to us about it.

They like the fact that we are into a couple of years in the law.

As you know, it only started in 2008.

We've been making significant investments.

We're partnering with the state, the latest one that we combined with DTE and Huntington Bank to do the Pure Michigan Connect.

The administration, this administration, sees us more as an economic development partner to help grow Michigan, make investments and move this state and business forward.

So I'm very pleased to help and it is what we want to do.

Secondly, think I heard you, John, say the plan would be to file the next gas rate case in the third quarter.

You also pointed out on a trailing 13-month average gas ROE of 12.6% was obviously significantly above authorized.

Are you comfortable, looking at the future trends, that you get back to or below authorized levels?

Or could that third-quarter filing be potentially pushed back a bit?

That's a good question and I would answer get to the end and say no.

We think the timing is right for the filing.

But the 12.6% do you see for the trail through June 30, if you weather-adjust that, right away you get to 11.5%.

But then when you look at our full-year plans for -- in the next six months, we're in that pretty close to the zone of the authorized level of the 10.5%.

So we feel really comfortable that what we are doing is bringing our investment programs forward and then asking to get the recovery of those in rates and working hard to keep our O&M down, so those are things that are received pretty well up in Lansing.

And take a look at what I mentioned in the electric business.

That case we filed there, all capital spend with a reduction in O&M.

That is a good way to look at it.

We talked before we about we're trying to keep our base rates or anticipate to keep our base rates at or below the rate of inflation going forward.

The way to do that is to go into rate cases where you actually have a reduction or very small increase in your O&M.

Okay.

Last question, Tom, I think you had mentioned no [plan to] a major block of equity.

But is it fair to say for planning purposes between DRIP and perhaps [non-periodic] equity around $15 million a year or so; is that a good rule of thumb to think about?

No, I'd tell you -- you should look at our cash flow schedule we show you.

And if you put those together, I would have you think between $25 million and $30 million a year.

The continuous equity being around $15 million, and then the DRIP and the rest there.

So that is about the number to use, $25 million to $30 million.

You see $29 million forecasted for this year.

Thank you.

You're welcome.

Mark Barnett, MorningStar.

A couple of quick questions; you give a lot of detail on the OpEx impact from those storms.

Could you maybe talk a little bit about the incremental CapEx from your plan that you may have incurred and how those expenses are going to be recovered?

Yes, the capital, when you think of storms like that, what we have shown you there is the impact on earnings.

Usually a storm is split.

But it depends on the type of storm.

Ice storm will be the majority of capital, a little bit less in O&M.

Most of the recovery of outage is based on wind, and others will be the majority of O&M.

So, for planning purposes, think of the split.

The capital that we spent for restoration for the customers is in the plan.

We've got the capital for that.

It was the O&M that exceeded what our targets were for the first half of the year.

Okay, that is good.

Second, I guess more of a general economic question.

Through the first six months even adjusted for weather you had a 2% increase in residential usage, if I'm reading that slide correctly.

What do you think are some of the factors that are driving that improvement?

I tell you the way to look at that -- and what you're seeing on that slide is full-year, just to relate that a little bit to help you on your questions.

The residential side for the first half is up about 1% compared to our two-year, and trending up.

Commercial has been down and flat.

And the industrial is what continues to grow for us.

So, what we have seen for the last year and a half is the industrial recovery is driving substantially the rest of the state for us, the rest of our service territory.

We're watching the first quarter with good growth, particularly on top of the 12% increase a year ago; the second quarter with good growth compared to the 12% a year ago increase.

And so, we see the industrial side leading the way out where consumer confidence comes back and the residential is already turning around, so we see that being up about 2% for the year.

Following that, industrial up about 5% for the year.

But the commercial side is lagging.

And candidly, that's simply confidence.

People going back to the commercial sector for things that they need, whether it is haircuts or whatever it may be, and that part is coming around so than the rest.

I suspect we will see that turn up a little bit next year, not this year.

And one thing, too, just to add to that.

Michigan has a reputation for the high unemployment.

But you think about two years ago we were at 14.5% unemployment rate.

We're down to 10.5%, which is a significant reduction.

We're still about a point above the national average, but we're starting to see the employment in Michigan come back and some of the autos come back and start to hire different shifts.

And particularly when you think about the Volt and some of the things that are being produced here, we're starting to see that unemployment number come down, which I also think may be have an impact on residential sales.

Big help.

Okay, that is good detail.

Just one more quick question, if I can.

Yesterday on a call had a mention of another legal challenge to either [Casper] or even the [hazmat] back in the DC Circuit Court sometime this year.

I was wondering if you heard anything about that and how that might proceed if that were going to happen.

I have not heard about it.

It is not unexpected though.

I expect that everything that comes out of the EPA recently and probably in the near future will be challenged by somebody.

So we're looking at -- our planning purposes looks at what the order says, what the regulation requires.

And then we look at what the reality is of what we expect through lawsuits and through fights to get this through.

Our point is, as we think at the end of the day, that regulation will probably be delayed about one year.

That is what we're looking at.

Thanks, appreciate it guys.

Paul Ridzon, KeyBanc Capital Markets.

Which regulation were you talking about being delayed a year?

That was Casper.

And what about (inaudible)?

No.

No delay?

No.

It will be fought in courts.

But the one where looking at right now that affects us most is Casper.

And then just piggybacking on Ali's question, except for the schools, there is really nothing afoot that could change the ROA?

No.

There doesn't seem to be much interest.

I mean people -- I hear it from analysts and I hear it from out-of-state energy providers, but there just doesn't seem to be the interest here.

And the reason is the administration looks it up as being the second largest investor in the state, the seventh largest employer in the state.

We spend $2 billion a year on goods and services with the state that support 2700 companies in Michigan.

So, when they look to us they think, wow.

This is a pretty important Company to the success of the state of Michigan.

Sounds good.

Thank you.

Brian Russo, Ladenberg.

Hi, good morning.

Could you just maybe elaborate a little bit on the coal plant air permit extension?

Remind us of the decision to delay that initially.

And is there a new kind of timeline for new baseload needs?

And is there a greater amount of appetite for a clean coal plant in Michigan?

Yes, great question.

I will say just publicly it was much easier to get the extension than it was the original air permit.

But now that we have it, at the end of the day, the fundamental principles of why we went -- why we delayed it in the first place still hold true.

Gas prices continue to be low.

We believe that shale gas is real.

It is going to keep gas prices low in the future.

Despite the fact were seeing an increase in customer demand, it is not enough to justify a new plant.

And there's still uncertainty what we're going to do about our older small coal-fired units.

Those plants, despite the fact that there are old, they are dispatched at a high rate -- nearly 70% capacity factor.

So, nothing has really changed from that standpoint.

But we thought it was in our best interest to request the extension just to provide an option for us in the future.

Okay.

Also, can you remind us how the decoupling mechanism works on the electric side?

I thought it was a tool decoupling and therefore favorable margin variances relative to favorable weather is somewhat mitigated.

How does that play out with the strong expectations for the third quarter given the July weather?

Yes, that is a very good question.

On the electric side you are exactly right.

It's full decoupling which includes the economy, includes the weather and energy efficiency.

On the gas side we don't have the weather offsets in decoupling.

However, remember the mechanism is versus the approved levels in a rate case and it's not really perfect.

So when you get a very hot summer, you will get a little bleed through of that good news.

And if you had a very mild summer, by the way, you will get a bleed through of that news the other way.

So it is not 100% in the method that the decoupling is done when it is done by average customers.

So you will see pretty good coverage on that with the decoupling.

But you will see, depending on the amount of heat in a summer month, some of it will flow through.

But remember, if it was very mild it could also go the other way.

So it's not a perfect mechanism.

Understood.

Thank you.

Mark Segal, Canaccord Genuity.

Hi good morning.

I was just wondering if you could provide an update on your activities surrounding smart metering.

Yes.

We're moving forward with it, albeit slowly.

We have a plan in place to move forward with Smart Grid when the pilots are complete.

We're looking at a very incremental approach to this beginning with the electric business, beginning on the west side of the state near Grand Rapids and then working its way around the state.

We have eliminated the gas business.

We don't see a positive business case for changing for gas customers, except those that are combination customers.

But the business case today is sound with our operational cost reductions.

And with the investment we make in Smart Grid, we should be able to see or we will see a payoff for customers on a net present value basis.

Okay.

And have you guys come to a determination yet over how long the project might span from a commercial rollout standpoint?

Yes, it's a pretty long rollout.

It's about six to seven years, as I recall.

It starts in about '12 and should be done around '16, something like that.

So it is scheduled.

It's done by geographic territory so we can get the benefits of those areas, evaluate the customer profiles, how they're actually reacting to Smart Grid and then move around to the other areas.

So, since we first proposed it -- if you have followed us for a while, we first proposed it, we reduced the amount of investment about $125 million, in that range.

We have extended the timeframe for the implementation of it.

And we have eliminated the gas-only customers in the plan.

Okay, and has the technology validation from the pilot, has that all been successfully concluded and it's just good to go now in the '12 timeframe?

Yes.

Actually we may be -- the fact that we're kind of a follower to the pack may be good for us as far as vendors and who we can secure for this.

Understood.

Thanks for the great detail.

Jonathan Arnold, Deutsche Bank.

I have a quick question on the Casper rule.

You said, John, I think that your assumption is that it is going to be delayed one year.

Yes.

What would happen if it is not?

And I guess even if it is, are you going to have to make some interim changes in your dispatch practices?

What might be the rate impact on the fuel side of doing that, given the timeline and I guess the slightly later timeline on some of your compliance efforts?

To the big five it really will have limited impact.

We may have to accelerate slightly some investments, and I don't have that exact number right now if we do.

If it moves to 2012.

So, that, I'm not too concerned about.

The impact would be what happens with the smaller coal-fired units.

But I think as we have talked before, those units we think are most impacted by the Mercury rule already established in Michigan.

So that would be -- when the Mercury rule goes into effect in 2015 in Michigan, that will determine the fate, if you will, of those smaller plants.

And as far as what happens to the viability of the customers and so forth, if the rule goes forth in 2012, I do believe you're going to see a quicker closure of some of the coal plants than probably what people are anticipating which, in turn, if those plants are competitive, could raise rates for customers.

And I know that is the case with our seven smaller units, which are competitive today.

But based on the rules that the EPA has come up with, I don't think it is likely that we would put the controls into those plants because of their age and the ultimate cost that is required.

So, to be clear, that is a rule content question rather than a timing issue?

Yes, yes.

So, basically, you're saying your likelihood is that you don't comply on those units unless something changes in the content of the rule.

Exactly.

And those smaller units, just to make clear, can run right now until about 2015, let's say, for round purposes.

Then we have a couple options.

One is to but the controls in and run them, but we need to make those decisions later this year and next year so that we are prepared for the 2015 target date.

If we don't put controls on them we could retire them.

Or a third option, which I think is most likely right now, but we haven't looked at the rule in detail yet, is to mothball them.

And we can mothball them up for three years.

Does Casper not affect those units?

That is what we're evaluating right now, Jonathan.

I want to make sure I fully understand what the impact is of Casper.

Okay, so it sounds like you are anticipating giving clarity a little later this year maybe.

Is that a fair statement?

Later this year or early next year, between those, because we need to make a decision on what we're going to do with those probably the end of this year, early next year.

And how would you view -- in the [event] (technical difficulty) [that you] do mothball or close or have to procure power other ways, any kind of indications what that might do versus your plan of keeping these rates within the rate of inflation?

It shouldn't affect it.

I mean at the end of the day if we close them down, we won't have any O&M associated with those plants, so that would keep our rates lower.

If we do invest in it, yes, that would bring some capital.

But the only reason we would invest the capital in those smaller plants is if those plants would be competitive in the market, which overall would save customers money.

All right, I've taken enough time.

Thank you John.

Thanks Jonathan, appreciate it.

We have no further questions in the queue.

Good.

All right, well, let me wrap up today if we can.

First of all, as Tom said, I know it is a busy day.

Some of you are flying between calls, so let me thank you again for joining us again.

We had another good quarter both operationally and financially.

First half earnings are up 20% and that has really allowed us, as we talked about, to accelerate reliability spending and cover our storm restoration expense.

One thing I want to highlight, too, we have eliminated all nuclear fuel risk with the DOE settlement.

Jim Brunner and his team did a great job getting that one done.

And we remain committed to provide value to our customers and our shareholders.

So, thanks for joining us today and good luck with the rest of your calls.

This concludes today's conference.

We thank everyone for your participation.