Feb 21, 2008
Executives
Laura Mountcastle - VP and Treasurer David W. Joos - President and CEO Thomas J.
Webb - EVP and CFO
Analysts
John Kiani - Deutsche Bank Samantha Dennison - Credit Suisse Paul Ridzon - KeyBanc Ashar Khan - SAC Capital Reza Hatefi - Polygon Investments Paul Patterson - Glenrock Associates Barbara Chapman - Bear Stearns Edward Heyn - Catapult Capital Management Robert Petrosino - Barclays Capital
Operator
Good morning everyone, and welcome to the CMS Energy 2007 Results and Outlook Call. This call is being recorded.
Just a reminder, there will be a rebroadcast of this conference call today, beginning at 11 a.m. Eastern Time, running through February 28th.
This presentation is also being webcast and is available on CMS Energy's website in the Investor Relations section. At this time, I would like to turn the call over to Laura Mountcastle, Vice President and Treasurer.
Please go ahead.
Laura Mountcastle - Vice President and Treasurer
Thank you. Good morning and thank you for joining us for our year-end earnings presentation.
With me today are Dave Joos, President and Chief Executive Officer, and Tom Webb, Executive Vice President and Chief Financial Officer. Our earnings press release issued earlier today and the presentation used in this webcast are available on our website at cmsenergy.com.
The presentation contains forward-looking statements. Actual results may differ materially from those anticipated in such statements as a result of various factors discussed in our SEC filings.
This presentation also includes non-GAAP measures when describing the company's results of operations and financial performance. A reconciliation of each of these measures to the most directly comparable GAAP measure also is posted in the Investor section of our website.
We expect 2008 reported earnings to be about the same as adjusted earnings. Reported earnings could vary because of gains or charges relating to previously sold assets and business operations or other 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 Dave.
David W. Joos - President and Chief Executive Officer
Thanks Laura and good morning to all on the call. Thanks for joining us today.
As is our usual practice, I will start the presentation with a brief update on the business, and then I'll turn the call over to Tom Webb for a more detailed discussion on the financial results and outlook, and then we will close with questions and answers. As I've stated before, 2007 was a transition year for us.
Our successful restructuring established the foundation for future earnings per share growth which we expect to average 6% to 8% annually over our five-year planning period. Early in 2007, we restored the common dividend.
We recently increased it by 80%, demonstrating the confidence that the Board and senior management have in our business plan. We recognized that our payout ratio was still below the industry average, and we plan to increase it over time but at a slower pace during the period of our aggressive capital investment plan.
We completed the divestiture of our international businesses and used the proceeds to pay down parent debt and invest in the utility. Due to regulatory lag, we don't expect the earnings loss from these assets to be replaced until the incremental equity investment in consumers as reflected in rates this year.
On the regulatory front, we received several supportive decisions last year, which I'll cover in more detail in a minute. One of these decisions was the expedited approval of our Zeeland gas power plant acquisition.
This acquisition and the announcement of our plan to build a new clean coal plant at our existing Karn/Weadock site are the first steps in the implementation of the balanced energy initiative that we filed with the public service commission in 2007. Near the end of the year, we reached agreement to terminate two unfavorable electric sales agreements at the Dearborn Industrial Generation plant for a payment of $275 million.
We recorded a liability for this termination payment in 2007 and closed the transaction on February 1st. As of now, we have entered into 3 to 5 year tolling contracts for most of the plant capacity, firming up the earnings for the next few years and greatly reducing our risks.
Lastly, we met our financial targets for the year which I'll review on the next slide, and we are maintaining our guidance for 2008 adjusted earnings per share at $1.20. Let's look at our final 2007 financial report card.
As you can see, all the targets were achieved. Our adjusted earnings per share was $0.84 exceeding our target by $0.04.
Cash flow before capital expenditures and dividends was $2.4 billion, almost $400 million above our target primarily due to the success of our asset sales. Our funds from operations to average debt and parent debt were right on target and the utility equity ratio was above target.
In fact, our favorable asset sales results allowed us to achieve our long-term utility equity ratio target through an increase in the plant utility equity infusion to $650 million. We had a strong year operationally in 2007 and continued to work to improve power plant and system performance.
We completed a major environmental upgrade at our Campbell 3 plant. This plant now burns 100% western coal resulting in reduced fuel costs, especially compared to today's higher eastern coal prices.
Although the Michigan economy remains weak, we are still seeing growth in our electric business setting three monthly peak load records in 2007. With our investment in the utility, we have been able to improve our electric distribution reliability by 20% as measured by customer outage minutes.
As you know, reliability is the key to customer value. Our Green Generation program continues to grow with enrollment hitting over 12,000 customers in 2007.
Overall, consumers maintain a strong operation, and expects to continue to improve. On the regulatory front, we received some important orders in 2007, including approval of the Palisades nuclear plant sale and associated long-term power contract, the settlement in the gas rate case and expedited approval for Zeeland gas power plant acquisition.
In September, we exercised the regulatory out provision of the Midland Cogeneration Venture power purchase agreement and reduced the capacity in fixed energy payments to the MCV to the amounts we collect from our customers. This action eliminated our losses associated with the contract, because we exercised this contract clause, the MCV partnership has the right to terminate or reduce the amount of capacity sold to us under the contract.
The partnership has until late April to notify us if it intends to do this. The MCV filed at the MPSC asking them to increase our cost recovery from customers which if approved would restore payments to MCV.
This proceeding is ongoing and we can't yet predict when a decision may be reached. I mentioned earlier that we filed our balanced energy initiative with the commission last year.
The DEI outlines our plans for meeting the growing electric needs of our customers through energy efficiency, demand management, expanding renewable energy, utilizing our existing generating resources and developing new power plants. The commission's review of our plan is ongoing.
Last week we filed a new gas rate case requesting a $91 million increase. The request assumes 11% return on equity, a 50% equity ratio on a financial basis and a $2.4 billion average rate base for the 2009 test year.
We also requested that the commission authorize a revenue decoupling mechanism for residential customers. The decoupling mechanism would remove the impact of the energy efficiency in conservation programs on revenue, removing the inherent disincentive to the company to promote these programs, and increasing the likelihood that we'll be able to maintain O&M spending at a level, sufficient to meet our customer service goals.
And of course, we are awaiting a decision on our pending electric rate case. We anticipate a proposal for a decision from the administrative law judge in late March, and a final decision in the second quarter.
Overall the regulatory environment continues to be constructive. On the legislative front, several bills have been introduced in the Michigan Legislature that address a number of important issues.
The bills have been presented as a total energy package addressing restrictions on retail open access, improvements to rate-making procedures to eliminate or reduce regulatory lag, energy efficiency and renewables programs, phased out of existing interclass rate subsidies we refer to as rate skewing, add a certificate of need process to review and approve generating plant investment plans. The state House has taken the lead in the package, targeting completion in the coming weeks.
The Senate will follow with leadership indicating a desire to get legislation to the Governor's desk this summer. We are very involved in the process and we'll continue to work hard to ensure that the final package is one that meets our needs.
Our major priorities for 2008 are shown here. First, achieve our financial objectives.
Tom will discuss those in more detail in a few minutes. Second, reform Michigan's energy policy to ensure we can make the investments in energy infrastructure that our state needs.
We need to achieve fair and timely orders in both the pending electric and gas rate cases. We're frustrated that we haven't been able to make more progress in resolving the Bay Harbor environmental issues that were raised in 2004.
As Tom will cover in the fourth quarter, we increased our reserve for the Bay Harbor clean up by $29 million after tax, due to unanticipated delays in additional EPA required remedial actions. One of our priorities for this year is to reach agreement with the regulators on the long-term remedy for Bay Harbor.
In conjunction with the energy policy reform, we will continue to implement our balanced energy initiative, and of course, we will work to achieve excellence in worker safety and operations for the foundation for our strategy. Turning to that strategy, our growing forward strategy hasn't changed.
We've simplified the story over the past several years working with our public service commission and focusing largely on our Michigan utility. Again, safe, excellent operations are the foundation of an asset based company like ours.
Utility investments provide rate base growth, but they also need to deliver customer value, and that means not only good service but also competitive rates. I believe our public service commission understands that fair and timely regulation is necessary to achieve the consistent attractive returns to shareholders, important to financing and investment program that's good for our customers and our state.
We are excited about our prospects and continue to make good progress. Now, let me turn the call over Tom for more details.
Thomas J. Webb - Executive Vice President and Chief Financial Officer
Thank you, Dave. 2007 was another year of delivering on our commitments, putting the complex enterprises restructuring behind us.
We exceeded our earnings and cash flow targets. We rebuilt the utility and parent balance sheet which was recognized by substantial upgrades from the credit rating agency.
And we restored the dividend early in 2007 and gave it a boost last month. Selling our international businesses at attractive prices allowed us to invest $650 million in our utility, pay down parent debt and reduce our risk profile in a profound way.
We were able to keep our promises. In 2007 we reported a loss of $1.02 a share.
Without recognition of the currency translation adjustment from our Argentine investments, the impact of terminating unprofitable contracts and other legacy costs, adjusted earnings were $0.84. Now that exceed our target by $0.04 at GE they probably would say this is great.
The utility contributed $1.20 and enterprises a nickel, offset partly by interest in other $0.41. Let's look at this in a bit more detail.
For the full year 2006, EPS was $0.41 without discontinued operations of $0.16 and with mark-to-market losses of $0.51. From this comparable number adjusted earnings were up $0.43, including an increase at enterprises in the parent of $0.20 and at the utility of $0.23.
Now at enterprises in the parent, the absence in 2007 of 2006 mark-to-mark losses of $0.51, earnings associated with a assets sold of $0.38 and 2006 tax benefits of $0.21 was more then offset with good news associated with the 2007 reduction in interest expense and overhead of $0.23. Remember too, the full impact of lower debt and overhead costs in 2008 and that occurs in 2008, and that's when we benefit from a full year impact of asset sale proceeds used to invest and reduce debt.
The utility increase of $0.23 primarily reflects the benefit of $0.23 from gas rate orders issued in late 2006 and August 2007, as well as $0.17 benefit from favorable weather, mild weather in 2006 and positive in 2007. These benefits were partly offset by higher operating cost of $0.13 associated with increased capital investment.
Cash flow for 2007 was strong. At the utility, cash outflow of $121 million included our $519 million investment in the gas-fired generation facility at Zeeland.
Now, we are pleased to have completed this purchase last year. Cash at year end was $195 million and today we have about $482 million available at our bank facility.
At the parent, as shown on the left, cash flow after a $650 million investment utility was still $676 million positive. Now that permits substantial debt reduction.
Cash at year end was $136 million and today we have about $322 million available at our bank facility. This provides us with a strong liquidity position at both consumers and the parent heading into 2008.
We have put the proceeds from asset sales and retained earnings to work promptly in the form of debt reduction and in new investment. Compared with 2005, a year prior through our major restructuring work, earnings in 2008 at enterprises and the parent will be down $0.78, this reflects our asset sales.
Reinvesting a portion of the sale proceeds in the utility improves earnings by $0.62. Using another portion of the proceeds to retire debt reduces interest expense by 25%.
Eliminating overhead associated with these sales face another $0.15. Now, none of this was easy but at least CMS with a solid growth profile and a lot less risk.
We have grown our earnings by about 8% annually through 2008 and through those restructuring years. I'd expect to grow as Dave mentioned, EPS about 6% to 8% on an average annual basis over the next five years.
Our future growth is enabled in part by running a leaner organization and a stronger balance sheet. Since 2005, we reduced overhead at Enterprises and the parent by $45 million.
That's worth about $0.15 a share. That leaves us with overhead costs of about $0.07.
This includes a little bit of legacy costs about $0.02 a share that we should be able to shed later. We have reduced parent debt by $800 million over the same period generating interest expense savings of $0.25.
Over time, we may bring this down a bit, but candidly it makes more sense for now to direct our cash sources towards the needs of the utility where we have an after-tax return of about 11% rather than parent debt reduction where we have an after-tax return of about 5%. For 2008 compared with 2007, higher utility earnings of $0.42 are expected.
This reflects our equity investment of $650 million and the full year benefit of eliminating MCV, PPA contract losses. Lower enterprise and the parent earnings of $0.06 are associated with the absence of earnings from assets sold in 2007, partly offset by improved operations at DIG and lower cost.
Enterprises will generate earnings of about $0.02 a share. This will rise to better than a nickel next year as the remaining legacy costs are shed and the full year benefits of restructuring DIG economics are enjoyed.
For CMS, our adjusted EPS is expected to be $1.20. Right now our GAAP earnings are expected to be the same and this could change but we are delighted to start from this point.
While our restructuring has allowed us to improve substantially our balance sheet at consumers and the parent we have also used tax loss carry-forwards to offset gains. At the end of this year we expect to retain cash benefits of more than $600 million associated with NOLs of credit.
By the end of the next year we expect to have more than $500 million left. Now the new Federal Economic Stimulus Act of 2008 provides for bonus depreciation and we may be able to use that at our utility.
If that's possible, we'll be able to extend the use of our NOLs by another year or two, good news for us. Consumers' 2008 cash flow before capital spending and Palisades related cash flow is strong in 2007 and 2008.
Capital investments enable needed improvements for our customers and provide stronger future cash flow. Parent current cash flow also will benefit from this investment.
Excluding asset sales, equity contributions to the utility and legacy costs, parent cash flow continues to grow, providing stronger capacity for dividend growth and/or debt reduction. Dividends from consumers more than cover interest and overhead cost at the parent as well as common dividends.
In addition to these cash flow slides, I would like you to please refer to our standard cash flow forecast slide that's attached to this presentation. We know it's a popular slide for most of you.
In it you will see our strong liquidity and financing plans for 2008. These plans reflect holding parent debt flat in 2008, following the cut by about two-thirds during our restructuring period.
The de-leveraging has allowed us to improve our credit metrics and they will continue to improve as cash flow grows. With our restructuring and international asset sales complete, the breadth of risks that impact our earnings and cash flow are substantially narrower.
With that in mind here are few examples of risks that can impact our earnings and cash flow in 2008. Except for the passage of time the sensitivities around the utility ROE, timing of the electric rate case and electric and gas sales haven't changed since our third quarter call.
Many of you have asked about the economy in Michigan, so in our last call we added sensitivity associated with uncollectible accounts. Historically, consumers collectibles had averaged less than 1.5% of revenue and that's about 25% below the industry average.
We've included a 10% increase in our outlook for this year. A further 10% change in the level of uncollectibles would impact earnings per share by about a penny and cash flow by about $3 million.
Now this, of course, could be up or down. Despite the negative publicity surrounding the Michigan economy, our customers largely have kept up with their utility bills.
Looking further to the future, our utility investment program is projected to fuel rate base growth by about 7% a year. This is up a little from our last report reflecting in part, request for stronger renewable and efficiency programs.
This could change as energy legislation is finalized over the next few months. These investments strike a balance between the need for operational and fuel efficiencies, improved reliability, necessary new generation and environmental goals with the desire to grow earnings, maintain responsible rate increases and sustain a healthy capital structure.
Managements align strongly with these objectives. Our short-term incentives are built around earnings per share and cash flow, and these incentives are reduced if operating standards are not met.
Long-term incentives tied to total shareowner return, combination of earnings growth and dividend yield. As shown above, the most recent three year performance plan phase out if the total shareowner return growth exceeds 19.5% with a 100% payout target and 26%.
The ability for larger incentive rises with total shareowner return performance up to 32.5%. Our targets for 2008 are shown here with EPS at $1.20, and cash flow at $400 million.
Capital structure and dividend targets also are shown. These are essentially in line with previous targets, except to reflect the DIG restructuring payment and nuclear decommissioning refund timing.
Over our five year planning horizon, we expect to grow earnings at an average annual rate of 6% to 8% and to grow our dividend at pace consistent with aggressive capital investment. So, I thank you for joining us today and thank you for your continuing interest in CMS.
We do appreciate it. Now we would be happy to take your questions.
Question And Answer
Operator
Thank you very much Mr. Webb.
[Operator Instructions] Our first question comes from the line of John Kiani of Deutsche Bank. Please proceed.
John Kiani - Deutsche Bank
Good morning Dave, Tom, Laura. Can you talk a little bit about House bill 5523, I know you touched on it in your opening comments, Dave.
But can you talk a little bit about file and implement rate making would work to reduce regulatory lag and also kind of maybe what the status of the bill is? Is it out of committee yet?
David W. Joos - President and Chief Executive Officer
Sure, John. There are a whole group of bills of course in that issue of file and implement rate making is one of them.
It's not out of committee yet, and in fact the whole set of bills is being actively debated as we speak. In Michigan we have had slower than the national average timeframes for processing general rate cases, and I think that's generally recognized and there seems to be a general support in the legislature for shoring that up, because I think there is general recognition that fair and timely rate relief is particularly important as you move into a heavy investment cycle that we've got planned here.
The bill as it is currently drafted would actually require the commission to process rate cases within 12 months, would allow the utilities to self implement after six months their filed increase and would specify that the utilities may use forward-looking test years in their filings. We think that's very favorable, we think they will have more teeth in the 12 month timeframe than they have had in the past.
Obviously, all of these things can change over time, but again, we feel like the draft has been put together and debated. It is a reasonable one and there seems to be a relatively good recognition by the legislators in the need to address this issue.
John Kiani - Deutsche Bank
That's helpful, Dave. And then, Tom, I know you made a couple of comments about this at the end, but do you think that 50% dividend payout ratio by the end of 2010 is reasonable given your CapEx program?
You did make some comments about dividend growth in relation to the size of the CapEx program. Do you think 50% by 2010 is reasonable or realistic?
Thomas J. Webb - Executive Vice President and Chief Financial Officer
We're not going to comment on payout ratios, I'll let Dave kind of add into this, but we won't comment on the payout ratios. I think the way you should think about this is, we're really pleased to; one, have restored the dividend; two, have given it a good boost here at the beginning of the year; and three, will measure -- the Board will measure decisions in the future of any increases that we are able to do based on the pace of that capital investment and all the other important measures that they evaluate.
And I don't know if Dave want --
David W. Joos - President and Chief Executive Officer
Yes I might condemn on the payout ratio but not to quantify it, let me just say this. We are about 30% today, I think that's probably about half of the sector roughly.
John Kiani - Deutsche Bank
Right.
David W. Joos - President and Chief Executive Officer
But you know I think that it makes a lot of sense not to move up to the kind of number the rest of the sectors out when the investment programs that we have is out there.
John Kiani - Deutsche Bank
Right.
David W. Joos - President and Chief Executive Officer
I think the Board has said they haven't established a specific policy. I think the Board has generally judged that we make sense to move that payout ratio up over time, but certainly not at the rate that we did in this most recent move.
But I wouldn't expect it to get up to anything near the industry average till this major construction cycle is really completed. So, we'll see in future years but the direction is up but we are going to be a bit cautious while we are building power plants and doing other things.
John Kiani - Deutsche Bank
Sure. Okay.
Thanks, that's helpful.
David W. Joos - President and Chief Executive Officer
Sure.
Thomas J. Webb - Executive Vice President and Chief Financial Officer
Thanks John.
Operator
And your next question comes from the line of Samantha Dennison of Credit Suisse. Please proceed.
Samantha Dennison - Credit Suisse
: Good morning.
David W. Joos - President and Chief Executive Officer
Good morning.
Samantha Dennison - Credit Suisse
Is there any way that you can provide a little bit more color on your 6% to 8% growth rate? Specifically what's driving that with respect to growth between utility and corporate?
Thomas J. Webb - Executive Vice President and Chief Financial Officer
I think if I can start out with Dave on that, but the best thing to look at is the slide we showed on the utility growth because when you look at that slide you notice we showed some of the detail about the different programs on top of our base capital investment and the fact that those programs will drive this up on an average annual basis of about 7% in our rate base that's a key driver here so investments we are making that are needed in our utility give us a nice boost in the ability to get recovery on that investment and that's the number one driver in our earnings growth, other items are small.
David W. Joos - President and Chief Executive Officer
I would just echo what Tom said, the enterprises piece of our business has been stabilize but it's small and it will continue to be small, it's really driven by rate base growth at the utility, I laid that out for you.
Samantha Dennison - Credit Suisse
Great, thanks.
David W. Joos - President and Chief Executive Officer
You bet.
Samantha Dennison - Credit Suisse
And could you also give a little bit more color on your CapEx? I know you spoke briefly in your opening remarks about renewables being up, those look like your base capital was also up a little bit from the prior plan?
David W. Joos - President and Chief Executive Officer
They are not up dramatically or different dramatically. We have a...
I am looking for the slide here as we speak but we've talked about a $6 billion investment plan, it actually was a little over $6 billion before. And in slide 22, that we had laid out for you, the total is now really $6.4 billion over five years.
Now that does include the Zeeland plant which was actually completed in December of last year. So we are up a little bit, I think we're about $6.1 billion when we talked about it before.
Some of those changes have to do with the renewable energy efficiency programs, and as I mentioned earlier, those programs are part of the package of legislation that's going through right now. We think that we're probably going to be a little bit more aggressive in our own rate base investment and renewable that we had originally planned and that's the part of what's driving that difference.
And obviously all of that could change over time is as this legislation settles out and our plans get more crisp but we feel reasonably good about what we got there now.
Thomas J. Webb - Executive Vice President and Chief Financial Officer
I just want to add one comment, if I may, that when we look at that slide that we gave you on the utility growth, you find that it's helpful to see that most of their colors are about programs that are before we get to our coal plant. So the next few years are driven by these investments that Dave was talking about around environmental enhanced distribution and the like.
The coal plant really comes in at the back end of our five year planning period, so think of it in two phases.
Samantha Dennison - Credit Suisse
That's great. Thanks a lot guys.
Operator
Your next question comes from the line of Paul Ridzon of KeyBanc. Please proceed.
Paul Ridzon - KeyBanc
Good morning, how are you.
David W. Joos - President and Chief Executive Officer
Hi, Paul. Just great, thank you.
Paul Ridzon - KeyBanc
Well congratulations on cleaning up... it looks like all the works done, it's very successful '07.
Just had a question on the CapEx, you previously discussed that you hoped to keep rate increases at inflation like levels with equipment costs and now the 7% rate base growth, is that still the objectives and is it untenable?
David W. Joos - President and Chief Executive Officer
Well, certainly in that range even when we talked about it before, we were trying to predict what CPI was going to be. We're probably little above that I think in the 3.5% range when we talked about it before.
But certainly not far from CPI. There are some things that are hard to predict, obviously construction costs for coal plants are up although a lot of that is laid in our five year planning cycle.
And in fact, a lot of that is beyond our five year planning cycle. And the other thing is it's difficult to predict, where carbon legislation for example is going to go and how might that affect our planning cycle.
We have baked some assumptions in here but those things could change. I would say broadly though as we put together our capital plan, the discretionary capital plans we talked about.
We focus very hard on investments that had the maximum benefit to customers at the minimum costs. And we are still comfortable that we will have competitive rates, like I said it's difficult to predict the exact numbers.
But we are not expecting untenable increases.
Paul Ridzon - KeyBanc
Okay, thank you very much.
David W. Joos - President and Chief Executive Officer
You bet.
Operator
Your next question comes from the line of Ashar Khan of SAC Capital. Please proceed.
Ashar Khan - SAC Capital
Good morning. I wanted to just go over a couple of the ROE issues.
The ROE that you set on the chart for the reported results, 9.4% for 2007 and 8.4% on the gas, what equity ratios, I mean common equity ratios were used in computing those numbers that Tom, I am trying to do it myself from the data provided. You have given the rate base, but the ROE you are saying is based on the rate making purposes, you give the common equity ratio on a financial basis.
But I wanted to understand if I was to do those numbers on my own, which equity ratio am I using to get to them?
Thomas J. Webb - Executive Vice President and Chief Financial Officer
The way to think about it is, we have been able to put enough equity into the utility to get our sales up to around 48%, 49% on a financial basis. I don't have right in front of me here the rate making basis.
We may be able to just give that out.
David W. Joos - President and Chief Executive Officer
Roughly 43%.
Thomas J. Webb - Executive Vice President and Chief Financial Officer
Okay.
Ashar Khan - SAC Capital
This is page 3 of the 11 of your... not on the slides but of your release.
Thomas J. Webb - Executive Vice President and Chief Financial Officer
Yes, and that's where we show 8.4% return on electric and 9.4% on gas.
Ashar Khan - SAC Capital
Right. And that's based on what equity ratio, that's rate making right?
So, that's based on what equity ratio?
Thomas J. Webb - Executive Vice President and Chief Financial Officer
And I don't have it right in front of me, I think down 3%.
Ashar Khan - SAC Capital
Okay.
Thomas J. Webb - Executive Vice President and Chief Financial Officer
Approximately. And by the way, we are happy to give you that percent exactly.
Ashar Khan - SAC Capital
Okay. And then Tom, the guidance for '08, could you break it down between electric and gas for the utility business?
Thomas J. Webb - Executive Vice President and Chief Financial Officer
Well, we don't do that in our guidance right now, but that's something as we go through the year, we'll give you a little more information on our performance.
Ashar Khan - SAC Capital
Okay. So, the way we should look at it is that, if I can ask in '08 what ratio do you plan, I guess to earn in the electric and gas business, on which the 120 around, 120 is based on?
Thomas J. Webb - Executive Vice President and Chief Financial Officer
You mean what ROE that we refer?
Ashar Khan - SAC Capital
Yes, what ROEs.
Thomas J. Webb - Executive Vice President and Chief Financial Officer
As you saw in our just recent filing here in the gas rate case, we are going to be seeking 11% return. So, remember we also give you the sensitivities here, so that you can make some of your own judgments from where you think that would end up, and we try to get ourselves in the parameter of 10.5% to about 11% when we are doing our own estimates and planning.
Ashar Khan - SAC Capital
Your own estimates and planning. Okay, great.
Thank you very much.
Thomas J. Webb - Executive Vice President and Chief Financial Officer
Ashar, thank you. Thanks for calling.
Operator
Your next question comes from the line of Reza Hatefi of Polygon Investments. Please proceed.
Reza Hatefi - Polygon Investments
Thank you very much. The $0.08, 2008 guidance associated with enterprises and parent operations in taxes, I guess you mentioned $0.02 is enterprises.
What is the other $0.06 composed of?
Thomas J. Webb - Executive Vice President and Chief Financial Officer
Yes, I think what I told you is that, the earnings levels on enterprise alone would be about a nickel as we go into the future. It's actually going to be a little less this year.
We will probably be in the zone of $0.02 to $0.03 for this year, because remember, we didn't complete our contract restructuring around DIG. And there is still a little bit of legacy cost in the overhead.
So, having the DIG contract done now, but not for the full part of the year combined with that, maybe a little bit lower earnings on enterprises this year, and then think about a nickel as you go into the future.
Reza Hatefi - Polygon Investments
Right, but looking at slide 14 of your slide presentation, the enterprises and parent operations in taxes is $0.08 of the 2008 guidance. So, if $0.02 to $0.03 is enterprises, what is the other $0.05 or $0.06 of positive earnings, where is that coming from?
Thomas J. Webb - Executive Vice President and Chief Financial Officer
What you need to do on that slide, if you are looking at it, take the operational piece along with the overhead piece that goes with that... and you'll see that we have about a couple pennies of earnings at enterprises.
Reza Hatefi - Polygon Investments
Okay, got you. And could talk about I guess when you guys originally gave your 2008 guidance and you had the sensitivities around it, and you continue to update that through the third quarter call.
It seems like with the electric rate case not being effective till the April-May timeframe, there would be something in the order of $0.10 slippage just from a timing standpoint, yet earnings guidance is remaining the same at above $0.20. Could you talk about some of the positive benefits and that has allowed you to maintain this guidance?
David W. Joos - President and Chief Executive Officer
Well, I would just say broadly that we had asked for interim rate relief. We had hoped that we'd get interim rate relief at the beginning of the year, and of course we didn't get that.
We had built an operating and maintenance budget originally that assumed we'd get that interim rate relief and we put together a contingency plan in the event that we did. And so, we've had to implement that contingency plan, we don't feel uncomfortable with it.
But frankly we would hope that we'd get a little bit more revenue recognition in the future so that we can up some of our O&M spending in certain... in some key areas.
But basically we implemented our O&M contingency plan and that's how we have been able to maintain the guidance.
Reza Hatefi - Polygon Investments
And Zeeland is also a positive driver, I can't recall... is it that rate increase, did that go effective January 1st or am I forgetting?
Thomas J. Webb - Executive Vice President and Chief Financial Officer
No, you are correct, the Zeeland plant acquisition was approved and the associated adjustment actually it was made, that was part of our interim rate relief request along with the other revenue. That piece went into effect, and the Zeeland plant of course goes into the rate base and helps with earnings on a go forward basis.
Reza Hatefi - Polygon Investments
And the $5.4 billion of rate base on that slide from the earlier question for Electric, does that include Zeeland at year-end '07?
Thomas J. Webb - Executive Vice President and Chief Financial Officer
Our rate base should include Zeeland, where is the 5.4?
Reza Hatefi - Polygon Investments
It's on the earning release.
Thomas J. Webb - Executive Vice President and Chief Financial Officer
Oh, yes. And the answer to that is yes.
Reza Hatefi - Polygon Investments
And just finally the reg out, obviously that was successful. Could you maybe expand a bit on that in terms of how is it, is there any recourse the other parties have or where that stands in terms of...
are you seeing clearly... is it clear at this point, how should we think about that?
Thomas J. Webb - Executive Vice President and Chief Financial Officer
I wouldn't say that there is no possibility that the MCV will contest that and that might go to arbitration. We have said before that was always a risk, and they have indicated that in the past.
I guess this February at this point in time, but may get extended a little bit because of the fact that the commission has or the MPSC is considering the request by the MCV to address this revenue issue. And of course, there is concern about the overall capacity available to the utility and this is a significant portion of our current portfolio.
So, that's up in the air a bit right now, we are hopeful that it will get resolved through the proceeding at the commission and all of these issues will be behind us, but we have to wait until those proceedings actually get completed before we can say that with finality.
Reza Hatefi - Polygon Investments
Thank you very much.
Thomas J. Webb - Executive Vice President and Chief Financial Officer
Thanks for your question, you bet.
Operator
Your next question comes from the line of Paul Patterson of Glenrock Associates. Please proceed.
Paul Patterson - Glenrock Associates
Good morning guys.
David W. Joos - President and Chief Executive Officer
Good morning.
Paul Patterson - Glenrock Associates
Just on the operating cash flow from '07 versus '06, could you just give us a couple of the drivers there that make the big difference? I am looking at page 10 of 11 of the earnings release.
I mean, I noticed some unusual things I am just trying to wonder what's cash and what's not?
Thomas J. Webb - Executive Vice President and Chief Financial Officer
We are just trying to make sure we are at the page that you are looking at.
Paul Patterson - Glenrock Associates
It's page 10 of 11 of the summarized statement of cash flows. That looks like cash from operating activities of $686 million, if I remember as well in 2006, but it looks like it has gone down about $27 million?
Thomas J. Webb - Executive Vice President and Chief Financial Officer
When you look at the cash flows that you have there, keep in mind you have that substantial swing from all of the asset sales that we had, which is the single largest driver.
Paul Patterson - Glenrock Associates
And that's sort of an operating cash flow?
Thomas J. Webb - Executive Vice President and Chief Financial Officer
That shows in the investing.
Paul Patterson - Glenrock Associates
Well I am just talking about the operating cash flows.
Thomas J. Webb - Executive Vice President and Chief Financial Officer
I guess the main difference for that line that you are looking at would be our accounts receivable financing which does show up in our operating cash flow line. That would be more than half of that.
Paul Patterson - Glenrock Associates
Because that's the working capital issue there.
Thomas J. Webb - Executive Vice President and Chief Financial Officer
Yes, and then keep in mind the other item that we have is during this last year we had a pension contribution of $109 million and we had a very small pension contribution in the prior year, those would be the two big swings that are in there.
Paul Patterson - Glenrock Associates
Okay. When is the actual 10-K coming out?
Thomas J. Webb - Executive Vice President and Chief Financial Officer
Later today.
Paul Patterson - Glenrock Associates
Okay, great. Thanks a lot.
Thomas J. Webb - Executive Vice President and Chief Financial Officer
You're welcome.
Operator
[Operator Instructions]. And your next question comes from the line of Barbara Chapman of Bear Stearns.
Please proceed.
Barbara Chapman - Bear Stearns
Hi, good morning guys.
David W. Joos - President and Chief Executive Officer
Good morning.
Barbara Chapman - Bear Stearns
Can you give us some color on the trends that you are seeing in kilowatt hour sale. I noticed that industrial sales are basically flat for the quarter, however, the residential and commercial had declined in the quarter due to according to your notes weaker demand.
So exactly what are you seeing there and especially as it pertains to the economic conditions in your service territory?
David W. Joos - President and Chief Executive Officer
We over the past several years we have had fairly weakened in fact in some cases declining industrial sales, but we have had reasonably strong residential and commercial sales. They have weakened a little bit as of late I think probably the same as the rest of the U.S.
Overall sales were up a bit for the year. Just remember that in our planning process for advanced energy initiative we have assumed about 1% of sales growth over the coming years and that's a lot lower than we have seen historically and a lot lower than probably about half of what the EIA predicts for the rest of the U.S.
So, our planning and our forecast are based on relatively modest sales. We would hope that the economy is going to pick up from there, but we think what we've been responsible in the way we forecast those.
Thomas J. Webb - Executive Vice President and Chief Financial Officer
So again when you look at the page that you are looking at, you will see that the performance in '07 for total electric sales was a bit stronger than what Dave mentioned, we are planning on for the future. So we are trying to stay quite conservative.
Barbara Chapman - Bear Stearns
So, you are saying the residential and commercial is catching up to where industrial has been or in the past residential and commercial was outpacing the industrial?
David W. Joos - President and Chief Executive Officer
Yeah, they have been fairly strong with the continuing air conditioning saturation and home electronics and things of that nature, while the industrial sectors lost some of its manufacturing base overtime. And we are seeing that over several years now, but it seems to be leveling out a little bit on both fronts.
Barbara Chapman - Bear Stearns
Now, when you look at the split between residential and commercial, is there one versus the other that could... it is not clear from the way its reported, is the demand on both sides or is it on one versus the other?
David W. Joos - President and Chief Executive Officer
Well, I'm not sure, but...
Thomas J. Webb - Executive Vice President and Chief Financial Officer
Let me help you just a little bit there. Keep in mind you don't want to base your thinking on the future just on the one quarter.
Barbara Chapman - Bear Stearns
One quarter. Exactly.
Thomas J. Webb - Executive Vice President and Chief Financial Officer
Take a look at those annual numbers, and that gives you a little bit better look at what's happening. So you can see there, residential was up about 1.8%, commercial 1.5%, industrial flat.
So when you take a look at those kind of numbers, you would probably get a better sense of a broader time period than just picking any one particular quarter which obviously can be hit by a lot of things, including weather.
Barbara Chapman - Bear Stearns
Well, that's actually what I'm trying to get at, is this quarter the beginning of a trend or is it just a one-time, because weather appeared to be from your comments favorable, I thought for the quarter. So I'm trying to figure out if the fourth quarter is the beginning of a trend or it's just an aberration and if you can just comment on that please?
Thomas J. Webb - Executive Vice President and Chief Financial Officer
I wouldn't put a big trend on those fourth quarter numbers just yet, it's just too early to do that, and on the annual numbers again, it's hard to predict, but our plans are based on something that's about half of what you see in the change from '07 compared to '06.
Barbara Chapman - Bear Stearns
As far as the growth?
Thomas J. Webb - Executive Vice President and Chief Financial Officer
That's correct.
Barbara Chapman - Bear Stearns
Okay. And then, that leads me to as you go into additional rate increases, are we at a point where the economic conditions could end up being a problem as you go in front for additional rate increases?
Thomas J. Webb - Executive Vice President and Chief Financial Officer
Well, that's an extra question, again you remember, earlier Dave commented on the fact that its very important to us as we put the new investments in place, that we try to choose those that are beneficial to our customers, so they will either be driving down O&M or reducing our past due cost for PSCR, whatever it may be, we'll be looking for the most important priorities for customers in our spending plans, so that we can try our best to keep any rate increases in that general range of inflation. It's very hard to predict in any one year exactly how much it will be.
David W. Joos - President and Chief Executive Officer
Let me just assure you that your concern is one that's appropriate to keep track of. We think that if utilities are planning on dramatic increases in rates year in and year out in the coming years, that's going to be difficult for the public to deal with.
I think here in Michigan, we've obviously got that issue with the weak economy, but we've been very sensitive that in our planning, we've shared our planning with the commission and the commission staff. We think it's responsible and reasonable and as Tom said, focused on particularly investments where we can not only improve service, but also make sure there weren't significant rate increases.
I've highlighted before with a great example that is our transition to Western coal. I mentioned that we just finished a transition at our Campbell 3 plant to the 100% Western coal.
We've spent just shy of probably $1 billion now altogether on our new NOx compliance program and a lot of that was done through converting our units from roughly 20% Western coal at one time to on a combined basis, and probably approaching 80% or 90% now. And that basically paid for itself from a customer perspective in terms of reduced coal costs.
We have got similar plans on a go forward basis when we talk about, for example, our AMI or our automated meter-reading infrastructure program, and awful lot of benefits accrue that will allow us to reduce operating and maintenance costs. So while we make a significant investment, the overall cost to the customers is very, very modest.
And so, as Tom indicates, we're very concerned and sensitive to those rate increases and we continue to believe that our program can be implemented and maintain the costs, if not at the rate of inflation not much higher than that. There are some factors I mentioned earlier like unknown carbon costs and new legislation, things of that nature that could ultimately influence those numbers, but of course they'll influence them nation wide.
Barbara Chapman - Bear Stearns
Okay, thank you.
David W. Joos - President and Chief Executive Officer
You're welcome. Thanks for the question.
Operator
Your next question comes from the line of Edward Heyn of Catapult Capital Management. Please proceed.
Edward Heyn - Catapult Capital Management
Good morning.
David W. Joos - President and Chief Executive Officer
Good morning.
Edward Heyn - Catapult Capital Management
Tom, I just had a quick question on the NOL slide. I guess, first off, in that slide are you assuming the benefit of depreciation from the stimulus act?
It looks like your NOLs don't change from '07 to '08 even though on my math you would have about $150 million tax bill based on your $1.20 guidance. Is that right?
Thomas J. Webb - Executive Vice President and Chief Financial Officer
No, we don't, not yet, and remember, if we do get that benefit, we do expect to get savings in the neighborhood of what you are describing for the utility, which then would delay when we take the consolidated benefits of our NOLs. So, those are not baked in there yet.
So we are pretty sure we are going to get the benefit from that, if we do get that this year you can add on a year or two to these NOLs.
Edward Heyn - Catapult Capital Management
Okay. So why are the NOLs not changing from '07 to '08 even though you are generating probably taxable income at the utilities?
Thomas J. Webb - Executive Vice President and Chief Financial Officer
We are using some as you will see there, but our position for 2008 doesn't really give us that substantial amount that we will need. One of the thought to keep in mind is the DIG contract transactions actually occurred this year.
So that gave us some more sheltering due to losses on those.
Edward Heyn - Catapult Capital Management
Okay. So there was, you were consuming NOLs but you are creating more from the DIG restructuring and that's why '07 to '08 doesn't change that much.
Thomas J. Webb - Executive Vice President and Chief Financial Officer
We think of it exactly that way.
Edward Heyn - Catapult Capital Management
Okay. And then you said if you were to get bonus depreciation that would expand your NOLs by about two year's, so you would have...
you would be consuming NOLs till about 2011, 2012, is that right?
Thomas J. Webb - Executive Vice President and Chief Financial Officer
Yes, previously we told you we use up our NOLs by about 2011 and so with the bonus depreciation is as we expect that you can add one year maybe two to that depending on the size.
Edward Heyn - Catapult Capital Management
Okay, and then you also have the AMT, that 282 of the AMT that you also can offset taxes with?
Thomas J. Webb - Executive Vice President and Chief Financial Officer
Absolutely.
Edward Heyn - Catapult Capital Management
Okay, great. I appreciate it.
Thanks a lot.
Operator
Your next question comes from the line of Robert Petrosino of Barclays Capital. Please proceed.
Robert Petrosino - Barclays Capital
Hi, good morning. If the MCV partners decide to reduce supply or terminate the contract does Zeeland kind of fill that void, what is kind of plan B for that capacity needed and what is going to be the recovery process?
David W. Joos - President and Chief Executive Officer
Well we didn't purchase the Zeeland plant with that in mind. In the EEI that we put together that was actually about a 500 megawatts go forward need for additional combined cycle gas capacity even with the continuation of the contract with the MCV and that's...
so that's how our balanced energy initiatives are put together. Zeeland plant actually was an opportunity though it's a significantly larger plant than what was originally proposed in that EEI about 400 megawatts of additional capacity.
So if the MCV contracts were to be unavailable to us that we backfill that obviously with a large portion of the capacity from the Zeeland plant. And then we make incremental purchases in the marketplace to offset the remainder in the near-term here and just deal with that in an update to our EEI.
Edward Heyn - Catapult Capital Management
Okay. And as I recall was that 6 months or is that annual?
David W. Joos - President and Chief Executive Officer
I am sorry.
Edward Heyn - Catapult Capital Management
Is that six months or annual true-up of the purchase power cost.
David W. Joos - President and Chief Executive Officer
We have I guess, I am not sure what you are asking exactly, PSCR?
Edward Heyn - Catapult Capital Management
Yes, power supply cost recovery case.
David W. Joos - President and Chief Executive Officer
Yes, that's an annual filing with monthly factors and then an annual reconciliation case after the factors.
Edward Heyn - Catapult Capital Management
Alright, great. Thank you.
David W. Joos - President and Chief Executive Officer
You're welcome.
Operator
And at this time there are no further questions, I would like to turn the call back over to Dave Joos for closing remarks.
David W. Joos - President and Chief Executive Officer
Well, thank you. And thanks again for joining us today.
I suspect you didn't see there were many surprises in our presentation today. We are actually proud of that fact.
It was our intention when we announced our restructuring last year that we would go through a restructuring phase, that our earnings would drop to about the level that we told you that they actually were. Our adjusted earnings came in a little bit higher than what we would forecast for you, and year ago when we talked about where we expect to be back to in 2008 is exactly where we currently forecast we will be back to at a $1.20 a share.
We feel very good about the restructuring of the overall financial condition of the company, the balance sheet. We obviously had significant improvement in our debt ratings, we are at...
at the utility now about where we'd like to be in terms of balance sheet strength and we've got a pretty strong program for investment at the utility and responsible rate increases associated with that overtime. I am optimistic that legislative package will move forward this year and it will set us up for the ability to go forward with that investment plan and that's important to us.
And then also I am optimistic that the rate making processes in Michigan will be improved a bit so that there is a bit more timely as we move into that process. And so, I would say the company is in very good shape right now to implement the plans that we've laid out for you.
I think we as a management and our employee base are pretty excited about it and we are happy to be where we are. So, again thank you for joining us.
We'll obviously keep you updated as these... as the year goes on a number of these fronts including the regulatory and legislative proceedings that are underway and also any changes to our capital programs as time moves on.
So, thanks very much and I'll talk to you next time. Bye now.
Operator
This concludes today's conference, we thank everyone for your participation.