CMS Energy Corporation
Q1 2010 Earnings Call Transcript

Published: 28 Apr 2011

[Operator:]

Good morning, everyone, and welcome to the CMS Energy 2011 First Quarter Results and Outlook Call. This call is being recorded. Just a reminder, there will be a rebroadcast of this conference call today beginning at noon Eastern Time, running through May 5th. This presentation is also being webcast and is available on CMS Energy’s website in the Investor Relations section. At this time, I would now like to turn the call over to Ms. Laura Mountcastle, Vice President and Treasurer. Please go ahead, ma’am.

[Laura Mountcastle:]

Thank you. Good morning and thank you for joining us today. With me are John Russell, President and CEO; and Tom Webb, Executive Vice President and CFO. Our earnings press release issued earlier today and the presentation used in this webcast are available on our website. This presentation contains forward-looking statements. These statements are subject to risks and uncertainties and should be read in conjunction with our Form 10-Ks and 10-Qs. The forward-looking statements and information and risk factors section discuss important factors that could cause results to differ materially from those anticipated in such statements. This presentation also includes non-GAAP measures. A reconciliation of each of these measures to the most directly comparable GAAP measure is included in the appendix and posted in the Investor section of our website. We expect 2011 reported earnings to be about the same as adjusted earnings. Reported earnings could vary because of several factors. We are not providing reported earnings guidance reconciliation because of the uncertainties associated with those factors. Now I’ll turn the call over to John.

[John Russell:]

Thanks, Laura. Good morning everyone. Thanks for joining us on our first quarter earnings call. I will begin the presentation with a few brief comments about the quarter before I turn the call over to Tom for a more detailed discussion and the financial results and outlook for the remainder of the year. And then as usual we will close out with Q&A. We started the year with a good first quarter reporting adjusted earnings of $0.51 a share up $0.13 or 34% from 2010. The increase was due primarily to colder weather this year compared to 2010 and the benefit from an electric rate order received last November. The business model we developed several years ago is working. And working well and continues to deliver consistent results. Our plan to invest over $6 billion in the utility over the next five years creates rate base and earnings per share growth of 5 to 7% and by using our NOLs we avoid the need for any new block equity during this period. The good news for our customers is that we can grow rate base and earnings while minimizing base rate increases to levels at or below the rate of inflation and I will discuss this in more detail in a minute. I am also pleased to affirm our guidance at $1.44 a share. A good first quarter provides more flexibility to reinvest in customer reliability. During the February call, I made reference to our plans to upgrade the Ludington pumped storage plant, to improve its efficiency and increase its role to support green energy sources in Michigan. This slide illustrates several of the operational benefits associated with the upgrade. Due to its proximity to several proposed wind power developments including our Lake Winds Energy Park, the plant will act as a giant battery to store renewable energy produced during off-peak periods making renewable energy more affordable and reliable. This project will increase the generating capacity of the plant by 15% to about 2,200 megawatts, plus the increased pumping efficiency will further decrease the plants operating cost resulting in reliable, low cost power for our customers. As a reminder, Consumers Energy operates the plant and owns 51% of the facility. DTE owns the other 49%. Consumers Energy will spend approximately $400 million over the next 10 years to complete the upgrade. About 25% of our $6 billion capital investment plan over the next five years will be spent to meet State and Federal environmental laws and regulations. The most recently proposed EPA rules on hazardous air pollutants and maximum available control technology are inline with our expectations and our plan. We will continue to closely monitor the development of these regulations to determine the potential effect on our operations. By switching to low-sulfur coal and making significant investments in control technology, we reduced emissions at our coal-fired generating plants resulting in significant improvements in Michigan's air quality. Since 1990, these investments have reduced sulfur dioxide and nitrogen oxides emission by approximately 70%. Till 2015, we plan to spend another $1.5 billion on our five largest coal-fired plants to further reduce emissions, keeping Michigan's air the cleanest it's been in decades. We expect to fully recover the cost of complying with environmental laws and regulations from our customers in our rates. The decision to upgrade our seven smaller coal-fired plants will be made after EPA regulations are final and we've had a chance to evaluate all of the economic factors. These units have a high utilization rate and generate power at a competitive price in today's market. Let me give you a brief update on a regulatory agenda. This slide illustrates the history of our electric and gas rate cases since the passage of Michigan's energy law in 2008. In February, the Commission delayed our gas self-implementation to give parties an opportunity to respond to our proposed $29.5 million rate increase. Since that time we have been engaged in settlement negotiations with all of the parties in the case. Yesterday we reached an agreement in principal with all of the parties and we are in the process of finalizing the settlement documentation. We expect to file the settlement with MPSC very soon. We also plan to file our next electric rate case in the second quarter, which will allow for self-implementation before the end of the year. We recognize that to be successful we must deliver safe, reliable, competitively priced power for our customers. This slide lists the result of several cost reduction actions taken over the past few years to minimize the price to customers. The most significant benefit resulted from converting our plants to burn low-sulfur western coal. About 85% of the coal consumption is from Powder River Basin. The price differential has saved our customers about $250 million over two years in fuel costs. We have taken a variety of actions listed on this slide that have resulted in base rate and surcharge price reductions for our customers. We made changes to our benefits plan and increased the cost sharing from our retirees and employees. We implemented a new SAP software system that reduced cost and improved efficiencies. Plus, we reduced the number of employees by 10% over the past five years to balance the workload with the workforce; and as we filed the request, and we filed the request with the MPSC to reduce the renewable energy surcharge. Collectively, these actions have resulted in about a $150 million of cost reductions to our customers. I am pleased with the results of the 2010 benchmarking study by Oliver Wyman which placed us in the first quartile when comparing our cost per customer with 21 other utilities of similar size and operations over the past several years. We cannot be satisfied with the cost reductions of the past. We have a number of initiatives underway across all business areas that are intended to improve productivity. Through these efforts, we plan to gain greater efficiencies, reduce cost and enhanced customer service and value in the future. Customer value was a critical element to maintain good relationships with our customers and the regulators and deliver long-term financial results. We have a major initiative underway to improve customer value. A key element of providing value to our customers is the whole rate base increases to levels at or below the rate inflection. We plan to deliver competitively priced energy to our customers over the next five years, while maintaining base rates increases at about 1.5% for electric and 1% for gas. Now let me turn the call over to Tom to discuss the results for the quarter.

[Tom Webb:]

Thanks John. And I am pleased to add my welcome to everyone on the call this morning. Thank you on such a busy day for dialing in. First quarter results were solid with reported GAAP earnings at $0.52 a share. Excluding favorable news around the small legacy legal settlement, adjusted EPS was $0.51 a share. This is $0.13 or 34% above a year ago and it's our best first quarter EPS in nine years. Weather adjusted, the profits still were strong at $0.47 a share. We are on track for electric sales to grow by 2.5% this year with the residential sales up 2% and commercial sales up about 1%. This follows as expected the industrial sales recovery of 10% last year and about 6% this year. Combined with the 2% sales improvement last year, with our forecast of 2.5 for this year, the post-recession recovery is clear, but it’s still below the down-spec experienced after the [bigger] recession in the early 80’s. We continue to plan conservatively. Although the 10 years census showed Michigan’s population down by 1% much of the decline was outside of our service territory; where we do business population grew about 3%. Now onto the results, we have first quarter results of $0.13 from last year. We’re on track to meet our target for the year and it’s our share we’ve referred our guidance. During the first quarter, almost $0.06 of the favorable year-over-year performance can be attributed to weather. That includes mild weather a year ago and colder than normal condition this year. We did, however, suffer from usually severe storm that exceeded our planned storm allowance by about $0.03 a share. Now, looking ahead to the rest of the year, much of forecast to great relief is associated with the full year impact of raised order of last year. As most of you know we take advantage of favorable performance when we can to make incremental investment to add value for our customers. Recently, we’ve been able to put more financial resources to work at further improving reliability and expect to do more in the rest of this year. The results are beginning to show up in customer surveys. We’re pleased to see that our score on the recent American Customer Satisfaction Index survey of investor owned utilities was increased for the second year in a row. We are above the national average and we hope to be able to continue making improvements for our customers by spending even more on reliability improvements during the rest of this year. Recently, we bolstered our liquidity further by renewing our five-year revolvers, a year in advance, $550 million for CMS and $500 million for consumers. We’re delighted that the market recovered enough to permit us to renew these revolvers for another five years. Combined with our $150 million three-year revolver, our AR and LC facilities and cash, our capacity totaled $2.3 billion at quarter end. Of that, $2 billion was available at March 31. This coupled with a strong operating cash flow and use of substantial NOLs allows us to avoid the need for any new equity over the next five years. We will of course continue our dividend reinvestment program and another small tools to grow equity even though at a very modest pace. It's a nice position not to have to issue any equity avoiding dilution of our 5% to 7% earnings growth over the next five years. Here’s our 2011 sensitivities table to allow you to independently assess our outlook. Rate cases continue to be our primary sensitivity. If we are wrong on our ability to earn at the authorized levels by say as much as 50 basis points our earnings could change by as much as $0.08 a share. We earned our authorized ROEs in the electric and gas businesses last year and we expect to do so again this year. And we are fortunate to have a public service commission that is maintained competitive authorized ROEs. As ROEs have dropped in other states our commission has sought to send a signal that Michigan is a good place to invest. Here is our full year report card; earnings, cash flow and capital structure matrix are all strong and on target. Thanks for listening in and John and I will be happy to take your questions now.

[Operator:]

Thank you very much Mr. Webb. (Operator's Instructions) Our first question of the day come from John Quealy with Canaccord Genuity. Please proceed.

[Mark Segal:]

Hi good morning guys. It’s Mark Segal for John. Just wondering if you could provide an update on your Smart Grid and Smart Metering plans? Perhaps talk a little about scale and timing there and just sort of general update? Thanks.

[John Russell:]

Yes. This is John, What we’ve done is we’ve scaled back our Smart Grid investments I’d say over the past year. We’ve looked at the business case, we’ve eliminated the gas territory and we’re focused primarily on the electric territory. We’re moving forward in the Grand Rapids, which is the west part of Michigan, with about 400,000 liters to test the [ability] of the business case, the technology. And so far with the installation – the installations begin about 2012. So we expect that to occur over the next couple of years and based on the success there we’ve a plan to carry that out throughout the rest of the state.

[Mark Segal:]

Okay. Great, thanks for the detail.

[Operator:]

Our next question comes from the line Andy Levi with Caris & Company. Please proceed.

[Andy Levi:]

Good morning. Good quarter for you guys.

[John Russell:]

Good morning.

[Andy Levi:]

Just one thing that I saw in your income statement I just need to get clarified. Depreciation was down $10 million for the quarters. And I was curious why and whether we should kind of incorporate that into the yearly number. Because I had some other assumptions.

[Tom Webb:]

With anything I think what you will see is that’s go over as you through the year. You got a one point in time here where we had [24] benefits that are rolling off and all that means is some recovery that we’ve been getting, that’s over the last five years during four choice period. And so it’s just kind of an anomaly and what you’ll see is the investments we’re making will continue to grow. So the CapEx will be bigger than depreciation. You’ll see that grow as you go through the year in the next five years.

[Andy Levi:]

So was it a timing issue or is it like a one time benefit, just want to?

[Tom Webb:]

No just the end of a program where we have recovery going over five years and this was the last year. So you see that ending. So you can think of that as a one time as that recovery ended and you will depreciation ramping right back up.

[Andy Levi:]

Okay. And how much was that total for that program ending?

[Tom Webb:]

For this year it would have been about $40 million.

[Andy Levi:]

$40 million on a quarterly basis or an annual basis?

[Tom Webb:]

Full year.

[Andy Levi:]

Full year, so quarterly is about $10 million or something like that?

[Tom Webb:]

Yes, but it is all over, remember that, ended at the end of 2010, that’s why you see that once….

[Andy Levi:]

Yes I am just trying to figure out what the benefit was for the first quarter because you’d papered that out. And then the second thing is can you just give us an update on the gas rate case, are you near settlement, is that possibly what’s causing the delay in implementing the rates?

[John Russell:]

Yes I think it is familiar with it in February, the commission delayed our self-implementation in the gas rate case. What I mentioned a few minutes ago is that we have reached the settlement in principle with all parties.

[Andy Levi:]

Do explain this out. Sorry.

[John Russell:]

That’s okay. That’s on ever since the delay we have been working with all the parties. Yesterday we were able to reach a final agreement or final agreement in principle with all the parties. And they are papering that deal right now and expect it to be filed with the commission very soon.

[Andy Levi:]

Terrific great. Okay, thank you.

[Operator:]

Our next question comes from the line of [Ishar Khan with Izium].

[Unidentified Analyst:]

I guess you kind of elaborate more on the settlement as to what the numbers might be, can you?

[John Russell:]

No, what I would like to do is just respect to all the parties that we dealt within this, they are finally in the deal right now, but I would expect that this would be public very soon within next few days or weeks. We’re very close.

[Unidentified Analyst:]

Okay. And then the second, I guess with this pick-up in extra earnings, are you guys just being cautious for the rest of the year or there is some stuff, I guess I saw on the graph; you’re going to do something extra to mitigate the $0.03 or $0.04 extra that you picked up in the first quarter?

[Tom Webb:]

That’s a good question. And I would ask everyone to kind of keep in mind that any time we can, if we have a hurt which is not what we have in this situation we work hard to figure out how to shape the business and shape our cost structure to address it and deliver on our guidance. In this case, it goes the other way. You’re right; we had a little bit of good news. Now some of that good news weather was offset by storms and the like. So it may not be as big as people think. But we did have some good news. We’re going to take advantage of that and invest in reliability; you may say, what do you mean; can be doing more tree-trimming than we had presently planned to do. There can be a lot of things like that, that are healthy for our customers and if that is a capacity that we can address, we’ll do it. That allows us to live within our authorized ROEs and at the same time deliver the guidance that we’ve shared with folks. So it’s not so much being cautious as it is trying to run the business in a manner that is as most affected that it can be for our customers and for the owners.

[Unidentified Analyst:]

And if I can end up, when should we expect electric rate case; could you just talk about the regulatory calendar for the rest of the year?

[John Russell:]

Yeah, I think the next thing after this, obviously to start with the gas settlement, that will be filed and then the commission would move forward and I expect some self parties agree with an order. So that would remove the need for an August order in the gas rate case. The next issue would be the electric rate case; we expect to file that in the second quarter which would allow for self-implementation at the tail end of the fourth quarter of 2011. So, from a regulatory agenda and an impact on the company for this year, I mean, as Tom mentioned, that piece is pretty much behind us.

[Operator:]

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

[Brian Russo:]

Just given, your discussion on the delay in the self-implementation of the gas rates and the all-party pending settlement, can you just talk more about, maybe your strategy? When planning this electric rate case in the second quarter of '11. Obviously, your electric side is much bigger than the gas side and how do we kind of look at, how you at the commission are going to kind of come to terms on self-implementation?

[John Russell:]

Yeah. I think, on the electric side, first of all, the case that we are going to file, as I mentioned earlier, we are doing everything we can to aggressively cut cost to minimize the rate impact to customers. So, as I said before, we are trying and we expect to be at about, at or below the rate of inflation when you take base rates compared to total costs. So, that’s an important element of what we are doing to mitigate some of that. Most of the case, I expect, will be capital investment. Capital investment that we made to clean up the air, to invest in renewable energy, to provide for a safe and reliable system. The commission has historically enabled us to recover the capital investments we are making particularly since the increases for customers will not be that great. At the end of the day, the strategy here though is to follow the law as the law was intended and as the Commission confirmed last week in the DTE case and we will move forward with that piece. It's been very transparent, very open with Commission, the staff and all parties in this case.

[Brian Russo:]

Okay. And just a question on the $1.5 billion of environmental CapEx you laid out in one of the earlier slide, can you just talk maybe more specifically like what kind of control technology you are assuming on the various coal plants?

[John Russell:]

Yes and the big five, what we are going to do is we will control everything to meet the EPA standards as well as the Michigan rule for mercury. So we are talking FCRs, we are talking baghouses, scrubbers, so those five large coal-fired units will have all the emission controls to meet all of the environmental requirements, both at the federal level and the state level and should position us well for the next 10 to 15 years. The thing in question though Brian and I think we've talked about in the past is we have seven smaller coal-fired units that we have three options with continue to run, mothball or retire. And those we are waiting for final results from the EPA or at least through final litigation to determine if those plants with emission controls can continue to be economic and that's where we are today trying to make that decision. We've not put money in the plant for those. However today they, as I mentioned they have a very high utilization rate, so when they run they are called on for energy and not capacity.

[Brian Russo:]

Okay and I guess previously I think you may have stated that your view is that there's an abundance of capacity in MISO, so that if those were to be retired you feel comfortable in signing PPAs.

[John Russell:]

Well PPAs or to invest in natural gas or make investments in some of the other facilities we have like the Ludington Pumped Storage facility. So yes capacity cost my belief is they are going to stay low for the relatively near term and maybe even longer term because there is a lot of power in the Midwest right now. The difference with these seven smaller units though, they run for energy, they are not just capacity plants, they are energy plants, so when they are available they tend to be called on to run because they are competitive in the marketplace. That's the difference between a lot of small plants in the industry and ours.

[Operator:]

Our next question comes from the line of Lauren Duke with Deutsche Bank. Please proceed.

[Lauren Duke:]

Following up on Brian’s question, I was hoping I could get you guys to kind of comment on your view of the Commission’s commitment to the 2008 Energy Legislation kind of focusing on self implementation and if you guys have seen any shift there or you think things are just proceeding, you know if they have in the past.

[John Russell:]

Yes, I think the commission is fully committed to implement in the energy laws as it was intended in 2008. I will take responsibility for our issue with the self implementation, we changed the number, lowered the amount of the last minute which we thought would be perceived as a positive and it was conserved, it will perceived more as question I think by a lot of parties, what changed, what happened and why just a few days before the schedule self implementation. So that’s a lesson learned from us, I wouldn’t blame the commission on that one in any way that something we did and the fact that we’ve been able to settle it says, we pretty much knew going into be able to get that settled. The commission acted this week in allowing self implementation for Detroit Edison or DTE, their call a couple of days ago. I mean what it shows right now is the law was implemented in eight and we’ve had three self implementations allowed since that and if you considered ours as settlement which will ultimately end the case, that’s a pretty, there’s enough dots there to connect that they are following the laws it was intended.

[Lauren Duke:]

Okay, great. And then just secondly I was wondering if you give any update on potential spending for the gas system with the renewed federal focus on safety, after some recent accidents, when do you think you might get clarity there?

[John Russell:]

Yes, tell you what, we are watching and monitoring that situation in Washington and advancing with care, but we are not waiting. We are already taking a look at plans to see how we can do more for our customers, we are meeting all the present laws and all the present regulations, in fact we are ahead of schedule on all the testing that we’re supposed to do for pipeline testing that we’re saying this could be a terrific opportunity for us to see if we can step-out a little bit further so we’re evaluating that right now.

[Lauren Duke:]

Okay, great. Thank you so guys.

[John Russell:]

Thank you.

[Operator:]

Our next question comes from the line of Leslie Rich with JPMorgan. Please proceed.

[Leslie Rich:]

Hi, I wonder if you could walk through the weather differential for the quarter; the $0.12 weather impact. It looks like part of that have the gas utility which does not have decoupling as I understand that. But I’m just wondering why the electric utility would have a weather sensitivity? And then if you look forward to the 2011 sensitivities, you show that there’s no EPS sensitivity to weather adjusted sales of the electric utility. So I’m just trying to reconcile that.

[John Russell:]

Sure. That’s a good question…

[Tom Webb:]

Good question.

[John Russell:]

And in fact, if you take a look at where we are for weather and particularly gas is a situation here because as you are observing, we’re not decoupled for weather. So the good news that occurred in the first quarter was $0.04. So it’s colder than expected and that compares to first quarter a year ago where we were at $0.02. And so you get net good news there of $0.06 when you put it altogether, so that’s the gas side of the business. And on the electric side, we do have decoupling for weather, but the scenario there is, there’s a little bit of leakage that comes through and it can come through on the good side or can come through on the bad side, because remember you’re not comparing year-to-year when you’re decoupling, you’re comparing to your authorized level and your rate case. So it can be sometimes a little difficult for you to see how that works and the mechanism itself is such that there can be a little leakage; if it’s very let’s do electric, if it’s very hot in the summer, it’s possible that a little good news can come through. On the other hand, it’s very mild in the summer, it’s possible a little bit of bad news can come though and that is just simply the model of the decoupling tool that works by customer class comparing to the rate case. So you get anomalies in two ways, a little bit of leakage, because it's not a perfect model but it's easy to do the math, so it's not subjective. And two, it’s compared to the prior authorized rate case not to a prior year, so you can see some differentials in there.

[Leslie Rich:]

So for the first quarter that was a full $0.06?

[John Russell:]

That on the gas side, that’s a full $0.06.

[Leslie Rich:]

Not, but on the electric side?

[John Russell:]

On the electric side, it really washes out to be about nothing. Now you may be looking at the chart on our slide 13…

[Leslie Rich:]

Yes.

[John Russell:]

That says $0.12; remember $0.06 of that is weather and the rest of that is just sales and decoupling mix. So the weather piece there is only $0.06.

[Leslie Rich:]

Okay.

[John Russell:]

Okay?

[Leslie Rich:]

Thank you.

[John Russell:]

You’re welcome. Thanks for the question.

[Operator:]

Our next question comes from the line of Edward Hyne with Catapult. Please proceed.

[Edward Hyne:]

Good morning.

[John Russell:]

Good morning.

[Edward Hyne:]

Most of my questions have been asked and answered but just John, I think you mentioned at the beginning the Ludington pumped storage was in part of being expanded to help or act as a battery for these wind plants.

[John Russell:]

Yeah.

[Edward Hyne:]

Could you may be talk about the cost of wind on a dollar per KW if you include the cost of the expansion in full capacity? And what that looks like for the customer and how expensive that is?

[Tom Webb:]

Yeah, let me start with Ludington. The primary reason we’re doing Ludington is not the renewable energy piece, that's an ancillary benefit. The primary driver for capacity is – Ludington investment is to increase the efficiency of the plant at a very competitive rate. Wind power, we are seeing that wind power rates with the capacity factors we have in Michigan, because of the wind regime are about $0.10 a kilowatt-hour. And what Ludington can be used for is that I think you know when the wind turbines run, they generally are must run from the MISO which means that if the wind’s blowing the energy, it's sending to the grid. For Ludington, the nice thing is that that can help pump up the water from the lake to the pond, which then can be used later at a peak time to be able to let the water run through and generate electricity. As far as what that would cost, since we don’t have a whole lot of operating wind turbines in that area, I can't give you a specific today on the net impact of the $0.10 minus the impact of what Ludington would provide. But once we get operational, I expect that would benefit and possibly reduce the overall cost of the renewable energy a little bit less than the $0.10.

[Edward Hyne:]

Got you. Okay, so it seems like the expansion is not solely for the wind, because I was just thinking that if that were then you kind of had to tack on that cost on top of the $1 per KW for wind build?

[Tom Webb:]

Absolutely not. No, no just – they are clear. Ludington is a standalone project. The economics business case forward is very sound to reduce cost to customers based on that investment. The ancillary benefit is the renewable energy benefit of doing that.

[Edward Hyne:]

Got you. Okay, thanks a lot.

[Tom Webb:]

Thanks.

[Operator:]

Our next question comes from the line of Dan Eggers. Please proceed.

[Kevin Cole:]

Good morning, guys. This is actually Kevin. For the gas settlement, should we assume that it’s down by the normal one-year block?

[Tom Webb:]

One year block?

[John Russell:]

Yes, you mean, for wind we would file again?

[Kevin Cole:]

Right, or could it – is there a possibility to settle for longer term or a one-year [tender sale]?

[John Russell:]

That's always possible; but we want to wait and let that unfold when you see the settlement information hopefully in the next couple of weeks.

[Tom Webb:]

Yeah.

[Kevin Cole:]

Okay. And also you’ve given your disciplined annual filings on the electric side has driven your [as] down to more management [buts]? Do you think the willingness by the commission to defer the gas rate case towards settlement is a sign that Michigan is evolving to a point where an electric case could be settled maybe say in a more quite manner?

[Tom Webb:]

Well, I mean this is one that we've settled, so I think you know historically before the law was passed in Michigan we did settled rate cases. In this case, I mean in gas rate cases we never settled electric at least in recent time, but we had settled some gas rate cases. I think the importance on this is the commission confirmed the self implementation in the DTE case yesterday and in our case we moved forward to reach a settlement with all the parties including the staff. And in this case, keep in mind, our position on this of self implementation amount was $29.5 million on a $2 billion business. With the increase of those rates if that's what we self implemented the overall impact and total cost to our customers because of fuel cost, the gas cost going down would be about a 6% reduction on a year-over-year basis. So I think the reasonableness here is it’s a relatively small case, it could be settled by the parties; it’s an indication of some cooperation of all the parties and the fact that what we are asking for or what we settled to seems reasonable.

[Kevin Cole:]

Okay. Has the delay in self implementation slowed down your ability to deploy gas capital?

[Tom Webb:]

Not at all.

[Kevin Cole:]

Okay. And then on the dividend when will you be reviewing for 2011 and just your updated thoughts on the timing to narrow the gap towards your 65% to 70% longer term target?

[Tom Webb:]

Yeah, we’ll discuss that with the Board as we usually do a couple of times a year. I think we've stated publicly that we expect our dividend growth to be inline with our growth from rate base and earnings. So that's what we are planning on in the future.

[Kevin Cole:]

Okay. And my last question with the Hazmat for putting your plants into compliance.

[John Russell:]

Yes.

[Kevin Cole:]

You think you can do this within the requisite window?

[John Russell:]

Yes, we do. We think we do because what we’ve done, we’ve already started some other work and when we started some other work we get contract in place with suppliers and with labor and we got a very good relationship with the skill trade but there is a lot talk in the industry right now about the ability to get all this gone in a short period of time and that is a concern. And I am concerned about that for a couple of reason. Our plan says as we get it done but as more and more people try to drive towards that finish line I think what you are going to see is probably an artificial increase in cost and shortage potentially of labor and raw materials. So I share the concerns to the industry but our plan is that we can it done on the five that we are talking – the big five units that we have.

[Kevin Cole:]

Okay, sorry. One more question if you don’t mind. With regards decoupling. Do you have I guess with [DT] pushing towards more of I guess a narrow lead coupling towards energy efficiency only. Do you have a view on I guess probability of that and how it might impact how you run you business or you [breakeven] final I guess as well

[John Russell:]

Yeah, I mean we’ve stated that to everyone. I like, I am satisfied with the decoupling process we have on electric and we were working towards on gas. I mean I’d like the certainty, the consistency, which is what our company is all about. The energy optimizations if we go to that we’ll satisfy with that because we can measure that to the modeling. We also have may be a reasonableness on sale on our forward looking test your basis. But personally what I would like to see is a continuation of the decoupling as the electric business has it today and there’s probably some adjustment as Tom talked about earlier based on capacity versus energy in class and so forty. So the minor tweaks are establish but it really provides certainty for us for making investments and for moving forward, which I like. But in good times as things recover it becomes much less of issue than in difficult times with the recession.

[Kevin Cole:]

Okay. So given the forecast here, that significantly reduces your risk and so I guess even if you’re to narrow down the decoupling as long as you get your one-year forward projection right, than you shouldn’t be impacted by the swings of the Michigan economy?

[John Russell:]

I’d say that’s the end cost of effect that if you believe that the recession is behind us and we’re starting to see some recovery that’s less risk too.

[Kevin Cole:]

Okay, great. Thanks guys.

[John Russell:]

Thank you.

[Tom Webb:]

Thanks Dan.

[Operator:]

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

[Ali Agha:]

Hi and good morning.

[John Russell:]

Good morning.

[Tom Webb:]

Good morning.

[Ali Agha:]

Hey, John, I wanted to get an updated read from you on what you’re hearing for the Michigan legislature from the Governor’s Office. There’s still talk that comes up in the trade rags about potential increase to the retail open access etcetera. Any further data points you can share with us?

[John Russell:]

No, I think we talked about it in the past. The Governor has made it clear to us and to publicly that change in the energy legislation is not a top priority for him. He’s focused on jobs, he’s focused on the economy and he’s focused on the budget. Then, last year, this year since the new legislature is in office, there has been no energy legislation bills proposed. So I think there was one last year under the old legislature but this one, nobody has raised that issue today. So I have kind of read the same things you have. There just doesn’t seem to be any indication here of raising the cap.

[Ali Agha:]

Okay. And the second with regards to your strategy on the annual filings and I understand that a lot of capitals is being deployed but based on your own stats that you put out on your earnings release both gas and electric at least over the last LTM or last 30-month average basis are earning well-above authorized ROEs probably the gas side. Is that a factor that is come into your thinking or do you really do feel confident that the way the CapEx is going to go, it is going to come back down to authorized when you are coming for the next round?

[John Russell:]

The issue is you are taking in a moment in time on the ROEs right now after a very good quarter, especially with the weather component that we had. We are going to continue to invest capital in the business which will drive down the ROEs. As Tom mentioned too we also are going to continue to invest in safety, reliability to continue to move this thing forward. So those are the big things that we have and also we are looking at part of that investment opportunity, you are looking at ROE potential of what we have, we did get an incentive for our energy efficiency, energy optimization. That does not count towards our return on equity. That was part of the energy legislation law and we were able to successfully achieve about 130% or greater. So, we are helping our customers save money. We are in the full incentive on that. That drove up our earnings a little bit, but the customers saved money as a result of that.

[Ali Agha:]

Yes, and the final question, while you guys clearly have your hands full over the next five-year program, the industry around you continues to consolidate putting the transaction what was announced this morning, I am just wondering, as you are looking at the industry longer term, five years out perhaps, where do you see CMS being positioned and what's your thoughts on M&A and consolidation and perhaps expanding your state exposure beyond Michigan?

[John Russell:]

I guess let me just take it from my standpoint rather than the industry. From our company's standpoint five years from now, my vision and what I expect for the company is we are going to be very successful. So, we continue to do what’s right for our customers. We continue to do what’s right for Michigan. As far as eliminating risk, I think, some of the things that the forward thinking legislature has done in Michigan and the Public Service Commission has positioned us well. And when you look at our track record over the past five years, as Tom highlighted in his comment, we got a pretty good model here that continues to work. We are committed to Michigan and as far as anything else, mergers and acquisitions, I can't even speculate on that.

[Operator:]

(Operator Instructions). Ladies and gentlemen, this will conclude the Q&A portion of the call. I would now like to turn the presentation back over to Mr. Tom Webb for closing remarks.

[John Russell:]

This is John. Let me wrap this up. First of all, thank you for attending the call today. The first quarter having represented a very solid operating financial performance for the company, we are off to a good start for 2011. As we talked about today, we remain committed to deliver on our promises to you, our shareholders and to provide value to our customers. So, with that I appreciate. Thanks for joining us today.

[Operator:]

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a wonderful day.