CMS能源 (CMS) 2011 Q3 法說會逐字稿

Good morning, everyone, and welcome to the CMS Energy 2011 Third Quarter Results and Outlook conference 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 November 3rd.

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

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.

Good morning, everyone.

Thank you for joining us today on our third quarter earnings call.

I will start 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 as we usually do, we will close with Q&A.

Third quarter 2011 adjusted earnings were $0.53 per share, up a penny from last year.

The utility performed well during the quarter despite higher storm restoration cost and accelerated reliability spending.

The impact of the hot summer -- hot summer weather was largely offset by sales decoupling mechanism.

Year-to-date results keep us on track to achieve our adjusted earnings per share guidance of $1.44 a share.

Now let me give you an update on the regulatory calendar, recent operating milestones, and our plans for environmental compliance.

Many of you are familiar with the Michigan energy law that was passed with broad bipartisan support in 2008.

The specific elements of the law, listed on this slide, provide the foundation for us to invest more than $6.5 billion over the next five years.

Our investments will improve the safety and reliability of our system, further improve the environment, and provide value to our customers.

We were able to make these investments and at the same time keep our customer base rate increases to a level at or below the rate of inflation.

For those of you who do not follow us closely, I want to mention we have a new commissioner and chairman of the Public Service Commission.

John Quackenbush was appointed September 15th, replacing Monica Martinez, whose term ended in July.

We look forward to continuing our relationship with the staff and the Commission, seeking fair and timely recovery of investments as we strive to improve service to our customers and help support the economic recovery in Michigan.

After our third round of rate cases, it is clear that the 2008 energy law is working smoothly and efficiently as designed.

Our rate cases have become streamlined and primarily driven by capital investments on our system and in our plants.

At the same time, customers are benefiting from cost reduction actions that have resulted in lower O&M charges.

A nice situation for both our customers and our company.

In addition to the O&M reductions, customers will also see a lower renewable energy surcharge and a refund related to the settlement agreement with the DoE as we discussed last quarter.

These two offsets will reduce customer charges by $80 million.

Switching to the operational update, we reached a milestone -- another milestone related to the implementation of our smart metering system.

In September, we signed a contract with SmartSynch to provide the advanced metering system for our electric customers.

The SmartSynch system will utilize existing cellular networks for communications, avoiding the cost of building a private mesh network.

Meter installation is scheduled to begin in August of 2012 and continue through 2019.

We received the final land use permit for our 100-megawatt Lake Winds Energy Park.

Construction is expected to begin in the next few weeks for an in-service date by the end of next year.

After this project is completed, we expect to have 8% of our energy supplied by renewable energy sources and on our way to the 10% requirement by 2015.

When we acquired the 935-megawatt Zeeland gas-powered plant in 2007, the plant was being dispatched less than 6% of the time.

That has increased significantly in the four years since we took over operations.

The capacity factor is now up to 19% for the first nine months of the year.

The plant plays an important role in meeting MACT emission reduction targets and fits nicely with our balanced energy initiative.

Our Campbell 2 coal plant completed a record 389-day continuous run before it was removed from service for a scheduled outage.

A remarkable run for a plant that is over 40 years old and a real compliment to our employees and their operational excellence.

Clean air standards is a primary topic of interest these days.

We have a long history of protecting the environment in Michigan.

Years ago, we started converting our coal plants to burn low sulfur western coal, reducing SO2 emissions by more than 70% and saving our customers over $2.5 billion in fuel costs.

Over 85% of our coal consumption is currently western coal, moving to 100% in 2012.

CSAPR mandates further emission reductions by January 2012.

Our balanced portfolio of generating assets will allow us to shift generation from our coal plants to our over 1,800-megawatts of gas combined cycle generation.

Additionally, we are planning to switch all of our coal plants to primarily burning western coal.

This will further reduce emissions and customer costs.

The final MACT rule is expected by year-end.

We already have a state mercury standard that requires a 90% reduction by 2015, comparable to the proposed federal rule.

As a result, we have a head start on implementing these regulations.

The bottom line, we are well positioned to comply with these new laws with the plans we have in place.

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

Thanks, John, and let me add my welcome to everyone on the call, especially during the busy earnings release week.

We appreciate your joining us today.

Adjusted earnings for the third quarter were $0.53 a share, up a penny from last year and a couple pennies from First Call.

For the first nine months of the year, we earned $1.30 up $0.14, or 12% from last year, and this keeps us solidly on plan.

As we mentioned in our last earnings call, storms were particularly severe in July.

This year, our storm restoration cost has been the most severe by far in over a decade.

Even so, we still had sufficient room to continue stronger than originally planned spending to further improve customer reliability.

As most of you know, we take every opportunity we can to increase spending to improve performance for our customers.

We were able to do this without deviating from our plans to produce targeted earnings and cash flow growth.

We know some of you would prefer that we take opportunities to increase our earnings beyond targets.

We are, however, committed to applying extra resource to help our customers without jeopardizing meeting our financial targets.

We haven't missed our targets for nine years.

We also improved results at the parent by $0.03 a share, and that's primarily from reducing financing cost in this low interest rate environment.

For the first nine months, results at $1.30 a share are up 12% from last year.

These results for both the quarter and the first nine months are ten-year record highs.

During the first nine months, sales were up $0.14 driven by improving economy and weather.

The weather improvement was in the gas business, where weather changes are not addressed in the decoupling mechanism.

The cost of extraordinary storms coupled with good efficiencies were within approved rates.

Looking ahead to the fourth quarter, we expect to earn $0.14 a share primarily from approved rates, partially offset by additional spending to improve customer reliability.

This is below last year because of the higher reliability spending and the impact of weather on our gas business.

So let's talk a little bit more about sales and customer rates.

Our industrial sales are back to pre-recession levels, and at the present pace of recovery, overall sales should be back in 2012.

Last year, sales were up about 2%.

We anticipate growth of about 1.5% this year.

That's a little softer than we previously thought.

It includes a strong industrial recovery of 3.5% on top of growth last year of about 10%.

It also includes residential growth of 1.8% and flat commercial sales that we expect will catch up later.

Looking ahead to next year, our experts see growth at well over 2%, but you know us.

We like to be a little bit conservative, so we are predicting closer to 2%.

Candidly, many of our industrial customers are concerned about the political turmoil in the U.S.

and Europe.

Their production levels are strong, but they still worry about financial complications and could emerge from the political wills and the battles that are going on, uncertainty about fiscal and monetary policy here and in the European Union.

Our sense is that many residential customers want to upgrade their automobiles, their homes, and their lives, but uncertainties continue to dampen consumer confidence.

You can see in October we are at the low levels of the recession.

For example, used car prices are high and supplies are low.

That's a strong sign that new car sales should continue to grow.

Accordingly, the U.S.

automotive production is scheduled to be up about 30% in the fourth quarter.

Customers want and need in many instances to replace their old cars and trucks.

The seeds of recovery exist.

It is sort of our national recovery to lose.

So in our service territory, we are seeing a good recovery, but we too are planning conservatively in case political disagreements dampen future confidence.

Looking to our end process rate cases, there are two major themes we continue to follow.

First, the bulk of our requests involve investment.

Investment for projects that are needed, rather than those we would just like to do.

Second, to help keep rates down, we target to keep our O&M flat to down.

We have requested reductions in both our gas and electric filings.

Now, as John mentioned just a minute ago, we also identify ways to reduce the impact of increases in prices to our customers.

For example, the offsets reduced the impact of our requested electric rate case by $80 million, holding the customer increase to 1.6%.

And on the gas side, lower fuel cost will more than offset the gas rate request of 2.2%.

Now, with this next chart, you can see our passion around maintaining responsible customer base rate increases at or below the level of inflation.

We could be investing almost $10 billion over the next five years, but we have self-imposed a limit to about $6.5 billion for the 2012 to 2016 period.

More investment would increase earnings and cash flow, but at a higher level of rate increases that we do not believe would be sustainable.

This unwritten pact with our customers is important to us, and we believe core to our successful plan to grow earnings and cash flow in a sustainable manner.

Now, talking about cash flow, here is our standard summary of cash flow for consumers and the CMS pairing.

The small level of tax sharing reflects the large level of bonus depreciation at consumers.

In total, we continue on plan with key financings complete.

With equity markets and discount rates down, I suspect you are hearing from others about the cost of pension and healthcare obligations.

Recall we pre-funded 2011 pension contributions in 2010 as bonus depreciation benefits provided some headroom.

We fully complied with the funding requirements in the Pension Protection Act.

As determined by the Act, we are 80% funded.

We may do some more pre-funding, but that decision is yet ahead for us.

As you know, we seek to pre-fund our parent debt one or two years in advance.

We do that in our belt-and-suspenders approach to minimize exposure to our non-utility debt maturities.

In addition, we carry a thick level of liquidity at 40% of market cap.

That's larger than most of our peers, which is closer to 20%.

This provides a further buffer to debt maturities and provides for strong risk mitigation in these interesting financial markets.

Some may think of this as a belt, suspenders, and a sky hook level of conservatism, but it is an approach that has served us well.

Here is our standard profit and cash flow sensitivities chart.

You can use it for this year and also for 2012.

It reflects risk mitigation measures already in place.

Now, please note the ROE sensitivity.

The Commission recently reset Detroit Edison's authorized ROE at 10.5%.

We have shown here a 20 basis point drop in our authorized level, both at electric and gas, to help you assess alternatives.

We are comfortable with our ability to manage the level of change shown here.

We have designed our plans to accommodate this if required.

Tools include managing our level of utility equity, capital spending, incentives not included in the authorized ROE calculation, like our energy incentive performance, and modest earnings growth outside of the utility.

I hope you find that our earnings and dividend track record speaks for itself.

We continue to be comfortable with our 2011 earnings guidance at $1.44 a share, and we have an opportunity to grow our dividend further.

We are on track to deliver on all of our financial targets as shown here.

We feel good about our prospects for next year.

John and I look forward to seeing many of you at the upcoming EEI conference where we will present on Tuesday, November 8, at 8.15 AM.

And on February 29th, we are planning an Investor Meeting at the New York Stock Exchange to celebrate our 125th anniversary, as well as our 65th year of being listed on the Exchange.

We look forward to seeing many of you at these events.

We would be pleased to answer questions that you have now, so, Jeff, would you please open the line for questions.

Thank you very much, Mr.

Webb.

The question-and-answer session will be conducted electronically.

(Operator Instructions).

Our first question comes from the line of Kevin Cole of Credit Suisse.

Please proceed.

Good morning, guys.

Thanks for taking my call.

Good morning.

Hey, thanks for slide 16.

Can you actually go back through it and readdress the three levers that you stated to offset any ROE degradation?

Happy to do that.

Again, let's put it in perspective.

You see our authorized levels of return at electric at 10.7% and gas at 10.5%.

What we did is we provide you with a little sensitivity for 20 basis points, which is maybe consistent with what you are seeing in other rate orders.

Things that we could do, we have a chance to manage the level of equity we have in the utility.

There is always a little room to put a little bit more in there.

We also have a chance to do a little bit better on our EO performance.

The incentives we get there are actually calculated outside on top of the authorized ROE.

And we plan conservatively on that.

We don't put all of those savings into our initial plans.

We work our way there.

There is also the chance, of course, we can adjust our capital spending a little bit.

Just tune that down a little bit, defer it a little bit, do the sort of controls we have been talking to you about for some time, and that can have an impact.

And then lastly, we don't have a lot of business outside of the utility.

We are core in the utility, but we do have a little bit in our enterprise organization, as an example, and we can always tune that up a little bit.

We're looking for ways -- these have been soft markets, as you would imagine, for IPPs.

So as we begin to see that turn, that may contribute a little bit to our earnings as well.

We see adequate flexibility and actions that we can take to do our job, earn the authorized ROE, even if it might be a little bit lower than where it is today.

I guess, then, does this annual mark to market of the ROE make sense anymore?

And would you look forward to maybe trying to extend out your rate cases a little bit given their largely capital focus versus rate mechanism focus?

Kevin, that's a classical answer, I have to admit, where it is enticing to say that if you think the trend of ROEs is down, you want to go into a rate freeze and stay out.

It's not where we are.

As long as we have our large capital investment program going, we are very happy to bring that forward each year to make sure we recover on a timely basis the investments that we are making.

And recall, we are working very hard to try to go into every rate case with O&M flat to down a little bit.

So we are actually giving something back if we can bring it down to our customers.

And that's our intent.

The other nice thing is we will get to recognize the portion maybe of decoupling, if that changes around the economy, so that with our annual rate cases we are still held neutral.

We get to pick up our sales.

And even though we are all a little nervous about where things are going, you can see the track record on sales.

It is certainly an upside if that is something that is not decoupled as we go into the future.

So for us, it is an annual case.

There could be conditions changing in the future.

Nothing we know of formally or officially.

But if we were to ever track investment, for example, I would admit there would be little reason for us to go in for annual rate cases.

But at this point in the game, that's our plan.

Thank you.

And so I guess it sounds like you are very confident in your 5% to 7% EPS growth, and is this confidence shared by the Board as well as the recent, I guess, ROE question?

I will let the CEO and one of our board members answer that.

We are not changing our focus.

The 10.5% that DTE received -- or Detroit Edison is just slightly below what we have in the electric business.

Our guidance is still the same for this year and we expect to grow as we've told you in the past.

You are still looking to revisit the payout ratio?

Revisit what?

The payout ratio.

We will be talking about that.

We expect it to grow with our earnings, but we're also going to address that with the Board in the upcoming meeting in January.

Great.

Thank you, guys.

Thank you.

Our next question comes from the line of Greg Gordon with ISI Group.

Please proceed.

Thanks, good morning.

Good morning, Greg.

So my first question was just answered.

So you will talk to the Board about dividend policy again in January?

Yes.

That's usually the time that we do it.

And as we have said before, we expect the dividend to grow in line with our earnings growth, but we will address it because we do know we are slightly below the average of our peers.

Great.

I guess my second question goes to just connecting the dots on a couple of slides.

You talk about on slide 7, because of the MACT rule, the potential for having to scrub.

And then on slide 13 you talk about the $6.6 billion of planned CapEx could be as high as $10 billion, and none of those four bullet points on things you are spending is environmental remediation.

Is that, in fact, one of the things that's in that $6.6 million plan, or is that an unfortunate upside that may be foisted on you?

I like your characterization, Greg.

Let me just make sure everyone is clear on slide 13, because it might not be clear.

What we tried to show are some of the things that are not in our $6.6 billion that are in this -- I'll call it theoretical $10 billion, because it is not our plan.

We have all the pipeline replacements and all the upgrades that we need to do to meet the laws.

But we would like to accelerate that some and folks would like to help us do that.

We would like to do more pole replacements just to stay ahead of the game to help our customers.

We may need new gas generation as we go through time, and we certainly would like to do our smart grid faster, but these are all things that aren't -- they are things that we want, and they are not things that our customers absolutely need right now.

So something like a change in the laws for environmental, those would be things that we would need to do.

All those costs that we just described for the five-year period are included in our plan.

So they are in the $6.6 billion already.

I mentioned when we have been out on the road with folks, that the timing is a little bit different because with the new rulings that came out, we had to adjust forward about $100 million of timing in this period.

But in the period in total, we were fine.

So I would tell you that our goal is, when something is foisted upon us, if we can, we will look for a way to rebalance the portfolio to keep the sorts of investments we need to do over the next five years at a level that keep the level of our customer rate increases down to a sustainable level.

Now, $6.6 billion is not an absolute number.

That's the other thing I think everyone should know.

If that number were $6.8 billion or $6.4 billion or anything like that, it is just not that big a deal.

But being in that general range, we think, is important for sustainability.

Does that help?

That's perfectly clear.

Thank you.

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

Please proceed.

Good morning.

Could you just elaborate a little bit on your enterprise segment comments?

It seems like that segment has been on an $0.08 EPS run rate.

You mentioned that there could be little bit of upside.

Just curious if you could provide more detail on that.

The numbers are small, and in total, if you think of enterprises in the small bank we have, I think the numbers you are referring to are probably about right.

But in part, the numbers are small because we haven't put a priority there.

We haven't invested money there.

We've put all of our investment against the utility where we think it is appropriate and is our strategy to do so.

However, I would also tell you, anyone following the markets knows for IPPs that this is not a good time.

Prices are down.

Capacity factors are down.

So it is hard to make a lot of money in that end of the business.

So as the market turns around, there is an opportunity for that contribution to us to naturally enhance a little bit as we go through time.

But I would caution everyone, it is a small piece of our business.

It is not where we are focused on the core, but it is a piece outside that may provide us a little extra earnings growth outside of the authorized ROEs.

Is there any ongoing evaluation of the enterprise segment and the potential sale of that business, and maybe utilizing the proceeds to pay down some of the parent debt?

We are always looking at all of our business in terms of what is the right mix of the portfolio.

I am always hesitant to say that we might do this or we might do that because then somebody out there thinks it is a plan.

So if you would take that context, I would tell you that we do keep an eye on the market value of the little bank that we have and the market value of the enterprise organization and the market value of some of the things in the utility, and we keep our eye on that to determine, are we optimizing for owners the right benefits?

Are we earning the right kind of returns and the right kind of profitability that is better than what we could do alternatively?

And it is why, number one, we have most of our investment all focused into the utility at those good ROE levels, and number two, we are always looking at options.

But I will tell you, we are very proud of the enterprise team and that little bank team with the work they are doing keeping their risk down and their returns up and providing a small but important contribution to the company.

And then lastly, just the potential pension contribution that you have earmarked on slide 14.

It should be -- should we be aware of any earnings impact in relation to the possible funding scenarios in 2012?

That's a good question.

Let's take it in two pieces.

First of all, on the funding side, we treat it like our debt.

We try on the parent debt side to stay ahead about a year or two in terms of the requirements.

Although the pension is more in the utility than it is outside, we also look at that as an obligation that we have.

So we look to stay ahead of the game on that.

And you remember last year we funded early, and when you do that, it improves your position in terms of being funded.

But it also gives you a little bit of an earnings upside, to be candid.

We will be looking at that opportunity more toward the end of this year when we see how returns and discount rates are playing out.

Let me shift gears to a second related but different piece, and that is I'm sure you are hearing from folks that with discount rates falling and interest rates falling as low as they are, that puts pressure on the size of the pension and OPEB liabilities.

So therefore it is a hurt and it is a hurt to us.

There will be several pennies of penalty when that number is known at the end of the year, and we don't know it because it is not determined until you have actuals, but that cost us some earnings power.

We've built all that into our plans looking ahead, and we feel very comfortable with what John said about the 5% to 7% growth as we go forward in time even with those pressures.

But yes, those pressures are there.

The other side of that coin that I would just mention is recall that when discount rates fall because interest rates fall, that costs companies a little more because of the then higher present value of their liabilities so it hurts their earnings.

But when those turn around and come back up, it is going to help their earnings.

So our view has always been manage it.

If you have got bad news, figure out how to address it and continue to meet your guidance for growth.

If you have got good news, invest that.

Help your customers out if you can, if you have some surplus to do that.

Does that help?

Yes, it does.

Thank you very much.

Thank you.

Our next question comes from the line of Paul Ridzon from KeyBanc.

Please proceed.

Good morning.

Good morning.

Your ROA sales fell significantly.

I assume that means that people are coming back to you.

What are the implications of that?

No, I think what you need to see there is when you are looking at those sales, those are their sales.

They are customers that are out of our bundled service.

But we are showing you because we still deliver power to them.

We may not be the source of it, but we still deliver it.

So we show you how they are doing, up or down.

And what you saw was for those customers that are out there, their sales fell off a little bit.

Customers in bundled service on the other side were up a little bit.

You saw that too.

We are still at the 10% level.

You should not think that we have come below the cap.

So the drop of theirs and pick-up on your industrials are not the same customers?

Different customers, that's correct.

Looks like you picked better customers.

Not fair.

Let me just tell you, we love all our customers whether they are in bundled service or not.

We are trying to help them all.

Thanks for clearing that up.

Our next question comes from the line of Steve Fleishman with Bank of America Merrill Lynch.

Please proceed.

Hi, good morning.

Good morning.

Just a quick question, really, relevant to your position versus the recent DTE order.

My recollection in the past was that DTE had typically been allowed a higher ROE, and they used to say partially because they served Detroit was one of the specific regions, and as kind of a higher risk factor.

And I don't believe that was included in this last order, so this kind of historic differential between your allowed ROEs and DTE's, was that in your mind the main reason it was different?

And thus, how do you think about whether there should be a differential there going forward?

Steve, I mean you summed it up well, I think, in the past.

The issue with this order, and we're going to let DTE talk about the order.

That's not our business.

That's theirs.

But we look at the orders to see if there is some consistent application between the two companies.

And the one thing that came out in this Commission, which is -- keep in mind, a new chairman in this Commission -- looked at it and the language is pretty clear.

They talked about the 10.5% being justified or the change based on the improvement of the capital markets, the economy, and the Michigan energy law.

So it looks like what they are doing is building this from the bottom up to achieve the 10.5% rather than the top down.

And I think that's important for us because I don't -- at least I don't sense much change in that justification and rationale from last week through our order in June.

I just don't see dramatic changes in those factors between now and then.

Okay.

And it was nothing that indicates a differential though between that specific company relative to that?

It was more generally Michigan.

Yes because, Steve, the last one you are right.

They designated the difference in areas.

This was strictly about the capital markets, the economy, and the Michigan energy law.

And we have the same economy, we have the same capital markets, and we have the same Michigan energy law.

And then how about from a balance sheet standpoint, the two companies?

Are they roughly similar?

If I can answer that, the utilities are similar.

But you need to focus at the parent structure and we still do carry a little bit of a more difficult credit rating than they do.

So that is a downside for us.

But do keep in mind the liquidity information we talked about.

We kind of have that built into our earnings from the bigger picture because we actually carry more liquidity than most companies and we pre-fund our debt.

That cost us a little money to do, and so that probably is built into our numbers.

Okay, thank you very much.

Thank you, Steve.

Our next question comes from the line of Jonathan Arnold with Deutsche Bank.

Please proceed.

Good morning, guys.

Hey, Jonathan.

You talked about having your experts saw growth well over 2% for next year, but that you were being conservative in going with 2% sales growth.

Can you give us any granularity in terms of segments, where that 2% is coming from?

Yes, I can.

I think that's a good question for 2012.

Our experts do some very good modeling, and based on the information they have, they have a number, and I will be candid with everybody that it's closer to 3% than it is to 2% for the overall.

But they see the residential, which has improved nicely this year, flattening out a little bit for next year.

They see commercial coming back a little bit, because remember, that's been flat to down.

That's sort of the last segment to follow.

And those folks actually see the industrial side continuing to pick up and in their numbers closer to 7%, maybe 8%, because they see certain segments that usually trail in a recovery.

Now, we are cautionary about the whole thing, and I know some people think we are just too doggone conservative but things are pretty uncertain right now in consumer confidence, and what I tried to explain with industrial confidence.

So even though companies -- many companies are doing pretty well, and some are even expanding, they are all a little bit nervous.

So we would rather be a little cautious and share with you our judgment that we should be looking for something closer to 2% overall next year.

And if we are wrong, and it is better, wonderful.

Tom, when you say your experts, is it your internal forecasters?

It is our own team.

And what we do is we contract with people who provide us data on economic growth specific to each county in Michigan.

So we have a chance to get a lot of information that is very useful to us.

And then our experts do a good job, whether they tell us what we want to hear, which is good news, or they tell us what we don't like to hear, which is bad news, and then we take that.

And typically what we do is try to be a little conservative, particularly if they see growth bigger than like we are seeing this year.

So they are internal experts using a lot of outside information.

And your 2%, does that include any particular estimates for residential?

No, I will be fair there.

We did an overall dampening rather than just trying to say any one particular segment.

I would tell you based on everything we know, saying residential would be flat, assuming there is not a severe double dip.

That's an assumption I am making.

We'd be flat, that's fair I think.

Assuming that commercial is going to come up a little bit, I think that's reasonable, but not a lot.

And I do think that the industrial side, there is still more room for year-over-year growth.

So we will see that, but I would say it is in that segment we are trying to be a little more conservative than what the experts tell us.

And we are just trying to be very open with you.

We are not -- we don't want everyone to think that we are trying to suggest something a lot higher or worse.

We are just trying to tell you exactly what we are thinking.

Thanks a lot.

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

Please proceed.

All right, just to follow up on that, what kind of GDP growth is the 3% based off of?

I mean, how economically sensitive is that?

It sounds like a lot of it is industrial.

It is, and I will give you a number just -- yes, it is about in that higher number for overall in the state of Michigan about 1.5% GDP growth is what is in there.

And so therefore, you can believe we are implicitly sort of dampening that a little bit.

So the 1.5%, if it was that high, it would lead to that higher number, and you guys are being a bit conservative with respect to that; is that correct?

We are.

That's right.

And remember what we have given you is sort of a Michigan number for GDP, but what we give you in terms of our projections on sales are service territory, so the little disconnect there.

And then just from a national perspective, is there -- I would assume a lot of this has to do with the national economy, or am I wrong?

In terms of obviously that kind of a sales growth number and so much being industrially oriented.

I am just wondering is there a national number that influences this?

Or how should we think of that?

You know, the national number hits some of our customers, our companies, from the standpoint it can drive automobile sales.

It can drive furniture sales.

It can drive those sorts of things, which comes back and hits us in our service territory.

So the way I would characterize this, if this is helpful, is that we have not projected even in our conservative numbers a big double dip for the nation or for the state.

But we are worried, and that's why we are being cautionary because consumer confidence has come down in the last couple of months, and when we talk to our industrial customers, and John and I and the whole management team partners up and talks to two or three of those customers on a regular basis.

They may be doing well.

Their production may be full out right now with schedules that are full out for the rest of this year.

But they still worry what is going to come out of Europe?

What is going to happen in our election process?

And so it makes them nervous, and in a nervous environment, that's hard to make solid predictions.

What I can tell you is that the decoupling mechanism certainly gives us some insulation in the state of Michigan, which is a helpful thing.

And on top of that, we just plan conservatively so that when bad things happen we are able to deal with them if they do.

Great, thanks a lot.

No, thank you.

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

Please proceed.

Thank you, good morning.

Good morning.

I wanted to come back on the ROE side question again.

Given, as you point out, some sensitivity in the state on that, can you just remind us, when you budget out the CapEx that is built into your rate case, what is the implied ROEs for the utilities that comes out to?

Because as you point out in your own presentation here, our ROEs currently on an LTM basis are above your current authorized levels.

So what does it equate to when we look at the forward CapEx, etc., that is built into the rate base?

As far as going forward for electric, we are looking at 10.5% and for gas, 10.3%.

When you think about the financials where we are today, as we work through the year, we expect to be very close or at our authorized return on equity on a weather-adjusted basis.

So a snapshot sometimes doesn't really do it, because between the sales, the spend, the timing of the spend, and when the equity infusion occurs, it does, on a rolling basis, have an effect on that.

Okay.

And then on the legislative front or even on the regulatory front, John, in the past there have been rumblings about expanding that retail open access cap beyond 10%.

Nothing really has happened but can you just give us an update on where things stand, and are there any bills being contemplated or what are you hearing?

Yes, there are -- Senator Nofs, who runs the Senate energy committee, is conducting some hearings on the entire base of the standard.

It has been a few years since it went into place.

The most you hear about is the noise on the retail open access cap.

I will tell you, next week I am presenting, along with the Michigan Chamber, the Detroit Chamber of Commerce, the Michigan Manufacturers Association, DTE is going to be there also, all testifying in support of where we are today.

And so we are going to make a point to the Senate about how important this law is to Michigan, the jobs it has created, the investments it has created.

And we've got some unique positions that we are going to talk about.

Because keep in mind, this is the second energy law that occurred in Michigan.

The first one was back in 2000 when a lot of expectations were set and very little came out of it.

So that's why the 2008 law was put into place.

So that's where we are today.

I think it is being pushed opening the cap by some customers and also because we are at the 10% cap.

But also from the standpoint of some outstate suppliers that would like to get into Michigan and do some work.

And my focus will be, and you will hear it next week at the Senate hearings, we are the second largest investor in the state of Michigan.

We are the seventh largest employer.

We want Michigan to be successful.

We are here for the long run.

Our rates over a long period of time are consistently competitive.

With the recession we have had over the past couple of years, despite Tom seeing the recovery, we are still coming out of that recession.

And with the natural gas prices, some of the coal fleet is not as competitive in our contracts as it used to be.

But that will begin to change in the future as we see the sales come back, and as we see natural gas prices increase, but not a lot, and as we see the impact of the environmental rules on the fleet throughout the Midwest.

And on the ground, are you getting any sense that there may be any additional support for increasing that cap in the legislature?

No, not -- it is the same group that's been talking about it.

It is a handful of people, Ali.

It is not a group.

I think we have shared this with you.

There are 300 customers taking choice today that reach the 10% level of our 1.8 million customers.

And those customers that take choice have shifted cost to other customers to the level of $180 million.

That's pretty expensive.

And if you want to raise the cap, more will be shifted to other customers.

That's why groups like the Michigan Manufacturers Association and the Michigan Chamber of Commerce don't want to see the cap raised because they don't want to see their customers take the impact of the shift for the very small number of 300 customers that are taking choice.

And last question.

As you talked about in January, you'll look at the dividend payout like you do annually Give us a sense -- I mean, from your perspective, when you benchmark against your peer group, as you guys look at it, what kind of payout ratios are you seeing as kind of the benchmark average that you referred to earlier?

I guess it is not what we are seeing; it is what you see.

But our peer group is generally around 62% payout ratio.

As you know from our numbers, we are slightly below that.

That tends to be where we are as far as where the peer groups are.

We will have a discussion about that with the Board.

But again, keep in mind we made a significant increase in our dividend in August of last year.

So we accelerated the dividend and increased it faster than what most people expected.

We will look at it again in January knowing full well that our peers are at about a 62% payout ratio.

Understood.

Thank you.

Thank you.

Our next question comes from the line of Carl Seligson with Utility Financial Experts.

Please proceed.

Good morning.

Good morning.

Curious as to what you are doing in the area of energy efficiency.

Are you promoting it in any way?

Are you giving away free bulbs?

What are you doing, and what kind of results do you think you are seeing as a result in reduced sales?

We are doing it in a big way.

We have a target and a law to reduce our electric sales by about 5% over a five-year period and about 3% in the natural gas business.

We are not giving away light bulbs, but we are offering discounts on light bulbs, which is a very small impact to the whole thing.

I believe personally, the Company believes, and I think the State did with the passage of the law, the cheapest form of energy is energy efficiency.

We think we can be at about the $0.02 a kilowatt hour range for energy efficiency for incentives that we provide.

That's about the impact of energy efficiency costs.

We have been in the program for two years now.

Our customers have saved $67 million.

So the payback for what we spent to incent compared to what they have saved is about a two-year payback.

In some areas it is very effective, less than a year.

And in others, particularly low income, it takes a much longer time to make up that difference.

So we are supportive of it.

I think it is good.

On the benefit to the shareholders, we also were incented with the current law to be able to, if we hit targets, exceed targets by over 100%, we are able to get a premium return for the money that was spent.

And we have achieved those the past two years and expect to achieve all or most of those going forward.

And lost sales are treated in what way?

Lost sales are treated with decoupling, so there's a decoupling mechanism which, on the electric, decouples everything, the weather, the economy, as well as the energy efficiency.

The Detroit Edison case that just recently came out, they focus primarily on the energy efficiency with a band of about 1.5% a year.

Thank you.

You're welcome.

(Operator Instructions).

Up next we have Ted Heyn with PointState Capital.

Please proceed.

Good morning.

Good morning.

I had a quick question regarding your comments on the environmental rules.

I think you mentioned that you currently burn 85% western coal and you're looking to move to 100% in 2012.

I wanted to get a sense of is that -- are you thinking about increasing your consumption of western coal, or is that a function of running your gas plants more than your coal plants, or just a little more flavor around it?

It is the latter.

What we'll do is we will have the capacity to burn 100% western coal next year.

Based on the market prices today, we will schedule the coal fleet differently than we do today.

So when we minimize some of the loads, we will be able to burn more western coal, the output is less.

But that is what will get us to the 100% western coal.

So we will take a little bit of a hit on de-rate, but we will be able to burn more western coal which will allow us to hit the targets -- hit the emission targets as well as save our customers some money.

So you are not necessarily ramping down your actual coal generation and replacing it with gas.

You are essentially just replacing your Central App coal generation with PRB.

Is that the right way to think of it?

Think of it both ways.

Ramping up and down of the coal generation, burning more western coal, which reduces the output of the plants.

So -- and the output of the plants being reduced will be replaced with the usage of some of our natural gas combined cycle units.

So the latter part of that is the economic dispatch, which again, that meets emissions.

And in today's world, it meets the economic test, but on the other side of it, we will have the capability to burn western coal, which will allow us to improve our emissions, meet the targets, reduce our costs, but also eliminate some of the output of our coal-fired plants.

And then just secondly, you talked about the potential spend on incremental other than your big four coal plants.

Five.

Big five coal plants, excuse me.

Where would that be -- where would you be spending that to meet the MACT rules?

Yes.

The way to think about that is we have seven smaller coal plants that are pretty competitive, and in reasonable times they are dispatched on a regular basis.

We have to make a decision.

Do we upgrade those for all the new EPA regulations, or do we mothball those, or even close those?

So that decision is out in front of us, and we will be making that in the near future.

And so the optionality is pretty good here.

You could upgrade them, some or all of them, or you could mothball or close them.

And that is a decision we haven't had to make because we don't need to make it in the immediate future here, but we will be looking at it real carefully as we balance our plans.

That's an upside to spending, of course that's not in our $6.6 billion as well.

And then, John, just to clarify on the first question I had.

I think you burned about 10 million tons of coal a year?

That's correct.

Could you kind of give me a flavor in 2011 how much of that was cap versus PRB and how much you are expecting to burn in 2012?

85% western was this year, and so assume for numbers, that's a good basis for next year, because we are going to de-rate some of the plants, even though we have the 100% capability.

So we will burn more western, say 10% more western, rough numbers, and eastern, we'll burn less.

So you will probably still be around that 10 million ton range or maybe a little bit less than that?

Yes.

Actually the tonnage will probably be a little bit higher, because we will burn more western coal, which means more volume.

So lower heat -- okay, got you.

Thanks a lot.

Ladies and gentlemen, that will conclude the question-and-answer portion of our event.

I would now like to turn things back over to Mr.

John Russell for closing remarks.

Thanks, Jeff.

Appreciate it.

Let me wrap up today by thanking you all for joining us.

We had another good quarter of operating, financial performance, despite the severe storms that Tom and I talked about.

The results for the first nine months are ahead of plan, allowing us to accelerate reliability spending and improve value to our customers.

We are on track to achieve the guidance that we provided you at $1.44 a share and we look forward to seeing all of you or many of you in person at the EEI meetings in the next couple of weeks.

Thank you for joining us.

I appreciate it.

Ladies and gentlemen, that concludes today's conference.

We thank everyone for your participation and have a good rest of your day.