CMS Energy Corp. Q1 2009 Earnings Call Transcript

May. 4.09 | About: CMS Energy (CMS)

CMS Energy Corp. (NYSE:CMS)

Q1 2009 Earnings Call

April 30, 2009 9:30 am ET


Laura Mountcastle - VP and Treasurer

Dave Joos - President and CEO

Tom Webb - EVP and CFO


Brian Russo - Ladenburg Thalmann & Co.

Dan Eggers - Credit Suisse

Paul Ridzon - KeyBanc Capital Markets

Ted Heyn - Catapult Capital

Greg Gordon - Citi Investment Research

Neil Stein - Levin Capital Strategies


Good morning everyone, and welcome to the CMS Energy 2009 first quarter results and outlook call. This call is being recorded. Just a reminder, there will be a rebroadcast of this conference call today, beginning at noon Eastern Time, running through May 7. 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.

Laura Mountcastle

Thank you. Good morning and thank you for joining us for our 2009 first quarter earnings presentation. With me today are Dave Joos, President and Chief Executive Officer; and Tom Webb, Executive Vice President and Chief Financial Officer.

Our earnings press release issued earlier today, and the presentation used in this webcast are available on our website at This presentation contains forward-looking statements. These statements are subject to risks and uncertainties, and should be read in conjunction with our Form 10-K and 10-Q.

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 when describing the company's results of operations and financial performance. A reconciliation of each of these measures to the most directly comparable GAAP measure is included in the appendix and posted in the Investor section of our website.

We expect 2009 reported earnings to be about the same as adjusted earnings. Reported earnings could vary because of several factors. We are not providing reported earnings guidance reconciliation because of the uncertainties associated with those factors.

Now, I turn the call over to Dave.

Dave Joos

Thanks, Laura. Good morning. As is our usual practice, I'll start the presentation with a brief update on the business, and then I will turn the call over to Tom for a more detailed discussion on the financial results and outlook, and then we will close with questions and answers.

First quarter 2009 earnings were on plan at $0.30 a share. This was down $0.13 from last year, due in large part to the effect of a new seasonal rate design on electric sales, and 2008 gain on the sales of sulfur dioxide allowances that were not repeated in 2009. Tom will give you more detail on that in a few minutes.

For the full-year, we expect adjusted earnings of a $1.25 a share, unchanged from our previous guidance. Although, it's old news to almost everyone now, we raised our dividend in the first quarter of 2009 to an annualized $0.50 a share. This reflects the progress we've made on our growing forward strategy, and the confidence the Board has in our business plan.

There are a number of important regulatory matters on the calendar over the next couple of months that will have a meaningful impact on earnings and cash flow, in particular, the electric and gas rate case filings.

Last week, the Michigan Public Service Commission issued a procedural order in our electric rate case directing us to file the rates we intend to self-implement in mid-May. I'll discuss the rates we filed yesterday and the staff filing in our case on the next slide.

Before I do, I want to talk about the state of the business in Michigan. Just about every company has felt the effect of the weak economy, and we are no exception. The financial plight of the big three automotive companies continues to be headline news across the country.

Last week, GM announced that it was reducing its inventories by extending the traditional two week summer shutdown by up to an additional seven weeks at some location. Of the 13 assembly plants affected, only four were in Michigan, and only one of them, the Flint assembly plant is in our electric service territory.

We don't expect a direct material impact from this extended shutdown. We will closely monitor all new developments related to the automotive sector that may affect our business.

As we said before, the auto sector, the Big Three, and Tier-1 suppliers in particular, represents only about 3% of our electric gross margin. Tom will provide a little more color on this topic in a few minutes.

Over the past couple of months, we've talked about our Balanced Energy Initiative, which is our resource plan to meet the long-term demand growth through a combination of demand management programs, energy efficiency and new generation resources. We believe it's in the best interest of our customers to maintain a balanced portfolio of generating assets, including a mix of fuel types and renewable.

The Michigan Department of Environmental Quality recently held public hearings on our air permit for our new proposed clean-coal plant in the Bay City. There was tremendous support from the communities and labor for the plant, and anticipated opposition from environmental groups.

The DEQ Chief says, he expects to make a final decision on the air permit late this year. If approved, this would put us one step closer to having the plant in service in 2017.

Now, turning to our regulatory agenda. In February, we filed our Renewable Energy and Energy Optimization plans with the MPSC as required under the new law. We estimate that will need an additional 900 megawatts of renewable capacity, essentially all from wind to meet the 2015, 10% renewable portfolio standard. Our plan is to build about half of this and purchase the other half. This will require capital investment of over a $1billion.

Our Energy Optimization Plan is designed to educate customers, provide economic incentives, encourage them to choose efficient products and take other steps to lower their usage. Our goal is to reduce electricity demand by 5.5% and gas by 3.85% by the year 2015. We expect to spend in excess of $500 million over the next six years to implement this plan.

Our plan also included a revenue decoupling mechanism to eliminate the disincentive associated with helping customers reduce their energy consumption. We expect this to be approved but perhaps in the general rate case rather than in this case. Final order for the Renewal Energy and Energy Optimization plans is expected in late May.

As part of the gas rate case settled last December, we agreed that we would not file a new gas general rate case prior to May 1st, 2009. We do plan to file in May, which would allow self-implementation before winter. The filing will include a low income rate proposal, revenue decoupling mechanism in tracker or uncollectable.

On Monday, the staff filed their proposal in our electric rate case, recommending a revenue deficiency of $75 million. There are some notable positives in the case, including support for an 11% return on common equity and a tracker for uncollectables. There are frankly also some disappointments.

The staff sales assumptions did not reflect the economic downturn over the past six months. We also don't think the staff's recommendations for operating and maintenance in capital spending is sufficient or frankly consistent with the forward test year approach included in our new law.

So, for example, their case reflected historic capital spending versus actuals for 2009, which is higher, and in our view, justifiable to meet our customer service goals and regulatory requirements. So we still have some work to do on the sales and spending issues.

Also, the staff did not support a full revenue decoupling, but did support decoupling for energy efficiency, and as I mentioned earlier, a tracker for uncollectables. Overall, the staff's revenue recommendation is too low. We'll file our rebuttal testimony on May 18.

Yesterday, we filed the tariffs we intend to self-implement subject to refund in mid-May. The MPSC has schedule to May, 5 hearing to consider a motion by one of the interveners in our case, ABATE, to prevent or delay self-implementation. As you know, this is the first case under the new law, so these procedural steps are not surprising.

Our tariff filing reflects an increase of $175 million, which is the level we believe is appropriate to meet our customer service goals, and allow us to earn the recommended rate of return for the balance of the year.

This is $35 million lower than our original $214 million filing, reflecting, reduced spending and other assumptions. We're confident we can make a case for this level of relief, but obviously, we can't predict the outcome of the hearings since all of this is new ground for the commission. Stay tuned.

Now, I'll turn the call over to Tom.

Tom Webb

Thanks Dave. My thanks to everybody for joining in our call today I know it's a busy day. Earnings in the first quarter were $0.30 a share equal to our plan at $0.13 below last year.

This reflects lower sales, seasonality change, and recognition of SO2 allowance sales in 2008 that we've not repeated this year, higher uncollectible accounts to reflect SAP launch related collection delays, and other, offset partly by a rate relief approved last year. For the rest of the year, we are planning on lower sales more than offset by rate increases, a good portion of which are already approved.

As Dave mentioned, fully year adjusted EPS guidance is unchanged at $1.25. While sales and uncollectible accounts are adverse, new cost reductions and demand rates provide offsets. We underestimated the demand portion of our bills as some customers continued operations while shifts were cut or reduced.

The electric business represents the bulk of our earnings, and with our electric rate case order last June, rates were redesigned to be higher in the summer and lower in the winter to encourage conservation during the high demand season.

On this slide, we isolate only the impact of seasonality. This redesigns results in higher historic revenue and profit in the summer but lowers than historic revenue and profit in the first and fourth quarters. This is just what we experienced in the earnings uptick last summer as well as the expected decline in the fourth quarter last year and this quarter.

Although the implications of the global economic downturn are uneven across Michigan, generally they're more severe in the East than West, and we now expect weakness to be more prolonged than originally assumed in our plan.

Sales in the first quarter were as budgeted. We are however reflecting a steeper and more prolonged reduction in the industrial sector, with full-year sales down 11% instead of 7% in our original budget, resulting in an overall decline of 3%, instead of 2% for the year.

As the recovery does begin in 2010, this recession may continue to look at lot like our experience in the back-to-back recessions of the early 1980. Here's a more detailed look at our new forecast for industrial sales by quarter.

Although the 11% decline in the first quarter is just as we planned it, we deepened the year-to-year decline from 10% to 15% in the second quarter, and from 6% to 11% in the third quarter. Our forecasted decline of 5% for the fourth quarter is on top of the decline of 6% in the fourth quarter back in 2008.

Last month, we increased our uncollectible amount write-off by $10 million to recognize receivables that aged more than we expected during the launch of our new SAP systems last summer. While we transitioned to the new system, our collection activities were temporarily suspended to facilitate the launch. Restoration was slower than we planned.

We've offset this higher exposure and the lower sales largely with demand and cost reductions. The potential for a broad auto-wide bankruptcy remain. Should it occur, and it is difficult to predict, but should it occur, we expect to take a pretax write-off of between $15 million and $30 million.

We show you here a range because the outcome as it occurs will depend on, when in the collection cycle it happened, and the breadth and the number of companies involved. We're tracking 178 companies that could possibly be involved.

Each is an OEM, a Tier-1 supplier to the auto industry or a secondary supplier to the OEM. GM represents about 25% of this exposure, and Delphi who already is in bankruptcy makes up another 15%. Delphi likely would not require another write-down, but we've included that in our numbers for conservatism.

For many, the bulk of their business in non-automotive, but its hard to predict who will avail themselves of the bankruptcy process. So, consequently, we maybe somewhat conservative with the estimates that we are showing you.

Since our last call, our cash flow and liquidity have strengthened, in part, because we were able to reduce our planned pension contribution from $300 million to about $200 million. This was made possible in part as IRS notices confirmed our ability to use more favorable interest rates to value our liability.

Successful completion of a new $500 million first mortgage bond last month, and extension completed yesterday of our $250 million accounts receivable financing facility also helped.

In addition, we're now planning to avail ourselves bonus deprecation this year, which should boost consumer's cash flow by about $50 million, and that will push out the use of NOLs at the parent. We also have been able to defer about $30 of parent tax payments through our audit reviewed.

As of March 31, our liquidity position exceeded $2 billion, including $800 million of cash, and $1.2 billion of bank and AR facilities available. Financing plans for the utility this year are complete, and we still plan to refinance later this year our next CMS apparent maturity due in August of 2010.

Profit and cash flow sensitivities are similar to our last review, focused primarily on the economy and future regulatory actions. Sales, gas prices and ROE sensitivities are unchanged.

We added a plus to the plus-minus direction indicator for the uncollectable accounts because, when we took the SAP launch related $10 million write-down, we didn't assume any recovery. As we pursue recovery, this could provide some upside.

As in our last call, we've estimated a potential impact of an auto-wide bankruptcy. This is not reflected in our guidance of a $1.25 a share. If this occurs, and the impact is small, we might be able to contain it.

As Dave described, we'll likely be self-implementing a $179 million for our electric rate case in mid-May. If the ultimate order is lower by less than 25%, we would refund the excess including interest at LIBOR plus 5%. For amounts greater than 25%, the interest would be at the authorized ROE.

Despite the tough economy, we met our plan for the first quarter, and we are on target for all of our full year report card measures.

Now Dave and I would be happy to take your questions. Operator?

Question-and-Answer Session

Thank you very much, Mr. Webb. (Operator Instructions). Our first question comes from the line of Mr. Brian Russo. Please proceed.

Brian Russo - Ladenburg Thalmann & Co.

What gives you the confidence that the Commission will approve a full decoupling mechanism?

Dave Joos

I don't think I said I had confidence the Commission would approve a full decoupling mechanism, although it is something that they have talked about here in Michigan. What I was referring to is the decoupling mechanism associated with the Energy Efficiency programs, and the staff has recommended approval of that although they recommended approval of it consistent with the Commission's ultimate approval of our electric rate case. There and has been a very strong support for that amongst the staff and others in the city.

Brian Russo - Ladenburg Thalmann & Co.

Okay, and absent a decoupling mechanism how might your ROE be sensitive to that?

Dave Joos

Obviously, that depends on sales. The decoupling associated with Energy Efficiency, obviously is a program where any sales reductions we're able to achieve by implementing those programs therefore wouldn't affect our overall earnings. Obviously without a full blown decoupling mechanism, we continue to be exposed to things like weather, like we always had been, and the sales downturn that we are currently seeing.

Although as we said, those are largely industrial where our lower margins occur and we then are offset by some demand improvement. So we are going to continue to have to manage the business as we have, adjust spending and that sort of thing if the sales are not what we expect it to be.

Tom Webb

Brian, I turn you and everyone to the sensitivity slide that Dave was referring to, and that will show you what happens in electric and gas in terms of every 1% change in sales. Remember, I think, we've tried to be very realistic in our forecast for this year, particularly around the industrial situation.

Brian Russo - Ladenburg Thalmann & Co.

Has you capital expenditure outlook remained consistent from your last update?

Dave Joos

Yes. We really haven't changed anything there. You recall that's down from what we originally filed in our rate case and what our forecast was last year, but we haven't changed for the remaining of this year.

Brian Russo - Ladenburg Thalmann & Co.

Okay. Dave, if you could just talk a little bit more about the staff recommendation seemed a lot lower than some of us were expecting, and as you mentioned earlier, they seemed to be using more historical data than forward looking. Can you give us a sense of what you might include in your rebuttal testimony to support your capital budget?

Dave Joos

I think what we have said in a way of our filing yesterday of our proposed tariff's for self implementation of $179 million is consistent with what we think we actually need to serve our customers appropriately, meet our service requirements and earn a reasonable return on investment at the 11% level the staff has recommended, and there is some differences there.

Some of them are real differences, and that's why that $179 million is less than the $214. We did cutback on capital spending. There have been some changes in our cost-to-capital assumptions, because of when we make equity infusions in the utility and also across the short-term debt are lower than we'd originally assumed.

We have also taken out some operating cost to our current budget. It is different than what was in the original filing, and we've reflected that in putting forward our $179 million.

It is true that what the staff recommended, and you look at the methodology, and of course we just saw these numbers ourselves a couple of days ago, are really more historic based, so they look at historic capital spending in prior years and average those numbers.

Frankly, even the numbers they used are incorrect, partly we think because of the numbers we gave them were partial year's numbers, and they interpret them as full year numbers. So we will be talking with them about that.

Our assessment is even the $300 million number they used was actually about a $150 million lower than our actual numbers. But the more important issue there is, they have used sort of average historic capital numbers for the couple of years prior to this filing vis-à-vis our actual capital spending program for 2009.

However, that may not be unreasonable for them just to take a shot at what we might be spending this year, but frankly, we are at higher levels than that. We haven't seen any indication that anybody thinks the numbers in the capital spending that we are doing this year is in any way imprudent.

So we will be spending our time simply educating in our rebuttal, what are the actual capital numbers for this year, and what we are spending them on, and why do we think they are appropriate. Of course, we will be doing the same thing on the O&M side. They basically took historic spending and actually applied a negative CTI to those numbers from 2008.

That's not what the actual experience is, and of course, we will have to defend that actual experience. But I would say generally speaking the staff used a more historic look, and I've indicated my comments, that's inconsistent with the new law which allows for our filing on a forward test year basis, and we'll be making that case, and going through those numbers in more specificity in our rebuttal.


Your next question comes from the line of Dan Eggers of Credit Suisse. Please proceed.

Dan Eggers - Credit Suisse

With the another reduction to the volume outlook, can you just give a little more color on what's you're seeing and which industrial customers are struggling more than others because you did more in the second and third quarters?

Tom Webb

If you think about the first quarter and the 11% decline that we showed you, GM, Delphi probably make up about a third of that decline to give you a little bit of the texture, and then it is a little bit of other automotive suppliers, and then the general slowdown in the nationwide economy, whether its furniture makers or food makers or whatever. You see some of those folks slowing down a little bit.

We look at that and we said, you know what, particularly with this announcement by GM of a longer shutdown in the summer. Nine weeks instead of perhaps two weeks, which could be followed by the other autos, we started thinking that that we better be a little conservative for the second quarter. That's part of the drive of why we take the industrial side down from 10% to 15%.

Then, a general planning is, without really being specific at all about any of the industrials, we said we probably should see this thing continue in through the third quarter, and watch a decline of around 11% instead of 6%, at least held where we were in terms of that 11% thinking in the fourth quarter by taking the 6% drop a year ago, and adding that to another 5% drop this year.

So the back part of the year is us just trying to be a little conservative, saying, we don't see a big turnaround occurring until we get into 2010. Near term, it is just really trying to take a look at specifics that we see from some of our customers. Add all that up, and that took our 2% reduction for our entire electric business down to about 3%, and that's still all included in our guidance.


Your next question comes from the line of Paul Ridzon of KeyBanc Capital Markets

Paul Ridzon - KeyBanc Capital Markets

Talk about the offsets to the lower sales forecast and where you see the opportunities to negate that?

Dave Joos

It's fairly straightforward, and lot of that has to do with simply managing the miniscule O&M items in every different area. So, I can't give you major offsets. We are looking at moving one of the outages at one of our smaller plants into next year. Some minor reductions in our tree-trimming budget, and our storm assumptions; there are a lot of small items in individual departments.

Then as Tom mentioned by the way, the impact on revenue is much smaller than the sales volumes might suggest because the demand component of the industrial rates is significant.

In fact, we think under forecast the original impact of demand on our revenue, and furthermore, as people cut back shifts but continued to have shifts in, say, the day time, we don't lose that demand margin. So, when we look at the margin overall, the impact is a lot less than what the sales impacts might suggest, and we are making O&M changes to offset those.

Paul Ridzon - KeyBanc Capital Markets

If the final order differs from your self-implement, what happens with the interest rates?

Dave Joos

Sure. The way the law is written, if there is a difference between what we self-implement and what the Commission orders, the first 25% of that difference, we pay an interest rate of LIBOR plus 500 basis points. If it exceeds 25%, that marginal amount over 25%, we have to refund as paying interest that are return on equity level, roughly 11%.

Paul Ridzon - KeyBanc Capital Markets

Late last year you borrowed against lines for potential tender or a conversion, have you repaid that line?

Tom Webb

Yes, we did. In fact, when we give you our liquidity position, you see that included at the end of the year, we judged, we just didn't need that at the parent level. So we returned that to the banks.

Paul Ridzon - KeyBanc Capital Markets

Lastly, how big is the August of 10 maturity that you plan to refund?

Tom Webb

$300 million.


(Operator instructions). Your next question comes from the line of Ted Heyn of Catapult. Please proceed.

Ted Heyn - Catapult Capital

I had a couple of quick questions. First, is it right to assume that the $179 million interim rate you proposed yesterday is what you've assumed in your guidance for the $1.25 level?

Dave Joos

I had mentioned this in our last quarterly call that our philosophy around self-implementation is we would go through and look at our last six months of experience since the original filing, and we've changed some things. Sales experience has been a little bit different, on collectibles a little different.

O&M is down a little bit. Capital spending is down a little bit, financing assumptions changed a little bit. So, we went through based on that six months, and said, what number do we need for the remainder of the year to serve our customers at the level we think they expect to be served, and to maintain our equipment and earn a fair rate of return. That's the number that we've self implemented.

Ted Heyn - Catapult Capital

Okay, but I guess my question was more; you talked about the amounts you'd have to pay on refunds if the final order came out different from what you self implemented. I guess the question is, would your $1.25 guidance be at risk, if in November, the ultimate decision came out below $179 million?

Dave Joos

Sorry. I didn't really answer your question. By the way, if I said self- implemented, I should say that's what we proposed to self-implement. Of course, we can't do that yet. Well, it depends on what actually comes out obviously. For example, the staff made a proposal that we are ought to tree-trimming back fairly dramatically from the level of about $45 million where we are today as part of reducing the impact on customer rates.

We can certainly do that. That hurts our reliability over the longer term somewhat, and as of right now, at least we have an active tree-trim tracker in place. So, we'd have to get some relief in that if we are going to do that. But that's one way in which obviously we could lower rate relief and still get to the same place.

We can work look harder at squeezing O&M costs in other ways. There are certainly limits to how much we can do, and if the number was way too low, and we didn't have appropriate trackers, obviously it could affect our guidance. But we haven't seen that yet, and as I said before, I think we're confident we could make a strong case as to what is required.

Tom Webb

Let me just be a little more direct. On the 179, if that's what we implement, we will not revise our guidance now.

Ted Heyn - Catapult Capital

The other question I had Tom was just on the accounting of this. I think we've talked about this before but given that staff proposal is much lower than what you guys have asked for. Is there any problem with actually having certainty about booking those rates from an accounting perspective, since they are subject to refund?

Tom Webb

No. This is a lot like where we are when would have a staff view in any rate case. So, that doesn't give you a final strong enough information to say that that's your new best estimate. As you know in accounting lingo, the key words are best estimate, and our estimate is exactly what we intend to self-implement. So, therefore, there are no issues for that.


Your next question comes from the line of Greg Gordon of Citi Investment Research. Please proceed.

Greg Gordon - Citi Investment Research

As we look at the rate case timeline and we choose to make the presumption, I don't see any reason not to make it, that there is a methodology issue and an education issue in the case not a prudence issue. At what point in the case time horizon will the staff have an opportunity to, if it decides to, revises its position. So, in other words, in terms of milestones, vis-à-vis the point where you are done communication with them, and they make a decision to agree or disagree with you, when would we see them update their position?

Dave Joos

Whether they update their position or not will be the question. But normally that would happen in the briefing process or possibly in cross examination. The staff has made their filing. We'll make our rebuttals later on in May, and then there will be cross examination that occurs in June, and some times the staff through cross examination and often times because we've had discussion with them and said, this calculation doesn't look right or may be you misinterpreted some data we gave you.

Sometimes they will correct that during cross examination, and then gives there is always an opportunity during the filing of their briefs. That will occur in sort of the August, September time frame

Greg Gordon - Citi Investment Research

So we are talking about mid to late summer then is when we should be focused on cross examination of their briefs?

The second question is, I think you inferred that the interim rate increase that your have requested takes into account modifications to your business plan, subsequent to the filing, including perhaps a modestly lower cap spending. You mentioned a $150 million number, so should we presume that the rate based number now is more like $6.15 billion pro forma for you having to adjust to economic conditions?

Dave Joos

No I probably confused you. As I said earlier, we have not reduced our capital spending since we gave you guidance earlier on this year. We did reduce our capital spending from what we originally filed in the electric rate case; you recall we talked about that in the first quarter call. So, when I talked about a reduction, I was simply talking about a reduction from what we had originally filed vis-à-vis what's in our plan right now. And what's in our plan right now has not changed.

Now, the $150 million is probably where I created some confusion, because what the staff did is look at the average capital spending over a couple to prior years, and came up with the number of $300 million less than what we have in our filing.

Partly, that was we think, and we haven't been able to completely resolve this yet, but partly, we think we gave them some partial year data that they interpreted as full year data, and that $300 million, if you use their calculation would've been more like a $150 million if we close the gap on that data discrepancy.

However, that doesn't mean that that's the right number. That is simply what's the staff's number would have generated, and what our actual number is for this year is higher and we have the same staff.

Greg Gordon - Citi Investment Research

Okay, so you still think that the right rate base forecast is $6.3 billion?

Dave Joos



Your next question comes from the line of Mr. Neil Stein of Levin Capital. Please proceed.

Neil Stein - Levin Capital Strategies

Hi. I did have a couple of questions. The first, on the $179 million, I assume that's an annualized number. Could you say how much you'll actually recognize of that in 2009?

Dave Joos

Well, it's basically from the time of self-implementation; you'll get that portion of it.

Neil Stein - Levin Capital Strategies

I imaged there was seasonal factors?

Dave Joos

Due to the seasonality issue, it works out to about two-thirds.

Neil Stein - Levin Capital Strategies

Two-thirds? Okay. Then, specifically on this CapEx issue with respect to the staff recommendation, the way I interpret their filing, they seem to be saying that, your '08 CapEx is about $250 million lower than what you guys said it was? Which seems strange to the extent, I think it's a question, a fact not opinion as far as what your 2008 CapEx actually was. It happened in the past.

Dave Joos

That's what I was referring to earlier. I think we gave them some data that either we conveyed it improperly or they misinterpreted. We are not sure yet, but that data is not quite right, and the actual spending for that year was higher.

Tom Webb

Dave, would you say that, really, we've not had a scenario where we've had something disallowed when they see the real spending.

Dave Joos

We don't see, I mean, what I see in the filing and I guess we're just talking about from what we've seen since the issues came out, and we haven't had a chance to have a full dialogue with the staff on this. But, what we think they did was simply take some average of prior years, and saying, what's in our case for this year, it appears to be inconsistent with what we spent in the past, and therefore, at least in their recommendation they simply incorporated a number that's more consistent with these past numbers.

They haven't suggested to my knowledge that anything we're doing this year is imprudent or shouldn't be included in the rate base, and we'll work through that process. But at least our history has been that we've not had difficulty getting prudent capital expenditures in the rate base, and we certainly feel that everything that's in our plan is prudent.

Neil Stein - Levin Capital Strategies

Then, with respect to your going back to the statute, and that it authorizes you to do filing and self-implementation, the Commission does have authority there to delay it or issue a temporary order to delay it?

Tom Webb

As I said before, this is all new, but let me tell you what the law says. There was concern when the law was passed that utilities could file some very ridicules thing and they could self-implement it, and the Commission could do nothing about it. So, they put something the law that basically said for good cause the Commission could intercede and prevent self implementation.

Now, we don't think there is any good cause in this case. It certainly in our view isn't the intent that we go through and try to accelerate, and do a full blown rate case analysis in the six month period, but the six months is sufficient for somebody to judge whether or not what file is totally ridiculous.

We don't think our case falls into there at all. But it is true that the Commission under the law for a quote, 'good cause', has the ability to intercede in the process, and this is new for the Commission, and new for us. I think the Commission is taking this cautiously, and making sure they appropriately consider a motion one the parties made for them to do that. I don't necessarily pretend that that means anything other than they are doing their job.

Neil Stein - Levin Capital Strategies

Is there any definition anywhere else in Michigan laws as far as what good cause means? What kind of standards there are going to use here in this case?

Dave Joos

I am not a lawyer and so I won't opine as to what that means. I will just sort of take it at face value, but I am sure the lawyers will argue about what that all means, when the stuff is said and done. But, I think the Commission is likely to look at this in the same way I do at face value, and I certainly don't believe there is any good cause based on what we've given them. Like I said, wait and see what happens, because it's all new for all of us.


There are no further questions on the queue at this time.

Dave Joos

We didn't have that many questions. We had some good questions, and I appreciate the opportunity to clarify some of those issues. I will take the fact that we didn't have that many questions to say that we didn't surprise anybody. We were indeed on track, and I think we've kind of come laid out what's going on the rest of the year, and of course we haven't changed our guidance.

That's not to say we don't have continuing challenges to manage. We do. The economy is still challenging for us, we've got some rate case issues, and we'll continue to manage those as we have in the past. We feel pretty good about where we are at this stage of the process, and we'll continue to keep you informed as things develop.

We appreciate your interest and appreciate your participation on the call today. Thanks.


This concludes today's conference. We thank everyone for your participation. Good day.

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