CMS Energy Corporation Q4 2009 Earnings Call Transcript

Mar. 3.10 | About: CMS Energy (CMS)

CMS Energy Corporation (NYSE:CMS)

Q4 2009 Earnings Call Transcript

March 2, 2010 8:00 am ET

Executives

Dave Joos – President and CEO

Laura Mountcastle – VP, IR and Treasurer

John Russell – President and COO

Bill Garrity – SVP, Consumers Energy Company

Maureen Trumble – Smart Grid Program Director

Tom Webb – EVP and CFO

Analysts

Greg [ph]

John [ph]

Tom Webb

As you all know we are webcast today. And I want to thank everybody for coming. A lot of familiar faces. We appreciate your interest in the company, and we thank you for your participation today. First thing I would like to do is just introduce a few people so you can get to know a few of the folks from the company that are here both presenting and not presenting. So not in the middle of our presentations, but certainly after that you will get a chance to catch them and ask them some questions.

First of all I will show you – oops, I won’t do that just yet, but I want to introduce Dave Joos, who will be leading the event today. Dave of course is our CEO. And then right over near Dave is John Russell, who is the President and Chief Operating Officer of Consumers, who will be talking with you today. In addition, Bill Garrity, who is Senior Vice President for both electric and gas supply, and I know you have a lot of good questions for because I've heard about some of those already Bill. So just to goose them up for you. Maureen Trumble, who is our Smart Grid director, and I know that is an interesting subject to many of you, she will be speaking today.

And also with us in the back here is Dan Malone, who is the vice president for customer and energy operations, important fellow to us. Laura Mountcastle, who may still be – there she is right in the back. Great, everybody knows Laura, vice president, investor relations and treasurer for the company. Phil McAndrews, is outside, but Phil is director for investor relations, and then of course we have Glenn Barba, back here in the corner. He is our vice president, controller and chief accounting officer. He keeps us all straight.

And Ammie Conrad [ph], where is Ammie – Ammie is outside, I think right now. She is part of the investor relations group. You'll get a chance to see here maybe a little bit later.

So let me do always the fun part, let me get it out and put my glasses on, so I can read this. But I would like you to take a look at this little more carefully, and it simply says that this presentation contains forward-looking statements that are subject to risks and uncertainties. They should be read in conjunction with the forward-looking statements, and information as well as risk factors section of the CMS Energy and Consumers Energy Form 10-k for this year ended December 31, 2009, as filed yesterday. I'm sure you all have copies of that.

The presentation also includes non-GAAP measure when describing CMS Energy’s the 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 on our website. So you will see that in the books that you have in front of you, those of you that are with us today, and those of you on the web cast check the website.

We expect 2010 reported earnings to be about the same as adjusted earnings. Reported earnings could vary because of several factors, and we are not providing reported earnings guidance reconciliation because of the uncertainties associated with those factors. So thank you for your patience here.

Here is the order of what we will do today. Dave will be up right now to introduce and cover some of the key aspects of where the company has come from recently and where we're going. And John Russell, Bill Garrity, and Maureen Trumble on the subjects that I just mentioned earlier, and then I will come up, wrap up with a financial overview, and then we will take your questions at the end.

So you would note that you have a very lovely, bright green pen. I don't know if it is a good sign or bad sign. We normally don't give things out. But our gift to you for being with us for many years, so you can make notes for your questions later in the day. And I will turn it over to Dave. Dave.

Dave Joos

Thank you Tom, and let me add my welcome to all of you here in the room and also those listening on the web cast. We had another good year at the company. I'm just going to give you a very quick overview of our ongoing strategy, as you know it has become fairly simple. John will get into more details, because frankly he's going to talk about the utility and frankly the utility is 95% plus of our strategy. We are not going to spend a lot of time talking about enterprises, but certainly if you have any questions I would be happy to answer those at the end.

Our strategy has been for some time operating utility assets, in which we have significant investment as you know in a safe and excellent way. And we think optimizing those assets is the way in which utilities can perform year in and year out. We have had a strategy to focus our investments on the utility each year. We update these numbers, and they get a little bit bigger this year. The next five-year window looks like about $7 billion of investment, and that has gotten about $1 billion bigger than last year, because we are starting to see the front-end now in our five-year projection of the coal plant investment.

Fair and timely regulatory recovery is critical to the strategy that we're talking about, and that is why we focused on improving the regulatory structure in Michigan a year and a half ago. We are now into the operation of the new energy law that was passed in Michigan and allows for forward-looking test here, self implementation rates and in fact also decoupling, which we now have on the electric side in the business, and expect to have shortly on the gas side of the business. And all of those factors combined, along with we think a constructive regulatory environment, and a constructive relationship with our regulators are going to allow us we think to deliver on this strategy that we have adopted.

Our goal has been to grow our earnings at 6% to 8% on an adjusted basis. This year, 2009 we reported $1.26 in adjusted earnings, and I'm not going to get into a lot of details, but I would mention our GAAP net income at $0.91 and the difference between the two almost entirely related to a 10-year-old issue associated with Big Rock Point decommissioning funds. We actually were anticipating that we might see that result. I won't say that it is not one that we are a bit disappointed, but we anticipated it having seen the administrative law judge [ph] decisions recommendations late last year. We were a bit surprised with the timing, the commission came out with a final order sooner than we expected, and we opened our books and reflected in 2009.

So it is 10-year-old issue. It is not a recurring item, and on an adjusted basis, we are at $1.26 a share, just a penny better than our original goal of $1.25. You will recall back in November those of you who were at the EEI conference, we were suggesting it might be difficult to reach our goal of $1.25 given some of the elements of the final order in the electric case that came out at that time, but we were able to overcome that with some good cost control and other measures. Tom will get into more details on those.

Our guidance on adjusted earnings for 2010, $1.35 a share is up exactly 8% from our goal last year of $1.25, and so we feel pretty good about that. We have been growing our dividend. As you know we increased it from $0.50 to $0.60 a share for this year, and that increase gets us to about a 44% payout ratio. That is still below the industry average. We are aware of that and our intention is to continue to increase it towards the peer average, although we don't expect that we will get there quickly because the amount of time or the amount of investment we are making in the company, we are not going to rush to get to that peer average, but we want to continue to move in that direction.

And also then to generate cash flow and liquidity, and I think our liquidity situation is fairly good now, and Tom will talk about that as well. And our cash flow is increasing roughly $100 million a year because of the investment portfolio that we are making. So that is an outline and John will get into a little bit more detail on the utility here in a minute.

2007, is a few years ago as you know, but as we prepared for this presentation we thought that the last time we did this kind of an event, we – was in 2007. So we went back and looked at what we were talking about then. I want spend a lot of time on this, but it is a bit instructive. We were dealing with a significant problem with a contract at Dearborn Industrial Generation. That is now solved. We were focused on regulatory restructuring. As I said it was important to our strategy. That has now been implemented we think in a very constructive way, and of course managing capital projects that hasn’t changed. And that is a lot of what we are focused on right now is those capital projects on a go forward basis.

The environment, the business environment overall, some positive and some negatives. I would say most of these have changed in a positive direction. The ones that haven't, of course the Michigan economy and the US economy frankly struggled since that time, and that has had some effect on our electric supply and demand. But costs of natural gas, cost of construction and a lot of other things have moved on a positive direction.

Maureen is going to talk a little bit more about technological innovation. Our business tends to move a bit slowly in that regard, as you know, but we are seeing technological innovation in the smart grid area and smart vehicles, plug in hybrid vehicles, and we that is going to have a positive impact on the company over time.

The investor issues we hear the most about. People always ask me, why are you guys trading at a discount, and my answer is we shouldn't be trading at a discount. We don't think, over time we think we should shrink that discount. But the kinds of issues that come up are these, the Michigan economy has struggled more because of the auto industry. We are not heavily focused on the auto industry any more, but there is certainly that perception. We think the Michigan economy as hit bottom and is starting to show some signs of improvement, particularly in the industrial side, and I think we will see that here in the coming quarters.

The response to that has been to try to somewhat alleviate the impacts of the economy through the regulatory restructuring. We have a tracker now on uncollectible accounts, and we have surcharges in place for our renewable and energy efficiency programs that are actually positive from a cash flow perspective. So we think the structure that is in place sort of mitigates that. But obviously our life would be easier if the economy was stronger.

Our balance sheet continues to be a bit leveraged at the parent, about $1.8 at the parent company debt. We could certainly pay the debt down, and it is our intention to do that somewhat slowly over time. But given today's environment and our opportunity to invest in the utility, we simply don't think it is economically efficient to take a lot of our excess cash and use it to pay down the debt quickly, but rather to invest it in the utility.

And our dividend payout ratio is still discounted a bit to the peers, but we are moving in that direction as we just talked about.

For 2010, our major priorities are fairly simple. They haven't changed a whole lot. We achieved our financial objectives, and I just talked about the $1.35 in earnings. Our cash flow forecast Tom will go over in more detail, and to maintain our coverage ratios and our overall debt level. We continue to focus on employee safety and operational performance. You will see this on every slide every year I suspect, because that is what we think the fundamentals of the companies are, and to execute our investment plan, including making sure that we get timely recovery of our investments in the utility and we continue to believe that the regulatory structure and relationships will support that.

National energy policy and environmental issues, well, they have been up-and-down, haven’t they? It is difficult to tell right now exactly what is going to happen in Washington. I certainly don't forecast any significant movement on carbon legislation this year, although Senator Reed [ph] mentioned that he wants to try to get something done. That was a bit of a surprise.

We do see some movement in the EPA, although I think that process is going to be long and drawn out. So we are continuing to watch it. We were expecting and continue to plan for some sort of long-term cost with carbon in our overall plans. Bill Garrity can address that a little bit more. But nothing dramatic in our view that is going to affect the company here in the coming years.

And then finally, our balanced energy initiative, and we make a bit of a caveat here with or without the coal plant. Many of you are aware. I think many of you were surprised that we were able to get a permit to build a new coal plant in December, certainly not a lot of those being issued nationwide these days. We continue to believe that that makes sense for the state of Michigan. But our plan hasn’t been based on just building a new coal plant. And frankly there are a number of hurdles to get over before we are going to move forward with the construction of the coal plant.

We have a permit. We expect it will be appealed in the courts. It is likely to take a couple of years to get resolved. We will be filing a Certificate of Need yet this year, and have to resolve with the commission whether it still makes sense to go forward with the coal plant. So a lot of detail. We are only over the first major hurdle here in the coal plant. But the point is I don't want people to get overly focused on the coal plant because the initiative along has been a balanced one. We have lots of investment opportunities, and whether we end up building a coal plant or don't end up building a coal plant, we don't think it has a dramatic impact on our future plans here. So I just want to highlight that.

With that, let me just end. I have got a cast of characters here to go over a lot of detail on this, and I will be back to answer questions at the end of the presentation. Thank you.

John Russell

Good morning everyone. What I would like to do is go through the utility update with you. This is our going forward strategy. This is a strategy I think you are familiar with. It is something that we have had for several years now. It is clear. It is consistent. When you look at the strategy, it is built on the foundation, which is safe and excellent operations. Everything we do with this strategy is based on that. And if we perform that well we are able to make the utility investments that you see, which provide value to our customers, and ultimately provide value for the regulators, which enable us to continue to make the investments and achieve the overall consistent financial performance Dave talked about.

What I would like to do today between me and the others here is that we will go through each of these sections with you to show you how we're performing. To begin with, let me show you what some of the highlights that have occurred over the past year. Operational improvement, I will show you some graphs in a minute to show we are making good operational improvement. We established targets back in 2006 what I called breakthrough goals between 2006 for us to achieve outstanding performance in 2012. Now I will give you an update on those in just a few minutes.

We just completed a restructuring of the Consumers Energy of the utility. We have reduced our workforce by about 5% and that was completed at the end of last week. The economy continues to be a challenge. The weather, Dave Joos used to refer to this as the summerless summer, which I think is exactly what happened in Michigan. We didn't have much of a summer. So we're challenged there. Implementation of energy legislation, the law was passed in the fall of 2008.

Last year we had our first full cycle, working through the legislation and through the regulatory component to have the implementation of the law. And my belief is the regulators did what was intended in the energy legislation, and I will show you a quick evaluation how I have rated that out based on the legislation, and based how the regulators have implemented it.

We did receive an electric rate order at the end of last year. Some key components there, we have talked about it with you last night. But some important pieces here are the key outcome to the case is full decoupling. That is decoupling for energy optimization, decoupling for the economy, and decoupling for weather. So an important piece for us to eliminate the uncertainty of those variables particularly in Michigan.

We did receive an uncollectible tracker. That is something we asked for for many years. We received that on the electric side of the business to mitigate some of the uncertainty of the uncollectible with the Michigan economy. And then finally, and you will hear from Maureen Trumble today, full recovery of the Smart Grid investment. It is something the commission is very interested in, and something we think we can capitalize on in an approach that helps to provide value to our customers, while advancing our technological systems.

The challenge we had though is the final order was left in self implementation. It is a bit of old news now, based on the earnings, but we were able to pull some operational levers, do some cost management to be able to make that our target. The good news for you though is that what is in that final order is what we planned on for 2010. So going forward our plan matches what the commission gave us as far as the electric rate case.

Big Rock decommissioning was a surprise to us. Without a lot of detail, this has to do with the refund of $86 million, plus interest for a surcharge that was on our bill for the Big Rock, which was a nuclear plant that we had. Big Rock decommissioning surcharge during the freeze period. And the freeze period occurred with the first energy legislation in Michigan. When that surcharge was completed and ordered to come off the bill prior to energy legislation, we removed it from the bill, and took those proceeds to general purposes.

That was discussed with the commission. It was also something that we filed a tariff with the commission that was approved. I'm personally disappointed in this order. We are evaluating all options now including appeal. So this is something we will continue to look at and see what happens in the future on that. And Dave talked about the clean coal plant. Bill Garrity is going to talk more about it, but I am proud that we did receive the air permit for the clean coal plant. What I am most proud about though, this is a best in class coal plant. You hear people talk about carbon neutral. This impact of this plant with the five units that we will shut down if we proceed, and two more potentially that we may end up retiring based on their performance, this would be a carbon negative outcome, and I have not seen that in the industry yet. What I have seen is carbon neutral, but with the efficiency of the new coal plant, and the retirement of the older coal plant, the carbon output will be less than it was before we entered into this.

So I'm pleased with that piece. Bill is going to get into more detail with you as we move forward. Let me know talk to you about some of the components of the strategy, and I will start with the base which was safe and excellent operation. As we established the targets in 2006, you can see here employee safety. For us this is the most important thing we do in the business, and I know this is a financial meeting, but without safety we can't run our business. We have had a great partnership with the union, the union leadership, and our leadership and the management team to reduce incidence by 47% since 2006.

Now we have got a long way to go. When you look at the 2006 number, we were in fourth quartile in the industry. And just to put things in perspective, we measure safe and excellent operations against all of our peers. We do a lot of benchmarking. It is the way we can determine whether we are performing or not. So far we have been able to move with the performance in 2009 in the second quartile performance. So a lot of great progress has been made by the employees, but we still have a long way to go to get the first quartile, and that is our target.

Productivity is another breakthrough goal, we established in 2006 to increase productivity by 40% by 2012. And you can see we made a pretty good jump in 2009. We are up to 14, and we still have ways to go there, but we are moving that in the right direction too.

Reliability, on the distribution side of the business you can see a 26% improvement. This is the wire side of the business, minutes of interruption. Even though this graph looks like we made significant progress, we are still in fourth quartile. We do have issues that we need to improve on the distribution reliability of this business. Our frequency is first quartile, which is the number of events that occur, but as far as the minutes of interruption, the duration, we are still in fourth quartile, but we will continue to move this and improve it for our customers because this is what drives value.

On the generation side of the business, you can see here EFOR, a standard measured in the industry for reliability. We have improved it by 39%. You see we have kind of leveled off between 2008 and 2009, and that is intentional because with the air permit that we received, we are making investments in our largest, newest units. And our newest units are far better than the 5.5% EFOR, but the smaller older units that we may retire in the future were limiting our investment on those units, because if they are retired, it doesn't make a lot of sense to put the money into it and make the investment. So we're going to see that levelized over the next couple of years, but that puts us at about the average, a little bit higher than the average as far as the industry.

Cost management, something we focused on every single day to enable our customers to have the best value they can. This is a five-year average on gas, and a six-year average on the electric business. These are generally all the O&M costs, including pension, overhead A&G [ph], and so forth. You can see from the chart there, we were at the top of the second quartile. Now we moved into the bottom of the first quartile. So we are pleased that we are moving that in the right direction, aggressively managing cost, and one thing we are proud to talk about, and we tell the commission often is that our A&G were the lowest in the country, despite the fact that Tom gave away a free pen.

However, we are keeping our rates competitive. This is how we do it. I won’t go through all of these with you, but the first one is probably the most important. Many years ago we converted to Western coal versus Eastern coal. That has saved our customers opportunity. If we would have burned Eastern coal versus Western coal our customers would have paid about $1.5 billion more in fuel cost than they do today. So a significant change, and I think most of you are familiar with it. Coal costs are about $58 a ton, Western coal is about $12 a ton. Now the transportation costs are higher getting the Western coal to Michigan. However, it is a significant savings for our customers.

You can see the other things that we have done between health care and cost sharing and pension, and so forth. And by the way the defined pension program is for all of our employees, including our union employees. And then finally the utility restructuring, which I want to talk about briefly. Back in 2007, when I combined the electric and gas utilities into one, we reduced the workforce by about 2.5%. We did and I call it a selective basis, which is a little unique for our company, a little unique for Michigan, and probably a little unique for the industry.

What that meant is that we offered a voluntary separation package of about half a year’s salary. If employees were interested in it, they could tell us they were interested in it. Historically, what happened in the company if you were most senior, the most senior person, you receive that package. That is not the way we did it this time. If your job wasn't going to be eliminated or if we couldn't do the job without you we didn’t give you that package, despite the fact that you were the most senior person.

And that made sense to me, because just because somebody is the most senior and a little bit older than somebody else, it doesn't make a lot of sense for us to pay them to leave if I want them to stay. And that was a change in 2007 that we did. That was very effective. People left that wanted to leave, and we were able to let them leave, and those that stayed, we also wanted them to stay because they added value to us.

We did the same thing again in 2010, but for different reasons. 2010 was a consolidation of the industry or the utility. It was the impact of the economy in Michigan. We have seen a couple of things happen. We think the economy, the recession we are experiencing now is cyclical, but also structural. And so we need to look at the workload and balance the workload with our workforce. We have reduced contractors. We have shifted crews around the state. We have ensured as much flexibility as possible with our workforce, which I appreciate all the employees doing all that they can to continue through this process. But we still had an excess of work and reached excess of resources compared to the work.

So we went through again on the salaried side, a selective basis. In 2010, just last month we also affected the union employees on an involuntary and voluntary basis. The net change was about 5%, and you can see there the two restructurings reduced our workforce by about 530 people. We are going through that change now. I expect it will make us more productive in the future, on balance our work force to the workload.

Let us switch up to another side of the pyramid, the capital investment, the investment. This is the criteria that we go through that all capital investments that we make at the utility go through this criteria, and it is something that we have used for several years now, and it really helps us prioritize where our investments need to be. And this is the criteria we use, the reduced O&M cost. And I think you are all familiar with a dollar invested in capital costs our customers about $0.15. A dollar invested in O&M cost our customers a dollar in that first year.

So if we can invest capital to reduce O&M, it saves our customers money as long as there is value oriented to that capital. Supply cost, we have done that. We have talked about the $1.5 billion savings in Western coal, and you can see the list here. Does it add value to customers? Does it provide service to customers? Doesn't it improve our competitive position? And ultimately there are some costs that we have to spend based on mandatory spending.

Clean Air Act and other things like that are required. We will do it regardless if it is the most efficient to do or not. But this is the criteria we use, which ensures that our investments that we have are rigorous, and we use great discipline in making those investments.

The slide, I think all of you are familiar with. This is the rate base slide. I'm not going to go through it because you are familiar with it. But I do want to make a couple of key points. If you look at the right-hand side of the slide, it shows the change from around 6 billion to 7 billion. And Dave mentioned the primary drivers for that. The check there is the new clean coal plant. But also there is a significant investment about a quarter of $1 billion increase in renewable energy from the last time you saw this, and about 400 million in environmental compliance costs.

Those are the big changes that have occurred over the last, for this five-year horizon compared to the last five-year horizon. But as Dave mentioned, we have a long process to go, and Bill is going to show you the various steps that are still required for the new clean coal plant. But if we didn't move ahead with the new clean coal plant, we have an abundance of opportunities to invest in utility. And you can see in the grade out box, several opportunities in the gas business, electric reliability, electric generation, plus what is not even on here is taking those older plants that we committed to shut down if we built the new plants, and make sure they are in compliance with the Clean Air Act. And so there is other investment opportunities there also. So a lot of opportunities for us to invest in both sides of the business.

Can the customers afford it? This is an issue that we struggle with everyday. That is why we are in the first quartile of cost management, and we look at every single dollar that we spend, as we need to ensure we add value to our customers. What I’ve done here in a very simplistic way to separated electric and gas, and have broken them down into two buckets. One is fuel and one is rate base. And you can see historically from 6 to 9, what the change was for electric customer rates for fuel and base rate, and what we expect them to be 2009 through 2012 with what our plan has today. Base rates would go up about 3%, almost a percent of that is renewable energy and energy optimization surcharges.

And the reason I mention that is that if customers are taking advantage of energy optimization, they should see their bill decrease. So the average rate, they won’t see the increase of average rates. They will be able to see less dollars paid from their pockets to us because they have taken advantage of it. I think energy optimization offers us a great benefit for our customers, and one worth investing in. On the right side of the slide, you see a little different story. That is the gas business. The gas business, the increase is about flat from 2006 through 2009, and then continues to be flat based on our expectation for gas prices from 2009 through 2012.

But on the bottom panel there, what is important is our competitive position. We continue residential rates on electrical are about 7% less than average and Michigan, so below average, and the gas side we are extremely when we think nationally, because of the storage that we have. So this is something that we also carefully monitor to make sure that it is affordable and adds value to our customers.

Let us more up the triangle to regulatory. This is our strategy with the regulators in Michigan. It is one that has been very consistent for the past several years. We need to be able to provide reliable and competitive priced energy to our customers. They need to have good service. They need to expect value from us, and we need to deliver that.

We also see and I think the commission sees the value of having healthy utilities in Michigan. Michigan had struggled over the past couple of years with the major bankruptcies of some auto companies, and they see it is important to have businesses be successful and be healthy in Michigan. And what we believe is important is a cooperative process. The commission doesn't want to surprise us. We don't want to be surprised, and we worked with them in a cooperative manner.

This is what I had mentioned earlier how legislation works, and how we are doing against legislation as far as the regulatory side. And what I've done is just taken liberties to grade out some of the first of all, identify some of the key components in the legislation. And you can see those there from energy efficiency to renewable energies to forward looking strategy [ph] and so forth. And then what I've done is now that we have had a full cycle of regulatory impact on that loss, how we ended up doing it.

And you can see that I think from our company’s standpoint and from the public service commission, not speaking on their behalf, but I think that they have implemented energy legislation as it was intended to do, as we intended the law when it was written. And you can see there most of the year, renewable energy the surcharges are in place. We are moving forward. Energy optimization, there is a cap on retail access, file and implement rate makings, all those things are progressing.

I have graded two of those in yellow, one is projected test year. What the commission did in their order with our electric rate case is both very clearly about the importance of projected test year. The only thing is we thought some actions that didn't necessarily aligned with the words. There were some contracts we had with our union employees in place that required us to increase their salaries, and yet the commission used the negative surcharge for some of those. So kind of hard to balance that, but the rest of it I am very comfortable with. So, certificate of need process, we haven’t done it yet. We haven't gone through it. Bill is going to talk about that in a minute, nor has the commission. And decoupling I am pleased with.

So I think the commission has done everything that was intended by the law and moving it in the right direction. This is my last slide, just to give you regulatory update. Most of you are curious of all the things that are going on with the regulator. This shows, I will start at the top, the gas rate case. We self implemented $89 million in November. Final order is due in the second quarter of this year. Electric rate case, you can see we filed at 178. We self implemented in July, and a final order in the first quarter of January. Show cause is one, I don't think we have talked a lot about. The commission asked us to show cause why in two years we under spent our tracked item. Our position on that was forestry and fossil fuel. Our position is we have overspent on the cumulative basis for it is through 2006 through 2009. For all of those – for those years combined we have overspent what they wanted us to track. And that is something that we are in the process of working through right now on the ALJ. The position will be out in April. I wish I could tell you what others think about this show cause, but no intervener testified in this case.

So that is a bit unusual. It was just us and nobody else showed up. Filed electric decoupling that is something you should know we will file after the year to align and true up the decoupling from the previous year, and then the clean coal plant, I will turn that over to Bill. There is an MTSE meeting today that has to do with the 2007 PSCR reconciliation. It is not out until 1:30, but we are all here today. I want to give you a heads up that is on the agenda today.

So with that let me turn over the certificate of need. I will leave it with that. Bill is going to talk about the balanced energy initiatives, and he can go into the detail of what many steps we have to go before we actually file the certificate of need, and do build the green coal plant. So, with that Bill Garrity, senior vice president of electric and gas supply.

Bill Garrity

Thanks John, and good morning. The balanced energy initiative was developed in 2007 as our comprehensive long-term energy resource plan. It has been designed as both a balanced and diverse plan, as well as to meet the Michigan standards for renewable energy and energy efficiency. Two thirds of our new resource plan comes from new renewables, energy efficiency and demand management programs. The other third comes from the Zeeland natural gas facility that we added to our operating portfolio in 2008, and our new clean coal plant.

I will be providing some status on our renewables and energy efficiency programs that were approved by the MTSC last year, as well as an update on the new coal plant. Maureen will be providing some perspective on our demand management programs next. Maintaining a portfolio, and diversity of fuel supply are probably the most key principles of the BEI. As illustrated in the upper left pie chart, our current portfolio is well balanced, and consists of about one third coal capacity, one third natural gas capacity, and the remaining third spread out over nuclear, oil, pump storage purchases, and existing renewables on our system.

Our portfolio is less dependent on coal than the Midwest ISO depicted in the upper right pie chart, which is the market we operate in. We intend to maintain a well-balanced portfolio in the future as exhibited in the lower pie chart. As that chart shows, including our new coal plant, retirement of a number of our oldest coal facilities, expansion of renewables, and the demand side management programs I mentioned by 2018 the portfolio will be about one quarter coal, one quarter natural gas, one quarter other existing generation facility, and one quarter renewables and demand side. Overall, we believe this represents an effective risk management strategy for our portfolio.

As Dave mentioned, when we were here in 2007 we had just announced plans to construct an 830 megawatt coal plant in our generating complex near Bay City, Michigan. The plan is in advanced supercritical pulverized coal design, and will use proven state-of-the-art technology in all aspects of the operations, including the latest and best available technology to control emissions.

That is very strong community support for the project, and it represents a significant economic boost to Bay County and for Michigan, including construction and operating jobs as well as expanded local property tax base. With a projected service date of 2017, ownership of about 300 megawatts of the total capacity is assumed to be allocated to municipal entities and other interested parties, resulting in about 500 megawatts dedicated to our use. In a significant development along the way, as John mentioned, the Michigan Department of Environmental Quality issued an air permit for the plant on December 29 of 2009.

Besides being an important component of a balanced portfolio, we continue to believe the call will be a significant factor in US power generation in the future. Coal is the most abundant natural resource in the US, and 50% of Americas as well as Michigan’s electricity is produced from coal. The new facility will eventually replace a number of our oldest less efficient coal plants. The new plant will be carbon capture ready, and designed to accommodate the installation of carbon capture and sequestration equipment, when this technology becomes technically and economically feasible.

In addition, coal is a significant factor in helping to mitigate market price volatility and risk, and the BEI capacity mix will reduce the fleet’s overall environmental footprint moving forward. As this chart illustrates, our emissions of sulphur dioxide, nitrogen oxide, and mercury have all been steadily declining since the late 1990s, and will continue to decline substantially as we continue to implement the BEI.

By 2018, the emissions from our portfolio will decline by as much as 80% to 90% from today’s levels. As we mentioned, we received the air permit in December last year, covering the first two milestones listed on this chart. That is the timeline indicates, we indeed have a long way to go. Our next big step is to file a Certificate of Necessity with the Michigan Public Service Commission, under the new process that was established by the 2008 Michigan Energy legislation. This will be a very challenging process, and we expect the CON case will be heavily contested, particularly since we face uncertainties, and indeed differences of opinion associated with Michigan’s economy, and associated electric demand, future commodity prices, primarily natural gas, and future emission control and regulation and cost.

It is very hard to predict the outcome of the CON process, and we will not move ahead with the coal plant if the commission doesn't approve the CON, along with cost recovery for the plants being retired. However, the BEI as I mentioned is a comprehensive plant, and a flexible plant. It identifies other viable alternatives as well, including life extension for our existing fleet and/or additional natural gas capacity if we don't move ahead with the new coal plant.

Moving on to the single largest capacity component of the BEI, as I showed in that first pie chart on the first slide, our renewable energy plan was approved by the MPSC last year, and we implemented an $80 million renewable surcharge last fall. Our plant is designed to meet Michigan 10% renewable energy standard, and the requirement to install 500 megawatts of new renewable capacity, which will be predominantly wind by 2015. We currently provide about 4% of our energy requirements through existing renewables on our system, and our plan is to meet the incremental energy and new capacity requirements by building 50%, and entering into power purchase agreements for the other 50%.

The 2008 Michigan Energy Legislation also established a Wind Energy Resource Board to identify the best wind potentials owned throughout Michigan. Based on the Board’s filings, the MPSC was also charged with designating a primary wind zone, at least one primary wind zone in order to facilitate expedited transmission upgrades associated with that zone.

Michigan’s Thumb region on the east side of the state was so designated as that primary wind zone, and the ITC transmission company will have the opportunity to build new transmission in this area to accommodate substantial wind energy expansion. This could represent on the order of $500 million in new transmission being built by ITC.

Consumers Energy will focus on the west side of the state initially for its new generating facilities, and in that area no new transmission is needed. There is excellent wind potential in that area, and this will facilitate obtaining the current production tax credit by 2012. Our intention is to move east to the Thumb region as new transmission becomes available.

Our new facilities in the Thumb on the east side will be named Cross Winds Energy Park in Tuscola County, Michigan. The west side, the Lake Winds Energy Park in Mason County, Michigan. We are already working on evaluating the results of our turbine generator solicitation to support our overall development plan, and of course with the potential of a federal renewable portfolio standard in the future that could require additional wind capacity by 2020.

On the power purchase side of renewables, the other 50% that I mentioned to complement the 50% of self build, we have already solicited for about 260 megawatts of new renewable energy purchase agreements, with about 10 megawatts of new contracts already in place and approved by the commission. We are well along in evaluating bid responses for the next 250 megawatts, and we have an excellent set of proposals to choose from.

We expect to issue another major solicitation in 2011. Moving on to the demand side, the commission approved our six-year energy optimization plan, and levelized surcharge of about 90 million in May of last year. A number of residential and business programs were implemented shortly after that, and overall customer demand, our overall customer response has been excellent since then.

The savings results in 2009 as you can see in this table significantly exceeded the energy savings targets for 2009 resulting in a $5.7 million incentive and reduced customer costs throughout our service territory. The EO programs will be expanded in 2010 to meet an higher incremental energy savings target according to the energy legislation with a maximum incentive potential of about $8 million next year.

Our most popular programs in 2009 included residential and commercial lighting, home furnace rebates, refrigerator and other appliance recycling, and incentives for heating, air conditioning and water heating equipment. In 2010, we will continue the 2009 programs and focus on the most popular ones. We will also implement a number of new programs, including an existing home retrofit program and an energy efficiency classroom program that we call think energy [ph]. We plan to spend up to the spending limit established in the energy legislation, and will strive to exceed the electric savings targets to satisfy the commission's great decoupling requirements.

Overall in summary the BEI embodies a balanced and flexible strategy for new energy supply resources without a dominant reliance on any particular type of capacity, fuel source or technology. We believe the BEI mitigates the significant uncertainties we face, and as an integrated approach to energy supply and investment planning.

And with that I thank you and I will turn it over to Maureen, who will talk to us little bit about our Smart Grid program.

Maureen Trumble

Good morning everyone. As Bill said, I would like to give an update on our Smart Grid program starting with an explanation of the three major components of the Smart Grid program. The diagram shows on the left side is the enhancements and improvements to our SAP enterprise system another core business system that will be required to support the Smart Grid. The middle component the network shows the two-way communication stream that connects the customer to the company, and on the right-hand side is the home area network, and it shows the 1.8 million electric meters that we will be replacing as well as the communication module that we will be installing on 1.7 gas customer meters.

80%, as you can see here of the total cost of implementing Smart Grid is in the middle and the right side of the diagram. So one of the things that we feel very, very clear in this is it is important to make sure that we are thoroughly assessing and piloting and testing the equipment to make sure we are making the right choices before we begin mass deployment.

Smart Grid is a customer oriented investment. We estimate the total investment at Consumers Energy to be $920 million. It enables operational efficiencies for the company and for our customers. Some of those include reduced field trips. We are able to do certain functions remotely. It also gives us the capability to improve service reliability. Bill talked about the balanced energy initiative, the Smart Grid program contributes significantly to the balanced energy initiative in meeting our customers’ capacity requirement going forward. It enables our direct load management program or dynamic pricing program. Both programs together allow our customers to make better energy decisions, and control their energy cost, and make better decisions as far as their usage patterns.

By 2020, these two programs together are estimated to contribute nearly 500 megawatts total capacity requirement. Smart Grid also provides customer value through expanded energy information that we are giving to customers, and giving customers the capability to control their energy usage and energy cost. It also provides a good return for our customers.

I know some of you in this room have toured our Smart Service Learning Center, which we are very proud about. It opened in late 2008, and it serves two primary purposes. One is a demonstration facility, and the other is testing. We’ve had nearly 2000 people tour the Smart Service Learning Center that includes legislators, regulators, major customers, major vendors in the industry, and media and several other groups as well.

One of the major benefits we see is it helps customers to better understand the benefits that Smart Grid will enable, and it also makes all of that technology much more realistic and understandable when customers can actually see the components involved. Looking at the diagram, I will start with the blueprint at the bottom. Looking at the bottom right-hand corner of the slide, you will see our demonstration facility in the Smart Service Learning Center.

One side of the room has the customer home of the future. The other side has the utility of the future. Moving counterclockwise on the slide, you will see in that upper right quadrant is our Michigan Public Service Commission chairman is touring the home of the future. And here he is learning a little bit more about some of the programs that Smart Grid will enable and actually seeing some of the devices. And we feel that this has been one of the keys to the relationship we have built in working with the commission, and as John talked about it helped as far as our recovery, full recovery of our investment through 2009 on the electric side totaling $46 million.

Continuing to move counterclockwise, the top left corner you will see what is the utility of the future, and this is the area where we demonstrate with our SAP prototype environment, we can actually show how we can remotely customers’ meters. We also show how we can enhance service reliability with outage response. And then continuing again on the lower left quadrant of the diagram here is what is one of the most important segment of our Smart Service Learning Center, our testing area. And here is where we are really rigorously testing the meters, the communications equipment, the equipment that will go into customer home as far as intelligent communicating thermostats and so forth.

It is only after where we have rigorously tested the equipment there, then we continue assessment by moving in into the demonstration facility, and continue to evaluate it there. We have continued to position ourselves as fast followers. We're not the first in the industry to deploy Smart Grid. We're learning from the industry. We are watching other deployments. We have said we will not be the first to deploy any significant equipment of any vendor.

We are continuing to assess. We are assessing seven different AMI Smart Grid vendors in our assessment facility. Some of the things that we are looking at there is that we are focusing on the component. We are focusing on interoperability, security and future proofing, making sure that the equipment will be able to expand going forward as small home energy or home area network devices are available and deployed.

From those seven vendors that we are assessing, the plan is to take 3 to 4 vendors into a pilot environment. I say 3 to 4 because we have already deployed to vendors into the field. We recently selected a third vendor and will begin deployment within the next month or so. We anticipate that we will have a fourth vendor that will pass our assessment criteria, but I can't say who that is obviously at this point, and I can't for sure say that there will be a fourth vendor. As I said, they have to pass that rigorous assessment testing that we have.

One of the other key things that goes into our architectural design in our overall vendor selection is security and interoperability standards. It is very costly and very difficult to change direction to match standards once you have deployed millions of meters. So one of the things that we have stated is until those security interoperability standards have progressed and have developed, we will not begin mass deployment. We are actively engaged with Department of Energy and other leading groups, as far as helping to move these standards forward, and this roadmap shows that the required standards will be developed by beginning early in 2011. And that fits very well with our program schedule.

We have had, as I indicated, a lot of people within our group that have been heavily involved. In fact, Wayne Longcore from our program team has taken a very active leadership role. He is working with NIST and is a member of NIST Smart Grid Interoperability Panel, which is a 20 member guidance panel. He also was recently named to a 12 member panel for GridWise Architecture Council, and they are actually an advisory group to the Department of Energy as far as Grid modernization. So we're taking the leadership role to help to move this critical work forward, and helping to drive it.

The next few slides will show a little bit more on some of the things that we are actually doing to test and assess the technologies. We have collected GPS information on all of our customer meter locations. We then used that information to develop geospatial models for each of the Smart Grid AMI vendors that we're testing. This diagram shows a geospatial model for one of the mesh [ph] communication vendors that we have in assessment.

Many of the pilot and early deployments across the country have been in more densely populated urban environments, and a significant portion of our service territory is rural. So we feel it is very important to test this equipment in a rural environment, and make sure how it will function, where the meters are a little bit further apart, and it makes a little bit more difficult with trees and hills and all of the things that come in between.

Once vendors have made it through our assessment in our lab facility, we actually get a little bit creative and we do – we continue assessing in a field environment. We actually have mounted meters on the back of trucks that you see here. We are also temporarily strapped them to poles. What we are doing is we're testing the geospatial model that we have developed. We are finding out where the vendor says, it takes so many collectors for so many meters, we're validating if that relationship is really true. How do the communication patterns work? Is the communication truly circular or does it communicate better in one direction than another? What is the impact of trees and hills? We have had highway abutments [ph]. We have had all kinds of interesting learnings as we’ve gone forward in this environment. We are able to pick everything up and continue in different locations the test.

I talked about our Smart Service Learning Center. Now I would like to talk about our Smart Grid Technology Center. And what this is is as you heard in the Smart Service Learning Center, we're testing their performance and capability, but this center focuses on something different. We are focusing on quality and durability. We are actually doing a rigorous life cycle test on meters and other devices, and this is really part of our risk mitigation strategy. Finding out how those meters will hold up over that 20 year lifetime, and it includes exposing meters to environmental chambers, as we find out how they will operate in a hot August day in Michigan, and how they will handle a cold January day in the dead of winter in Michigan.

We are really putting it through a rigorous test. We feel it is critical to test and validate not only the performance, but also the durability and the quality of all these equipment before we do begin deployment of 1.8 million electric meters, and 1.7 million gas modules on meters. Very quickly, this shows our four pilot territories that we have mapped out in the Greater Jackson area. We have had significant learnings on vendor performance as we have gone through the pilot. We have also learnt a lot about vendor support as we have gone forward. All of this has truly reaffirmed our approach that we feel that it is important to continue assessing and piloting the technology.

This last slide shows our program timeline. It represents the major segments of work going forward and the incremental program cost. Our board of directors recently approved funding for the program through 2011, and I have talked quite a bit already about assessment and piloting. So I would like to spend just a couple of minutes talking about two other major streams of work that we have going forward over that two-year program or period I should say.

First of all, our systems and communications enablement. This is where we are building upon the enterprise system that we built with SAP, that we implemented a couple of years ago. Continuing to add the functionality required to enable Smart Grid benefits for our customers. It also includes expansion to our outage management system and other supporting systems.

The first release you see there will be implemented in the middle of July of 2011 that will enable us to begin mass meter deployment beginning in January of 2012. That has been a second release that will come in the middle of 2012, and that release will give us additional functionality, as well as it will give us the capability to handle a higher volume of meters being deployed. The other major stream of work I would like to talk about a little bit here is the two programs that I mentioned earlier, our dynamic pricing program, and our load management program will actually be conducting field pilots of both of those over the summer of 2010. Getting ready to kick both of those off right now.

Dynamic pricing will actually have five treatment groups as well as a control group, and we plan to learn a little bit more about customer motivation and acceptance of our marketing approaches as well as multiple pricing options. With our load management program, we are hoping to learn more about customer reaction and receptivity to different marketing approaches. Other utilities across the country have deployed load management. We're taking a little bit of different twist to it, but in addition to that it is very important for us to understand how customers will respond in Michigan versus customers in California and other parts of the country, because all customer groups can be different.

Meter deployment as you see here begins to ramp up in January of 2012. We are going to start with a slow deployment pace. About 150,000 meters over that first six months. It gives us a chance to learn a little bit more still about the technology. It also gives us an opportunity to learn more exactly how the field deployment goes, and what are the learnings there, so we can just going forward.

The middle of the year, we began to ramp up the pace, and will begin deployment of about 4000 meters on a daily basis. And we will continue at that pace on average through the life of the program, and expect to complete deployment by the end of 2015.

Thank you very much.

Tom Webb

Thank you Maureen. I hope you'll find that it is beneficial to have these professional experts come and chat with you, and then to have the finance guy to get up. I've got about 878 slides to take you through in great detail, about how everything is going, maybe not that many, but if you need to, take a stretch its okay, but just your fingers on your pen that's all. Okay.

I won't be much longer before we get into the most interesting part and that is to take some of your questions which we do look forward to, but here let me just give you a quick piece. This is the 2009 report card, and then I'll show you little bit about '10 and then the more distant future where we're going. We're pretty pleased that in a tough year, where the economy wasn’t really our friend, and as John mentioned and quoted Dave, I think on, the weather wasn't exactly there for the summer either. It was a pretty big challenge, but we beat and exceeded all our report card goals except one, and we're going to watch that one carefully as we go into the future and I think Dave chatted just a little bit about that.

Here is some other accomplishments that aren't directly shown on that chart as they include the further cost reductions, and you could say if you're already feel you're pretty lean, why would you be doing more, and I think John described it nicely and his team gets a huge amount of credit for going out there and keeping us down to the size of where the customers are and what they really need from us, and that's never a fun thing to go through reduction programs like that, but it's one that we keep our eye on because we’ve got to watch the rates we charge our customers.

Then on the liquidity position, I look to Laura. She just seems to have a crystal ball out there. She figures out exactly when the market is going to be terrific. My advice to you is to watch Laura as she starts to make a move on CMS, check all the rest of your clients out there, because there are some good about to happen. And in fact in our case we nearly doubled our free cash flow through some things with the government help like lower pension contributions and like the some things that we did on our own, and we pre-funded our 2010 and 2011 CMS parent maturity requirements, which takes some overhang out of this system, put a little cost into this year, but we think that that's the right thing to do. So congratulations to the team there doing that at the lowest interest rate ever at CMS Energy parent.

And then also thanks to the Public Service Commission for some very constructive regulatory orders that allow us to take the programs that we've been talking about for a couple of years and continue to move forward with those in a way that's helpful for our customers and helpful for you, the owners of the company, and then of course Dave mentioned the dividend. We thank our board for staying tuned in on that to try to keep moving in a direction that's helpful to you.

In this slide we show you the track record, and if you look at what's happened over the last several years, you see the earnings growth is up about 8%. We are pleased with that but our guidance isn’t that. That would be the high end of what we would expect to do in the future as a lookout over the next five years. This year $1.26 a penny better. Sorry we couldn't get it right on the money, but a penny better is better than a penny worse I think, and the picture here of showing the dividend increase that occurred in January and the makeup of where the earnings were in 2009.

Let's take a little look at as you think about where we were this time last year, what were we facing and how those things really turn out, because Dave has already talked a little bit about of the left side of his chart, I want to go over to the right side of the chart and just remind you that versus the plan that we started out with, the economy was tougher than we expected, and the weather was awful, almost $0.10 of earnings lost to the mild summer that we had. And then as John mentioned we had a very constructive, a very helpful rate order, but it was a little tough on us in the back part of the year in terms of what it meant in 2009.

We were able to go out and do a variety of things, including some really good operational changes to be lean on cost, including some benefits that didn't occur until 2010 around some of the restructuring, but some things that helped us in 2009 and the parent financing was good as it was for liquidity. It also brought us a little earnings boost that we're able to put into the year, and then Bill Garrity mentioned too, the energy optimization incentive, almost $6 million that was also able to help us performing well on what our customers really wanted us to do.

Now here is a peak if we now look at the 2009 results compared to 2008 and just say how year-to-year did it go, and again here you can see in the left side where the weather hurt us a bit and the economy hurt us a bit as well, and we had some programs in place like our resource conservation program that had been completed so that was behind us, no benefits in 2009, but you see how the utility put us all together with its rate cases and it's cost controls to hold itself flat in a pretty tough year. And over the enterprise side, we were lucky with some of the financing or fortunate I would say with some of the work on the financing and some of our projects to be able to add in a little bit of good news all in the total structure of the company that leave us with a $1.26.

Now here is a little peak about the refinancing that we talked about, which is kind of a pre-funding of maturities. This is a nice kind of look at exactly what that means. We still have about $67 coming through this year in parent maturities and $214 million in 2011, but the financing that we put in place that shows here as 2020 of $300 million covers that. So we are in good shape. Now to put a little pressure on the earnings, but nothing that we couldn't continue on the guidance that we provided to you. So we thought that was a good move for our liquidity and taking overhang out of the way.

Now, looking to the future for 2010 here is the guidance that Dave mentioned at $1.35 a share, part of that 6% to 8% growth, in fact about 7% growth compared to last year, and then you can see the elements in the company on where that's going to happen, and when you look at the utility there is a lot of pieces, a lot of ups and downs but if you just simplify the picture, and you look at the rate base growth, and you look at the equity portion of that including having a little bit better ROE than we would have had in the prior year, you can see that the $0.16, $0.17 of earnings growth that happens at the utility is driven by that.

Now there are other things in there but that's the simple look at how to figure out where the company is going in 2010. Let me jump over to a picture that says well how does that all compare to 2009, and we've done a little bit of linkage here for you. We show that on the utility side where revenues are going to be down a little bit in part, because we talk about a little softer economy than most, and I'll show you more on that in just a moment. That links up in part with our decoupling program, not in total but a large part of that, and then when you look at the costs and other these are the things that we need to do for our customers, investments that we're making, maintenance work that we're doing and most of that is captured in our new rates.

So you can see here between the new rates, the decoupling and the full year effect of old rates that were put in place during the course of the past year, utility becomes the driver that you would have expected to be with earnings worth of about $0.29. On the enterprise side, you can see we have to pick up a few things that don't repeat from the prior year. So you see things like the financing where not only did we get some benefit last year that doesn't repeat this year, we also did that prefunding. So we're holding a little more cash than we normally would and that's a negative year to year.

So you can see those pieces. Another important piece that I know you're very attentive to is our convertibles, and our convertibles will cost us money as the price of the stock goes up, and I hope you don't ask me the question on what we assume the price of the stock is, but I'm certain with that comment someone now will. But we make just a guess of where it might be for planning purposes and build that into our guidance. So we view that stock appreciation as a good thing even with a bit of dilution that comes out of that to have our 7% growth.

So let's talk about the economy. I wanted first to show you just a little bit about 2009 compared to 2008 because it's somewhat instructive of what I think you're hearing from a variety of companies including us. The blue bars that we show up here are industrial overall 6% down for the year, last year compared to 2008. The green bars up here show our total electric sales on a weather adjusted basis, and you can see that overall they were down 3%, but you can see there is a trend in here as we were going through the year, the declines were less and less, and in fact in the fourth quarter we looked pretty good, but I want you to remember the industrial for the full year down 6 and the total down 3 as I take you to this next slide.

Here you can see that same 3 in the total blue bar for 2009, and the same 6% in that longer bar for the industry side, and then you can also see where we were in residential customers and commercial customers, but more instructively with the green bars where we think we might be in 2010. Now, neighbors to the south of us and to the east of us and to the west of us are talking about something a little more robust and I think many of them have been more in the ballpark of a 1% growth. We'd rather plan conservatively, we're not smarter than our colleagues around the region, but we'd rather be a little bit safe here with our decoupling in place that will give us some protection on the electric side, whether it's the economy or whether it's the weather or whether it is energy optimization whatever it may be and then starting in May, we may also have some decoupling around the gas side of the business.

Well, I hope assuming you say, why plan conservatively. I just think it's good to be there on an underlying basis, and if we're better more benefits back to our customers because we're going to have our chance to earn our authorized rate of return in any event, and we'd like to see that turn happen. So a little soft. Now the big yellow circle on the left side of it, I have been showing this one, it feels like since about 1981, but it really has only been a year or two and this recession, the great recession as they call it in our country here is certainly different than what we faced back in the early 80s, but it does have a lot of similarities, and it looks like the impact at least in Michigan is a lot similar this time compared to then.

Remember back then we watched sales decline over a three-year period in total about 7%. In this period, it looks like we maybe closer to 6% and if we're a little too pessimistic on this, maybe it won't even be that much and that's a good sign despite all the difficulties we face, we've been through this before and know some of the things that we need to do to work with our customers to try to help them be successful.

So here is some of the protection. This is a look and I hear you talking a lot about this with others, but these are some of the things that we are able to do to minimize or mitigate the risk at the utility. I want to start with the circle on the right side. When you take a look at that that's the revenue recovery we get for our cost structure, and if you look at fuel side where we had that pass through for some time both on the PSCR and the GCR, but here as you look at the business also tree trimming on electric side and uncollectible. That's about two thirds of our cost structure that we have some protection for and that's a good place to be.

Now the rest clearly are O&M investment and interest expense. If there are changes in those up or down, we're still exposed to what those may be, not the absolutes but of course the changes. That's a pretty nice position to be in and we're grateful to be working with the Public Service Commission that's helpful to us on that. Go to the left side now, sales side of the story. I think we probably have one of the better decoupling mechanisms on the electric side and that gives us protection for about 60% of the business, and we suspect we'll have something similar to that in the gas rate, but we'll have to wait and see how that plays out.

So it gives you some nice protection on the sales side. Again importantly when their sales are down we get this protection, which helps us and we're just as happy to have this mechanism when the sales are up. I know that some of you say, oh, are you going to give up the upside. We really don't think of it that way. When there is an upside that goes right back to our customers and that gives them some cushions that gives them a little bit more benefit and we still get our opportunity to earn our authorized rate of return.

So the risk mitigation here we think is important. Now staying with the decoupling for a minute, here is an example of how it works for us in Michigan. Taking a residential customer only but you could apply this into the other classes, but this is monitored by class, residential, commercial classes, industrial classes, and here what you see the operative words are we get the comparison if you will of average sales per customer compared to what was authorized in the rate case for decoupling.

So let's use an example where the average sales for customers for say a month would be 725 kWh and then we get an actual for that month of about 700 kWh. If you take the difference in that and multiply that times the number of customers that were in the rate case in the average margin which in this case, in this example gives you a surcharge of about $2.4 million. That we collect a little bit later of course, after it goes through its review process. It's pretty simple.

That's how it works, but remember it goes the other way as well. If those average sales are up, then that's a refund that goes back to the customer again later, but we still have our ability to earn our authorized rate of return. Now Dave made a quick mention about the rest of the business, and we do have this one slide and I wanted to share with you so what is happening in enterprises and where are you with EnerBank, and that's what's in this particular slide. You get a map here that shows you where are all the facilities and operations are and a little insert marks that tells you for the generation facilities, where do they burn, where do they have partnerships and what's the capacity and as always the main story there is the Dearborn Industrial Generation facility that makes up the bulk of the operations.

Here you can see that we expect the earnings per share for 2010 to be about $0.06 on enterprises and a couple of pennies on EnerBank. So about $0.08 in total. You've heard us talk I think a year ago about the enterprise side being about a nickel, but may be going up to $0.06 or $.07. So you begin to see that we actually did a little better than we expected last year, and we expect that to continue at about $0.06. So small part of our business, but contributes about one penny to the growth that we have.

Let's look at cash flow, you have in your materials in front of you and then on the website that we put out for everybody, this seem cash flow slide for 2009 and the only thing I'm going to point out because I know you're very familiar with it and enjoy having the parent on the left and the utility on the right. When you look at the parent on the left, we've starburst [ph] one item. By looking at the source of cash compared to both interest and preferred dividends as well as overhead and tax payments and you can see the space there has grown. It's up to $455 million that is shown on this slide for 2010 that equivalent when you look at the backup we have provided you here for 2009 was about quarter of $1 billion.

So you see substantial improvement as we go through time for the parent and that gives us headwind to do the things that we like to do. Here is just a brief picture on liquidity. We like – instead of just giving you one picture. We like to give you a two-year look and how the liquidity runs because there are the absolutes for the end of the year of $1.1 billion worth of liquidity, and because on the gas side of the business we buy gas throughout the year, but during the summer months and spring and fall months, we're buying gas, putting it into our storage field to buy it at a favorable rate for our customers. That gives you a little bit of cycling here in terms of our cash levels and our liquidity levels, and that's the purpose of this slide.

On this next slide, this is one that's very familiar to you as well and I like the repetition, I hope you do as well, but these are sensitivities. Now highlighted in yellow here, the things that we think are still substantial, still important to look at, but what's different in this slide, from what you've been looking at in prior years is that we have some more trackers in place, and a little production on the decoupling side. So reflecting all of that you can see the sales isn't as big an issue to us even though it still has the cash flow implication in part because the cash is collected later through the decoupling process, but you still get the ups and downs there.

On the gas side, it has always been true. The earnings impact has been small, but because of the gas we are putting in the inventory, you can have some flexibility short term working capital on the gas that we purchased. The rule of thumb here that we use for about $0.50 that's worth about $60 million up or down depending on the direction that you're going. UAs with the tracker that's in place on the electric side, and then probably on the gas side coming up this May gives you a little bit of protection there. So there is not a lot of exposure and then ROEs are still important, both that we get a good authorized return on equity, and then we have the ability and that we succeed on delivering that and I think when you look at the track record on that we've been doing better and better as we’ve gone through the years on both of our main business units, electric and gas.

And you can see what the impacts are here if we were to miss. So here are the targets for 2010. There are very similar to the kinds of targets that we've shown you before except for cash flow. We thought it might be more instructive to use operating cash flow now to show you where we're going to be, and what we expect to do and in two slides, I'll show you the reason for that. When you move to a slide here that John used and went through this for (inaudible), I put this up again because I want to reemphasize the two track approach that we have to our investment programs.

We are very hopeful that coal turns out to be the right thing to do and that we can get a Certificate of Necessity approved, and we can be successful with that, but if it turns out the economics aren't there for whatever reason or the commission doesn't see, that's a certificate they want to issue, we have a second track of investments that John talked about that are very important for our customers. Some of them are substitutes for what we would need to do it there is not a coal plant and some of those are being able to do some incremental work that we would really like to be able to do and we think our customers would prefer. So there is a two track approach here on the investment and plan.

Okay, now this is the slide that tells you why I wanted to focus a little more on operating cash flow and that is because as we put these investments in place, which are shown on this slide in the light blue and the yellow with the choices in the yellow that investment generates not only the earnings growth of around 6% to 8%, but it also delivers an operating cash flow improvement. So the underlying cash flow of the company improves each year by more than $100 million as you can see on this particular chart, and that's important for a lot of reasons.

That gives us the room to make the additional investments in the future, to do the things that are important, including growing the dividend. So an important slide for you to look at. Now this one goes out a little bit further and it is just to give you a view of kind of the layering of three of the choices, and they are a lot of choices we could have put up here, but here is the cash flow as we see it for the next many years into the future, and then it shows you some – one of the big choices that we are making of course is on the wind side where we're required to make these investments.

Even though we're using PPAs earlier as Bill Garrity told you in our investment program and our old investments come a little bit later. They are still early in this cycle for where we go, and Maureen told you about the AMI program and she showed you the investments we're making. Those are those investments shown up there in the red or pink or whatever you want to call that color, and then the coal plant or whatever other investments may be there. So you get a sense of how those layer in over time. Now I have one more slide that I wanted to, oops I like that slide, but I'll go to a different view.

I have one more slide that I want to show you that's a bit of a repeat. This is a one that John showed you because it's so important to us. I'm taking from some of the detail that he talked about to show you four points about what I call the balance on the left side. John gave you several of examples of why the investment needs to meet customer needs, first and foremost. If the customers don't need it then there is no reason to make the investment, but then there are three other pieces. One, you've got to do these so they result in responsible rate increases that our customers can't afford. Two, they are affordable for our capital structure, and three, they are attractive to earnings growth and those push in different directions of course, and it also along with the earnings growth gives us that extra cash flow growth that gives us the flexibility to do important things we need to do.

This is the same data for the same period. These are annual rate increases over the last three years in the first bar, and over the next three years, our guess in these in the second bar. And on the electric side you see overall rate increases coming down from about 7% to 6%, but the important part is the rate base request that we have over that three-year period would be about 3%, and any increase is a challenge for your customers when they are in tough times, but when they are delivering on things that are going to give them the reliability that they need to have and give them returns as they go through times like as an electric customer on AMI, they're not going to get the return day 1, but they are going to get a nice return as we go through time on that investment being laid on their back.

And of course the gas story is even more exciting, because it essentially says, if fuels go where we think they're going to go, gas prices come down the way people are predicting. Then we'll have a situation that's a lot like where we were in the last three years, and it's almost like the investments are for free for the customers, but we are still very focused on that 2% piece of the base rate increases. A couple of more slides, this one is a slide that has a little bit of history and thank goodness we don't have to talk much about this anymore, but we had some challenges in the early years over the last – 10 years ago and spent a lot of time restructuring and rebuilding our balance sheet, both at consumers to get the equity level up, as well as at the parent to get the debt down substantially as shown here by $4 billion.

That was fun, but I get asked, you like it now more than back then or wasn’t that exciting to be a part of the restructuring. Let me be clear. I like it now. It's a whole lot better. What we've done over the last couple of years has gotten a comprehensive state law around energy, and I think taken any other way would not have been successful for us. Trying to do that piecemeal wouldn't have worked. Those people at maybe one of the coal plants for good reasons are not the same people that would want renewables, but we have the possibility for both, people that want to see energy efficiencies on one hand probably don't necessarily want to see more investments that are related on generation or whatever on the other hand.

Lot of balancing and a lot of great work under Dave’s and John's leadership and many other people in this room and outside of this room, along with the legislature and other politicians to make that possible was very important for our business, and then over the last year we've been in the execution phase. It's all well and good to have a law, but again you really do what's intended in the law, and we're well down that path and we're proud of that. So, little bit of sunshine as you look into the future. That's the $7 billion of investment, and remember when we talked about going from $6.3 billion when we showed you this for a five-year projection last year compared to a little over $7 billion now, it's really this simple. It's the same program we've been talking about, but it drops of the first year of lower spending, and adds in a new last year in the fifth year at a bit higher spending that follows some of the charts that I've shown you here. So it's the same program as we're evolving through time.

With that if we are able to better serve our customers and that's what we're all about, then we can be very successful and grow the business for you. Few takeaways that I'd like to have you think about is we're more visible now. We're more visible from the standpoint of our utility investment that leads to earnings growth of 6% to 8% and operating cash flow growth that's about $100 million or more each year improvement.

We are fortunate I guess to have NOLs. I was cringed a little bit for how we get them, but we are fortunate to have them because it avoids the need for new equity in the near term. Our regulatory framework is constructive. We're very happy with the way we've been able to do our work with the Public Service Commission, and the way they've been able to lead us to things that are important to them and to us for our customers, and we've been able to mitigate our risk somewhat.

And then lastly and probably very importantly to many of you, we've been able to grow the dividend I think substantially over the last few years, and we know we have more work to do in that area. So what I'd like to do now is ask the presenters that they would come up to the front table, so they have a chance to look you in the eyes and you can look them in the eyes everyone. Dave, please come up to lead us through the Q&A session, and we're happy to take your questions and we thank you for your patience over an hour and a half here because I know that's a lot of patience and we look forward to your questions. Dave.

Question-and-Answer Session

Dave Joos

If anyone needs to stand and stretch, feel free to do so. Let me just start with Greg [ph], and by the way I want to thank the team for doing. I think it was nice job walking through a lot of detail on some of these issues and I'll try to be sort of the MC and spread the questions to whoever it is most appropriate. Yes, Greg?

Greg

Thank you. I have two financial questions. First is on Tom’s slide 7, obviously, I'm presuming you've made us an assumption about the share count, and I'm not going to ask you what that is. I can assume the stock price which – since I'm recommending your stock I'm hoping is higher but the – all things equal, I'm just wondering what is driving the estimate for interest and other from $0.37 to $0.45. I presume a chunk of that is the pre-funding of the maturities. Can I get a sort of a dollar amount that is a $300 million amount. What was the rate on that?

Tom Webb

Let me just help you, if I can get the mike. Thank you very much. Just I'm going to answer your first question anyhow because it won't go away. The number in here is not a prediction of where the stock price will be or should be, but the numbers $17 a share because I know you're going to go out and figure it out anyhow, and I want you to know we hope it is substantially higher than that, but that's what is built-in to the convertible calculations for the dilution.

I'd like to also point out in case you didn't know that in the appendix portion of your book, we’ve laid out the convertibles for you, convertible by convertible with the impact that could happen going stock price up or stock price down. So you can do your own math and understand exactly how that affects our earnings. Importantly on that subject we built that into our guidance, and so we're still very comfortable with $1.35. To your second question that's specific about the interest in other, for those of you that don't see that slide, it goes from $0.37 in 2009 to $0.45 in 2010.

The biggest piece of that is the pre-funding of the interest. In part, we had a benefit last year if you recall that helped us a little bit on the interest side of the equation, and then because we had done a few things that helped us on our earnings per share, but then on this side we've done this pre-funding. So we got an extra $300 million sitting in our cash coffers to pay the $67 million at the end of this year, and $214 million I think it was into next year. So that's an interest expense that we didn't have $300 million times 6.25%. You can figure out that particular piece and put in there, but there is another little piece that's in there. That is some parent tax benefits about couple of pennies that we had in 2009 that we don't predict would repeat in 2010, and everybody looks at me and said, hi you always say that Tom and all of a sudden there is no couple of pennies or tax, but there's not any in our guidance. So put those two together and that's about $0.09 that covers.

Greg

Okay. So not a higher overall corporate tax rate, but just a couple of pennies of benefit that you don't expect to repeat or does that translate into a modestly higher…

Tom Webb

Well, we also would have a modestly higher effective tax rate as we go through time but remember, on a cash planning basis we have all those NOLs. I know you're familiar with that.

Greg

What were the one-time or the nonrepeating interest benefits from last year, can you give us more detail on that?

Tom Webb

We have built into this particular number some of the benefits we had by taking the QUIP [ph] out, if you recall early which gave us a little advantage that we retained a portion of that in our numbers for 2009 that doesn't repeat in 2010.

Greg

Just you got the benefit early.

Tom Webb

That's it.

Greg

Got you. Okay. The second question is looking at slide, I think it is slide 20, is there an inference here that if you're successful in getting buy in on all the capital projects that you think are necessary that when we get out into the 12 to 13 timeframe, you consumed all the tax position on the parent balance sheet that you'd be looking to, maybe turn on a drip or the external equity financing to fund all this?

Tom Webb

Well, I'll be very direct on that. I don't see any need to go to the markets to issue new equity certainly over the next couple of years and maybe three. Again I wanted to have everybody that's listening in here, look at the attachment that we gave you on NOLs and AMT tax credits that's in the material that you have and you can see, they give us protection through 2012.

That's what gives us the shelter and the comfort about not needing to issue new equity. Once we get past that unless new things come up, and I'm going to give you one example of new things in just a moment. We would need to go to the market, particularly if we had a project of the scale of a coal plant or something like that it would make sense for us to come to the market to issue new equity. We haven’t made that decision. That's pretty far out in the future. So it's one that I guess I wouldn't worry about, but I want to be very candid and transparent with you that we don't have other tools in place.

Now, why might I be wrong and why might this protection that we have last longer. Why might the NOLs be worth more to us as we go further in time. We have not built bonus depreciation into the 2010 guidance yet, and there is still a pretty good prospect that something may happen there. I think you all realize how that works when we get the tax shelter down at the utility that pushes the time when we use the NOLs out, doesn't change them. They have a good life. It just pushes that timeframe out. So we're always looking for the best ways to first protect our customers down at the utility with whatever tax shelters that are available and then two, to get a benefit to help the financing for the company at the top end. So I hope that helps. Dave.

Dave Joos

Go ahead, Ammie. Anywhere you like, you got one over here. Okay, go ahead. Hi, John [ph].

John

Hi, Dave. This is a question either for Dave or John, just – I don’t know where I saw this within the last couple of days. There seems to be some move in Michigan to push very high up. Can you comment on whether you think that move has any lags on the legislature and your position on that, and maybe while we're on the legislature talk about the moves to try and raise the choice cap, and how that might impact your plan and what you think about that?

John Russell

Well, I might just comment briefly on that. I don't know that any of that will necessarily have any lags, but it doesn't surprise me that people talk on that. Obviously, maybe talk about both of them. We're at a 15% renewable portfolio standard, I'm sorry, 10% renewable portfolio standard by 2015. There was a lot of debate about what that standard ought to be when the legislation was passed. In our case, we already had about 4%. It wasn't certainly a huge stretch for us to get to six. There were a lot of people thought that ought to be higher. Of course we're hearing the post federal standards that are higher than that, and I think some people continuing the pressure say look, let's do more.

I would say it was carefully considered because there were arguments on the other side to say look Michigan's economy isn't real strong right now, assuming you want to drive up the price of power by overdoing renewables at a time when renewables continue to be able to be more expensive than what prices otherwise would be in the region. I think there'll be continued debate, but I don't expect to see anything happen in the near term with regard to changes in the state standard. We'll continue to watch what happens at the federal level, and if something higher does happen, I think we've got the ability to implement more within the state.

On the choice cap, remember when that choice cap was put into place, we were only at about 3% maybe 4% of folks taking choice percentage of our load. We had been higher than 10% at one point in time, and while we pointed out to the legislature and resonated was what, when you have a situation where customers can come and go as they please, and the kind of gas price volatility we saw could drive that in either direction and has, it's going to be difficult for folks to invest in base load capacity, whether it's on the merchant side or whether it's on the utility side, and eventually folks, yes, you know, you're right.

We're not prepared to completely get rid of the idea of choice, but we are prepared to limit it as a 10% cap. We were okay with that because frankly that's about the level of short-term purchases we would normally make as part of our portfolio planning anyway, and it wouldn't preclude us from moving forward with the base load plan. There are some now because gas prices come down dramatically in price, and with the economy off for summer, that power prices came down and choice is now up to that cap, and some are saying, while we had to raise the cap.

Well, a lot of the folks I talk to understand, the fundamentals of this where we knew that would happen. And what has happened is exactly what was predicted and that's the reason we put this cap into place. I expect there'll be proposals to raise the cap. I don't expect that they'll get any traction, but there will no doubt be some debate about that, and I think the reason is exactly as we said, if you raise the cap then it's going to be difficult to invest in significant generation within the state and what has happened is totally predictable, and the reason they put the cap in place in the first place, but we will have to watch this space. It's a political year. People will be talking about things like that. I don't expect much will happen quite frankly.

John

Yes, couple of questions. First, Tom I like your weather slide, except you should have had some shower [ph] and lightning for the pre-2003, I think. Just on the ROEs, what were your earned ROEs in 2009 at both electric and gas, and when you look at 2010 guidance, can you give us a sense of what the earned ROEs or are you earning your allotted returns on both, are you slightly under earning. Could you give us some sense of that?

Dave Joos

I'll let Tom take that. Go ahead.

Tom Webb

Yes, for the full year 2009, the ROE on gas was 9.9% and by the way these you can find also in your attachments to the press release, the standard things we put out. But I'm glad you asked the question, because when you look the electric side, we are at 6.4%. Now that's because we put the big rock piece all in there and when you take that out that number is more in the neighborhood of 90% so to get apples to apples. In our guidance, we have built in moving up our ROEs closer to the authorized 10.7%, but not fully there. So roughly around 10.5% is where we are in our guidance because you never know, you never can predict hitting it precisely. So there is an improvement year-to-year in where we expect to be, but not all the way to the exact authorized ROE. Lot of play. We'll see how that works out.

Dave Joos

Well, and of course you recognize that even if you are effectively earning at the allowed rate of return but continue to invest capital, we've addressed a lot of the timing issues, but it doesn't go away completely even with the six month implementation. So you're always going to lag a little bit.

John

One other, Dave, just one other general question. You have a governor election later this year. Just any general implication as you see for electric issues things that we should be watching, you know, if the Republican governor comes in, what does that mean if at all, any thoughts there?

Dave Joos

Is this a wide-open election at this stage, and just five announced Republican candidates and other three announced Democratic candidates. We are going to have a new governor because the existing governor is term limited. I haven't seen any indication that energy issues are going to be part of the political discussion in any great way. If anything there may be sort of on a positive way. Some of the candidates have talked about their support for building new generation state. Obviously, a huge focus on jobs and there is a lot of jobs associated with that, but other than that I haven't seen any indication that's going to be a political issue within the state. Yes, I mean, wherever you go the microphone will follow.

John

I wanted to just clarify one thing. My understanding is that if you guys get bonus depreciation, we'll simply push out the NOLs. It doesn't really have any impact in the current cash flow numbers that we see here. Is that correct?

Tom Webb

Well, overall it doesn't. That's correct. As we get the bonus depreciation number, think of our cash flow sites for the utility and it gets the shelter. So we're in good shape, but then the benefit that you get at the parent just still comes but comes later. So you'd see some different texturing and things like that.

John

Okay, I got you. Now, the other question I have is on the slide 21, this customer impact. Base rate impact of 3%, is that just – that's over the three-year period. Is that correct – does that suggest that you…

Dave Joos

It's annual.

Tom Webb

That is annual.

John

That's the annual increase, okay, and does that suggest that we're going to have another rate filing after the decisions beginning of January – early first quarter of 2011.

Dave Joos

Yes, in fact we repeat this consistently. We developed a strategy several years ago of getting a better rate process in place, and then filing rate cases basically one right after another. We haven't completely seen the benefits of that, but we expect to see the benefits of that as the staff gets more accustomed to seeing a rate case every year. Hopefully that the minor adjustments from the prior rate case can make them easier to manage, but as long as we are in this investment cycle, we want to make sure it gets reflected quickly and frankly we think it's a better strategy to avoid a large step increase, you know, every couple of years, and just do it on an annualized basis.

John

Okay, it's 6% with fuels. Is that right, is that because your protection for fuel that because of rates, you could be going up, okay. And so – now in the previous presentation that you guys have with respect to the utility, you suggested there might be offset of EO/Smart Grid opportunities. Is that offset the number or is that including that number. I mean, is O&M all the cost efforts that you're making, is that inclusive in this 6% number that we're looking at?

Dave Joos

John mentioned that, but the answer is the costs are inclusive in there. This is what the rates will do. Now the question is if you are somebody who has taken advantage of energy efficiency, and in fact you've lowered your energy and your demand on a net basis your bill will be lower than the 6% increase could even be flat depending on what you've done. So rates will go up. Consumption in theory will go down, but of course not everybody will take advantage of that. The ones that do will see less of a rate impact.

John

What percentage of the average ratepayer is going to be in that category versus the ones you just don't do anything?

Dave Joos

You know, that's hard to predict it because it's early enough. It's really hard to tell. A lot of customers are doing little things like replacing their light bulbs, with high efficient light. A lot of smaller percentage of customers are going out and making major appliance replacements and things of that nature. So, customers that don't do anything will see this kind of a rate impact because their sales won’t change. Customers that do, they know the sales go down, their overall bills won't necessarily go up this much.

John

Okay, and then finally I saw some comments and I didn’t have a chance to read them thoroughly. I believe David that you make some comments with respect to the transmission and the need for local involvement versus the federal involvement. What's the context to you that we should be thinking about, what are you concerned about, what makes me – why these statements now, you are not the only one, I think there were others, but could you just give us maybe just a little bit of flavor as to what the issue you see there and what we should be concerned about or what you are your concerned about.

Dave Joos

Yes, CMS is part of a coalition that wants to make sure that we don't end up with a top-down planning in a broad socialization of costs, maybe I should just say it that way. There are folks that are proposing, for example, that the fastest way to rollout renewables in the eastern interconnect would be to build a high-voltage overlay over the whole Eastern interconnect somewhere between $50 billion and $100 billion worth of investment over time, and they likened it to you know, the interstate highway system.

That may be fast but it isn't necessarily fair to all customers and doesn’t necessarily reflect the market. So some of the folks that are involved in this, and I would say including us are concerned that if you build that and socialize all the cost basically postage stamp type rates if you will that you'll warp the economics so that indeed wind power from the Dakotas where you know, the wind is 40% plus on availability factor is going to be much more competitive than wind in Michigan or wind on offshore on the East Coast. If you have no other cost of transmission, if you roll the cost of transmission in and the folks building the wind or buying the power are paying for that incremental cost, the economics actually may be favorable, in fact (inaudible) that they are favorable to developing renewables in Michigan, and (inaudible) for example, he believes his math is favorable to developing offshore on New Jersey, but you wouldn't develop offshore wind in New Jersey at that expense if the transmission costs were effectively socialize, because it's going to be cheaper to buy power from North Dakota.

On an overall cost, however, customers would pay more. Secondly, Michigan is a bit unique in terms of circumstances, because even the Eastern interconnect overlay analysis that's been done says Michigan wouldn't derive significant benefits but of course if you socialize the cost, they pay a large share of those costs that actually come out negative in terms of the cost of transmission. So our goal is simply to say, hey let's make sure the people that are benefiting from significant transmission investment are the ones that are paying for the investment, both for customers and so that it doesn't work the economics and potentially even impede the development of renewables across the eastern interconnect of the benefit of a few locations. So that's the concern that we have.

John

Okay, thanks. Two questions, Dave, in the presentation you alluded to the fact that you acknowledge that your dividend payout ratio is still less than where you would like it to be. Could you give us a little more specific on A, what you think is the appropriate payout for a company with your profile, and two, when you say that it will take longer to get to that what timeframe are we talking about, three years, five years?

Dave Joos

We haven't really gotten that specific. I think the industry pay out ratio averages somewhere in the mid-60s now, roughly maybe 70 something like that. We all think it makes sense for us to get there very quickly. In fact while we are in major construction, we don't think it makes sense to get there at all probably. We're at 44%, that's quite a gap. What we expect to do is to grow the dividend in our plan faster than perhaps our earnings growth is growing so that eventually we get to that number, but don't expect us to get there very quickly. We'll continue to move it upward, and that's about as good a guidance that I can give you. I think we’ve developed a trend over the past several years, but I don't see any reason we wouldn't continue, but those are decisions the board makes annually as you know.

John

Also in the slide when we talked about the rate impact to rate payers, the 6%, 3% numbers we were discussing earlier. You've obviously made an assumption on commodity price moves being somewhat muted particularly on the gas side, now I was just wondering if commodity prices start to rise at a much faster pace, would that in your mind in any way impact the rate base investment program that you have given the rate increase implications for customers going forward.

Dave Joos

I might invite Bill if you like to add to this. I would say that you know the general view right now is as the economy improves, we might see some strengthening of commodities. Natural gas of course every two to three years we seem to have a different story, but the story right now is all about Shell Gas as you know and the viewpoint, certainly the futures reflect a more stable pricing higher than they are today, but more stable pricing going forward than we've seen in the past. I don't know whether to believe that's a long-term trend or not. Obviously, if gas prices moved up fairly dramatically over time that makes a coal plant even more attractive, but obviously also drives up the price of natural gas on a delivered basis to your customers and drives up the regional prices and puts more pressure generally on the economy and more pressure generally on your customers. So I don't know that changes anything dramatically. I would say that the reason that we've emphasized so much the balanced energy portfolio is the unpredictability of some of those commodity costs, and we continue to believe that's the right way to look at it.

John

Okay, and I guess it may be in the slide one last follow-up, but when you look at that next five year plan, how much would you say is pretty much set in stone, of course the coal plant is a moving target, for the rest of it, should we assume that's pretty much what you expect will be spent over that time period.

Dave Joos

Well, things can always change as you know, but as Tom demonstrated in his slide, we have probably more investment, capital investment opportunities that we think are reasonable and justified than we think makes sense for us to invest, and so we prioritize those in a way John described by looking at the benefits to the customers, direct offsets in O&M, direct offsets of fuel, things of that nature. The coal plant is one that we've been working on for a number of years and we're proud of where we've come with regard to the coal plant, as we've tried to point out there are so many factors that can influence that that we don't want to base the plan on our success story, inability to move forward with the coal plant. And if we are unable to move forward or we don't think it makes sense economically when we see the results for the process then you know, we'll emphasize more capital investment in some of those other areas.

Unidentified Participant

Tom, can I just ask a couple of nitpicky detail questions, first guidance does not assume that Big Rock gets appealed this year so there wouldn't be any reversal this year?

Tom Webb

No, it doesn’t.

Unidentified Participant

The ROE…

Tom Webb

It doesn't mean we won't, but it doesn't.

Unidentified Participant

The ROE assumed in guidance from the interim rate case for electric is using 11% ROE or is it 10.7?

Tom Webb

In our guidance?

Unidentified Participant

Yes.

Tom Webb

10.5%.

Unidentified Participant

10.5%. So even on the interim it's 10.5%?

Tom Webb

Well, –

Unidentified Participant

That would implement in the third quarter.

Tom Webb

I'm going to hesitate on the interim numbers, because we've not said publicly what we're going to do on an interim basis yet.

Unidentified Participant

Okay. And how much bonus depreciation did you guys have in 2009 and given Capex level, would it be a similar number presumably.

Tom Webb

Yes, if I remember right, a couple 100, a little over a couple of hundred million dollars and yes, it'll be a similar number in 2010 if it's approved.

Unidentified Participant

And I guess Dave, it's kind of bigger picture, long-term demand growth expectations for your service territory down 1% again in 2010 guidance as you guys look at adding 6% resource from renewables looking at the coal plant, maybe a gas plant. What kind of long-term demand growth do you guys assume in your numbers, and how will that affect, you know, as you re-shift the Capex plan on the long run basis?

Dave Joos

Yes, I'm going to give you very big picture, and then I will let Bill give you some more specifics. I would say in a big picture basis three or four years ago, we were talking about demand growth and our service territory as high as 2%, then 1.1%, then when we take into account energy efficiency and other things, it was going to be 0.3%, benefit is going to be negative. Now we've seen 6% load growth over the past three years, and one of questions is well, how much of that is temporary cyclical and how much of that is sort of resets the bar. We think there is some of each. I don’t know how fast you expect it to come back. We certainly think we're going to see some significant improvement in industrial as Tom showed you on a year-over-year basis. So those numbers are all over the math, and could continue to change and Bill, give him some specifics as to what you got baked in right now.

Bill Garrity

Yeah. It is always difficult to say. Dave kind of set me up here, while sometimes they are negative, sometimes they are positive. I got to tell you what the real number is. In our filing that supported the coal plant air permit, we had about 0.5% a year top line growth overall for the next 20 or 25 years. But quite frankly, it all depends on the economic assumptions, and where are we evaluating that right now, as we did in the debts [ph] of preparing the Certificate of Necessity for the coal facility. So that is certainly subject to change going forward, but that is generally where we’ve been at in analysis over the last year.

Tom Webb

Dave, can I add something on this recessionary thought. That is good, I think everybody will remember. I don't have a crystal ball, and I'm not suggesting I know what is going to happen. But we often underestimate the recovery coming out of recessions, whether it is a country or the state or the world. And there often can be some correction, where you come back up, which is in a manner that is not indicative of what your long-term growth could be.

So there is a chance that the base changes from the low level that it has gone to that it comes up a bit, when you see the industrial swings that we are talking about. And then you have sort of a more consistent projection of what that growth would be. You need to factor that into your thinking as we do, and Bill has in his models trying to figure out what is the right decision.

Unidentified Participant

Okay, hi. Okay, on interest and other in 2010, so is it fair to assume the pre-funding, the 300 million pre-funding that will take out debt at the end of this year and early ’11. So when we look at run rate for interest and others, it is a nickel lower or…

Dave Joos

Yeah, you could characterize that $300 million new debt offering we did to cover the maturities you just mentioned. More of a one timish kind of thing, even though we will be trying to keep our debt flat net of cash throughout all that process. So yes, there is some future upside, not in 2010 that could be associated with that, unless we reach forward again, and buy out some more maturities that are coming due within advanced prefunding.

Unidentified Participant

But, on else equal that would drop down in ’11?

Dave Joos

Yep.

Unidentified Participant

Thank you.

Unidentified Participant

Hi, could you talk about any rate base implications at all of the smaller less efficient coal plants being retired. They have a book value or anything?

Tom Webb

Well, they are baked in our plan. We have a few hundred million dollars in net book values still remaining on those coal plants, and that was part of the discussion surrounding the air permit quite frankly. If we are going to commit to shutting those units down early, we want to make sure we have the opportunity to recover that cost and in fact, at this stage we would expect to have a process in parallel.

We have had this discussion with the commission already, a process in parallel with the certificate of need to allow for the recovery of any remaining net book balance on the plants that would be decommissioned as part of that overall agreement.

Unidentified Participant

Okay, and with regards to your 7 billion investment plan, I will start with the new coal plant, of course, are there any major regulatory filings or approvals needed to accomplish that goal.

Dave Joos

Well, you know, generally speaking other than the CON, we have not had a process in the past for pre-approval from a regulatory perspective. In Michigan, it has always been you file after you’ve spent or invested the capital, and it is coal used and useful. In fact, the reason we had such a debate about the CON, is that we didn't feel that it made sense for companies to make those kind of commitments to our major generating facilities without some assurance upfront that at least that it would support for the investment.

So that CON process really only applies to $500 million or larger generating plant type of investments, and we don't have anything else in our plan besides the coal plant of that category. Having said that, we work closely with the commission and the staff, and they have been aware of what we are doing. We don't want them to be surprised, and I would say the Smart Grid is a great example of that, where you have got close $1 billion of investment, and one nationwide, there has been some controversy over is this the right thing to do, and how much of the cost, how fast should you do it, what are the benefits. And we spent a lot of time with the staff on that, Maureen and her team in particular.

And the commission has decided that in the case of Smart Grid, they are going to allow us to recover on a running basis, and we have already rolled into, is it $44 million? Is that the amount?

Maureen Trumble

46.

Dave Joos

$46 million that the commission supported very strenuously in our last case. So, we will see generally speaking most of these projects, when it comes to distribution investments, energy efficiency investments, things like that, all of those things are going to get rolled in as we invest in them, and you are not going to wait for some big major use and use for them like you would for a coal plant, and you won’t see formal preapprovals. That doesn’t mean we won’t be in a dialog with them.

Unidentified Participant

Okay, and then lastly just in addressing the converts, which you consider refinancing or calling those converts to eliminate the shares outstanding dilution.

Tom Webb

We will look at different alternatives for that, but I really don’t want to speak to any change in that. It involved so many different people. We are happy where we are now. We thought that was good financing to have in place, and still think that, but we will always be looking at our options, and what is available in the market to improve our situation.

Dave Joos

Any other questions out there, any burning issues that we didn’t get to? All right. Well, thank you. Then it has been two hours here. I know it has been a lot of time. I appreciate your support for the company again, and all the great questions, and all interest in the company. Thank you for those that are participating on our web cast today. Bye now.

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