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CMS Energy Corporation (NYSE:CMS)

Investor Meeting Call

February 29, 2012 12:30 ET


Tom Webb – Chief Financial Officer

John Russell – Chief Executive Officer

Dan Malone – Senior Vice President, Distribution & Customer Operations

Patti Poppe – Vice President, Customer Experience & Operations

Jack Hanson – Senior Vice President, Generation & Energy Supply

Ronn Rasmussen – Vice President, Rates & Regulation

Tom Webb – Chief Financial Officer

Thank you everybody for coming. We appreciate it. Just to let everybody know, we are webcast today, so when we get to the Q&A section, which we are going to hold to the end of the presentations, we want to make sure that if you can get a mike or something, so everyone else can hear your question that are in here. What a wonderful setting to be for our 65th Anniversary being listed on the New York Stock Exchange and our 125th Anniversary as a company serving customers. So, today is a big thank you to you as owners, investors, and lenders and analyst and specialists, we do appreciate all that.

So, with that welcome, I have to do this very important here. I've to read this word for word, but I am going to rely upon you, my Chief Counsel sitting right in the back there, so I am going to rely upon you to read this with some care and diligence. Remember, this is our Safe Harbor statement. We have forward-looking statements in the presentation you are going to have today. Just make sure you look at the K, we have a fresh K out, and look at the risk factors in there, look at the forward-looking statements in there, and make sure you understand, where we are as a company with those in mind and we would appreciate that. Also, remember, there is a non-GAAP measure or two, we try not to have very many, but we do have some in here, so you see at the end of the brochure that you've got nice reconciliations back to the GAAP numbers, please take a look at that and make sure you've considered those in your thinking and your analysis about the company.

Well, now I have a real distinct pleasure here at the beginning is just to introduce a few people and I'd like to ask them, just standup and just wave the hand, so you can see who they are, because one of the highlights of today is to get a chance to see the Executive Management team of the company. And so for some of you, when you hear me and I sort of look good and sound like I know what I am talking about, all I do is just try as best I can as to repeat everybody, but Jack, I do very much try to repeat what they know and things that they are experts on that I am not, but I at least can share with you a transparency into the company. You are going to meet the people that really do it and know how it works.

So, let me go down through the agenda that you have and I first introduce these folks. Dan Malone is the Senior Vice President for Distribution & Customer Operations and Patti Poppe works for Dan. She is the Vice President for Customer Experience & Operations, a new position for us and you are going to hear more about that and you've asked me many of you what's new today watch that spot, because there are some nice new things that I think are important to us. Jack Hanson is my favorite team member, Senior Vice President, Generation & Energy Supply, really one of the sharper folks we have in the company and I have learned a lot from him, just don't use it all. And then Ronn Rasmussen is the Vice President for Rates & Regulation and everybody knows that's an important post in any regulated company, and so you are going to I think learn some very interesting things from him today as well.

I would like to introduce some other people just briefly here, because they are here and I'd like you to take the chance when we break to pick out those that you like to know more things about. And so Jim Brunner in the back there is our Senior Vice President and Chief Counsel, the very back; John Butler, Senior Vice President, HR and Shared Services, right over here, key player in our company; Bill Garrity, Senior Vice President, Energy Initiatives & Strategy, right over here, Bill, thank you, Bill; Glenn Barba, our Vice President, Controller, and Chief Accounting Officer, right over there near Bill; Laura Mountcastle, you all know is the Vice President of Investor Relations and Treasurer of the company, she must be in the ladies room; John Murphy, Executive Director, Corporate Finance in the back and then the bankers all know John; Bev Burger, Assistant Treasurer, bankers love Bev; and Phil McAndrews, (hitting the Poppe's head) in here just for a minute, Director of Investor Relations, a good friend, (he is knocking the Poppe's head in), but a really help to all of you, I know; Travis Uphaus, the Senior Financial Analyst in the back here in the Investor Relations side for us and in the Treasury side, some work there; and DV Rao, Executive Director for Financial Forecasting and Planning. Sometimes, when it looks like I really know about the numbers, I am just trying to remember what he told me, so that's the main event for guys like DV in helping me out a lot.

And on that note, it's a real pleasure to turn the show over now to our Chief Executive Officer, John Russell. John?

John Russell – Chief Executive Officer

Thanks, Tom. Good afternoon everybody. I really do appreciate you making the time to come and see us here today, particularly in this beautiful setting. It is absolutely gorgeous to be here in the thrill for all of us. We have the opportunity this afternoon to ring the bell in closing of the exchange today, which is a great honor for us at 125 years of the company. You saw the video before we started here today. I want to start with another video that we had much shorter, but talks a little bit about the company and something we are going to use as we go through the 125th year celebration. So, queue it up, we'll start with that and then we'll give you the presentation today.

(Video Presentation)

(That's the way) give up after launch gives you a good perspective of the company, Tom Webb and Dave Mengebier put that together for us. I wanted to start out with something that was kind of our history, to have the proud moment of what we have actually done through the years and what we deliver for you as investors. What we want to do today and what I'll start out with is to give you an overview of our strategy, the way our strategy works, they way we have accomplished the strategy and what we'll be looking at our priorities going forward. I also agree with what Tom said we want you to have an interaction and time to talk to our executives, because it isn’t me that makes this happen, it’s them. And this is a chance for them to come see you, they'll answer your questions, they'll all be here to talk to you, and these are the people that really make it happen, which I do want to give them credit for.

Let's start with our strategy. I think, most of you are familiar with it. This is our growing forward strategy. It served us well through time and supports our vision, the vision to be best-in-class provide the best value to our shareholders and our customers and to ensure that our employees are proud to wear the colors. The foundation, as you can see here, is built on safe and excellent operations. If we do that well we can make the utility investments, which drive customer value, which in the end will get fair and timely regulation, which drives the consistent performance. The thing what about this strategy that served us so well is that it's durable, it's flexible, and it's balanced.

And as you can see in the video, it served us well for 10 years and that will serve us the same for the next 5 to 10 years going forward, but the key to success of any strategy is its execution. And this is something I haven’t talked to you much about is how did we get to where we are today and we had a chance over launch to talk to some of you about, some of the history we've had at CMS. And there were some legacy issues that we had overcome, but the key to any successful strategy, I believe is to ensure that the company focuses on the execution of the strategy in everything that we do. And I want to show you how we have done that over the past several years.

Back in 2006, we set a benchmark this is at the utility, when I was running the utility to set breakthrough goals, and what breakthrough goals are our long-term broad-based goals which are aspirational in nature. And for the utility business that’s a little different, because utility business tends to be incremental in nature, and so there were some doubts about could you set goals out to 2012 on performance and achieve those targets. And I will be honest with you we had skeptics. We have skeptics on my management team. We had skeptics in the company that didn’t believe we could set goals in 2006 through 2012 and achieve those goals. And I want to give you little bit of a recap on what we have done and the targets that we have the categories, there is 12 of these goals and they fall into the categories you can see on the left side of the slide up there.

The first goal we set, which was the hardest goal that we had to achieve, but the one that I set -- think set the platform for us in the future and the ones that we have the most skepticism for our employees was safety. We set a goal in 2006 to reduce the incidents of our employees and employee safety by 50% by 2012. The reaction from most employees is that's unattainable. In 2010, we achieved that target of 50% reduction and we have raised the bar to 70%. We have gone from fourth quartile in incidents back in 2006 to first quartile in 2011. And the reason I use safety is that could not have been done without a complete team effort of our management team, our union employees, and the leadership of our union.

One other thing that illustrates to that I believe personally if you get safety right, it brings a sense of rigor and discipline to the business that carries through all phases of the business. And we know in this industry we operate a very dangerous business both on the electric and gas side. So, this is one of the ways that permeates as we go through and a key here is we are not done yet. And I think you know how we set goals at CMS Energy and Consumers Energy. The target we have for 2012, which is not there is a 20% improvement on where we achieved in 2011.

And I think you're familiar with our investment side of the strategy. We set goals aggressively and work very hard to achieve those targets. We won't rush, but I will tell you this is primarily for employees until we get to zero. And that's going to be harder as we move forward, but this is one of the things over the past five or six years I am most proud of. I'll show you another one in a minute.

The other area that we had to improve on is our generation reliability. Back in 2006, our generation reliability was not where we wanted it to be. We set a goal to improve it by 50%. This is in time also when there were a lot of changes as far as environmental controls on the plants, major investments in plants. And for those of you that are familiar with generating units, as you take a unit down and put a lot of controls on it, it tends to operate sometimes not better than when you made the investments in the plant.

And I'll tell you across the board, the areas that Jack Hanson and his team have worked on, he has the same that we leave it better than we found it. After the environmental controls go in place, the plant runs better than it did before. And it comes out of the shoot running better. Now, I didn't put the target here, but our Campbell Complex, which was one of the top – one of the five units that we're going to control, there is three units on that site. In 2011, the reliability of their EFOR rate was 2.7%. So, the $600 million of emission controls that we've put on those plants paid off very strongly in reliability, which paid the benefit to our customers and to the environment. And it makes me gratified when I think of shareholders that the investments payoff in performance.

Here is an area we need to improve on. And then I didn't want to just show you the good and the bad. This is our distribution reliability. We set a goal to improve it by 50%. We were able to improve it by 23% and we were hit with several storms, which Dan Malone will talk about in 2011, which caused us not to achieve our target, but like we normally do, we set the target in 2012 based on 2010 performance, not the anomaly that occurred in 2011. We set the bar back to continue those aggressive aspirational goals to achieve that target. This is an area we need to improve on.

We are still fourth quartile in minutes of interruption. So, we need to get better in this. We know how to get better and I do attribute to Dan and his team and the customers in Patti and her group, the response our employees had in 2011 with these horrific storms was impressive. They not only fixed our system, they went all over the country to fix other peoples' systems too. So, lot of credit deserved for our employees and their willingness to go out every single weekend as it seemed like and restore power to the customers. We talk about another one, and then we just as recent information, employee engagement, we needed to ensure that our employees were engaged across the board. We have just completed this is 2011 data. This comes from the nationally renowned Corporate Leadership Council, CLC, national firm that does engagement for employees.

Let me frame the slide for you. The key components to employee engagement on the left side of the right panel there, employee engagement, plan to stay, proud to work, career goals, discretionary effort, leading to the overall employee engagement. I've compared our performance for the utility peer group, and on the right side, is the high performing companies and those companies that are the Fortune 100 most admired or 100 best places to work, companies like Amazon, Google, Apple and so forth. I'm pleased to see that compared to our peers were better than our peers at all five categories, compared to utilities, and four out of the five with the highest performing companies.

Our employees are engaged with the company and the reason this is important to us is it's a very good foundation for us to build on and you'll hear me talk about a little bit over the next round of goals.

The other thing too that I was very pleased with our employees and this is both the union and salary by the way. We wanted to survey all of our employees and our employees said that a 75% factor that they could work safely, improve service to our customers, and be more productive. So, that's the response of our employee. So, a lot more to come and more is expected.

This is one that we needed to improve on. We set a breakthrough goal to improve productivity at the company in 2006, and you can see how we performed, we have the target was 40% by 2012. We are on track to meet that for this year. Now, some of you may – well, how will you measure that? Productivity is difficult to measure, it's hard to measure. That was one of the first things I heard when people didn't want me to set this target, because that way we wouldn't have to measure it. What we ended up doing is it's very simple? There is 12 metrics its input versus output. It's how many people that Dan have in his shop and how much workload comes out of it. Its how many gigawatt hours that we produce in Jack shop and how many people do we have to do it. It's how many meters that we have in Patti’s shop and how many meters that we read and in Patti's shop two in the call center. And we have a corporate measure which caused some angst among Tom and Ronn and others to measure corporate productivity. We have to measure what we do. And the results here are very good. I also compared to our US manufacturing and non-foreign business. So, we have employees that are engaged and we have employees that are productive.

Now, you probably ask yourself how did you get here? Couple of ways we got here, one is, back in three years ago, we implemented a full suite of SAP. We are the only utility in the country to put in all SAP for all of our legacy systems at one time. John Butler and his team and the IT group did a great job. It was difficult to do. I can see why nobody did it all at once, but we did and I don’t regret it.

Tom was running it at the time and we had a lot of conversations do we want to do what you call the big bang. And it was a big bang, but it’s paying off, because we can automate systems say and move it forward. We are doing a lot of work on process improvement, which I think most companies do. But the other thing that's a little bit different for us is we’ve restructured this business twice over this timeframe in 2007 and again in 2010. The utility workforce is down 7% where it was when we started this target and CMS workforce is down 10%, but we still have productivity gains to make, because this is just the start of where we can go.

Are we also getting some of those reductions in the workforce? We are making capital investment to reduce O&M. We can automate things that today are done manually, we can automate them, which you can see the basis that we have here of $6.6 billion over the next five years. This should grow a right base at 5% to 7%. We use a strong discipline in how we allocate capital. And the discipline, the criteria we use is, does it reduce our O&M cost, does it reduce our supply cost, does it add value to customers, is it required for some sort of compliance, and does it improve our competitive position? We wait our capital request and the ones with the highest score we invest in.

The key for us though and Tom is going to talk about this in much greater detail, we could invest much more than this, but what we try to do is find the optimal level that our customers can afford. And that’s something I think that uniquely positions us and let me show you the forecast that what we expect in the future.

Our base rate increases. In the electric side of the business, we expect through 2016 to be less than 1% increase per year. And on the gas side of the business, base rate increases about 1.6% and we rounded up to 2% here for the slide. So, we expect our base rate increases to be at or below the rate of inflation that includes the capital investments that you just saw. So, we need to use that rigor we invest capital. So, we can make those investments and get these kind of returns. Now, I’ll tell you in all full disclosure on the electric side of the business, the fuel cost will go up about 3% on top of that 1%.

And on the gas side of the business, the fuel cost will go down 3% compared to that 2%. So, actually, our gas customers will see a decline in their total rates over the next five years. And that’s something that we need to continue to do more to talk about. How are we doing this? Pretty much the same way as we did with productivity, continued productivity, reduction of headcount, Consumers Energy, the utility, we expect to lose about 400 employees per year. That’s kind of the average attrition rate we have, may seem high to you, but we've got an aging workforce and we’ve got some nice pension benefits for those that work at the company. We expect going forward that we will replace about 250 of the 400. So, this normal attrition will take us down a couple of percent a year. How we do we get the work done, through automation, through capital investments, and through the use of technology.

The other thing too which I am pleased with is that we have eliminated going forward all legacy cost for all of our employees including union employees. So, in the contract that we have is that we no longer have defined contributions, defined benefits plan for our employees. Everybody is on a pay-as-you-go plan all new employees that started several years ago with salary and last year with union employees. We hear a lot in Michigan about state workers contributing to healthcare. Our average mix is 70% paid for the company, by the company, 30% by employees. And going forward, it's a 50:50 split. We cover half, the employees cover half. That really had the significance ability for us to achieve these targets going forward.

The other thing we need to do too is talk much more openly and widely about the value that customers get for our services. And Patti has got that initiative no pressure on you Patti to do that and I am not talking about satisfaction you saw the video here earlier. I think about rural electrification. When electricity came to the farms that made it easier for people to get their days done. Our average customer spends about $3 a day with us for their total cost of electricity less than the price of the gasoline. Actually, many of you here today, we call them talking points, have your cell phones, your iPads, and so forth, to charge the cell phone in our service territory, $1 a year. And for some of you, that’s the most important dollar you'll ever spend, especially in this room, but it just shows there is value. The value you get from electricity and from natural gases sometimes forgotten. And our plan is to help improve that and help customers understand it.

What we have done in the regulatory side? Regulatory, there is two panels here, one is electric and you can see how we've done in electric, just to frame it for you, the red line is the peer authorized level and the green line is Consumers Energy authorized level. The blue bars are what we achieved. So, having a good authorized level, but not achieving it doesn’t too much good for investors. You can see on the electric side besides one dip there with the Big Rock Point disallowance, we've been pretty consistent on the electric side.

The area on the right side of the one besides safety, I am most proud of is that we’ve certainly changed the gas business. The authorized level is a little bit higher than peers, and for the past several years, we've been able to achieve it. I took over the gas business. We’re making 5% return on equity. The gas business is a great business to Consumers Energy. It's one of the largest in the country and there is opportunity to invest while reducing customer rates. And there is many opportunities with pipeline integrity and other opportunities to be able to invest there and continue to grow. So, I'm pleased to see that, and as I said earlier, with declining prices in the gas side, it really makes at a nice opportunity to invest in.

How is it done for you as investors? We started this journey about 10 years ago. We set a course to rebuild the company from some of the legacy issues that we had. As Tom and I talk off in that list of legacy issues was getting smaller all the time, which is nice. We told you we would grow in mid single-digits about 10 years ago. We increased that to about 6% to 8%. And you can see for all those targets, we better achieved that target. The other thing too was in 2000 – the dip we had in 2007 that was due to the divestiture of the international assets. But as we also told you, we were going to grow based on the 2006 target not reset the bar based on 2007. And we did that, just like our breakthrough goals. We continued to achieve the performance that we told you were going to achieve.

Now, in 2010, we had two increases in the dividend and took our yield from 3% to 4% and our growth instead of 6.8% to 5% to 7%. I think you're all familiar we did just last month we raised the dividend 14% to increase that along with 5.7% – 5% to 7% growth rate. So, I think we’ve turned the corner and are now a much more stable and predictable company. And I think what’s important too is the street has seen it in the total shareholder return. If you look at how we've done over the past year, we're above level of our peers, the three years pretty good compared to our peers and also the grey box there is the Standard and Poor's index, but the one that's most impressive to me is the five-year run.

When you look at that five-year run, we've been able to beat Standard and Poor's, beat our peers, and also what with important too, we beat it during some pretty difficult times. The past five years, the economy has not been where we expected it to be or hoped it would be, and as some of you have asked me, that’s especially the case in Michigan. So, we have had a good plan, that strategy is solid the execution is very good, what's next? Well, now it’s time to determine the next breakthrough goals. So, we set the breakthrough goals in 2006 through 2010 and we are working now on establishing the next form of breakthrough goals. Our employees are compensated based on these. They understand how breakthrough goals work, and based on the engagement that you saw of our employees, we are ready to move forward with that.

Customer focus, we impose limits on ourselves, because we don’t want our base rates to increase more than the rate of inflation. Despite all the environmental compliance and all the investment that we need to make, that’s the goal that we set for ourselves. What we need to do now and Patti you'll talk more about the customer value initiative is begin to tell the story publicly. And I am not talking about bragging in anyway, it's simply just talking about that story. And I'll tell you how modest we are as a group. Patti ended up and Dave Mengebier hiring an ad agency of record, which is the first one, I can remember in my carrier as a Fortune 500 company.

We tend not to talk about what we do, we just do it, but now we need to help customers engage and understand what we provide to them and see value for that. From energy efficiency and Patti will get all those in those things for you today. Strong investor alignment, you've been very clear to us, be transparent, be predictable, be consistent. And I think we do that. We tell you the good and the bad and will continue to do that going forward.

The regulatory environment was important in Michigan. It's important to us that we do have – continue to have open and very positive relationships with the commissioners and the staff. I think what’s important for us though in Michigan that maybe sets us apart we do have energy legislation, which requires some things to be done in a certain timeframe. And that’s a nice backstop that we have. And it's something that we'll continue to support that while going forward. Risk mitigation, I think, everybody does risk mitigation, like we have Tom Webb credit, I think we have some of the best risk mitigation in the industry. And I think it came about from some of the lack of risk mitigation during the earlier days.

We went through some things that we saw legacy issues that continue to surprise us back in 2003 and 2004. That list today is down to a very small list, but the discipline and rigor that brought us to where we are today, we continue to use in the utility in every single thing that we do, particularly the major projects, which I think is very important for us and we'll provide the certainty and flexibility moving forward. And then obviously what you look for, for us and we commit to you is that we will provide you and we work very hard at the consistent, predictable, financial performance in the future. And that’s we want to do.

It's my pleasure now to introduce you to and we'll take questions afterwards and the whole team will be here for questions. But let me introduce Dan Malone that Tom indicated earlier Senior Vice President of Distribution and Customer Operations. Dan is going to talk to you. We are going to go though the other four folks here and then well I'll come back up for questions at the end. Okay, Dan.

Dan Malone – Senior Vice President, Distribution & Customer Operations

Thank you, John and good afternoon. Start with distribution and customer operations is fundamentally the distribution systems in the gas and the electric business, the pipes and the wires, and it includes the customer operation functions, which are the billing, the revenue recovery. Thank you, John. Then the customer operations, that’s the billing, the revenue recovery functions, the call centers, the smart grid project and the customer value initiative.

In the distribution and customer operations organization, we recognize the critical importance of continued improvement in safety, productivity, reliability and customer value. We made substantial investments in our system and we have substantial investments that are continued to be needed. These investments not only drive our financial performance, but also enhance our productivity, our reliability, and the customer value proposition that we provide.

So, let's look at productivity. On the graph on the left, this shows the distribution and customer operations organization productivity. And as John indicated in simple terms we measure by work orders by employee per day. And over that three-year period, we improve productivity by 43%, and in 2012, we will deliver another 6% to yield the total of a 49% productivity improvement over this time. This has occurred through many differing aspects, one the transition and the leveraging of the SAP system that has brought about improvements in our scheduling and our dispatch, also has been brought about through is negotiations with our union contract, partnering with our union contract, renegotiating aspects of the contract (describe our call in) of our workers at a greater percentage than they were before. We are also now using metric-driven performance improvements across the organization, where we are measuring individual worker performance on a weekly basis.

So, let's talk a little bit about our investments right now. Now, let me go back one other thing, I apologize, we're going back. The other thing that part of this has helped us is a headcount reduction. Let me frame the gap on the right. We've had almost 375 person reduction over a three-year period of time and our productivity during the same period has increased by about 43%. We are continuing to follow that trend and will continue to follow that trend going forward to continue to improve our productivity.

So, let's talk about investment. With the San Bruno tragedy recently and there has been a substantial amount of focus on the gas pipeline infrastructure. At Consumers and CMS Energy we have had in place and has been recognized by the American Gas Association, leading programs in the high consequence area, pipeline inspection programs, and gas leak detection practices.

We've also put in place an infrastructure investment replacement program. This 25-year program will eliminate all of our cast iron distribution piping and any at-risk steel piping. We'll be replacing piping for a total of $350 million over every five-year period for the next five, five-year period. The total investment when you add to that compression investment such as our Ray Station and other compression overhauls for another $126 million, we'll have a total of $1.4 billion investment in our gas system.

On the bottom portion of the graph, you see the pipeline safety. The inspections of the pipeline required to be done by the end of 2012, all high consequence area pipelines. We have 12 miles left to get this year and we will attain that. We have not only attained and achieved the law, but we have also inspected another three times at a mile, almost 900 miles of non-high consequence piping. We are very comfortable with the condition of our pipeline.

So, let's look at the electric distribution system. We have a $2.4 billion investment that has been identified. This investment includes low voltage substation automation, projects in the high voltage distribution from pole placements to rebuilding sections of the system, increasing capacity requirements, and upgrades from vehicle replacements and other substation equipment. On the low voltage system, we also have another – 14,000 projects. These projects get a small as the pole replacement, but we now have an annual pole replacement program that will replace 7,000 poles a year. We have $1.6 million poles that are out in our service territory. And up until a year ago, we were only replacing a few 100 of those on an annual basis. We are investing in our system, 7,000 poles (we will replace) this year and annually going forward.

Additionally, we've been hardening our system, changing cutouts, lightening arresters, transformers and increasing capacity on our system. As John indicated in his one slide, we did have a lot of storms last year and it challenged us. It challenged our system a lot. When you put ice on wires, they unfortunately come down, but the real challenge in the system is when you load that system heavily. So, have our investments been paying off? The answer is absolutely.

Now, let me frame the two graphs that you are seeing. The graph on the left shows the peak load on our system, dating back to 2006 at 8,883 megawatts. Going over to 2011 where we had a load of 8,930 megawatts. This is live load on our system. This is an all-time record for our system in 2011. So, how does the system perform during this time? Let's go with the graph on the right. The blue indicates data from 2006. The green indicates data from 2011. We're going to focus on the scale on the left to start with those are percentages and that is percentage of the time that transformers or high-voltage distribution lines were loaded at the 70% to 90% mark.

So, when you load this equipment at that point and then you hold it there, you're going to have failures in that equipment. So, we need to bring that down by increasing capacity and improving the reliability of our system. We have been doing it. And as you see in 2011, the significant reduction in the percentage of time, but that equipment was maintained at that loading level. And translate this into the customer, in both of these years the weather was very much similar. We had heat, but we didn't have storms, in case pretty much is an apple is an apple. In 2006, we had over 25,000 customers that were out. In 2011, that number was 12,000. There were other utilities in the State of Michigan that didn't fair near as well. The distribution and cost of our operations department that was not just about pipes and wires, it's about technology, and technology that can improve our efficiency, our productivity, and our customer value offering.

One of the major things it’s going to bring us about is our investment in our smart grid infrastructure. We have a program that will invest $750 million through the year 2019. The graph of the State of Michigan on the left shows the phases and how we are going to go about implementing our program. The little kind of yellowish one shows the original 600,000 meters in the Jackson area of our pilot program. We will begin later this year in Phase II on the west side of the state and we will start implementing meters to Muskegon and Kalamazoo and Grand Rapids. Yes, we have done across the bottom and then up to the northern portion of the state.

Okay we have had this investment and taken a very patient, watch, learn and listen approach and this has been enable us to implement our Smart Grid program without the typical mesh network the other utilities are doing. We will be implementing ours, utilizing a very proven cellular technology. The technology that was and being used on the commercial basis, but on a limited scale, we will now be using and now become very cost effective and we will have a very competitive program that will not require us to build out of mesh network, which will enable us to provide greater reliability to our customers, greater timely service and turn on to our customers, move in move out we will be able to be automated through the use of the system. We will also be able to monitor theft on our system with much greater accuracy using smart meters.

We are also benchmarking our peers. We are looking for those with great regulatory success as well as communication success. We are taking those learning, benchmarking and implementing those. We will also be providing program an opt-out program. There is a small classic customer, who doesn’t want to see a smart meter and it becomes very public lately.

They have varying concerns as to why, its big brother watching me. I am concerned about the ratio frequency. We will believe our technology size that. It’s a cell phone. It is simply a text messages going to go off about six times a day. That is what our technology is going to provide. But if our customers don’t want it, we will provide an opt-out program and we are able to do that with our cellular technology in that we don’t have to build out a mesh network. So, as shown in the investment we also provide a $40 million net positive value for our customers.

So, with all of this, we continue to enhance our customer service, our reliability and our productivity and safety, but we are now at a point in the utility, where we must move from commodity to value. We must move beyond the commodity and we are going to do that through our customer value initiative. And to discuss that with you is our Vice President of Customer Experience and Operations, Patti Poppe.

Patti Poppe – Vice President, Customer Experience & Operations

Thank you, Dan and thank you all for being here today. It is my pleasure to talk about one of the most exciting things happening within Consumers Energy and that is our customer value initiative. As John Russell mentioned, you know, it is the fundamental aspect of our strategy. We had a long tradition of serving the people of Michigan. Now we are just going to build on that tradition and create really a new trajectory for our relationship with customers.

Some people might think a customer value initiative might be kind of a soft, warm and fussy, feel good program. Well, I hope to describe for you today is a very analytical approach with an operators mindset around delivering customer value in a very real and tangible way, yielding real and tangible benefits to both customers and all of you as investors and shareholders.

There is four main pillars to our customer value initiative, starts with the customer in the center that it really builds on this idea that we need to know our customer better, core competency and customer insights, establish count on us customer experience is very repeatable. The customers can expect that we will deliver right in the first time.

It’s an employee and customer engagement, if you look at the diagram we show the customers in the middle, but that touch point with our employees is where the rubber meets the road until those employees are engaged as John described we have got high levels of engagement of our employees to channeling that to delivering that count on us customer experience. All of that creates a foundation for growth and for value.

Now some of you might be asking, so what, yes there is a monopoly card, yes we are a utility, why bother. Right our customers are stuck with us. Really are you wasting money on these customers and all this business, this is just some kind of side routine. Well what I would like to convey for you today if it actually is foundational, fundamental, required for that regulatory risk and managing that risk.

If you can imagine regulators if they are getting high numbers of complaints from customers, they might be less likely to approve investment. They might do considerably more scrutiny over our decision making they might second guess us on a much more regular basis. I like to say I hope that this initiative put the MPSC as our partner not is our judge. We should be partnering for serving our customer. Partnering to be a utility that can be trusted in is a vital part of the Michigan landscape. The operational cost efficiency, some people ask, is this going to cost something, is this going to be extra, how much money are you going to spend on this? I actually see this as a critical part of us achieving that rate commitment to customers, because if you improve your operational efficiency, you actually lower the cost to serve. So, not only can we deliver superior customer experience, we can do it at a lower cost and I'll talk a little bit more about how we are doing that.

And then fundamentally, it creates the foundation for growth. You can't earn the right to serve your customers with more products and services and other offerings, if you don’t get your basics right. So, where some companies might turn a customer value initiative into some and it’s all about new and glossy and fantastic products. We deliver commodity, gas and electricity. We have to deliver it well. We need to focus in on our blocking and our tackling getting that right and earning the privilege then to grow our offering and our suite of offerings, but first it starts with getting our basic fundamentals right.

So, when I talk about customer insights, what I am talking about is the opportunity to really know who we serve. I often kid around that we have customer segmentation at Consumers Energy, we have three segments: residential, commercial, and industrial. Now, any of you who know about segmentation rates, you might find that funny, obviously, you don't find that, that funny, but that is supposed to be funny. We're doing segmentation research right now, because we need to know who we serve. We need to learn what their needs are and what really drives. A customer who want solar shingles on their roof wants to talk to us through web apps and only electronically is very different than a customer who wants large type based thought, bill inserts, and who wants to be able to call someone and talk to us. Those are two entirely different customers and we need to serve them, but we need to know who they are. So, in fact, we've got segmentation research data coming back by mid-March and we'll be able to pinpoint to the address who it is we serve and make sure that we communicate with them in a way that resonates for them and that is not the same for every customer.

In addition to that, in addition to combining quantitative research about who it is we serve it’s operationalizing that, taking that information, having an organization who is equipped to give that information and then take action. Another joke, this is a joke, I am just giving you advance warning. Another little thing that happened when I took the position a year ago and Dan Malone made a job offer to me on the phone, he was kind of outlining what my responsibilities included. He mentioned that I have to market or I asked the question, also do I have the market research department? And he said, yes, you have him. His name is Bill. So, Bill has some company now. We are spending sometime making sure that we understand the analytics that drive our business; understand the cost to serve each of those segments, and then operationalizing our response.

In addition to doing quantitative kind of customer research and qualitative research that goes along with it, we are building a voice of the customer system. The first day, I walked into the call center, I found out we received a lot of calls at our call center around 12 million and we only have 2.8 million customers, so I wonder who is calling us all those times. So, we need better system to get the voice of the customer. I often talk to our customer service reps who are working on call centers, they hear the calls, they know what customers are telling them, but we had to design the other system to get the voice of the customer to the field organizations who can make a difference with it. And so just by implementing, for example, we started a daily operational conference call giving information about why customers are calling, getting it back to the field, we've had dramatic improvements in reduction in call volume because of getting the information, getting the voice of the customer into the hands of the people who can do something about it and letting them loose, because as John described, we haven't engaged workforce. It's channeling that engagement, channeling those employees to deliver.

And let me tell you when you run a utility and when you work a utility, you are not just serving kind of a generic customer, you are serving your neighbor. You are outworking in your community. You are visible. And so the difference that you make for your family members, your neighbors, your community is significant. And so our employees love hearing about what they can do to deliver that service better, make things giving dinner a lot easier when we do a good job. So, they like to be able to give that information and then do something about it. That's what we mean by operationalizing that voice of the customer and really taking customer insights to a whole new level. And that's how we then deliver the Count On Us customer experience. I talked a little bit about this voice to the customer system. One of the key pillars of the voice to the customer system includes what we are calling customer council. And it's actually leveraging the J.D. Power survey data and John Russell is the Chair of the council, each one of the officers is championing one of the key drivers of the J.D. Power Satisfaction Index.

What we find and a lot of people assume that price is really all that matters. Well, when you study the J.D. Power research and understand the customer feedback and what really drives customer satisfaction, it does drive about 27%. There are significantly other important drivers, however, to the customer satisfaction. So for example, if a customer calls the call center and they have an issue and we resolve their issue, the first time that they call. They have a higher level of satisfaction than someone who never called this a call center at all.

So, every touch point with the customer creates an opportunity to improve their satisfaction and in fact when we go into the deep aspects of that data we have found and there is a well-established correlation between if the customer has a high first contact resolution and when they called the call center a positive experience the first time. They actually think that our price is more competitive.

So, it's worth the price when you get great service. And we talk about what is the value of customer satisfaction, what is the value we can equate it to the other aspects of the survey and each of the officers, who championing one of those drivers is getting a whole new perspective on what drives customer satisfaction. We have had lots of discussions about hypotheses well maybe we could try this project because we're sure that'll make a difference.

If you have informed you on equipped to answer the question what truly drive customer satisfaction. So, Glenn Barba for example, who is here with us today, our Controller is responsible for billing and payment drivers, now he is already fascinated about what really drives customer satisfaction in billing and payment. He is championing new ways for our customer to pay before that made them delegated to a customer service department if the companywide effort.

With John's leadership, we've got broad-based the entire company focused on driving customer value. This is not a program. This is a way to run the company. In addition to the Count On Us customer experience, again let's talking about engaging our employees at the service of our customers. So in John talked about the agency of record and we talk about having an agency of record, which is a new thing for us.

We are not paying them up for a big fancy, glossy ad campaign in the State of Michigan that will now apply with our customers. They are – they are actually ascended if they see too much spent on sales promotion so, what we are working with a agency of record is building a true grassroots leveraging of our employees to serve our customers in very personal ways and tying it altogether, before we had energy efficiency programs that were run by one group. We had as smart grid rollouts in community meetings around that. We had other charitable giving and they all great the independent. We are working at the agency of record is building the customer engagement strategy, so they are all trying together.

I have this real reaction to like just having our name plastered up at some music studio or music rock concert or something, there is no brand association with having your banner hanging up at rock concert. What makes sense is, for example, we just finished watch for worms all across the State of Michigan.

Over 1000 of our employees and their family members were teamed up with community action agencies, putting on their blue net hats, yes, these guys were in blue net hats with Consumers Energy on it, walking through our communities, helping raise funds for heating assistance. That has brand association when people look at that they see Consumers Energy is my neighborhood utility. And it's a fine balance. We are a Fortune 500 energy company, but we don’t want our customers to feel that. We want our customers to feel that we are their neighborhood utility. And so this is how we are leveraging a true customer engagement strategy to bring that to life.

And finally, all of that creates the foundation for value. We are actually in the process. We have a small handful of value-added products and services, most of them are under the utility umbrella, they create a little revenue requirement headroom, so the dollars may get invested back into the utility and the offset rates. We are evaluating all of those and again tying those back to what we are learning about the customer segmentation, understanding what are the products and services that best complement our offering and makes sense for people that our customers are willing to pay for. And so, we are actually evaluating all of that and we are looking at how our smart grid and our advanced meter infrastructure can create a foundation for providing customer value, giving customers, with our cellular technology, it gives our customers an opportunity to pick their pay date, their bill date, pay as they go.

We can deploy meters. We don't have to do a whole geographic region of meter deployment. So, we will as the mainstream deployment, because that creates the operational efficiencies, but we can package up the meter to provide customer offerings and deploy one-off meter deployments as part of marketed programs, because of the technology that we have chosen. That is the differentiator for us and some of the value that the cellular choice provides to us and to our customers. So, we feel like what we are doing today is creating a foundation that operationalizes customer value that really creates an opportunity and a way for our customers to trust us and to count on us.

With that, I'd like to queue up a video that will highlight a little bit of where we've come and where we are going next.

(Video Presentation)

Jack Hanson – Senior Vice President, Generation & Energy Supply

Good afternoon. I am Jack Hanson. I am the Senior Vice President of Generation & Energy Supply for Consumers Energy. And I'd like to talk to you about our commitment to excellence and customer value and how that translates to investment opportunities for our company.

First, I am going to talk about environmental compliance regimen and our specific position in that situation and how it impacts our investment opportunities for the environmental controls and then we also have renewable energy requirements that also provide an opportunity for investments, and then I'll talk about our balance portfolio strategy and how that limits risk for both price risk for our customers and risks for our investors.

Okay. Here we have the environmental compliance timeline, I think many of you are fairly familiar with some of these things, the Cross-State Air Pollution Rule goes into effect in two phases in 2012 and 2014 require reductions in SO2 and nitrous oxide emissions on our coal plant. We are in group 1. Although, there are separate groups for compliance, group 1 requires the largest reductions in SO2 and nitrous oxide. As many of you aware the rule was stayed and that we don't expect to see a ruling on that until the middle of the year at the earliest, and typically you have as many months that the rule will stay before you have to comply after the ruling. So, we wouldn't expect to have to comply with Cross-State Air Pollution Rule until 2013 as it stands today.

Next time, I will talk about the Mercury and Air Toxics Standard on the bottom, that's going to be a major change for the utility industry. It's going to drive a lot of generation from coal to gas and the big question is who, when, and where, but we are – I think we are prepared well for that and we'll talk some more about that in few minutes.

One thing I want to point out here that's different for us is that Michigan Mercury Rule. And in October of 2009 after the Clean Air Mercury Rule was remanded by the court. The State of Michigan established its own Mercury Rule and it required us to meet a 90% reduction by January 1, 2015. What we would normally view, our own regulation is being positive, this actually was very positive for us in that. It provided regulatory assurance that we knew we had a final rule and a due date to meet and we were able to put our plans together and have a very consistent workable plans that wasn’t impacted by the all the goings on in Washington DC and the Circuit Court of Appeals. That's been a big advantage for us in this process.

Now, I will talk about the Clean Water Act 316(b). We are a little bit different than main utilities and that 316(b) is to protect the product life. Many power plants are on rivers, small lakes, and have a major impact on the ecology of those waterways. All of our plants are on the Great Lakes, very large bodies of fresh water and we have much less impact on the product life there. We feel that it give us the competitive advantage and it means that we are going to have to do less we'll have to do some. We will have some opportunities for some investment, but it won't drive us to having to put clean towers on our coal plants and make them less competitive in the process. So, we are a little bit unique from that perspective.

Then the last part, the Resource Conservation and Recovery Act, that’s really the act dealing with ash disposal. All of our plants have already been converted to drive fly ash handling. Many plants (indiscernible) their ash out into the disposal areas with water, many of the contaminants dissolved in that water, and then they are getting discharged to surface water. We have already completed all our modifications. We’ve completed our last modification about three years ago. So, all of our plants now are drive fly ash handling, we will have some modifications to make to our actual ash landfills, but it’s going to be fairly minor in comparison to what many people that they have to deal with in this process.

The Cross-State Air Pollution Rule, as I said it’s been stayed, but in reality we are meeting the Cross-State Air Pollution Rule as written and the reason being is that our strategy to meet the Cross-State Air Pollution Rule in 2012 was to change the coal that we've burnt, hence the shift of burning 100% western coal, except for probably two months of the year, when we would shift back to our normal plans. We know we burn about 85% blend of western coal. When we burn a 100% western coal, we de-rate considerably on our units, but to get the full capacity of the plants, we would still be able to do that in the middle of the summer, go back to our normal plans, and still meet the Cross-State Air Pollution Rule emission limits.

Now, because of the big drop in natural gas prices that occurred in November and has carried through into 2012, we have already transitioned to going to 100% western coal, didn’t wait for the Cross-State Air Pollution Rule, and in order to keep our plants competitive and be dispatched, that’s where we are in the process. So, we have prepared for that. We ended up doing it for different reasons that we prepared for, but it’s kept us competitive ending in a good stead.

Now, we transitioned – we started transitioning our coal plants. Our coal plants were all designed to burn a 100% eastern coal. We started our transition in 1986. We've put a lot of investment, gained a lot of experience, and did a lot of work to get ourselves into position, where we could go do this, when the time came. Over that time period, we've saved our customers $3.5 billion in fuel cost by our transition from western coal, eastern coal. So, it's not something that a real value to our customers in this process as well as significantly reducing our emissions and I'll show you that in a minute.

I am sorry I missed the Mercury and Air Toxics Standard. The Mercury and Toxics Standard is going to impact our fleet of our 7 we've announced that our 7 smallest coal units are going to be mothballed and possibly retired when the Mercury and Air Toxics Standard goes into effect. They were planning on that in 2015 timeframe. So that we’ll lose 950 megawatts of coal capacity at that time, the other, the remaining our 5 largest units just under 2,000 megawatts, we do plan on installing full controls on those units, and we have a plan to do that and here is the plan.

Now, I won’t go through all the details of this, you've got it in your handouts, but each of these different colors is a different technology for a different pollutant. What I want you to get out of the slide is that we have two sites, the Campbell site and the current site. And what we've been able to do because we've had this regulatory assurance of having a final route that we need, we have been able to layout a plan that keeps our skill trade labor force fairly stable on those sites for 7, 8 years. And we've been able to establish relationships with our contractors, with the trades, and with the vendors of the equipment, and you will see that we've sequenced the equipment to where we install piece of equipment, get familiar with the issues, get experience, and then build that into design of the next unit and continually we are keeping a consistent technology across all of our units and it's been working out very well for us. It's making us more cost effective and how we implement our controls in our investments.

And here are the results. Our shift to western coal and installation of low nitrous oxide burners on our plants has allowed us to achieve before we started our big capital investments has allowed us to achieve over a 70% reduction in SO2 and nitrous oxide emissions. Like I said before we started putting the large capital investments in our units, as we put in those – the rest of those controls really get down over 90% reduction on all of ours and you can see the big drop off there. The green is mercury, the blue is SO2, and the pink is nitrous oxide emissions.

Okay, moving on to our renewable energy investments. In 2008, we had a comprehensive energy law passed in Michigan, one of the pieces of that was to require that we meet a 10% renewable portfolio standard in 2015. The rule allowed us to build up to 50% of that capacity that we would need to meet that rule unless we were required to contract on it as independent power producers. Our strategy is to build that maximum 50% and we are in the process of doing that.

The other really positive thing about this rule for us is that we submit a plan the Public Service Commission approves it. Our plan indicates what our costs are over the next 20 years to meet those renewable portfolio standards. Those costs are then taken and levelized over 20 years. So, we actually had positive cash flow in this process for the first couple of years of this and we dip down, come back up, but overall, there is much less impact on us from a cash flow perspective, then you would normally expect for this type of capital investment program. That's been very positive for us in the utility and for our customers.

We have also taken advantage and learned from the development of better technology primarily for wind farms and we've been able to reduce our estimated cost of meeting this portfolio standard by over 70%. So, we've submitted. Every two years, we have to submit a new renewal energy plan. We just got our plan improved and it reduces that surcharge by $54 million, because of where we've been able to do and improving our use of technology to the development of better wind turbines in the process.

Our plan, we'll invest around $0.5 billion in renewable generation that we will own, and again, we have pretty much of similar amount that we've contracted for. Our first wind park is under construction. We have 25 of the 56 wind turbine foundations in place. We’ll complete it before the end of this year and it's expected to qualify for the Cash Grant in lieu of the Investment Tax Credit for that project.

Now, to pumped storage facility, this is a real gem. It’s the fourth largest facility of this type in the world, second largest in the US. This facility is 1900 megawatts of capacity that is we use – we pump water up from Lake Michigan, from the shores of Lake Michigan we take water and pump it up, the hill behind it about 300 feet into a 27 billion gallon reservoir. And then we do that at night when there is excess generation, low prices, and then during the day, when we are short generation and the prices get high we then run the back down the hill through the same turbine and generate electricity with it and put it back on the grid. And this is going to be even more critical in the future, because of the large amount of intermittent renewables energy sources that are coming after the grid. With that wind, it create – typically the wind blows more at night in Michigan than it does during the day, which doesn't line up well with our load, but this facility is going to allow us to shift that energy from the back from the off peak onto the on peak. It also has a very good load following characteristics as the load changes that helps us follow as the wind changes also helps us follow load.

We went into service in 1972 is now due for a major overhaul. When we looked at that major overhaul, we saw an opportunity to upgrade this facility and to modify the turbine runner, and the turbine runner is that lower picture 365 tons of stainless steel, 730,000 pounds, 27 for diameter, that’s what the water runs through going up the hill and back down. We are in a place that with the more efficient and the higher capacity runner, so we're going to gain about 300 megawatts of capacity at this facility over the six years. We are going to do 1 unit each year, there is 6 units between 2013 and 2019 and it will improve the efficiency of that pumping cycle by 5%, which is a big improvement from a greenhouse gas perspective, energy efficiency perspective. $800 million project, this facility is jointly owned between us and between Edison with an operating partner of 51% owner, they are 49% owner. So, another great investment opportunity for us and (one of the things) is going to payoff for our customers and our investors.

I want to talk about our balanced generation of strategy and what we have. So, presently that’s our mix of generating capacity. And you see that, that we are fairly balanced between coal and gas. No, that’s not the case from most Midwestern utilities, so we are unique from that perspective in Midwest and it’s just an operator system. And you'll see that blue section there and the orange the gas section which says Zeeland 10%. In the 2005/2006 timeframe, we recognized that we were heavier in coal than we wanted to be and we were seeing load growth. We went out and we purchased 900 megawatts of gas fire generations and it actually came to us in 2007. So, that gives us a better balance in this process. And you see we have long-term contract with Palisades for nuclear. We have some load generation. Our pumped storage is a big piece of our generating capacity. And we already have 4% of our capacity comes from renewables.

So, our plan in 2016, you will see that, that coal portion goes down, that’s that reduction of the 7 small units as a result of the Mercury and Air Toxics Standard. And you will also see that the pumped storage even though the circle gets bigger, the pumped storage gets bigger, so it sees the same proportion, that’s because of that upgrade project that I just discussed.

You'll see our renewable growth significantly, some people say we are rising that 10%, the 10% requirement is energy, this is capacity. That’s the difference there. But you also see that there is a section of purchases where we will, our plan is to purchase capacity on the market, but those off for opportunities in the future for potential investments.

So, to wrap that up, we have a very strong plan on how we’re going to efficiently, effectively invest $1.5 billion in environmental controls for our customers. We’re going to achieve over 90% reduction in emissions from those plants as a result and we are going to – we are on track actually ahead of schedule on achieving the 10% renewable portfolio standard in the state and in our territory. And we are going to maintain our balanced generation portfolio mix to minimize the risk to both our customers and our shareholders.

And with that, I’m going to turn over to Ronn Rasmussen, Rates & Regulation.

Ronn Rasmussen – Vice President, Rates & Regulation

Thanks, Jack. Well, let me start with the observation. Fair and timely regulation is critical to the overall success of Consumers Energy. Make any sense, we are kind of 100% regulated utility kind of make sense to me, but I am pretty close to it. I don’t think that was an overly intelligent or creative statement but it is critical to the success of the company and I want to tell you a few things that I am excited about in our regulatory world up here and some of the things that we are looking at, some of the things we are trying to do, and what we expect to accomplish.

First of all, when I hear what’s been said here already today and I’ll confess it's not the first time I've heard it, but you talk about what John kicked off with the breakthrough goals, the changing the pace of the utility, the performance of the utility. Dan followed up with safety productivity infrastructure investments. Jack talked about environmental stewardship supply mix, the things we’re doing on that side of the equation. And if you didn’t hear passion and intensity from Patti, you weren't listening about our customer focus. Okay, when I look at those areas of the utilities involvement with the State of Michigan, then I am pretty excited, because if we are performing well in all of those areas, then rates in regulatory, fair and timely regulation is a lot easier, and it becomes simply a translation to financial success.

So, if I could bring a story to our regulators saying how well the company is doing what we are doing for the customers. What we are doing to hold down costs while we invest in Michigan, then it’s a pretty solid story and we’ll be in pretty good shape. To get to the point we are at today though I do want to talk a little bit about where we’ve been in the regulatory world. As John said, we started breakthrough goals about 2006. And in the regulatory world at that point in time, we were a little bit disadvantaged. We had some substantial regulatory lag going on. We filed occasional very large rate cases, very complex, and hard to process.

We actually had our rates were set looking back in time. And even though, our rate case could take 18 to 24 months for the larger ones to process if they were set from a timeframe prior to even filing it, by the time, you’ve got to 18 to 24 months you were two to three years down the road. And things have changed from the time you filed your case. That was the environment that we were battling in. We had a substantial subsidization of residential rates by basically industrial rates. And we had no limitation on our customer choice or retail open access load so, you saw lot of volatility there.

In that environment, we started trying to make improvements in the regulatory process and we are actually making some progress there. We started to see our return versus authorized popup a little bit. But in the middle of all of those efforts, we really had some major success in having the Michigan energy legislation pass.

Okay. And the regulatory or ratemaking piece of it is just one piece of that legislation addresses a number of issues, but in the ratemaking arena, we now have legislated forward-looking rates or projected test years, where you can actually look forward to what you expect to happen and by the time, you get there and implement your rates you’ll be synchronized in the timeframes that your rates are in place, that’s a big deal. We have greatly reduced lag through the file and implement provisions of the energy law, meaning six months after filing the utility has the opportunity to sell implement rates. So, that’s a known timeframe. And actually, there is a 12-month processing limitation on rate cases. So, you also know the end date of a rate case.

Those two items go tremendously to eliminating the lag from a timing perspective, very, very critical. What I do want to focus on here though is I wouldn't say that's a free pass for the utility. We still have to get a successful final order out of every case that we process. So, timing is one thing success at the end of the day and the amount is another. And again I am going to repeat what I said earlier, that's why I am so excited about what this company is doing, because the ability to achieve or retain successful final orders and amount is increasing in our company and I think you will see that some of the slides that I am going to run through here. So, the law is very helpful. It doesn't end all problems in a regulatory world, but we are in heck of a lot better place than we were a few years ago.

Okay. So, where are we? John showed a version of this a few minutes ago. We're basically in a position that we are earning our returns. Our returns are slightly above peer group and we are earning above the peer group's performance. So, a little bit of a dry factor there and again it goes to performance primarily and we are pretty proud of that.

What I also want to talk about, I think you are all aware we have a pretty busy regulatory agenda. We've not hidden the fact that we are trying to streamline the process or trying to file simpler cases more often instead of the cumbersome cases less often. So, we've had quite a few rate cases in the recent past. What this slide would indicate to you is that when I talk about the amount being so critical at the end of the day, we've been highly successful in getting a large portion of our self implemented rate increases approved in final orders and that goes to a stability and consistency for planning and operating purposes. It goes to quality of story. We are doing okay in translating the operations of the company into final rate relief.

We do have two cases pending right now. We have actually self-implemented on the electric side. In December, we'll be heading towards a June final order in that case. I'm going to talk a little bit about the primary components of that case in a second. On the gas side of the business on the lower half of the slide, we actually self implement tomorrow. Last week, the Commission approved our gas self implementation at the filed amount of $23 million and that will go into rates tomorrow.

Okay. So, I just want to look for a second at our last few rate cases and what drives the increases that we have asked for. I would do that slide change. In our last several electric cases, we have seen significant impact from degradation of economy. So, if you look at the blue bars on the left two electric rate cases, we have had to adjust our sales levels, basically the denominator in a rate case discussion, so that we've seen about 63% of those two cases and 70 in the other one was investment driven, all the items that you are hearing discussed today, and the rest was primarily adjusting our sales levels, and in one case a little bit of O&M change.

The change in our most recent electric case, the one that we self implemented in December is that through all of our O&M control efforts and through stabilization of the economy, we are now talking about an investment case. This is a big driver for us in Michigan driving Michigan's growth or attempting to get Michigan back to grow mode. We have substantial jobs on the table. So, the utilities infrastructure investments, the implementation of lot of the investment from that is critical, and it's the primary driver of our rate cases. So, if you think back to what I said before of more streamlined and less cumbersome, there are fewer issues in our cases and investment is critical on the electric side of the business.

On the gas side, kind of the same story, we saw continued degradation in sales over a long period to time. So, our May 2010 case had a substantial part of sales and O&M in it, but we’ve seen stabilization since then on the gas side for sales. So now again we are talking about the other drivers of rate cases, O&M spending and investment. And on the gas side of our business also it's all investment, we are controlling our O&M, we're reducing expenses that we do have that control over a better story for the customer. So in both of the last two cases, it's almost all investment and that's a good story to tell.

Okay, we do have challenges, no doubt about it. In Michigan, there is discussion about the energy loss, ongoing discussion some oppose the ROA cap for the electric side of the business, the customer choice cap at 10%. We are hoping the Michigan economy starts to grow very quickly and there are some signs that it could, but it's been down for years and so the Michigan economy is a challenge for us in the regulatory world. And I think nationwide, we are hearing people discuss rate fatigue, continual rate cases, I said, ours are smaller and more frequent. I think you get a rate fatigue discussion as well with an occasional and very large increase, but there is conversation amongst customers and other interested parties that we are having too many rate cases.

Our challenge around that is to show the benefit that comes from the rate increases or the rate cases. And again, I mentioned a minute ago, our Michigan investment agenda is huge. The utilities in Michigan are investing substantially, ours is over $6 billion in 5 years. It's going to the issues that you've heard described here. It's going to serving the customer, improving the infrastructure, the reliability, the supply balance, complying with law when you put all of those investment pieces into place, and you recognize the jobs that come from it, our investment agenda is fairly well received in Michigan. So, that's one way to alleviate concern over the regulatory environment or rate fatigue.

John mentioned that we are holding our base rate increases to the rate of inflation, very, very true, not easy to do, but our last four filed cases I believe had a reduction in O&M in them. And that's one perfect example of how we are doing that. There are other rate offset tactics that we put into play as we move through time. If you look at what we are charging today for the fuel portion of our rates, this is not base rates, there are investments in base rates that we make that help us the whole down fuel expense. There are also market conditions in play for fuel expense.

But on an annualized basis for the year 2012, our customers on the electric side will be paying about $100 million less for fuel than we would have said several months ago and on the gas side of the business also about $100 million less than we would have said several months ago. Part of it is because we are able to in our gas system, we are cycling our inventories and we are getting out of some higher price forward-looking contracts as we move through time. So, that's part of it market conditions and how we operate our system, but the point is the electric rates this year, the fuel portion and rates are not going up anywhere near what we thought they would be, they are almost flat for last year and we thought there would be a big increase in gas prices. I think you are all aware of what gas prices are doing. Actually, it drives part of the electric reduction. It also shows up pretty quickly on the gas side of the business. So, that's fantastic.

The other thing that we are looking at and we always have and we focus intensely on is communication alignment. No surprises, we talked to the regulator, we talked to the public service commission staff as much as we can, no surprises with them. They don't always agree with what we say. You can see some of the staff filings. You won't see words, let's say, we support 100% of what consumers filed in their rate case. They are going to take a contraposition on things, but if we are at the table talking to them about why and how, then hopefully that's just a disagreement and not a misunderstanding. Okay. So that's critical to us.

The other item that we look to tactically as well, as we look at what we are doing, we are always trying to improve the process, not just the communication. So, we are trying to limit the issues. We are trying to focus everyone's attention on only the most important items. We are trying to reduce the volatility in our rates. Some of our expenses actually are extremely volatile. So, even though, we've been whittling down overall O&M and cases you get some expenses that just bounce around benefits would be one of those. Uncollectible accounts expense would be one of those. So, we are trying to look at tracking mechanisms that kind of take those things out of rate cases and make it less volatile in the day-to-day and getting into more reconciliation mechanisms, where you can look at the expenses incurred and say, yes, that's reasonable, but not kind of the upper rate case with it.

We are actually look at our investment as the opportunity to do that as well, maybe a capital or a rate base kind of true-up mechanism, because we are in continual investment mode. No guarantee of success there, but we are going to look into those issues and see if we can make any progress there, but at the end of the day, if I left you with a message, I’d probably say that from a rates and regulatory perspective, we are really excited about progress that we made in the regulatory agenda. We are excited about the process improvements that we’re making. We’re very excited about the company’s performance and how we’re able to turn that into positive regulatory results.

And at the end of the day, we’re just absolutely excited about continuing to improve in the area and it flows through the financial performance of the company. But it is only a translation. It’s a translation of performance – operating performance through the regulatory environment and into financial performance.

So with that, I’ll thank you and I’ll turn it over to Tom, bring us home.

Tom Webb – Chief Financial Officer

Thank you, Ronn. I’m bringing in a lot closer to Qs and As here in just a moment. You did hear a lot of different things, but always like to pick up what I heard. I heard both Dan and Jack talked about a lot of investment, kind of like that. I heard Patti talking about being reasonable about it and bringing good customer value. And then you just heard Ronn talking about a lot of techniques and tools and the relationship it's been built over the years that brings a partnership with both legislatures, members, as well as the regulators. And that’s very important because none of it happens if we don’t have that partnership as well. And a lot of that is then targeted to this sort of thing. The spaghetti bowl that you see up in the right side is our peers once that we look at. And how their earnings per share have changed over the last many years, they see lots of ups and downs and all around and then you see us.

And that’s our goal we’re not always a peak at every change. We’re seldom at the bottom, but we’re predictably working very hard to continue that track record that shows us moving forward in a manner. There is something that is sustainable for our customers and reliable for you as investors. So here some quick pictures then I’ll give you through pretty quickly because I think lot of you know the story. Here is the goal that we set there were about 6% to 8% growth in the early years of our recovery. We performed at the high end of that and John showed you again how we ended up this last year after having move to a richer dividend more certainty of return for you and to a 5% to 7% growth and how we've been staying on that track as well.

And here is a peak of that all important dividend and we think that's essential for us if we are going to be a predictable utility is to give you a good reliable dividend that will grow each year. We’d like to see grow at least with our earnings growth. But who knows how that can change in terms of the upside as we go through time. And then this is a slightly different version of the chart that John just shows a rich fact just a little bit further about eight years back. So you could see what that TSR track record has been over the last three years, five years, and eight years, and it’s one that we’re proud off because we do it for you. And it’s one that we like to sustain as we go through in a future. So how is that all work on all these things go together here is the model, many we have seen this model, it is driven by investment. It’s been working great over the last few years, we anticipate, but it can work very well over the next five plus years and here is part of the reason why?

The big bubble up there is over $10 billion of investments. Some of you heard me tell the story that when we were talking about strategy with our Board of Directors and we had a plan that invested about $6.5 billion over the next five years. And we’re talking about new things. We could do new things we ought to do. And I’m certainly like the finance guy making notes and writing them down and before I knew we were at $10 billion and growing. But we all agreed in the management team in the Board that we have to stay close to that 6.5 level when you look at five-year period because that’s what drives our customer rate. If we allow our base rates to go up more than inflation so about 2% a year, then there is going to be real increases for our customers and how sustainable to you believe that will be over a long period of time probably not.

So pretty important, here is a little slice of the pie and you got to hear books so that you can look at how that thing is sliced up today at $6.5 billion and how might be sliced up a little differently as you go into the future we’re here, you can see there might be more spending on the gas generation side you heard some hint to that, I think a little bit from Jack. We might go faster replacements with our pipes, with our poles. If we can do that and fit it in, that’s a good thing for our customers. We could even do this smart grid faster, but thank goodness we didn’t by going at the pace we did, we got to a whole new approach to how we will actually knew the technology of the smart grid, which is going to give us tremendous advantages over those that rushed a little too fast with the systems that were economic and available before then. And here is that model then. So, it's got this growth of investment that you see here in the green bars and then you see the blue bars are the gross operating cash flow. The best way I know to show you at the capacity is for the company to do things including making more investments, increasing the dividend, retiring some of its parent debt, whatever that maybe, the choice is grow over time when you can see just over this five-year period that our operating – our gross operating cash flow will get up to over $2 billion and that's a nice place to be.

Now, a couple of people have talked about this slide, which says we've got to control our cost. You can see the history here on the left that what we did and we thought we were being very responsible back then, 7% increase to friends, 7% to all our neighbors as Patti was telling us and all of our good friends in companies. So, we put on our new hat, we said, you know what our customers have to find ways to reduce their cost and we need to do the same thing for them.

So, long-term, we are looking at O&M coming down about 1% a year, but it's the near-term that counts. We can show you hockey sticks. This year, we think we can bring our O&M costs down 4% and you heard Ronn talk about those kind of numbers being factored into our rate cases, which are very important for our customers. So, this is a good way to keep rates down. You can see them at the bottom of the slide, let me highlight just a little bit with a bright yellow section there.

Remember John mentioning some of the longer term numbers we'll look at 2012. The base rates for electric up about 1% this year, fuel and purchase power up 2% as some work to do. We'd like to figure out how to keep it down as well. And on the gas side, a much better story with the 2% base rates reflecting those investments that you heard about, but then with the commodity price, as the gas prices coming down more than offsetting those increases, in fact not only for this year, but the next several years, so a wonderful place to be.

Now, here is another enabler as we talk about O&M as an enabler, the investment as a principle, we talk about sales as an enabler too. We are seeing the turnaround that feels like it's a little bit quicker in our service territory compared to some of the other folks in the Midwest area and even compared to good friends down at southern. We looked at some notes together and they are seeing, they are struggling on the commercial side and on the residential side we are two. These numbers are coming back slowly, but I am amazed that they seem to be coming back a little better than other areas. So, it maybe there is a sign in Michigan at least in our neck of the woods, where the kick up is a little bit better, but we want to plan conservatively.

So, you are going to see us keep the numbers down. If those sales numbers are better, this happens to be electric weather adjusted, but if they are better than that wonderful and if they are not then we have prepared ourselves for tougher times, but to the extent that grows that spreads the cost across more people and it's a nice place to be in.

And here is one that we don't talk a lot about, because it's a so small, but this is our enterprise organization with some small IPPs and one big one mostly renewables except one big one and the small interbank. And you can ask questions about those as you will, but remember don't talk a lot of time, because they represent as you can tell here a little piece of the business. Here is the key, their growing pieces they are improving. IPPs aren't doing really well on this market, but the potential as the market turns is wonderful for them. We like the renewables that we have there and the bank has a very low risk profile with a nice growth profile that goes with it. There is optionality in here in terms of what we can do in the future that can keep these and help us grow our business a little bit as we go through time or there is always the chance to monetize, if that makes sense to do.

John talked about risk and he gave credit, where it really wasn't due talking to me, because there is a lot of people that drive the risk model inside of the company. It does not work unless you have a management team that is committed to understanding your risk, facing the hard ones, and doing something about it. And the CMS team is committed to just that. So, our whole process is one where things bubble up from the bottom and issues get talked about across the management team in a very open, casual, and calm way. So, we see problems coming up, we do something about it.

I pick three just for a little bit of entertainment, I guess on the economy, what if things do go wrong, where you can see here the focus on the customer could be one of the critical things, because then you have a partner who is working with you, if there are problems, but we have backup liquidity measures. We have ways to slowdown some of that spending. We talked about it if we need to and put a little less money down into the utility and that gives you a nice backup if you had to do it. It's ready to go. We hope we don't need it.

Picking out another one on capital investments, so what about regulatory recovery, just how good are we at that, what we do? Well, if we prioritize the projects well and do the things that are the most important for our customers or mandatory through law then we have a good chance of winning and being successful for those customers. So, it’s what I call the needed investment, instead of the wanted investment. We wanted to do a lot of things. I want to have several good sport cars, but I only need one. No, you don’t need that much.

So, if we get focused and prioritize that’s important. Then if we align ourselves with our regulators and you heard Ronn talk about that so they understand these are investments they want in fact in some cases we want to faster than we think we can do and keep the rates from going up too quickly, we end up with good compromises.

And then lastly look at capital structure, interest rate. Some of you heard me talking about the rates are going to go up 10 years ago or five years ago or last year. So, I have been consistently wrong and good risk management keeps me out of trouble on that, but at some point that little elastic is going to burst and I think the interest rates are going to up.

But when that happens, we need to be ready because that could affect our parent debt. So, we have some simple things that we really do and I will show you a slide on that. Three things on the right as you can see we keep a thick liquidity and you can see that on the left bar that’s there, which is roughly depending on the plenty time in the year about 2 times, where the average of our peers are, nice back up to add.

We pre-fund our parent debt and our pension in fact as far as that goes, but our parent debt by at least one and usually two years. So we don’t have an issue right in front of us. And then third we keep that robust backup plan, where we could push out some investments if we had to at a moments notice so that we can have space to save some of that money that might have to go down to the utility to do things, if we had to.

Some people in this room and most of them in the management team not the rest of you, but they call it bulk spenders and a skyhook is found by me because I think it works if things do go wrong. As Patti said that was joke.

So, let’s look at the results very briefly. Cash flow that is not up there just because there is a couple of people from the rating agency sitting over here. We had a message with everybody. Our investment program is going as quickest as we can without pushing rates up too quickly, but the pace that we are doing is growing our cash flow, growing our capacity to do many things in the future, which could be nice reductions in that parent debt as we go through time, could be continue growth of the dividend, could be some continued good investments or nice mix of all those things. We live in the world of and rather in the world of or. So, that’s an important one. I know most of you seen that before.

I don’t know if there is anybody in the room that hasn’t seen the slide before? Okay. This just says its our earnings we show it and every time I have to look at that notch I crunch, but it was something that we had to do as John described so that we can continue on the growth plan in another words move out of international and move right back in to the utility, get a full year of the equity benefit of that investment in the utility and a full year of the interest savings that we got from the cash flow proceed and then right back on the growth track. Don’t even miss to be and we are proud to be there and the dividend that goes with that. So, then on this slide just as I kind of wrap up and get us in to the important part of the Qs and As and we hope we have warn you down that you still have some really tough Qs and As for the management team. I hear them all the time.

So, total shareowner return is our drive and when we say we believe up there -- we believe what’s up there very deeply is because we do. We are quite aligned with you. Our short-term incentive plans for every salary employee in the company include earnings and cash flow for the year we are in. And for the long-term for the senior management if you will officers of the company, you are tied to one thing, total shareowner return and outperforming our peers. And I think those are the good things that our rewards to your success and we like be in there.

So, when we talk about predictable and visible earnings growth, we do mean it. When we talk about affordable because it would be sustainable levels of rates for our customers, you heard Patti talk about that customer focus, needed investment, you heard Dan and Jack talk about the investments that we need to make and the regulatory support that we have, you heard Ronn talk about the great progress we have made and how far we still think we can go in the future with that. It’s not like we are at a plateau. We think there is another whole plateau of risk mitigation working with our regulators that we can get to and that sort of the ending point on that strong risk mitigation. We do all that well. The prospects of getting to the TSR that we show there is higher. Higher for us, you judge if its higher than for other companies, but certainly one that we are proud of. So, we are very proud to be here on our 65th anniversary at the New York Stock Exchange and being listed here and our 125th anniversary and what we would like to do now with the two minutes that are left. Honestly, we have a lot of time.

Let’s take any questions that you have, I'd like to ask the speakers that they could come up here and join us at this point. John will come up and leaders do some Qs and As and don’t hold back. This is a great chance in a beautiful room for some good questions.

John Russell – Chief Executive Officer

Thanks Tom. I appreciate your patience. You saw lot of information. You saw the management team. We are open to any questions you have about anything. So, we got a couple of microphones so the folks can hear this at webcast and you can start.

Question-and-Answer Session

Okay. A couple of easy questions, just as far as on the electric side if the commission would endure or modify your decoupling on the electric side similar to let’s say what (TT) got it in the last rate case. And the Michigan economy started to really get going in the next two or three years. That mitigate possibly you need to probably as many rate cases?

John Russell

Yeah. Let me start and I'll turn it over to Ronn. Our belief is always have been and I think your assumption is correct. The commission is going down the path, when you think about the energy efficiency and the decoupling it will be a key for energy efficiency. I do have it for everything. I think it’s important, when you -- as an investor if you want certainty, reliability, take it all out of the equation.

On the electric side of the business, we generate electricity to value our customer. How do you help us so that if we’re not disadvantage by that. So, but I do think that’s where it’s going. On the flip side, we are seeing some recovery in Michigan and as we see the recovery in Michigan, I think there could be some upside for us also the weather hit back.

We gave money back to customers last year in 2011, because it was a very hot summer in Michigan. And we had full decoupling assortment back to them. That’s okay. I think for the type of company we are the predictability and uncertainty is better. To your point is it going to change? I think it is going to change. From our standpoint, yes, the economy is coming back. We probably have upside. We with the rate cases, if we have sales and Ronn pointed out very clearly in is couple of rate cases were sales oriented, when you go back about two (ago). Recently, yeah, we could probably offset a rate cases that’s the case. But we're still going to be continued to make investment and the recent cases are really driven by the capital investment.

Unidentified Analyst

And then second question a little bit out of that field, but if you look at Michigan and potential for maybe some shale gas, going forward I think kind of way your storage assets are I think surrounding that. And you guys see any opportunities will you there?

Unidentified Company Speaker

Yeah, I think couple of things. I think we all believe first thing the shale is real, shale is going to drive prices down. The key we have some of the largest storage facilities in the country last number I saw will between second or fourth largest in the country. The problem is there are no spreads today and there are no spreads in the future. The storage isn’t a big advantage yesterday. I do think midstream assets, the pipes, the connect, the shale gas to the interstate pipelines and also to connect the new gas generation that’s going come online as a resulted of this. I think does have merit and that’s something will pursue. Storage ultimately will payoff. Today it really doesn’t, but let me make a clear for who doesn’t know our business that well. We have storage assets over 300 billion cubic feet that we can store and we need those to provide the winter protection for customers, because we don’t pay for the transmission to have that capacity. So, we always after use our storage and that’s why it’s recoverable.

Unidentified Analyst

Looking at your CapEx detail, you have a category called investment choices and I'm wondering why you call that are they optional and is the recovery mechanism for that spending just the normal rate case process. There are there any -- any of that got its own specific mechanism. I guess see renewable has that surcharge, but is there anything else in there be treated outside of a rate case?

John Russell

Yeah, the capital investments, that we have is what I mentioned earlier. We prioritized the capital investment options. It relates to reducing O&M, reducing supply cost, adding value to customers, or improving our competitive position. So, that's how we rack those and make the most important one first. We could do more, and I'll let Tom answer, we could do more than that, but the ultimate lever that we have is how much can our customers afford and if it doesn’t payoff in those functions I mentioned earlier then we avoid it. And could we cut it back, yeah, but the return on these is pretty strong.

Tom Webb

So, a lot of the things that are kind of up above, they are the improvements that we have to make for reliability, where we really don't have a choice. They are some of the required things on the environmental side, where we don't have the choice. What we it is, there is nothing gap about it, that's for sure, but it is our way of trying to say where are things that we could do quicker or slower or whatever that our regulators or customers want in smart grid is a good one. When we started out on smart grid, we actually had over $900 million and we had it pulled way upfront, and then we realized it, we wanted to understand more about the security, more about how the technology would work, lots of things. So, we say it is a plan. This will be one of the choices that we'll push back and we'll do it. And we found we could do it even cheaper, so we are closer to $700 million, but do it over a longer period of time and it's permitted us to do things like the cell systems and the like that we think are going to be very smart.

So, the choices is segregation kind of independent to our company to try to determine what things could move slower or faster or even not at all. Smart grid is just a nice example of that and we have some things that may have to come the other way, and that choice, for example, if you kind of took something out of what Jack was describing, maybe there is going to be a need to do more on the gas generation side. And that will be a choice for us to try to do it in this five-year period and then we don't have any money in for an all new gas generation plant, not for building one or not for buying one or anything like that, but if we do it, then we will do. We'll work very hard to figure out how to reprioritize our investment and find some of those other choices that maybe have to slide out a little bit to fit those needs or we'd have to look at different ways with our capital structure and we are trying to avoid that. We are trying to stay in a situation, where we don't have to issue any new equity, any block equity for the next five years and we feel really happy about that plan. Does that help?

Unidentified Analyst


Unidentified Analyst

I want to touch base on the slides, first, I think that I heard, I was just wondering if I was correct here that she said that your employees going forward were going to be sharing healthcare 50:50, did I hear that correctly?

Tom Webb

That's correct.

Unidentified Analyst

How much does that save? And just in general how your employees reacting to that? Could you….

John Russell

Yeah. The salaried employees have been paid for that for six years, the union employees, just recently the past two. We're proud of the fact that we provide very good benefits to our employees and now they are sharing in this and just sharing on the incremental cost going forward 50:50.

Unidentified Analyst

Okay. So, is that the full?

John Russell

Oh, no, no, no. Hopefully, it's cool, yeah, going forward its 50, as cost rise, they pay for 50 and we pay for 50. Let me give you a good example of that, your reaction. John Butler runs our HR department. We did a survey to ensure, not a survey, a mandatory response that employees had to tell us based on our records, where their records the same as ours. In other words, if they had a spouse and the spouse was on healthcare that we are covering, we needed to see a married certificate, things like that. If we would have done that five years ago we would have had unrest at the company. People would had to turn in marriage certificates, birth certificates for the kids, the kids were going to college, we sent that out with basically a note that said we are all sharing on the healthcare costs going forward, if somebody shouldn't be on this, then we need to know. And keep in mind, I am not saying there was anything fraudulent, but if you had a retiree whose spouse passed away and they didn't give us the information, we are still covering them on a monthly basis if they are part of an HMO of some sort.

Unidentified Analyst

Okay, I got.

John Russell

Your guys response was great, and we lost about 600, 700 people out of it.

John Russell

Okay. And then also the 2.2% weather adjusted, weather normalized growth, what's if we were to back out industrial what kind of growth rate you are talking about, what's really actually leading to those, I mean, just that is remarkably high. How should we think about that?

Tom Webb

The biggest part of that is industrial. It's what a lot of people are seeing around the Midwest and down in the Southeast as well. Industrial -- a lot of our industrial customers are back to where they were at the deep part of the recession and beyond. Residential and commercial in last year and this year they think they flip, we're talking about 1% in one and then flat in the other end it was the reverse of that last year. That's coming back slowly. What we think is going to happen this industrial will continue up, it will pull back the residential side, pull that up a little bit as it followed it down and then the commercial were filling behind that. That's what we think is going to happen. We are doing really conservative on those two in our projections though. But the industrial side looks pretty good so far.

Unidentified Analyst

Okay. And then just finally when I read the interim order that came out, I do sense from at least through the commissioners a lot of enthusiasm. What seemed to be rather restrained type of limitation request on your part, when you got it, but I mean just in general could you elaborate a little bit as to what that might be --what that might suggest going forward?

John Russell

Sure. I don't have any insight to what they were thinking at the time, but I thought that they were very clear in there one decent and the other support of it. I think you probably would look at it, it's a change in the guard, you have a new chairman, who is going to do things maybe in a way that he believes is right. The other -- the former Chairman decented so there maybe a change coming at the commission that was not there before. The order was fine. We got it. It was relatively small and a scheme of thing. As Ronn indicated in is talk too gas prices are coming down pretty substantially. So the timing of this offset one month from now as Ronn said we're going to be down a $100 million in cost on the gas side of the business. So, could have been timing. It could have been rate fatigue. I’m really not certain, but I guess what I say to everybody here, let's see what the new chairman does as far as how he drives the regulators for the next six years and not those that are really going to be here a year, year-and-a- half.

And then if I could just add the one comment to Tom’s about the industrial growth. We are a big unique that our largest customers in the silicon chip business. There is three times as largest as General Motors and they are growing like crazy. Now it's a pretty discounted rate for them, but at the end of the day, when you see the total sales and most people don't think of us in those terms. But they are in mid Michigan, they are owned a subsidiary of Dow Corning, up in the midland area and they are growing at a very, very rapid rate.

Unidentified Analyst

Thank you. I guess this question is for Ronn. In your strategy comments you are saying that you are working hard with the commission to try to bring some if the costs were up outside of the annual rate cases. I guess taking that to the next level that's achievable would you look at asking for longer term stay out given your CapEx plans more longer term in nature and do you think the commission to be willing to have that conversation?

Ronn Rasmussen

I missed the last half of that. But the very last statement if that is true.

Unidentified Analyst

If that's true would you look at longer term stay out and that something that you are going to ask for and something the commission would be willing to hear?

Ronn Rasmussen

Well, my answer that would be, yes we would. We would bounce all of the financial ramifications of any of those types of mechanisms. It might be that we just don't look at longer term situation to defer increase. You might not need them because you are attacking those types of thing. So the simple answer, yes, we would look at it. I don't know what the answer would be obviously.

Unidentified Analyst

Okay. And then I guess for this year for 2012, I guess with ROE degradation I guess assuming somewhat I think imminent what are the levels that you are able to hold to I guess keep your 5% to 7% EPS growth for 2012?

Tom Webb

I don’t know. There is a whole bunch of things we can do, when you heard John talking about cost reductions. Just remember all of the things we've done in the past and jotted down in list here. The restructuring to right size was $30 million. SAP was $40 million of savings a year. The union contract along with pension fees was $30 million a year and some of these still flow over into this year. The healthcare audit that John talked it was a couple of million dollars a year. The pension pre-funding that we did this year was another $10 million a year. So, there isn’t any ever one thing. One of the mechanisms we have is things like free training, where we try to put in ample amount of that we can always come back a little bit, but the first place will go. As we look at own cost structure and see what we can do. Let me help you make your question even tougher if I may. We could see the ROE come down, but we're not going say to what we think, but we've already planned on some reduction so built into our numbers.

And the whether is not good. It just as mild I mean if you want to go on your bathing suit and run around, it’s great, but not good for us in Michigan. So, we already have plans in place to offset. That when we are looking at things what if that continues and its stays mile for a long time. So, we got a lot of tools in place and things we can do.

Last year we were fortunate that we could pull some work and cost ahead. So, we were able to do some outages in Jack's area earlier than we would have done, which helped us and this year that we are in now. We were able to do more free training, more reliability work than we originally planned to do and that helps Dan and the efforts that he is doing to get ahead of that game. So, lots of things like that. We had good year, last year and pull some work ahead. So far it looks like we got our work out for us this year, but it’s too soon to tell how much. We are working everyday, but great question.

Unidentified Analyst

And then just one last question, just to make sure I understand. So with the renewal surcharge, with that $54 million I guess refund from previous expectations. Is that really going to be $1 billion of customer rates avoided over the 20 years?

Unidentified Company Speaker

The answer is first its closer in the regulator be there by 2013, so it’s 2015 or 2016, Tom you can probably help me on that, but it covers to that period and then there would be fresh looks that across to anything else that we're doing beyond that. But if we are able and the reason I hesitate, if we can do the work in the way we described and we choose to do it bit more. Yeah, that would flow through because it will be more efficient, better win, hopefully catch the right tax laws and be able to do things that make a lot of sense, but it covers this near-term this first period of compliance.

Tom Webb

Yeah, the key is really differential between renewable energy and price in the market. So, as we go forward that differential that spread should be reduced.

Unidentified Analyst

Thank you.

Unidentified Company Speaker

(indiscernible) in the back can take the next one.

Unidentified Analyst

Just two questions, first of all, with respect to retail open access, you know, as gas prices come down given that’s the feel on the margin most often. I would imagine further and further pressure as time goes on. Can you talk about are you deal with that combat with that over the course of next couple of years or its going to resurface?

John Russell

Yeah. I think there is we have already have couple of hearing in the state. The senates gone through, thrilled wedding of the law and the head of the senate energy committee has come up publicly and says the law is good. It’s well balanced. The governor, new governor past two years has been supportive of the law thanks to drives the investment. And the house has been supportive at this time. You write about the pressure is that gas prices continue to drive. Today’s market is an unsustainable market for electric prices it’s my opinion. You can’t have a market that has zero value for capacity and expect to continue for ever, it just a short-term arbitrage. The Governor of the State of Michigan is a business person he called it arbitrage, which always glad to see that if you want the balance of this then you need to open it up. Now I don’t – I wouldn’t be foolish enough to think that, there isn’t going to be further pressure to do this. But at the time being right now, there is a cost shift that most legislators don’t want to shift go to other customers such as residential customers. So, they don’t like that piece of it and what they look at is the law being well balanced. Those are the generally you want to open up the gap or oppose to increasing the renewable portfolio standard or energy efficiency. So, that’s what nice about the law that really is the balance between all areas. But the best thing that we can do is help ensure that the legislature knows our position, knows the impact on customers and as a team of fed focused on our cost to get our competitiveness as quick as possible by doing some other things that Jack talked about and having that balance portfolio.

Unidentified Analyst

The other question I had is just you had -- enable slides sales recover being providing some headroom, rate headroom, given the decoupling you have maybe I’m missing something. How does that provide rate headroom?

John Russell

Go ahead.

Unidentified Company Speaker

Sure. Unfortunately we see the decoupling disappearing potentially on the economy and weather. We don’t have the decoupling for weather and gas, but we do on electric. And then but the way things are going and what you saw in the DTE orders earlier we suggest that for this year, we probably won't see decoupling benefits for weather or the economy. We’ll see how it plays out through the rate cases we have. And so you may not have that going forward. We’ll still have it for energy efficiency and everyone is fully in favor of that so whatever efficiencies are out there and we call it energy optimization, get the benefit. So, if the DTE approach is successful and it’s not what we would propose, there are few things we disagree on, but on this one we think we ought to have risk mitigation, when sales are going up. So the opportunity goes the way and the customers get it and risk mitigation when sales are going down, we got to have it both ways. But if it's going to go the other way then we’ll see the benefits flow through into our annual rate cases be able to accommodate that for our customers.

Unidentified Analyst

So the expectation if you don’t have decoupling in or they bake in some sort of a revenue assumption, load growth assumption?

Unidentified Company Speaker

We know each year when each time with your rate case, there is re-look at sales. So you could argue with annual rate case is decoupling it’s not that bigger deal anyhow. But I like the automatic nature of it personally. It just the risk approach that we have, either way I think we’re going to be fine. But somebody suggested that what if we ended up with maybe a tracker mechanism of some kind on capital investment you sought from Ronn how much that is of a rate cases, you might not have to come back as often just reason to come back as often. So that having the decoupling on sales will be good I think in that situation.

Unidentified Analyst

Yeah, couple of questions. First, you talked about maybe some new regulatory concepts like a capital tracker, pension tracker or things like that. Is that something you could do under the current law or is that something you would need to get new legislation to be able to do?

John Russell

Go ahead Ronn.

Ronn Rasmussen

We believe that could be done under the current law. That’s the commission’s discretion to implement those types of mechanism.

Unidentified Analyst

Okay. And then you mentioned Tom you like to do something may be if possible on the fuel and purchase power increases that year, projecting why are those going off what are some things that you might be able to do about influencing that?

Tom Webb

Okay. The big increase that we saw this year in our prices are delivery prices is primarily due to renegotiation of our transportation contracts for coal. And Burlington Northern and Santa Fe raised our rates 44% in the process just from last year to this year. That was a very significant impact on us. Now, we have very small increases for the next three years until we get a chance to renegotiate that contract. We’re starting now to try and prepare for the contract negotiations with the volume reductions that we are seeing across the country for coal deliveries. We are starting to send some more willingness on part of the UP in specific to give bids for transportation contracts typically in the past than BNSF.

In the past, we had difficulties getting legitimate bids from both of the providers. So, we think we got some leverage now with the reduction in tonnage on the rails. We are going continue to push hard on that. We have some significant power purchase agreements part of the PURPA rule back from the Midland nuclear power plant era, that there are fairly far out of the market for us. (indiscernible) and we get full recovery, but it does make us less competitive. We are actively looking at those contracts and having discussions trying to find ways of reducing our cost in the short-term, while the market prices are as low as they are. Once we anticipate that once the Mercury and Air Toxics Standard goes into place and there is significant reduction in coal capacity on the system. That’s going to restore the capacity prices.

As Tom alluded to earlier, the capacity prices today are essentially weather cautious to get the contract in place, essentially zero in terms of value for capacity. That's not sustainable and clearly it’s going to change very rapidly, when large amounts of coal get decommissioned in the process of people deciding not to put large capital investments in those units. That’s going to totally change the situation as soon as that actually occurs when we get the Mercury and Air Toxics Standard in place. So, we are trying to prepare (indiscernible) and everything we can to reduce our cost. And I think we've got some significant opportunities to do that.

John Russell

Any questions?

Unidentified Analyst

Going to your nuclear PPA with Palisades, how long is the tender of that and any commentary or concerns with the recent issues and/or the operator themselves?

John Russell

Full disclosure before Jack answers it. Jack used to run the plant and so did Dan. No, just plays guys.

Jack Hanson

That was the Operations Manager of Palisades for five years and held the senior operators' license. That contract goes till 2022 and we get full off-take from the unit. They have the ability to replace any power at their cost for that contract, where we can just grow the market in the process. They are currently – they’ve been downgraded by the NRC. Today, if they quit producing power and deliver it to us and didn't replace it, it will reduce our cost, because of the capacity payment that we make to them and because we can go out today on the market and purchase capacity for way lower than what that long-term contract is, we're going to actually reduce our cost. So, the problems that they are having today with NRC, it doesn’t provide any risk costs at all in the process.

Now, why it suited them that the contract is out of the market today, again it goes all the way to 2022. When you look at the overall impact of that, we expect to be very much in the market and to be very beneficial to our customers, and in addition, when we sold that plant and put that contract in place, we refunded a significant amount of money, you know, how many?

John Russell

Ronn, it was through…

Ronn Rasmussen

A bulk lot of money.

Jack Hanson

300, yeah.

Unidentified Company Speaker

How much?

Jack Hanson

So, we already gave the customers a lot back from their process, and overall, that contract is very beneficial to the customer. So, the issue that they are having with NRC is not an issue for us unless it runs for more than three years in the process. We don’t anticipate that.

Unidentified Company Speaker

Also the operator is Entergy and Entergy is a very solid operator of nuclear power plants, I mean, very successful operating there. We do have great confidence in their ability to operate and have an operating quite well from the time that we actually sold the plant. They do have some issues to work with on some of their programs, but we do have great confidence that they will solve and then continue to operate the plant well.

Unidentified Analyst


John Russell

Three years is the timeframe, then I’d expect that capacity market to recover, because that’s the general timeframe that the Mercury and Air Toxics Standard going to place and when you also be taking a lot of units offline, but actually tie in those air quality control systems that everyone is in the process of trying to build.

Unidentified Analyst

Given the direction of ROEs, you've talked about in the past about potentially thickening up the equity layers the potential offset, what would hit the appetites that is at the commission and how far do you think you could take it?

John Russell

Ronn, go ahead.

Ronn Rasmussen

Sure. Well, we are running under 50:50 right now on a regulatory basis. So, generally speaking, you can get to 50 and shouldn’t anticipate a problem with that, but there are a couple of other smaller utilities in Michigan that run a little higher than 50. We have to obviously evaluate how far we could go on that issue alone.

Unidentified Analyst

Where are you now?

Ronn Rasmussen

We are just a little over 49.

John Russell


Ronn Rasmussen


John Russell – Chief Executive Officer

Okay. Take them a microphone, any other questions? Alright. We’ll tell you on behalf of the team, I want to thank all of you for coming here today. I know it’s a long presentation, but as you saw from the team we are proud of the 125 years and also the fact what we provided to you. So, I hope you enjoy the time with us, interact with the management, and be sure to watch at 4 o’clock today when we are on the podium. So, thank you very much. I appreciate it.

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