Feb 24, 2011
Executives
Laura Mountcastle – VP and Treasurer. John Russell – President and CEO Tom Webb – EVP and CFO
Analysts
Paul Patterson – Glenrock Dan Eggers – Credit Suisse Paul Ridzon – KeyBanc Ali Agha – SunTrust Terry Shu – Pioneer Investments Michael Worms – BMO Brian Russo – Ladenburg Thalmann Mike Bolte – Wells Fargo Raymond Leung – Goldman Sachs Ted Hyne [ph] – Catapult Eric O’Keene [ph] – Basel
Operator
Good morning, everyone, and welcome to the CMS Energy 2010 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 March 3rd. This presentation is also being webcast and is available on CMS Energy’s website in the Investor Relations section.
At this time, I would like to turn the call over to Ms. Laura Mountcastle, Vice President and Treasurer.
Please go ahead.
Laura Mountcastle
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 at cmsenergy.com. 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 2010 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. Let me welcome everyone who is joining us today on the call.
2010 was another good year for CMS, both financially and operationally. We adjusted earnings per share of $1.36 slightly exceeding our guidance and up 8% from the $1.26 in 2009.
The increase was driven primarily by recovery of investments and aggressively managing our O&M costs. Our Board raised the common dividend twice last year by a combined total of 68%.
This was the fourth increase since restoring the dividend in 2007 and raises the payout ratio to a more competitive 58%. With the increase in the dividend, our total shareholder return for 2010 was 23%.
Customer value is one of the cornerstones of our business strategy. Last year we enhanced customer value on several fronts.
We restructured the workforce early in the year, reducing cost by $30 million on an annual basis. We spent over $55 million on energy efficiency programs.
Our customers saved energy and money, and our shareholders earned an incentive for exceeding the annual energy savings targets established by the MPSC. We also continue to improve reliability on the electric distribution system.
Customer outage minutes decreased by 13% last year, and we are now down 36% over the last five years. And we improved employee safety by 20% in 2010 and 57% over the past five years.
I’m very pleased with the performance of the management team over the past seven years as we restructured our business and focused on the utility. We set a high standard for performance.
As the graph illustrates, it is resulted in consistent financial performance and competitive shareholder returns. Our annualized earnings per share is up 8% over this time period and expected to be up another 6% this year.
Contributing to the future growth, we signed a new contract to upgrade the Ludington Pumped Storage facility. We plan to invest approximately $400 million over 10 years to improve the plant’s efficiency and increase its generating capacity by 16% to about 2,200 megawatts.
The plant allows us to store energy, which will become even more valuable with the development of renewable energy in Michigan. All major contracts for the development of our 100 megawatt Lake Winds Energy Park have been signed and approved by the Michigan Public Service Commission.
Construction will begin later this year, and the energy park will be operational by the end of 2012. We have also completed the majority of work on two major environmental projects to further reduce emissions from our coal-fired plants.
We are in the process of installing an SCR at our Campbell plant to reduce NOx, and we are also installing a pulse jet fabric filter at our current plant to comply with EPA standards. These projects continue to add value to our customers, improve the environment, add to our rate base, and help boost earnings going forward.
We’ve recognized that customer value is a critical element to continuing to deliver long-term financial results. In that regard, we have developed several areas of focus to improve the customer value proposition.
We have redesigned the customer bills and our website. We have also improved the performance of our call centers.
We signed a new five-year labor agreement with the union that provides for increased healthcare cost sharing and changed post-retirement health benefits. Going forward, this eliminates the legacy cost for all new salary and union employees.
We plan to continue maximizing our energy optimization programs to help our customers lower their energy consumption. So far, over 300,000 customers have taken advantage of the programs we offer, helping them to save energy and money.
System reliability is an important element of customer satisfaction. As referenced earlier, we continue to make improvements to system reliability in both the electric and gas distribution areas.
We plan to spend more than $400 million over the next five years to continue improvement in these areas. And finally, the most important aspect of service is delivering reliable power at a competitive price.
Over the next five years, we plan to invest over $6 billion to drive rate base and earnings per share growth of 5% to 7%. However, with a sharp focus on managing our cost and achieving the benefits from our investment programs, we plan to hold customer base rate increases to about the rate of inflation.
We believe this represents a good balance between price and enhance customer value. As illustrated on this slide, over 80% of our $6 billion investment plan relates to maintaining our electric and gas distribution systems, leading environmental requirements, and achieving the 10% renewable standard in Michigan.
The remaining investments are targeted at improving safety, system reliability, and providing a smart grid for our customers. To meet Michigan 10% renewable energy standard, we are required to add at least 500 megawatts of new renewable energy capacity by 2015.
To achieve this level, we have entered into purchase power agreements that will provide 300 megawatts of capacity by the end of 2012. And we have plans to develop 250 megawatts of our Lake Winds and Cross Winds Energy Parks by the end of 2014.
As a result of declining production costs, better capacity factors and the production tax credits, the cost to comply with the standard has declined significantly since our plan was approved by the Michigan Public Service Commission in 2009. Today, we will file an amended plan with the Commission that will lower the customer surcharge by $55 million or 70% from $78 million per year to $23 million per year, with no impact to our long-term earnings per share growth rate.
We anticipate that this reduction will be effective by the end of the year. This does not change our plans to invest $650 million over the next five years at our two energy parks.
Turning now to the regulatory front, we are in our third year of regulation, following the passage of the 2008 Michigan Energy Law. We have completed two electric rate cases and one gas case.
And by all accounts, the process has worked smoothly and efficiently. Cases were filed, rates were self-implemented, and a final order was received within 12 months of filing.
However, in the current gas rate case, the Commission has delayed our self-implementation to give parties an opportunity to respond to our process or proposed the keys from $48 million to $29.5 million. They filed the responses earlier this week, and we have until March 1st to file the reply.
This will delay our self-implementation by several weeks from our original date. We will continue to work with the Commission to resolve this issue, which we believe is procedural in nature.
Our strategy has delivered proven results, both financially and operationally. We will continue to improve in all areas with an added emphasis on customer value.
Safe, excellent operations coupled with competitive prices translates into value for our customers and ultimately value for our shareholders. Now let me turn the call over to Tom to review the financial performance in greater detail.
Tom Webb
Thanks, John. Let me add my welcome to everyone joining the call today.
We certainly appreciate it. 2010 was a good year for CMS Energy.
Our reported earnings were $1.28 a share, and that’s $0.37 or about 40% above last year. Adjusted EPS was $1.36, up a $0.10 from last year and just above our guidance.
We excluded from adjusted earnings a substantially favorable insurance settlement worth $0.11 as well as unfavorable legacy cost principally $0.10 for environmental remediation at a site at Northern Michigan called Bay Harbor. We increased the remaining reserve from $58 million to $98 million to ensure adequate financial capacity.
We are in the final stages of this work, and we expect that we are near the end of these costs. Now, back to 2010 overall, we started the year by restructuring the utility when we eliminated 5% of our workforce to stay aligned with the demand and to minimize the size of rate increases to our customers.
We sold non-utility assets including small renewable facilities in California and Connecticut. We also completed $800 million of refinancing at the parent permitting us to reduce the ongoing cost of debt service, eliminate dilution overhang, and improve our liquidity.
This included pre-funding parent debt maturities as well as $375 million of pension contribution for 2011 and most of 2012. We exceeded energy optimization targets that permitted us to recognize the maximum incentive payout of $8 million.
This does not count in our ROE performance compared with authorized levels. We adopted the fourth year of bonus depreciation, allowing us to sustain higher levels of investment in Michigan and to extend the use of our NOLs another two years.
And last but certainly not least, we did raise our dividend by 20% last January and another 40% in August. The economy turned favorable in 2010.
Industrial sales in our service territory were up 10%, with total weather-adjusted electric sales up 2%. Residential and commercial sales lagged, as shown in the left of this slide.
The recession impacted our sales less than the one that occurred in the early ‘80s when sales fell 7% over three years. The recent decline ended up with a drop of 6%, but as you can see in the yellow ovals on this slide, we are planning on a slower recovery.
One at about half the pace experienced in the early ‘80s. We may be a little conservative, but as you know, we seek to plan cautiously.
Our earnings improvement in 2010 compared with 2009 reflected planned investment at the utility and continued solid growth at enterprises. We did not repeat an $0.08 gain on refinancing in 2009, and in fact, we recognized $0.04 related to the cost of prefunding debt and $0.09 of dilution to improve our position in 2011.
You will see more about this in just a moment. The key driver to our financial performance, however, continues to be the utility where we focused all of our investment resources to deliver substantially improved customer performance, from energy efficiency to environmental upgrades to additional renewable capacity and the major improvements in reliability and safety.
As you can see here, investment levels in 2009 and 2010 were higher than the previous five years to meet the substantial needs of our customers. This is a major factor in the improvement of our gross operating cash flow, and that’s cash flow before working capital, taxes and interest expense.
It reflects the improving capacity of the company to meet future needs. This measure has been a weak point compared with other utilities in the past.
It’s becoming a strong point, particularly when coupled with our substantial NOLs that provide a consolidated tax shelter through 2014. Bonus depreciation enacted into law last December enhanced our tax advantage position further, effectively extending the planned use of our NOLs by about two years.
Bonus depreciation helps us at the utility where all our capital investment occurs. We put this new bonus depreciation cash benefit to good use by accelerating investment and pension funding, as well as reducing debt.
This, however, leaves less tax sharing with the parent, reflecting the improved shelter at the utility. Near-term, that requires more debt on a temporary basis at the parent, and of course, all this nets out on a consolidated basis.
The great news, our tax shelter is largely in the form of NOLs at the parent last longer putting off the need to issue new equity through 2015. We met all our report card targets, save one for 2010.
The phase of the parent debt is higher and originally planned, as we replaced less attractive equity-related financing costing about 4.5% a year, with more attractive low-cost debt costing 2.5% a year. We exceeded all other targets, including the utility equity ratio, cash flow to debt, operating cash flow and earnings.
Now let’s look ahead into this year. We expect sales growth to accelerate with residential sales recovering behind the sharp rebound in industrial sales.
Many of our industrial customers have resumed pre-recession levels of production. Commercial sales, however, likely will be flat.
As you can see here, utility earnings should continue strong reflecting a healthy level of investment to meet the needs of our customers. Costs are recovered largely in a proved rate with less than a quarter coming from new rate request.
The delayed self-implementation of the gas rate case in progress likely will have a negative impact of about $0.01. We have included this in our guidance.
Gas weather benefits reflect the absence of a mild weather in 2010 and a cold start in 2011. Please note the refinancing benefit shown here at $0.09.
This is the saving that I mentioned earlier. The strong operational and financial platform put in place over the last few years continues to support improving customer service as well as earnings.
Here is the utility investment and gross operating cash flow slide we just looked at, with plans for 2011 added. Both investment and cash flow continue to grow.
During the 10 years prior to 2007, investment averaged a little less than $600 million, rising to an average of about $800 million in the 2004 to 2008 period and $1.1 billion this year. That drives the gross operating cash flow up at a similar pace, strengthening the capacity for future growth.
And most of you tell us that you do appreciate having a ready reckoner to assess risk and opportunities on your own. Here is the latest version.
Our risk mitigation programs had helped us to substantially minimize exposure to changes in sales, fuel prices, collections, and other costs. It continues to be important that we deliver strong customer value and earn our authorized ROE levels.
We appreciate our Public Service Commission’s foresight with continuing a competitive level of authorized ROEs, sending a clear message that they understand what it takes to attract investment to the State of Michigan. And as you know, we work hard to earn about the level of authorized ROE.
We consistently reinvest surpluses when they occur to help our customers knowing that earning our ROE allows us to deliver an attractive growth in earnings per share. For 2011, here is our new report card.
We set the EPS at $1.40, up another 6%. Most of you have asked us to maintain a point estimate rather than a range as provided by most companies.
And we will work diligently to deliver on it. For gross operating cash flow, we picked the goal at a level up another notch reflecting the continued growth and strength of the company.
All this provides metrics that reflect the next step beyond the past seven years of growth that we project to continue over the next five years. Our planned rate base growth continues at 5% to 7%.
That compares to a level of growth at 4% in the past. We are able to project EPS growth rates at 5% to 7% in part because of our ability to finance a good piece of the growth with avoided tax rather than dilutive equity.
New bonus depreciation extends the value of our NOLs through 2014. Doing all this while holding down rate base related price increases at about the rate of inflation makes this plan even more practical and sustainable.
On this slide, you can see that 5% to 7% operating cash flow growth that goes along with the equivalent EPS growth. The investment that drives this growth is all focused on our customers at the utility.
We recognized the importance of earning the support of our customers and you, our investors, everyday. We completed cost restructuring last year, both at the utility and enterprises.
We structured our debt portfolio, enhancing liquidity and cost. We grew our earnings and our cash flow more than planned.
We substantially accelerated the plan to increase our dividend. We structured ourselves in a way to eliminate the need for new dilutive equity.
We’ve vigorously employed risk mitigation. And in the future, we hope to deliver more of the same.
We hope our track record speaks for itself. And on that note, John and I would be delighted to take your questions.
So, operator, could you please open the call for us?
Operator
Thank you very much, Mr. Webb.
(Operator instructions) Our first question comes from the line of Paul Patterson of Glenrock. Please proceed.
Paul Patterson – Glenrock
Good morning.
John Russell
Good morning.
Tom Webb
Good morning.
Paul Patterson – Glenrock
On the I guess post-retirement benefits, the healthcare cost, how does that show up in earnings? I mean, sometimes you see an accounting benefit in the near-term, and I was just wondering if you could sort of just give us a little bit of flavor as to what the rough impact of that was.
Tom Webb
I’ll tell you, the way to think about how it shows up, it shows up two different ways for us in the utility here in Michigan. In one manner, if we invest moneys like we’ve just did some pre-funding, that essentially is built into the working capital piece of our rate base.
So we get to earn on it. And then in the other fashion, if it’s just in our cost structure, it’s in our expenses so that in that case we get to earn on that as we put it into our next rate case whenever this change up or down.
And I think that’s really pretty simple.
Paul Patterson – Glenrock
Okay. Was there – so in terms of the – when you reduce the healthcare, when you have these people contributed to the healthcare etc., was there any accounting benefit that actually happened as a result of that or –?
I mean, I’m trying to understand –
Tom Webb
There's a couple of things that I’ll refer to. As you know, there is a lot of complicated features of healthcare as well as the pension.
And the first things what we’ve done on operational basis, and John may even want to comment on that in a moment, we worked very hard with our salaried employees and our hourly employees and made sure that we’ve done everything we can to eliminate legacy cost. So in our position where we’ve been able to move our people to define contribution programs instead of defined benefit programs when there are new employees coming in.
That’s been true on the salaries side for several years and obviously that yields some nice benefits. On the healthcare side, same kind of thing.
We try to do cost sharing with our employees so that they pay a portion of what the healthcare costs are and could that save money for you as an investor. So those are some of the operational ways that we are trying to balance giving good compensation and benefits to our employees and yet keep the cost as best we can in a reasonable way.
And I want to hit the second side of that and just suggest that. There are things that we don’t control so well, and the best example I have is whatever the discount rates are at the end of the year, like on the pension funds, those are going to eat our health or hurt us, and those will be recognized for the year ahead.
So, as interest rates are down a little bit and the discounting changes a little bit and when they go the other way, which they are likely to go next year, those discount rates will probably rise and we’ll probably get a little bit of help. So there is a lot of mechanics in here.
But here is the bottom line financial message. We pick up whatever all those changes are and try to acknowledge those in our results and then deal with them and continue to provide for you a consistent growth in earnings per share.
So they are just like – if all of a sudden we have storms, and we had one here recently, cost us some money, then they cost us more than what we’ve planned to do. We look at our business overall and we figure out what can we do to adjust to make sure we take care of our customers and we deliver the earnings per share growth.
I don’t know if John – if you want to add anything on the –?
John Russell
No, I think the – the one thing to the only thing that I’d add to that is, as Tom said, when we provide good benefits to our employees and also provide reasonable benefits going forward with the legacy cost, what happens there, it also provides us the headroom for our rate increases. So what we’re doing is consistently managing those costs down so we can make investments, get recovery for investments, add value to customers, and also have the rate increases be reasonable.
Paul Patterson – Glenrock
Okay. I’ll follow up on that.
Okay. The self-implementation denial, could you give us a feeling as to what you think the – I guess you said it was procedural in nature.
I was just wondering if you could describe a little bit more as you see that? Because it sounds like it was the first time the Commission has ever done this and it was a little bit unexpected, I think, at least for some of us.
So I mean, I guess, what I’m trying to get at is, is there – do you sense any change in the regulatory appetite for rate increases or anything of that sort?
John Russell
No, I don’t. This was procedural in nature.
I know that the Commission has stated that to some people too. We had changed the amount of self-implementation, reduced it to the $29.5 million the day of the self-implementation date, because that is the amount that we thought we needed to move forward.
That change caused the Commission just to ask for a little more time to have all the parties see that additional amount and comment on that. Keep in mind, you talked about maybe regulatory fatigue, on a customer rate basis, on a year-over-year basis, with the full self-implementation and with the decline of fuel prices, customer rates would decline 6%.
So it’s really more procedural, just to make sure the record is understanding and everybody understands what is going on.
Paul Patterson – Glenrock
Okay, thanks.
Tom Webb
And Paul, while we were chatting, I had the guys look up something to give you a little flavor on the benefit expenses overall. For 2010 compared to ’09, we’re down about $0.04, and a lot of that’s the restructuring work we talked about and the other items we talked about.
As you look ahead to 2011, we plan for about $0.01 of bad news, most of that’s driven by the lower discount rate net of other things.
Paul Patterson – Glenrock
Okay. Thanks so much.
Tom Webb
Thank you for your questions.
Operator
And your next question comes from the line of Dan Eggers of Credit Suisse. Please proceed.
Dan Eggers – Credit Suisse
Hi, good morning. I was just wondering if we could talk a little more about the renewable side with the rate impact coming down so much.
Do you guys see appetite for maybe expanding the renewable program in Michigan or legislative action if the cost impact is so insignificant?
John Russell
I don’t see that now, Dan, because when you open up, if you increase more renewable energies, you are likely to increase the law and the law then could affect other things. So, no, I don’t really see that.
There’s been a change of administration here in Michigan, a change of the House and Senate, more driven by the Republicans now. They are driven by the Republicans who I think will see this decline as more reasonable cost for renewable energy.
But let it be stated that with all the hard work we did to reduce these costs, renewable energy is more competitive than it was, but it’s more expensive than base.
Dan Eggers – Credit Suisse
Okay. I think maybe just with the change in political landscape in Michigan, can you kind of give any thoughts about the conversations you are having with the government administration and any energy policy issues we should be keeping an eye on this year?
John Russell
Yes. We’ve met with the Governor and met with all the key legislative leaders, the new leaders.
I’d tell you that there are many issues that Michigan is leading with, just like other states. I’m impressed with what the Governor is doing.
He has our support. As far as energy legislation, he made a statement to us and publicly at least with a few hundred people that in my terms the energy legislation for 2010 – in 2011 as far as an issue for him is off the radar screen.
So it tends not to be high on his priority. He is more worried about the budget, about employment and getting Michigan back on track.
So – and the other thing too to provide comfort for you, many of the leaders, the House Chair and the Senate Chair of the Energy Committee were deeply involved in the passage of this energy legislation that sits today.
Dan Eggers – Credit Suisse
Okay. I guess just one last question is on the consumption side of the business, the residential and commercial, orders were relatively weak, weather-adjusted in 2010.
What signs have you guys seen (inaudible) recovery there? And are there structural changes you are seeing from a usage perspective that are going to continue on?
Tom Webb
Dan, it’s a great question, thank you. I’ll just, for all listeners, just recap.
We did see residential was off of about 2% this last year and we expect it to be up 1% to 2% this year. Commercial was down about 1% last year, and we expect it to be flat this year.
Industrial had a nice recovery of about 10% last year, and we expect that to continue with tougher comps of course to be about 6%. Here’s what I read.
We are not completely out of the woods. The whole country is, and Michigan included, is still dealing with a slow jobs recovery that comes along with the recovery in the economy.
What our customers are telling us though is a lot of them are right back up to where they were before on their production, particularly metals, in autos, in castings, a lot in the food area. So there is a lot of good news coming through.
What we see is caution in the degree of their hiring. They are trying to hold their productivity levels so the residential side stays a little soft.
So we expect to see that come around and then commercial to follow that. Now, with double-dips for country ignored, I think we are on a nice deliberate recovery and our planning and our projections may be too conservative.
I know they were last year when we said ’10 would be down and it turned to be up. But I really do think we’re going to see a slow, good, solid recovery, again, absent disasters in the Middle East or whatever could happen in the world.
But we’re going to keep planning conservatively and hopefully let the economy come back a little bit better to our customers than what we project.
John Russell
Dan, one thing too just on an employment side. You think the worst – we have the worst – unemployment rate in Michigan was about 14.5%.
As of December of 2010, we are about 11.5%. So we are seeing, even though those are high levels, they are certainly improving from the worst of the recession.
Dan Eggers – Credit Suisse
Got it. Thank you, guys.
Tom Webb
Thanks, Dan.
John Russell
Thank you.
Operator
Your next question comes from the line of Paul Ridzon of KeyBanc. Please proceed.
Paul Ridzon – KeyBanc
Good morning. Congratulations on another solid year.
Tom Webb
Thanks, Paul.
John Russell
Good morning. Thank you.
Paul Ridzon – KeyBanc
Can you remind us the balance of the NOLs?
Tom Webb
I sure can. In fact, I’m going to try to give you a little bit of perspective on how they shifted around a little bit.
We would have told you before bonus depreciation that we would have ended this last year at about $1.2 billion while we ended at $1.5 billion on a gross basis. We now anticipate that that will not be eliminated.
We won’t use all of that up until we get out into 2014 where we’ll still have some AMT credits and the like that give us some nice protection.
Paul Ridzon – KeyBanc
How do you balance –?
Tom Webb
In the appendix of the presentation we sent out today, Appendix five, I’m told, we give you a little year-by-year the gross – four, so I can’t count that the CFO trouble counting every now. Appendix four.
You can see the NOLs, both gross and net levels along with the AMTs.
Paul Ridzon – KeyBanc
And given that we didn’t know bonus depreciation was coming, how are you offsetting the deferred tax impact on rate base without lowering your earnings growth targets?
Tom Webb
Yes. Two thoughts there.
In Michigan, like in some states, but not all states, our deferred taxes are actually over on the liability side. They are not on the asset side of the balance sheet.
So it really doesn’t change our rate base when we do this. But it does impact earnings and which we easily offset by taking on a little less debt than we plan.
And we accelerated a little bit of our investment, including putting some money into our pension fund earlier than planned. Al those things together fully offset the earnings impact at the utility and then we did some similar things at the parent level.
But there is a downside to this that I want to make sure that everybody knows. The downside is, because we’ll take the tax benefits at the utility, we’ll have a couple years here where we’ll take on a little bit more debt at the parent until we’re able to use the NOLs which are at the parent.
So you will see our parent debt come up just a little bit, but you’ll also see it go right back now, as we get back to using the NOLs. The greatest news of all, NOLs last us longer and they’ve got a life that goes out beyond 2023.
So we were thrilled to have the benefit at the utility to extend the consolidated benefits of NOLs and not have the issue.
Paul Ridzon – KeyBanc
You indicated no equity before ’15. Has that changed?
Tom Webb
Well, no equity through ’15. And what we’ve done with bonus depreciation is short that up.
We had some tools we were using to be able to avoid the need for equity. We know we’re not under any stress at all because we’ve got the extra cash coming up from the bonus depreciation that we hadn’t counted on, which lets us use our NOLs even later, which makes the ability to avoid equity through 2015 a lot better.
We have no fear of equity, and I want everyone to know that. If we ever need it to issue equity, we would come, we would tell you, and it would be for really good business reason or we wouldn’t do it.
The great news is, unlike most folks, we don’t need to.
Paul Ridzon – KeyBanc
But the through ’15 is consistent with prior language?
Tom Webb
It is, but it’s now even stronger, but through ’15.
Paul Ridzon – KeyBanc
I’m sorry, but slide 21 – I'm having trouble to find the graph what you’re trying to show.
Tom Webb
That’s a good one. That’s the cash flow slide for everyone who might not have that handy in front of them.
What we show is our gross offering in cash flow, which is our cash flow before interest, working capital and the like, is growing at about $100 million a year. We have always talked about our earnings growing at 5% to 7%.
But I think some folks have lost sight on the underlying cash capacity, the strength of our balance sheet. This is the cash flow that continues to grow as we go through time.
Now, take off the working capital and importantly, the investments that we are making, and we use that up so that on a free cash flow basis, we’re actually slightly negative. But when the spending slows down at some point in the future, you’re going to see all that operating cash flow flowing through to give us the ability to do whatever, whether it’s more dividend or it’s more investment or whatever it may be, the capacity will be stronger.
Did that help?
Paul Ridzon – KeyBanc
What’s going on in ’14? Is that the roll-off of NOLs?
We get things get a little non-linear there.
Tom Webb
They look – if we’re looking at the same slide, they look pretty linear to me. But what will happen as you go in time – oh, you’re probably looking at working capital.
What you will see as you get out to ’15, we will be paying some taxes, because even though we have the protection of NOLs prior to that and we have AMTs, we’ll be in a position where we think we’ll have to pay a little bit tax, that gray bar you’re looking it. And I put emphasis on the word ‘think,’ because we’ll be looking at other opportunities that are available today that may accrue to us as we get out in that point in time and maybe we can extend the period when we don’t have to further for which have to pay any taxes.
But right now we project we’d start paying a little bit of taxes in ’15.
Paul Ridzon – KeyBanc
Thank you very much.
Tom Webb
Thank you, Paul.
Operator
Your next question comes from the line of Ali Agha of SunTrust. Please proceed.
Ali Agha – SunTrust
Thank you. Good morning.
John Russell
Good morning.
Ali Agha – SunTrust
Going back to your strategy of filing annual rate cases, based on the data I think that you guys gave in the earnings release, looks like the gas utility ROE last 13-month average was above its authorized ROEs. And you mentioned obviously the procedural issue on the interim rate increase being pushed back.
But just given the dynamics, ROEs being higher than current authorized levels, are you – are we looking at the strategy of going in and filing every year, then filing the interim and then that strategy given how ROEs are playing out right now?
Tom Webb
Let me just start a little bit on the facts just to help us out, and the John, I think, would like to talk to our plan for filings in the future. Just as you do with the taxes, it should be in this filing we did, our electric ROE for ’10 was 10.6%.
So just a hair below one-tenth of a point below where we’re authorized. And for gas, we were at 10.9%.
You know our authorized level is 10.5%. So that’s your point I think that you’re making.
And I think we can continue to operate in the level of being pretty close to those ROEs, because as we said in this call, it’s our intent not to over-earn, but we’re in a situation where we don’t need the support we try to give it back to our customers. But on the plan for rate cases –
John Russell
Yes, let me talk about that. Ali, one of the things that we continue to do and you’re aware of is file frequent rate cases, regular and routine rate cases, as I describe it as.
Working with the regulators, the more cases you do, the more filings that you make, the easier it is to do these cases, because on a case-over-case basis, the difference as far as the amount of increase is getting smaller. From a base rate standpoint, as I said before, we expect to be at or below the rate of inflation going forward.
So the increases are fairly moderate. But what I like is it provides the regulator to have a snapshot of our business on an annual basis.
They can see our business. They can talk to us about our business.
They can also influence some of the things that they want us to do on our business. And maybe it’s the way I grew up, but I saw one of the biggest regulatory challenges we’ve had as an industry and we had as a company is during a rate-free period, we stayed out of rate cases for many, many years.
What that forced us to do is to get back with the fairly large rate increase and make the investments and the commitments to serve our customers. The Commission understands the strategy.
The Commission has been supportive of providing the feedback to us during these rate cases. They are regulators.
They want to regulate. We have the information in front of us.
And I think our style here as a company is we’re very open and transparent on how we do things. As we share with you, we share the same thing with the Commission.
Ali Agha – SunTrust
So the implication that given the investments you’re going to be making in ’11 that gas ROE trends down closer to the authorized level, is that the way to think about it?
Tom Webb
That’s correct.
John Russell
That’s correct. We did actually – the biggest significant change we made in this last and the self-implementation number was take the return on equity request from ’11, which we think is justified.
But based on circumstances here in Michigan, dropped it down to the authorized levels that we have today, which is 10.55. And that really – that and some O&M reductions, but most significant changes from our self-implemented amount to the second self-implemented about.
Ali Agha – SunTrust
And also, I’m just curious – on your perspective, as you said, they delayed the interim because you changed the numbers a day or two before the date and they wanted everybody to take a look at those. The fact is you note the numbers, you didn’t raise them.
Isn’t that, I mean – wouldn't that have actually smooth the process and federal decline. We are coming again with lower number than we were originally coming in.
We’re coming in with a lower number than we were originally coming in. I’m just curious in your interpretation of the food beyond just a procedural aspect of it.
John Russell
I think, Ali, I think that is just procedural, because you’re right. Not only did we lower the number, which would have been an advantage to our customers.
As I said earlier, if you take fuel into account, with the self-implementation the rates are down 6% on a year-over-year basis. So it really is to enable all parties to look at what is in that $29.5 million, give them the due diligence and the time that they need.
And we’re talking weeks here, and then to move forward. And if you’ve read the order, you also notice that it wasn’t a consensus of the commissioners.
So I mean – yes, there – basically it’s a procedural issue. We’ll get to the end on it.
We’ll make our filing next week, but you’re right. It’s a pretty small case.
I mean, it’s $29 million on a $2 billion revenue stream, about $2 billion, with 1.7 million customers. So the numbers are pretty small.
Ali Agha – SunTrust
And Tom, I think you said based on your guidance as about $0.01 reduction for the delay. What have you assumed specifically as far as when the interim rate increase actually will get implemented?
Tom Webb
Yes. First I would say I don’t know, because we’re growing through a process here, just revising things.
And remember, it’s not a very big number because we’re coming to the end of the winter season and into the shoulder months, where it just wasn’t very big. My guess is, in the few weeks it will take to get this resolved, it will be about $0.01 and we factored that into our guidance.
Ali Agha – SunTrust
Got it. Last question, John, you mentioned that you’re heading from the Governor.
Given the change in the composition on the legislative side, particularly I guess in the House, would you still expect a bigger push for customer choice, increase, and how do you see that dynamic play out in the new legislative grouping that you have now?
John Russell
Yes. Those parties that are pushing for that, Ali, that you’re aware of, really the – probably the news today is the fact that from the Governor’s perspective, he – we had a meeting with him, several of us, the coalition for energy that we have, there were several people there, legislators, DTE was there, Jerry Anderson was there and myself and the Governor, all three of us spoke.
And he made it clear that that’s not a top priority for him. So from my standpoint, I think that’s important to know.
However, you may see the House and Senate go through some hearings just to see what the impact is. Just to give you a ballpark though, we’re at 10% now, which you’re aware of, and there is only about 500 customers that are taking choice today – actually 300 that are taking choice today.
If we took all of the customers that are in the queue waiting, that would only be 4% more than what we have today. And that’s another about 500 customers.
So in perspective, and this is what we’ve told the legislators and told the Governor, we have 300 customers taking choice today, over 1.8 million customers. There is another 500 in the queue of our 1.8 million customers.
If we open up the cap, cost shift will occur to residential customers. And as you know, we’ve worked very hard to ensure that we’re getting to the point of fair rates for all, that everybody pays their true cost of service.
So I think what you’re going to see is you’ll hear about it, there will be a push for it; but my belief is that this law is good, the law is working, we’re only a few years into the implementation of the law. And as we talked about the renewable energy investment, we’re just beginning these investments now.
So to change the bar right now, I believe it’s premature and I think we have support from the legislature and the administration on that.
Ali Agha – SunTrust
Thanks a lot.
John Russell
Thank you.
Tom Webb
Thanks, Ali.
Operator
And your next question comes from the line of Terry Shu of Pioneer Investments. Please proceed.
Terry Shu – Pioneer Investments
Most of my questions have been answered. But I do want to ask again about the rate relief requirements to support the growth.
I think you said a number of times and in the past as well that we’ll in line with inflation. But if you really look at customer bills, including fuel and other trackers, is that also within like the 2% to 3% level that’s on your best judgment?
John Russell
Yes. What you’ll see is – let's separate the two businesses.
The fuel I’ve taken separately. Fuel, on the electric side of the business, will be at or little bit above the rate of inflation.
On the gas side, I don’t expect that to be the case. The gas costs have been coming down.
And I expect them – they have come down in 2010. And because we store an awful lot of gas, even though gas prices when they begin to rebound will have some of the lower cost gas in storage.
So, on the gas side of the business, I think the rate of inflation for the next few years could include fuel. On the gas side, it won’t.
The surcharge component you raised is a good one. The surcharge is already in place for the components of the energy legislation.
With the announcement I made today of the reduction of $55 million, that will also reduce customer rates.
Terry Shu – Pioneer Investments
So, as the customer each year in the next couple of years, all in, they will see their rates go up approximately in line with inflation, which I’m assuming is like the plus-2% rate.
John Russell
No, no. I’m separating the rate base growth.
Okay?
Terry Shu – Pioneer Investments
Okay. So if you can tell me, then what would be the customer build as the customer might per usage increase would be approximately what each year based on your best forecast?
John Russell
Yes. If you’re looking at all this over the next few years, including fuel on the –
Terry Shu – Pioneer Investments
On the electric side. I’m mainly asking about electric.
John Russell
Around 5% in 2011. That includes fuel.
And again, fuel is really hard to predict. That’s what we think.
And then about 3% and then about 5% and then about 3%. Those are the next several years out.
Now let me – while I’ve got you, let me talk about the gas side of the business (inaudible) half of our business. Our reduction of 5% in 2011, flat in 2012, and a reduction of about 2.5% in 2013.
Did that help?
Terry Shu – Pioneer Investments
Yes. A lot.
Thank you.
John Russell
Thank you.
Operator
And you next question comes from the line of Mark Barnett of Morningstar. Please proceed.
Mark Barnett – Morningstar
Hey, good morning, guys.
Tom Webb
Good morning.
John Russell
Good morning.
Mark Barnett – Morningstar
Just a couple of quick questions. With the Ludington investment that you’ve announced, the $800 million, what’s the timeframe for that to close rate?
How long do you think that project is going to take to complete?
John Russell
It will take about ten years, Mark. It’s a very long-term project, because what we do is each year we replace the runners on each of the turbines.
So it’s a long-term process, and we’ll put it into rate basis. We complete the turbines, enable to run those turbines successfully.
So we won’t have to wait the full ten years, but it is a long-term investment.
Mark Barnett – Morningstar
Okay. And then, are you considering any other asset sales at the enterprise business in 2011, or do you think maybe your (inaudible) for now?
John Russell
I don’t think that we have a lot more to do. Enterprise is a real small part of our business.
As you can see in our release, again, it still looks like a nickel, $0.06 of earnings, as you look at the business going forward. So it’s small of the total.
We’ve been trying to clean up a few things and get rid of some of the smaller businesses that don’t really fit. But we kept the renewable portfolio in Michigan and a small renewable plant down in North Carolina.
That’s a great experience for our people, and they are great resources for us. And I think you’re going to get only more attractive as w go through time.
The big piece of enterprise is the Dearborn Industrial Generation plant. And this is a soft market.
It’s hard to deal on this market right now. But again, I think that’s a very attractive operating business that will get even more attractive as we go through time.
But no changes planned.
Mark Barnett – Morningstar
Okay. Just one last question.
I mean, again, I reiterate, no equity until 2015. Will you be issuing some – for your plans like a small amount?
Can you really –
Tom Webb
Of course. We will continue to have a drip program, small amounts of equity going on.
This is something that most companies do. And you can count on us to continue doing that.
It is much a service that we provide to folks as a way to bring in a small amount of equity. When we talk about this, what we mean is what’s really big and diluted to you, guys.
Any block issuing or anything like that. There’s no need for it.
So we won’t be doing that.
Mark Barnett – Morningstar
Sure. I understand.
Should we expect the sort of similar level as recent task going forward or –?
Tom Webb
I think so. But be careful when you’re looking at the stock counts when we do the diluted levels.
Just remember we took out our convertible preferred last year and we took out a debt convertible last year. Part of dealing with those is the cash payment and a share payment, so that changes your share count.
And as we go through time, we still have two convertibles in our portfolio now that we may keep or take out depending on what’s the most economic choice to take. So that can move our numbers around a little bit.
Other than that, you pretty much know the story.
Mark Barnett – Morningstar
All right. Great.
Thanks for taking my questions.
Tom Webb
Thank you.
John Russell
Thank you.
Operator
Your next question comes from the line of Michael Worms of BMO. Please proceed.
John Russell
Hey, Mike.
Michael Worms – BMO
Good morning. Thank you.
I have a question on the Lake Winds and Cross Winds projects. And that would be simply – will there be any transmission needed to be built to accommodate those projects?
If so, will you build it or will someone else build it? And what would the cost estimate me?
And are those costs included in your CapEx budget?
John Russell
Okay. Let’s start with all of them.
Lake Winds Energy Park is on the west side of the state. No transmission is required.
We have an interconnection that we will do to the transmission facility. And that’s the first part that we have on schedule for 2012.
Cross Winds, which is on the east side of the state, does require transmission to be built. Transmission is expected to be built by ITC.
They have got a proposal through, which is through the approval process that will be charged separate. Obviously, they will but make their investments in the transmission and we will hook up to that transmission when it’s completed.
And that project is set for 2014 or ’15.
Michael Worms – BMO
Thank you very much.
John Russell
You’re welcome.
Tom Webb
Hey, Mike, I would add a comment on the overall investment story, particularly for all investors listening in now, is we really are an after loan level of investment for the next five years. That’s $6.5 billion.
There is a lot of things that we’d like to invest in, that we think our customers would like to have. They are easy, these either gone slow on or exclude it.
So when opportunities come up, there’s something that might need to go where we’ll fill that hole pretty quickly. And to the other end, we’re not adding more investment above the $6.5 billion because we think that would put too much pressure on our customer rates.
So, as John talked about, we want to stay down to that level of inflation rates. That’s just as important to us as the earnings side of this claim.
So we think we’re in a good spot where whatever happens we’ll probably be able to sustain above that level of investment. And therefore, low levels of rate increases and good levels of earnings growth.
Michael Worms – BMO
Thanks, Tom.
Tom Webb
Thanks for letting me add that in.
Operator
Your next question comes from the line of Jonathan Arnold of Deutsche Bank. Please proceed.
Jonathan Arnold – Deutsche Bank
Hey, good morning.
John Russell
Good morning.
Jonathan Arnold – Deutsche Bank
My question may be somewhat related to the last, but can you talk a little bit about how it is the amount of investment going into the owned-win projects is unchanged, where you’re just seeing these big declines and presumably the PPA project?
John Russell
Yes. What we can do, Jonathan, couple things.
One, several things happen as a result of what our original estimates were compared to what we see now. We’ve negotiated very good contracts for the wind turbines, because as you knew, as we know a few years ago there was queue.
The queue has kind of eroded. We were able to negotiate at the good time.
We did not plan on production tax credits that are now – we’re able to get the production tax credits because we’re able to complete the works in time while the production tax credits are still available through 2012. The other thing too that we’ve seen is that Michigan does have a very good wind regime, which we had anticipated, but now that we’ve done the net tower studies, we’re seeing a much better capacity factor than we thought before.
And it’s surprising how good it is in both the east side of the state and the west side of the state. So those factors have caused us to be able to reduce the cost of the development.
So we’ve advanced some of our own-builds. We’ve entered into purchase power agreements for the portion of our renewable energy targets that need to be provided by third parties.
All that being done, call it we kind of hit the sweet spot for growing renewable energy in Michigan, and Michigan looks like they will be a very good source. But all that doesn’t affect our earnings per share.
It still allows us to make the investment. It’s just we can reduce the surcharge now to be able to save our customers’ money while still growing at the same pace that we had before, actually accelerated in some cases, which will drive the earnings per share.
Jonathan Arnold – Deutsche Bank
In the rate base piece, the result of some of the things you talked about, ultimately smaller when you get to the end of the period?
John Russell
No, the period was extended a little bit. So yes, the period – you're right.
For a five-year period, it’s a little bit less. So when you go five years and beyond, it gets to the same level than we had before.
Jonathan Arnold – Deutsche Bank
Okay. Thank you.
John Russell
Yes.
Operator
Your next question comes from the line Brian Russo of Ladenburg Thalmann. Please proceed.
Brian Russo – Ladenburg Thalmann
Hi, good morning.
John Russell
Good morning.
Brian Russo – Ladenburg Thalmann
Just on slide 20, you update the average annual rate base, and I just noticed some minor adjustments. It looks like $100 million lower in ’11 and ’12, flat ’13 and then up in ’14 and ’15 relative to your last update.
I’m just curious, is it just timing or it is just some moving parts there?
Tom Webb
Here timing. As you think about what’s happened, as we are following, for example, the EPA direction on our environmental spending, we have to adjust that a little bit, programs of the same – what we’re going to do is basically the same, but the timing shaped out a little bit different.
So that and trying to do the smart grid more accurately compared to probably what you are looking at, we may have timed that a little bit of different. So it’s nothing but a mix of the investment that still has the same $6.4 billion of investment.
And again, that may happen to us as we move out through the next couple of years. The shake may more ever so slightly, but the overall size of the investment will probably stays the same.
Brian Russo – Ladenburg Thalmann
Okay. And just what share of diluted shares outstanding are you using for your 2011 guidance of $1.44?
Tom Webb
When we ended the year at 253 million shares, and we have – thank you – about $263 million in our calculations for ’11.
Brian Russo – Ladenburg Thalmann
$263 million?
Tom Webb
$263 million. And remember and keep in mind the real driver behind that is the accounting for the convertibles in terms of at what prices our stock and therefore at what level those dilution can we have.
And therefore we’ll move around depending on the price of our stock.
Brian Russo – Ladenburg Thalmann
Okay. And lastly, could you just remind us of what your longer-term base load generation needs are?
I thought I read recently in some local papers that there might be some support, somewhere for a coal plant?
John Russell
Yes, Brian, I’ll take that. We’ve got – I think you know our plans.
We have seven smaller units that we are evaluating the long-term life of those units. We won’t make that decision till later this year, early next year depending on environmental certainty.
The coal plant has been deferred. Our plan is to continue to look at it, but right now based on gas cost and based on the timing of the recovery of Michigan in our load, we really just are looking at that right now in deferring it.
So the changes you m may have heard is that some of the permits that were denied coal-fired permits, that were denied by other companies in Michigan during the previous administration, have now been over turned and most of them are in the process of trying to be approved.
Brian Russo – Ladenburg Thalmann
Okay. So the air permits that you had the existing site for where the previously proposed coal plant would be.
Have those expired?
John Russell
They have not expired. We have 18 months and then we could ask for an extension for another 18 months beyond that.
Brian Russo – Ladenburg Thalmann
Okay. Thanks a lot.
John Russell
Thank you.
Operator
Your next question comes from the line of Mike Bolte of Wells Fargo. Please proceed.
Mike Bolte – Wells Fargo
Good morning.
John Russell
Good morning.
Tom Webb
Good morning.
Mike Bolte – Wells Fargo
I just have a question on the $0.06 weather – catch weather impact on the 2011 earnings driver slide. Looking at your earnings release, it looks like, I guess weaker than normal weather hurt EPS by about $0.03 in 2010.
So that kind of implies that 2011 gas weather would be $0.03 about normal. I was just wondering, are you guys concerned at all if that gets sort of clawed back in the gas rate case?
John Russell
Well, couple of thoughts. First of all, in our gas rates that we have now, it is not a weather adjustment.
So good news or bad news flows through. Most of what you’re looking at on slide 16, which is the EPS projections for 2011, is related to the bad news gas sales, if you will, in ’09 – I'm sorry, in ’10.
Don’t repeat because we project normal weather for the year. Now, because we are already here in February, we had a pretty robust January with gold.
We’ve picked up a little bit of good news there. So all of our projections though for this year are strictly at normal weather.
Whatever happens, if it’s colder and we make it some benefit for that. And if it’s warmer, we’ll lose a little bit.
But we do like we always do. We worked to offset that in other areas.
Mike Bolte – Wells Fargo
Okay. Thanks.
Did you guys – were you guys asking in this gas rate case to actually have the decoupling mechanism include weather?
John Russell
Yes, yes. We would like to – we have it on the electric side, Mike.
We’d like full decoupling, including weather the economy and energy efficiency on the gas side too.
Mike Bolte – Wells Fargo
Great. If it did not get approved, how would sort of like above or below normal weather in ’11, would you assume it would just get sort of normalized, like a true-up in ’12?
John Russell
If it was approved – I'm not sure of the question. The decoupling mechanism that is a process that’s aside from the rate base process.
So that’s what we end up doing.
Mike Bolte – Wells Fargo
Well, I guess my main question is right, like, so you have some favorable weather in the first couple months, say, above normal weather. If a full decoupling mechanism with the weather was approved in this gas rate case, I assume that benefit would basically go away.
John Russell
No, going forward – Mike, going forward, they don’t take it away.
Tom Webb
Yes. Any change is only for the future.
I would also ask you to look at slide 18 because that will help you. You can look at the gas numbers there and look at what might happen, whether it’s weather or not, whatever drives it.
And get your own sense of about what the impact is to us on the gas business.
Mike Bolte – Wells Fargo
Got you. All right.
Thank you very much.
John Russell
Thank you.
Operator
Your next question comes from the line of Raymond Leung of Goldman Sachs. Please proceed.
Raymond Leung – Goldman Sachs
Hey, guys. Just a couple of things.
With respect to – given that you do have decoupling, can you talk a little bit about what’s embedded in terms of customer growth in your outlook? And also can you talk about longer term, what’s the appropriate that level at the parent company?
It looks like it’s going to rise near-term because of the bonus depreciation. But can you talk about longer term goal there?
Tom Webb
Sure can. First, on the customer side, we are being, I hope, cautious.
For 2011, we are projecting 2.0%, 2.5% growth, with residential coming back about 1.0%, 1.5%; industrial still strong at 6% over last year; and then commercial, flat. We don't expect to see commercial to grow until we get out to 2012.
It will follow the industrial side of the business. Longer term, we are thinking around the numbers of 1% growth or something in that area.
Nothing strong, because we find it's the best way to plan the business. Hopefully, we will be pleasantly surprised.
On the debt side, we are going to have a little bit of a bubble. Because of the bonus depreciation benefits at the utility, we won’t use our NOLs at the parent in the next year or two, and that will cause us to borrow a little bit more money.
So you will see our debt rise up to $2 billion, $3 billion, maybe $2.4 billion at the most. That will automatically come back down, because then as we get the cash flow at the parent through the NOLs, we will bring that right back down to a level that will be about $2.1 billion.
Now, that's our kind of flat level that we've talked about. And again, we are not projecting the same.
We are trying to pull that down substantially. But we will take opportunities where they make sense to just ease that down over time, because we would like to see a smaller debt burden at the parent.
We think we are in a good place right now. If we invest our money in the utility, we make almost 11% return after taxes, and when we put it into debt reduction at the parent, we make 4% to 5% return after taxes.
So it’s a pretty easy decision, but we are also very attuned to wanting to pull that down as we go through time and we will.
Raymond Leung – Goldman Sachs
Tom, thank you. But the number you gave me, was that electric sales or was that a customer account?
Tom Webb
No, I’m sorry. I was giving you electric weather-adjusted sales.
Raymond Leung – Goldman Sachs
Okay. Is there any embedded what customer account that you have in your guidance?
Tom Webb
No, we don't make that a public thing. But what I expect to see is residential customer account won’t turn around and increase until we get into next year on any meaningful level.
Commercial, probably the same thing into next year. And industrial, we are seeing some new businesses come in, but if I gave you customer accounts, they are not going to be that substantial.
What’s important is like new battery plants bring a lot of business to us and they bring more tax-paying citizens and therefore more commercial businesses that follow them. Those will all trend up a little bit as we go through time, but our numbers would be very conservative.
Raymond Leung – Goldman Sachs
Got you. Appreciate it.
Tom Webb
Yes. You’re welcome.
Operator
And our next question comes from the line of Leon Dubov of Catapult. Please proceed.
Ted Hyne – Catapult
Hi, guys. It’s actually Ted Hyne [ph].
How you doing this morning?
John Russell
Good morning.
Tom Webb
Good morning, Ted.
Ted Hyne – Catapult
Most of my questions have been asked. I've just actually one minor one, and then I apologize if I missed this.
Have you – did you disclose what share price you are assuming in your guidance for the impact of dilution?
Tom Webb
Yes. You know me.
I usually stumble around for about half an hour answering that question saying I don't know, which really means I don't want to say, because I do know and the problem is we don’t want you to think we’re predicting the price of the stock. It just is the wrong thing for me to do.
But for purposes of understanding where we are, we just use the number of about $20 to do these mathematical calculations on dilution. And I'm going to emphasize again, that’s not a prediction that the stock price will move to that level or any other different levels.
It's just math.
Ted Hyne – Catapult
Got you. And obviously with the refinancings you did last year, that number becomes less material because you’ve already taken out about half of that stuff that used to move the numbers?
Tom Webb
Well, said.
Ted Hyne – Catapult
Okay. Okay, great.
Thanks a lot, guys.
Tom Webb
Thank you.
John Russell
Thank you.
Operator
Your next question comes from the line of Eric O’Keene [ph] of Basel. Please proceed.
Eric O’Keene – Basel
Hello, can you hear me?
John Russell
Yes, we do.
Eric O’Keene – Basel
Yes. (inaudible) In terms of the debt reduction, and you had mentioned your convertibles that you have out there, just taking a look at them, it seems like the 2.875% is – that one I believe is callable in December, but it’s trading way, way above the corporate.
So I believe you can compare that. I mean, if you call for conversion.
So if you put a call in there to compare it. And the 5.5%, it seems like that one is not callable until 2014, but that also is trading above – the prices above the conversion price, so (inaudible) can also get that converted into equity, and that leaves the trust preferred.
And I’m just trying to find out how you think about these things as you go through your process of converting (inaudible) paying some of these things down?
Tom Webb
I think John wants to take this question.
John Russell
No, no. No, I'll let you do that.
Tom Webb
The answer is we never comment on what we are doing in terms of what we may be calling or coming back to market. And I hate to disappoint you that way.
But we never go through that. What we do is we take a hard look at the economics and sometimes it’s the direct economics of the transaction and sometimes it gets linked up with something that’s so closely associated with it.
And we just make sure we don’t pull in a debt or issue new debt unless we think it’s the best economic decision for the company and all of its investors. So, we are looking at all of those.
And the best practice that you can see is last year, we found an opportunity to do something that I thought was good for investors and also very attractive for the company. And we will be watching all of those maturities coming up and abilities to call and looking at those, but I just can’t make it a policy not to project what we are thinking of doing.
Eric O’Keene – Basel
Thank you.
John Russell
Operator, I think we have time for one more question.
Operator
There are no further questions at this time.
John Russell
Good. All right.
Well, let me wrap this up if I can. First of all, thank you for joining us today.
2010 represented another good year of solid progress and performance. And as Tom mentioned, we are off to a good start in 2011.
We remain committed to working hard every day to deliver on our promises, provide value to our customers, and to earn your support. Thank you all for joining us today.
We appreciate it.
Operator
This concludes today's conference. We thank everyone for your participation.
You may now disconnect. Good day.