CMS能源 (CMS) 2015 Q3 法說會逐字稿

Good morning, everyone, and welcome to the CMS Energy 2015 third-quarter results and outlook call. This call is being recorded.

(Operator Instructions)

Just a reminder, there will be a rebroadcast of this conference call today beginning at 12 PM Eastern time, running through November 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 Mr. DV Rao, Vice President and Treasurer, Financial Planning and Investor Relations.

Good morning, everyone, 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 news release issued earlier today and the presentation used in this webcast are available on our website.

This presentation contains forward-looking statements which are subject to risks and uncertainties. All forward-looking statements should be considered in the context of the risks and other factors detailed in our SEC filings. These factors could cause CMS Energy's and consumer's results to differ materially. This presentation also includes non-GAAP. A reconciliation of each of these measures to the most directly comparable GAAP measures is included in the Appendix and posted in the Investor section of our website. Now let me turn the call over to John.

Thanks, DV, and good morning, everyone. Thanks for joining us on the call. I missed the last earnings call due to emergency surgery. Now I'm back and feeling good, and I want to thank the management team for doing a great job while I was recovering. Now let's get to business.

I will begin the call with an update on earnings, provide an operational and legislative update, and talk about some recent renewable energy developments and how those fit into the generation portfolio. Then I'll turn the call over to Tom, and he will discuss in greater detail the quarter and additional upsides.

Adjusted earnings per share for the first nine months were $1.51. This is up $0.09 from last year, or 10% on a weather-adjusted basis. Today we are raising the bottom end of our 2015 adjusted earnings per share guidance by a penny, to a new range of $1.87 to $1.89. This is up 6% to 7% over last year. In addition, we are introducing 2016 adjusted earnings per share guidance of $1.97 to $2.01. This is up 5% to 7%, which supports our consistent and year-over-year predictable performance.

Here is a view of our past performance and future expectations. Our past earnings performance has been consistent and predictable. We are confident in our plan to achieve the higher end of earnings growth. Further growth upsides not in our plan include more renewables, new capacity, and more investment in our gas system, already one of the largest in the United States with 1.7 million customers, 29,000 miles of distribution and transmission pipeline, and over 300 billion cubic feet of annual deliveries.

Operationally, we continue to have strong performance. Both electric and gas residential customers rate us in the first quartile for customer satisfaction. We continue to leverage our large gas system with low natural gas prices and the largest LDC gas storage system in the country. We have invested more than $400 million in gas transmission and compression in recent years, and our customers are benefiting from that investment. Our customers are paying 60% less for natural gas than a decade ago, creating headroom for additional investments.

Overall, the business is operating at a very high level, and we are setting Company records in safety, reliability, and generation. Recently, our Whiting Unit 3 coal plant completed a record continuous run of 679 days. That is the sixth-longest ever in the US. Our major projects continue on schedule. We are seeing better-than-expected results from the Ludington upgrade; smart meters are being very well received by our customers; and we're adding more gas compression.

In addition to the strong operational results, we have had a string of recent economic development wins. Our strategy has been to partner with state agencies and target companies looking to expand or site new facilities in Michigan. As these customers begin operations, we should see an increase in our sales and a lift to the overall economy.

The update: the Michigan energy law continues to move closer towards the goal line. The Senate and House are closely aligned, and final bills are expected after hearings are completed this month. Over the next two months we expect committee and full votes from both the Senate and the house. This will allow time for the governor to sign the bill into law by the end of the year. The comprehensive update will help to eliminate unfair subsidies, and the integrated resource plan will ensure there are sufficient resources in place to meet the supply needs of our customers and to comply with federal and state environmental regulations. But as a reminder, our long-term plan is based on the existing 2008 energy law, and not changes to this law.

We are not waiting for new energy legislation to introduce more renewables into our portfolio. Recently we signed a competitive wind purchase power agreement. The 100-megawatt contract spans 15 years with an option to purchase. We have broken ground on the state's largest solar garden at Grand Valley State University's campus. By the end of 2016 we plan to have 10 megawatts of utility-scale solar on our system. These additions to our portfolio will increase the renewable energy share beyond the 10% required in the 2008 energy law. With the retirement of seven coal units next spring, our coal mix will shrink to less than 24% of total capacity by 2017. The addition of the Jackson gas-fired plant will add more flexibility while reducing operating costs. The major expansion at our Ludington pump storage facility also will improve our portfolio.

Overall, we are in a good position to meet the EPA's Clean Power Plan. Although there still is a lot of work to do, we expect Michigan to be fully compliant by the deadline.

Now I will turn the call over to Tom to discuss the third-quarter results.

Thanks, John. Welcome back. Thank you for joining our call today, everyone. We appreciate your interest in our Company and for spending time with us today.

Our third-quarter results at $0.53 per share reflect continued consistent progress, up $0.16 from a year ago. All business units exceeded plan for a strong quarter. For the first nine months, earnings at $1.51 a share were up $0.09, and on a weather-normalized basis, earnings were up $0.13 or 10%. As you can see here, and as usual, strong performance positions us for delivering the high end of full-year guidance. As shown in the dotted circle, cost performance continues to be robust. This slide has become popular with many.

Higher than planned cost reductions and favorable weather provide substantial room for O&M reinvestment. This improves customer reliability, generates incremental productivity, and accelerates a planned major outage at DIG from 2016 to 2015. I just walked the DIG site, and the outage is going very well. The acceleration accomplishes two benefits: accelerating the outage cost into 2015 when we have ample room to absorb it, and freeing up capacity in what will be a tight market in 2016. In addition, you may recall that we will be increasing DIG's capacity by 38 megawatts to 748 megawatts. The impact of this reinvestment in 2015 makes it easier to achieve better reliability and profit next year.

While we're on the subject of DIG, the Ferrari in garage, you can see that the engine has been purring. As capacity prices in Michigan have risen, we've been layering in profitable contracts. Over the next few years we could feed our plan by as much as $20 million; and if capacity prices reach the level of [Kona], as much as $40 million. For example, in 2017 about half our capacity and a quarter of our energy is still available. We're discussing a contract now that could use some of this and increase profit by about $15 million to about $35 million in 2017.

The bulk of our growth, of course, comes from our gas and electric utility investment. Please remember that our earnings growth is not predicated on utility sales growth or cost reductions. Upsides from these are directed to our customers. These do, however, create headroom for more capital investment. Our capital investment program over the next 10 years is 45% greater than the last 10 years. That's 45% greater. More than a third of this investment is for gas infrastructure. While many see more convergence, we are fortunate to already have a rich mix of gas in our business.

As a percent of market cap, CMS investment exceeded 10% over the last 10 years. It is at 16% over the next 10. The opportunity to increase investment by another 30%, or $5 billion, to over $20 billion, continues to be practical, particularly when many of the investment opportunities do not increase customer bills. Some of the opportunities include capacity for retail open access customers should they choose to return to bundled service; more renewables; additional gas infrastructure; and replacing PPAs with new generation that will reduce customer bills.

Many have commented on our model that starts with the customer and enhances results for investors. This organic capital investment program does not include any big bets. It is, however, what drives our earnings growth at 5% to 7%. We are able to self-fund much of this growth, keeping base rate increases at or below the level of inflation. Our 5-year plan includes O&M cost reductions worth about 2% a year, a conservative forecast of sales growth at about half a point a year, the ability to avoid the need for block equity dilution worth about another point, and other. This self-funds five points of growth without raising customer rates. This is a big win/win, with earnings growth at 5% to 7% and customer rate impacts that stay below inflation.

Our model is simple. Perhaps it's a little unique. And we have many capital investment opportunities that just aren't yet in the plan. Most of these can be accomplished without increasing customer bills. For example, replacing PPAs as they expire, and the potential that customers on ROA may return to bundled service, provides incremental capital investment without increasing customer bills. Imagine adding the equivalent of about a new 700-megawatt gas plant every few years for the next dozen years, and that is on top of our plan.

Here is some of the detail around cost reduction actions, down nearly 3% a year on average since 2006. Looking ahead, we don't do it by squeezing a rock. We achieve our reductions with good business decisions. For example, as we switch from coal plants, which require substantial number of people to operate, to gas generation and wind farms, which require about 10% of the workforce needed to run coal, we are able to reduce our O&M by about $35 million. For another example, as we lose about 400 workers a year through attrition, new workers are added at a savings of about $40,000 each. This comes from decisions made years ago to bring new hires in with defined contribution plans rather than defined benefit pension programs, and on more competitive healthcare programs. This saves another $35 million.

While we have a clear plan for how we will continue our cost reductions in the future, we are working on new ideas. For example, our call centers are too busy. As we introduce better service, billing, and emergency mobile applications, we can respond faster and reduce call center workload. This reduce costs. Second, new technology will permit us to modernize the grid more efficiently and maintain our systems at a lower cost. A line-loss reduction of one to two points could save $25 million to $50 million. And third, as we improve customer quality through better work processes, we will save on overtime costs and temporary workers by simply doing it right the first time. Nearly one third of the time when we roll our trucks on a job, something goes wrong. The right parts are not on the truck or other parties who need to be on site are not on time. We are aggressively pursuing these opportunities to improve quality for our customers. Cost reductions come for free.

Let me take a minute to update you on the economy and sales outlook. Since 2010 through last year, Michigan's GDP is up almost 14%. That is the third best state in the union. And the largest city that we serve, Grand Rapids, is up 21%. That is among the top 10% of all cities. You can see the strong economic data for Grand Rapids compared with Michigan and the US on this slide. We continue, however, to plan sales conservatively to help ensure that this is an area of upside rather than a risk. We project that industrial sales will be up about 2% annually for the next five years, with overall sales up about half a point.

With a robust business model we have been able to deliver consistent annual earnings growth of more than 7% for more than a decade -- through recessions, through adverse weather, through changing policy leadership, through anything else that came our way. As we do, we hope you too see this is a sustainable model for our customers and investors for a decade ahead.

Now here is our sensitivities slide that we provide each quarter to assist with assessing our prospects. You can use this slide for 2016 and 2015. There is not a lot of new news, but we do hear some analysts raised concerns for the sector about interest rates. That is not a surprise in a time of volatile views about interest rates. I know I've been wrong for 10 years in a row. It is comforting, however, to know that our model is not very sensitive to changes in rates. Higher borrowing costs related to higher interest rates is largely offset by the impact of higher discount rates on our benefits and retiree programs, and this excludes a higher return on equity should rates rise a lot. On top of this, our practice includes pre-funding parent debt two years in advance, larger than peer liquidity, and maintaining a smooth maturity schedule. This further insulates us from risks to changes in interest rates.

So here is our report card for 2015: We are in a good position with substantial benefits from the Arctic blast earlier in the year, as well as better than planned cost reductions. We're putting this surplus to good use with reliability improvements for our utility customers and accelerating outages to enhance the outlook for 2016. This will be our 13th year of transparent consistent strong performance. Continuing our mindset that focuses on our customers and our investors permits us to perform well. We hope you agree we've achieved substantial improvements in customer value and customer satisfaction. We've got the best cost reduction track record in the nation. Our 13th year of premium earnings includes previous dividend growth, and we plan to continue this performance for some time.

So thanks for your interest and thanks for your support. We would be delighted to take your questions. Operator, would you please open the line?

Thank you very much, Mr. Webb.

(Operator Instructions)

Michael Weinstein, UBS.

Hi, good morning.

Good morning.

On the legislation, what are the key debates that are currently being talked about in the legislature as the bills being negotiated and firmed up for eventual presentation to the committees. Are there any major changes that are now being talked about? Anything significant to be looking for?

Yes, let's go through it. Right now I think they're mostly just small adjustments to the bill. There's some issues going on today about retail open access. When they return, how many years they have to have capacity, whether it's three years or five years. So there's some issues there.

And what is the determining factor for if there is a shortfall in Michigan. On the integrated resource plan I think you're going to see some debate about the difference between having the integrated resource plan and also having a renewable energy standard. Right now these are kind of I would call adjustments to bring the bills together. And we're the very end of this process, so I would expect that to happen.

Most of it is really revolving around the retail open access. As the queue continue, there's a queue that we have beyond the 10%. Do customers come back? Do they have a right to leave, or do they stay throughout that entire time? That's what's going on today. I think an important piece that Tom and I both mentioned that I want everyone to understand, we're not planning for any new changes in our plan for the next five years that this law will change. If it does change these are things that can benefit us as Tom talked about in his section of the presentation.

Were you saying that right now the plan is for 5% to 7% growth? Is that something that could change upward if legislation passes that you guys would be talking about later?

Right now again we've given you guidance 5% to 7%. We've continued to hit the high end of that through the years. Right now you know what our process is, and Tom showed it on one of his slides. We continue to go back and reinvest the positive weather, the cost savings for customers and their value. We are to going continue to do that.

We see plenty of opportunities that way. On the other hand, though, as Tom mentioned, if the law passes and if all this stuff happens, there may be an opportunity in the future sometime to with a new plant or PPAs to do something that would cause even additional capital investment for us which could drive some earnings growth.

That's great. Thank you very much.

Yes. You are welcome.

Daniel Eggers, Credit Suisse.

Good morning, guys.

Good morning. Do have a cold?

Yes, I do, unfortunately. Great timing into earnings, unfortunately. Hopefully I'll be better by the EEI. (laughter). When you think about trying to bridge the IRP and RPS together, what is it going to look like process wise, and is there going to be a process difference really from how you guys do planning or how you work with the commission if they are separate entities or if they're merged together?

If -- I want to make sure I understand, Dan. The plan that looks like it's going to come out, is an integrated resource plan that the process that is used today is that the state which I give the governor a lot of credit for this.

What he is doing is trying to develop the best plan possible for Michigan, and he's coordinated a lot of departments to work on this at the front end so there's no surprises at the back end. What the legislation will do, we expect, is to support the integrated resource plan.

What I mean by that is to hit the clean power plan target. If we need to produce more renewable energy, or more energy through renewable energy or have energy efficiency, that will all be included in this plan. The good news about the law the way it is today, at least, it's not the law, but the bills that are there is that, that would allow us to go forward and have our capital plans approved to meet the integrated resource plan.

And that is the assurance we want that as we go forward to meet the plan for the clean power plan which is a federal law that the state law and the regulation supports us meeting that target. I think as many of you know, many of the laws -- some of the regulations that EPA has come up with have been overturned at the last minute.

We don't want that to affect our investments in whether it's the right choice. So the pre-approval process is important to us.

It's like a big con.

Exactly. Which is in the current law today.

Okay, got it. I guess on the need for open access customers to procure capacity, do you any feeling for the three- or five-year decision process, and would DIG be a candidate to provide capacity to some of those customers, or do you think that capacity will be procured elsewhere before there's a chance for those open access customers to get to it?

I think the three to five years that -- it really -- what we want here, Dan, and we've been pushing in the legislation, we want to have it material. If somebody is going out to the market and if we have to supply them later we need to have enough time to build that asset or secure that asset. I think five years is right.

If three years is what it comes down to, that probably gives us deficient time with more risk than the five-year component. And as far as DIG, I will turned it over to Tom because he keeps talking about that Ferrari, so I will turned it over to him.

I still think it's a Ford Mustang GT but whatever. The truth is even today some of our capacity, not much, but some of our capacity actually goes to some of the AESs to serve retail open access customers. We don't have any bias for or against that, and if there is a change in the law, it's probably going to be a gradual change anyhow and people will need support, and we will provide that.

I would tell you the principle purpose of DIG is to supply folks in Michigan where it can and to backup the utility if there is needs there. So it has a nice dual purpose, and it really is a good engine because for the first time today I kind of admitted that the $20 million for 2016 probably is going to look more like $35 million for 2017. It's almost impossible at this point with the contracts that we have not to have that happen. So it is a nice opportunity.

Got it. Thank you guys.

Thank you. Hope you feel better.

Ali Agha, SunTrust.

First question, Tom or John, the investment recovery mechanism that is part of your filing of the rate cases. Is that still on the table realistically given the [ELJ] and staff keep coming back and opposing it? What is your sense right now on the commission's views on that [metric]?

It is still on the table. For example, in smaller portions it is already being done in Michigan for utilities, but not the big picture. Not the question you are asking for covering all of your capital. So I think some people see this as a wonderful opportunity to actually have better, more thorough regulation looking at the total business around CapEx rather than just a narrow slice of one year.

There are folks that think this is a really good thing, and of course we would be happy with it, and there are folks think you should not look out that far. Here's what I believe is going to happen. More and more there has been interest and people have asked us more about it in the decision-making process. We are moving in that direction.

If we move into this integrated resource planning process it may even gazunk the whole idea because it may give you the confidence you need for capital investment over several years so that you've kind of got that support you need. It's a little different, but it's kind of the same answer.

One way or another I think we are all going to be looking further out at the business together so better decisions are made for customers.

Let me just add to that. I absolutely agree with what Tom said. And look at our gas business. As big as our gas business is and the fact that our prices are -- for the customer prices are down 60%, this is a good opportunity to put the infrastructure in place now, without putting a real burden on our customers because their costs are really coming down rather than going up. That's what we're trying to see in the gas case that we're testing to.

Okay. And then secondly, on a weather-adjusted basis, system deliveries have been negative last two quarters and negative year to date. Can you just kind of elaborate, what is the trend going on there in terms of that negative trend there?

The residential and commercial segments have been flat at best, so up a little bit one month, down a little bit the next month, sort of flat to down. Industrial has done pretty well and continues underneath to do very well. But in this year we've got when customer who had an outage that they are coming back very slowly from.

We won't make a lot of money on this customer because it's a very good rate but it is still important to us as business. So as they're coming back up we're probably going to see most of that benefit show up next year than some of it this year as we had hoped and anticipated.

So the outlook that I'm giving you probably is still pretty good where we talk about industrial at 2% a little bit better, and this is net of energy efficiencies when you look out to 2016. And we are going to tell you flat to down on residential and commercial because candidly they are not picking up like they do out of the typical recovery after a recession. So we're going to plan on half a point growth.

We're probably a little conservative, but we will see how that plays out. We would rather be there and not be hurt much in our self-funding plans on rates by counting on too much from sales. But good observation. We have been flat, residential, commercial and industrial which typically would've been up more than you are seeing now is one heavy user who is just coming back from their outage much slower than they had anticipated.

Got it. And last question. You know the ongoing cost reduction programs that you have going on for the next few years as well, how do you think about that in terms of the headroom that creates -- and trying to quantify that in terms of the headroom that creates for rate-based investment without customer rate impact.

In other words a $1 savings in O&M, what would that equate to in terms of extra CapEx spending without customer rate impacts?

And easy way to see that is slide 17, the one that says O&M cost performance. And you can see there the dollars and how they are really happening in the next few years where from 2014 to 2018 we will take out about $100 million net, there's a lot of ups in there as well but net down $100 million, and that's worth 10%. So you can do that math and bring it down a little bit and think $10 million is about 1% if that helps a little bit.

So then when you think about our self-funding model, we're looking for about two points of cost reductions, so 2%. And that, mixed with the other things we have over the next five years keeps us in a position where we could grow as high as 7%, and our customer rates would still be at or below inflation which we're guessing at roughly 2% so that gives you some of the math that you can work with. I hope that helps.

Yes. Thanks.

Thank you.

Andrew Weisel, Macquarie Capital.

Good morning, guys. John, sorry to hear about the surgery having gone through one myself recently I can sympathize and definitely hope you get well quickly.

Thank you. Feeling good. Good to be back.

First question, just to elaborate on the O&M conversation you were just having, these other ideas in slide 18 roughly $50 million to $80 million of additional cost savings. Can you give us a sense of timing as to when you would make some decisions on those and when the benefits might start to show up?

Sure. If you look at them in the categories that we laid them out, the two way communications as we called it which is more mobility, that is something that is going in place now, but you've got to have your systems well coordinated to make that work. So I will give you an idea around that.

Smart meters and over the next year and two, we will have most of our smart meters in and with that will come some mobility plus. So that is sort of a time frame where you might to see that kind of thing happen. On the grid modernization, I'd push that out further because that is better data, better line sensors, better smart meters. So I would go out several years before I would think of that as an opportunity. So you've got one a couple of years from now, another one maybe five years from now and then go down to work management.

Now that is one where we will actually get improvements every month, every quarter, every year, and it will start slow. It is this simple. I always tell people when you are changing your process try this yourself.

If you drive a car, and you back out of the driveway and you try to back out and turn the opposite direction of what you normally do. It is very hard to do. I guarantee you if you try to do that over the course of one week you're going to be wrong at least a couple times during that week.

So it takes a lot of discipline, a lot of work and then a lot of practice to make these things happen. Plus, we need some better systems for our work management and that is going to take us some time to put in place. So I would say you will see gradual bits of that come in over next year. Small amounts and then in a little bit more the next year and during the life of five years I think you will see a lot of that begin to happen.

So I would call that one over five years. I would call technology or the line loss past five years and communication something over the five-year period. And keep in mind, some of these will end up blending right into our plans. They will actually be some of the cost reductions we're talking about, but a lot of these will be incremental, and that is a nice place to be.

Okay. Thanks a lot for that detail. Next question is the five-year plan, obviously 5% to 7% growth. In the past few slide decks have shown this upside opportunity at 6% to 8%. Is that something that by year end if the Michigan energy law goes the way that you are hoping in ROA returns, you might make that change sooner rather than later?

I know it's a question you get pretty often in a bunch of different ways but trying to get a sense of how soon that 6% to 8% might become a target whether it be early in the new year or not until we have a better sense of the nuclear contract or however you can help frame up the timing.

Let me start and then, Tom you may want to pile on this one a little bit. Let me go back and say again we are very comfortable with our 5% to 7% growth rate. And what has helped us is we really balance the financial performance for investors with the customer value that they get.

So what we're constantly doing is looking at the financial, the operational, and the customer side of this business. We think today for the next several years there's more opportunity to invest and I'm talking not only capital but O&M back into customer value and back into operations just as Tom talked about in the previous question.

Here are the truck rolls and some of the things that we need to improve on. That's why I think for the next few years we really need to continue to invest and continue to grow at 5% to 7% which is higher than our peers. What would cause this to change, I think as Tom said on the slide that's up there right now. You can see if the law goes into effect, and Tom made a good point I want to emphasize.

If the law goes into effect as we expect and there are shortages of capacity in Michigan which we expect in the future, customers will return to us. But it's not going to happen overnight and it's going to take time. So we will roll that in and as we go forward.

If you looked at that in the future, if the customers' satisfaction continues to be first quartile, that the operations continue to be best in class then there may be a few catalysts that Tom talked about in the out years that would drive us to that. And you saw it there. The PPAs are long-term.

The retail open access is shorter term than the PPA -- need to replace those. That's where I think you ought to think about for us. Our plan is pretty good that we have here today, and there's upsides which we wanted to show you, but right now we don't want to commit to those yet because there is more work to do in the base business that we have.

So I'll just add, the real purpose of this slide we show where it says we self fund a lot of the growth for our customers and their rates, is when we are talking about the upside opportunity we're trying to demonstrate short term if ROA customers came back and longer term when we might need to replace those PPAs and we could build gas plants or put in wind farms cheaper than the PPAs. Those are opportunities that we can put in place.

By the way they're worth -- those things I just said, as much as $3 billion. But those are opportunities we could do without hurting the self- funding part without causing our customers to have bills going up any higher so that's really the illustration there. Conversations about where we might go beyond five to seven I think are something for the future, but we want you to know we wouldn't go there if we could not take care of our customers at the same time.

Okay. And lastly on the long-term load growth you talked about planning for 0.5%. Is that based on the current Michigan energy law? Or is that embedded in anticipation of higher energy efficiency when this law gets revamped between now and year end?

Well, it could be both. But, what we assume in our numbers now is that we would have about a 1% energy efficiency deduct from the economic growth. And when I say it could be both, the other thing that is not in our numbers is a heavy hand on economic development where we are beginning to see a lot of progress now. So as economic development brings in more customers, spreads that base, there could be room for energy efficiency to go up and be even higher and still get these numbers that were talking about. I think we've got you in the right ballpark whatever happens.

Got it. Thank you very much.

You are welcome. Thank you.

Paul Ridzon, KeyBanc.

Is Bedford still the next resource, and what is the permitting process there, and what does it look like now?

Yes it is. Bedford is an existing site that we have. It has gas infrastructure, has electric infrastructure in place. We currently have a permit that I think extends through this year into next year, so we have an active permit to build on that site that has been approved by the DEQ. I do not expect to move forward with that. We pretty much put the project on hold until we see what happens with legislation, but, yes, it's a great site, it's ready. The community will accept it. We've got older peakers on the site right today, and we could move forward if we need to.

Thank you. Can you give a little more detail what part of energy legislation is the commonality around?

The commonality?

What aspects to it does everybody agree with?

I think generally everybody agrees with start with retail open access. We have to do something about it because there's an unfair subsidy. What we do about it is a debate. Is it 10% with the queue? Is it full regulation which we are moving away from full regulation more to keeping the 10% with probably a one-way door. So, if you return, will stay with the utility.

The integrated resource plan is a bit of a debate because what the governor is trying to do is put in a plan that meets the EPA clean power plan that also is best for Michigan while at the same time I think some of the Democrats in the House and Senate want to have a standard in there that they can count to that, that will be part of the law regardless of what happens with the integrated resource plan. So that's a debate right now.

The commonality, I think we've talked about this in the past from a regulatory standpoint, self implementation will probably go away, but will advance the timing of rate cases from 12 months to 10 months, and if they are not done in ten months you go into full implementation.

Could I just add a little bit? I would just say you've got two bills, one in the House and one in the Senate, that have moved closer together.

Definitely.

And there is a lot of similarity in those bills, but there are some people who really don't like certain parts and so of course now is the time people are pushing real hard. There are individuals who are pushing real hard on different points in different ways, but I would say the momentum is in those two bills which is pretty good. I would say there's a lot more commonality at this point, even with a lot of arguments going on from a few people to move ahead with a pretty good law.

I think, Paul were confident it's going to be done by the end of the year. There isn't -- I mean we've had the hearings, the hearings are completed. We are very close and I think they are very close. If they weren't I don't think we would have rated this as successful by the end of the year. Here we are almost in November that in two months this thing's going to get done.

The wonderful thing about that is the 2008 energy law is pretty good.

Yes._

And we are in quite a great position if nothing changed, but this is a wonderful opportunity to address the EPA rules, to address renewables, to address ROA, to address a little bit better regulation. And so there's a lot of opportunity in there for our customers, and we are thrilled about it.

I'm going to pile on one more time, Paul. You also have two leaders there and three with the governor, but these two leaders have really spent a lot of time with Senator Noss and Representative Nesbitt to get this thing right so that they could be aligned. They have spent a lot of time, a lot of committee hearings, and they've been talking about it for quite a while. When they bring they bring it together they want to make sure that the debate is limited.

Where is decoupling?

It is in the bills, whether it will make it or not we will see. It is in the bills -- and on the gas -- it's on the gas side it exists today.

The way it is structured in there, it's optionality. It so it so that if a utility wanted to ask the public service commission for decoupling, then they could do that. It gives the commission the authority to do that with the clarity that wasn't there for both the gas and electric last time.

And then the commission and the utilities get a chance to decide if they want to put it to use when you get out there in future rate cases.

Any update on Palisades? There's been some noise around [entertees] nuclear plants. Any threats there in the near term?

No. We don't see any issues there. I think the filings and things they are doing with FERC to move along and keep the plant running successfully appear to be all going well. Our only issue, candidly is at the end of the contract with us we would like to make sure for our customers that it is more economical.

If it turns out that building a gas plant is a lot cheaper for our customers then we have to negotiate hard to extend the contract or go with what's best for them. But everything we know and you should ask them rather than us -- they appear to be doing a good job.

And, lastly, Tom. You said you pre-fund two years in advance. Is that just interest rate hedges, or can you just elaborate on the process?

No. We're so chicken we are unbelievable. We have -- just because we got frightened in 2002, we never got let go of this idea that we just want to be conservative when it comes to the financial side of the business. So for the parent, we actually reach out for two years, and we don't necessarily take the debt out, but we raise the debt so that the cash is in place.

We don't do it with arbitrage or hedging or anything like that. We literally raise the cash. You are going to say what kind of conservative people are you? But we are.

We raise it. We put that in place, and then when the economics are right to actually call the debt and take it out we do that. So we have the resources ready to go for two years out in time and it's just that simple. There's no magic to it.

Typically what is that level that you are carrying extraneously?

Do you mean how much cash? You know what, this is really easy to do, because we give you our maturity schedule on the parent and the utility. Just look at that look forward and you can see either there is nothing left for the next two years or whatever the debt is go look at cash line, and you will see it is bigger than that. So you can watch that all the time as we move through time depending on the size of the maturities.

Thank you very much.

We like being chicken, by the way. (laughter)

We like it, too. (laughter)

Good. (laughter)

There are no further questions at this time.

All right. Let me close things out. First of all I of all I want to thank everybody for joining us today on the call this morning. We are pleased with the quarter, and we look for to future success both this year next year. And we look forward to seeing you at EEI.

With that we will close it out and thank you for joining us.

This concludes today's conference. We thank you for your participation.