密歇根天然氣 (DTE) 2002 Q1 法說會逐字稿

All participants will be able to listen only mode until the Q&A session of the conference. The conference is being recorded at the request of Detroit Edison. If you have any objections, you play disconnect at the time. I would like to introduce the conference leader, David Meador.

Thank you, [INAUDIBLE]. Good morning everybody. Thank you for joining us. With me this morning are Dan Brudzynski, [INAUDIBLE] our [INAUDIBLE]. This earnings conference call will contain forward-looking statements concerning the company. With that behind us, I would like to get started. I am pleased to report our first quarter earnings of $200 million or $1.24 per share. As we displayed last year, the diversity of our earnings base is proving to be a strength for sdet.net. In the [second] quarter we were able to meet our objectives in spite of a recession, mild weather and two storms. As you will see as we go through the numbers, all parts of our business played an important role in delivering the $200 million in profits. I would like to start by going through on page 3, then I'll turn it over to Dan to go through the numbers. If you look at page 3, we want to introduce our new [INAUDIBLE] orientation. It's more representative of how we manage our business and it's consistent with how represented the business at our analyst meeting last June. This provides us -- internally it allows us to set strategic goals, allocate resources and target. The segment [INAUDIBLE] of our business unit is along four [INAUDIBLE] areas. First is energy resources reporting to jerry anderson which includes our electric generating assets, coal transportation, bio mass and energy trading. Energy distribution the next box over reports to Robert Buckler. This includes the wire as well as D-Tech. Then the last operating unit is energy gas reporting to Stephen Ewing. This includes Mic-Con as well as the midstream gas operations that includes the pipeline storage and Michigan gas production. Each one of these businesses have both regulated and non-regulated aspects to them. The final area is the corporate group which carries some minor corporate costs, as well as the energy venture capital investment funds which invests primarily in energy technology. With that background we'll turn to page 4 and I will turn it over to Dan and have him take you through the numbers.

Thank you, Dave. Good morning. Today I would like to discuss Dte's results for the first quarter and provide an update on 2002 guidance. On slide four we have the highlights for the first quarter of 2002. Net income for the quarter was $200 million or $1.24 per diluted share. This is up 27 percent from comparable 2001 levels of 140 million or 98 cents per diluted share. Let me reinforce what David mentioned earlier. We are very pleased with the performance for the first quarter. It is solid, it is in line with our expectations in light of some challenges so early in the year. Some of the highlights include continued non-regulated growth. non-regulated earnings were 50 million, up 85 percent from 2001 with an increased ongoing distribution from our coal-based fuels operations, the addition of midstream gas assets and wholesale and marketing activities. First quarter earnings attributable to mark to market gains was $8 million. In addition lower power supply costs and operating costs synergies contributed favorably in 2002. Average purchase power cost per megawatt hour are down over 30 percent from last year. Also the impact of the economic recession upon the base electric business was not as severe as originally expected. Delivered sales were down one percent from 2001 levels, reflecting stronger than originally believed economic conditions. Interconnection revenues were down in 2002 largely due to market prices remaining at low levels. The gas distribution side of the business contributed 54 million in earnings. It was tempered by one of the mildest heating seasons on record. The negative impact on the gas business over temperature normal levels was about 8 cents per share. Finally two catastrophic storms an ice storm in February and a wind storm in March added incremental restoration costs to first quarter results. The impact on o and m was approximately $25 million pre tax. The graph on the left side of slide four details out the contribution to the first quarter by major business unit as David previously mentioned. With the largest contribution to the quarter by our energy resources portfolio of businesses. Now, let me move on to Slide Five where the first quarter contribution by line of business is laid out in more detail. This slide lays out the contribution to earnings across the various lines of business within Dte. The profile of earnings is reflective of the make up of our business, diverse and asset-based. Our regulated power generation business contributed 44 cents per share or roughly 35 percent to earnings. Newly acquired set of gas businesses added approximately 30 percent to 2002's performance. On the power distribution or wire side of our business, they had a lower than expected contribution due to storm restoration challenges in the first quarter. Continuing on to Slide 6. We detail out some of the changes from 2001 levels by major business unit. Within energy resources revenues were down 44 cents per share due to the soft economy, the five percent rate cut as part of securitization and lower interconnection sales due to lower market prices. Power supply costs were favorable by 30 cents per share due to lower volume and favorable market prices. non-regulated earnings within this business unit were up 11 cents per share due to increased ongoing coal based fuel production and wholesale trading and marketing activities. Energy distribution, as I mentioned before was down due to the economy and storm restoration costs. The contribution of the energy gas was not in 2001's results. It added about 42 cents per share, although the mild weather tempered this contribution, as I mentioned earlier. We anticipate a lower contribution in the second and third quarters from this side of the business reflecting a seasonality of gas earnings. The average share impact of the MCN merger diluted performance by 27 cents per share. The share buy back in 2001 as a result of securitization provided a 9 cent per share uplift. Moving on to slide 7 and the outlook for the balance of 2002. Early into the year, as I mentioned we are pleased with our progress and remain confident in on 3.70 to $4 per share projections. non-regulated plans are in place and still on course. We will begin ramp up production in our coal-based fuels business over the rest of this year. Our summer capacity plans are in place and we are targeting continued growth in wholesale trading. Overall our non-regulated projections remain in the 170 to $190 million range. Consistent with our prior 2002 guidance, we expect a stronger economic environment in the second half of 2002. Certainly the strength of the economy and recovery will impact the remainder of the year. Electric choice is also projected in the five to eight percent range for 2002. Our regulatory discussions are continuing on that front. Weather for the remainder of 2002 certainly affects our business. The impact of early storm restoration costs has depleted our annual planning reserves. This remains a risk to our projections. With that as an earnings overview, I would like to turn the discussion over to Nick Khouri who will give us a brief update on the balance sheet.

Thanks, Dan. Good morning everyone. Page 8 provides an overview and discussion of DTE energy's balance sheet. Continuing our long-standing practice, DTE's management and Board of Directors remains committed to a strong balance sheet, solid investment grade ratings. As with net income the timing of cash flows and outflows has changed since the MCN merger. In general reflecting the impact of the gas business, net cash is weaker in the fourth and first quarter of each year and stronger in the middle two quarters. For example cash requirements for inventories and receivables billed before and during the peak heating season decline in may through September. As a result, while up in the first quarter by year-end Dte's leverage should be down from the 54 [INAUDIBLE] percent debt to cap recorded at year-end 2001. For the full year 2002, we are on target to reach 1.2 billion of cash from operations including asset sales consistent with our earlier projections. Capital spending is projected at approximately 950 million including over 200 million for environmental spending. As we stated in the past, state law provides for the future recovery of certain environmental spending after the rate freeze is lifted. We believe, therefore, it is prudent to finance [INAUDIBLE] project with debt matching future cash flows to debt service payments. A strong balance sheet coupled with discretion area non-regulated investments allows us to invest in non-regulated projects as opportunities arise. We developed a rigorous internal capital case process allowing us to only invest in projects with suitable risks and rate of return. If the projects do not materialize, we intend to reduce debt or buy back stock. Finally, rest assured that Dte has always taken a conservative approach to balance sheet management rarely using special purpose financing vehicles and always fully disclosing financing for the rating agencies into the street. Now, let me turn it over to Peter Pinta.

Thanks, Nick. I wanted to give a quick update on the stock's performance and review some IR initiatives coming up. On page 9 DTE's stock -- . [INAUDIBLE] on a year-to-date basis returns have been about 10 percent excluding the dividend which is also above the index average and about 3 percent. On a valuation basis the stock is attractively positioned. Today the stock is only at about the index average in terms of forward PE and we have made steady progress on this measure over the last few years from a 10 to 15 percent discount to the industry average evaluation a few years ago. On the IR front recently we have been very active in increasing our communications with the investment community and thus, we have been meeting with current and pro expective investors in the U.S. and in Europe. On these visits, we continue to focus on our basic investment thesis. That is a solid base of gas and electric utilities, credible growth businesses in energy markets we understand. A solid financial position consistently delivering on our earnings growth targets and a free option because of our unique approach to the emerging energy tech sector. This story, as we have been speaking with investors is receiving very positive feedback. Investors like our diversity of earnings which tempers volatility in our earnings stream over time and provides multiple platforms for future growth. They like the transparent and direct approach by our management team in dealing with business priorities and addressing questions. They like our consistent strategy and what we are saying today, we've said for several years. And, bottom line the 10 percent plus total return to shareholders is attractive in today's environment. One final note. We don't plan this year to do a full year [INAUDIBLE] meeting. We are striving for more frequent and timely communications. And, as a result, we are planning a mid-year business update in New York on July 30th. Then, again at year-end on early in '03. In July, we'll discuss the financial and business results through the first half of the year. We'll then provide additional guidance through the end of '02 and into '03. We'll update our strategy and business priorities. We'll provide an update on what we are seeing in the markets that we participate in that is the gas, power, coal and the energy-type market. Dave do you want to wrap-up?

Sure. Thanks, Peter. Let me summarize. Given the challenges that we saw in the first quarter in terms of weather, both mild weather and the storms and then the economy, this was, as we have mentioned several times a very solid quarter for DTE and I am pleased about our results. At this time we are keeping our guidance that we also have mentioned at $3.70 to $4 per share. Realize this is a larger range than we normally provide and I expect we will tighten up our guidance at our mid-year update in July. In the meantime I'm getting more optimistic and confident about the low end of the range as the economy in the MidWest gets stronger. For the remainder of the year we will focus on our core business strengths and continue to drive operational improvements through the implementation of our DTE operating system. We'll continue to focus on the strong balance sheet. We'll continue to execute our growth plans. One area we won't lose sight of during this year is achieving merger synergies which we have done a great job on so far and we will continue on that path. Before we open up for questions, also I would encourage you to listen in today at noon as [Tony] will be webcast during our shareholders meeting. It will be available on our website. At this time, we would like to open it up for questions, Mary.

Thank you, sir. At this time we are ready to begin the Q&A session. If you would like to ask a question, please press star one. You will be announced prior to ask your question. To withdraw your question press star two. One moment, please. Barry Shoe, you may ask your question.

Hi, Dave. A couple of questions. First, if you can give us an update on the [Mich-con] Fuel case situation and what would be a down side case in that respect? On the debt to cap, you talked about the current level, and then an improvement. Do you have a projected number for year-end 2002?

I'll take the first item and I'll ask Nick to take the second item and Dan the third. Regarding, I believe, Terry you are asking about the Mich-con case?

Right.

This is what I would describe as a routine process where the cost of gas is taken through a process to [INAUDIBLE] look at what happened in terms of inventory and cost of gas. We are confident, at this time, the proposed supply plan that we have implemented will be approved by the commission. So we are on a path gas costs and we don't see any issues at this point in time regarding recover built of those costs.

Are they not -- did not the Attorney General recommend some different level because of this whole argument about the inventory gas that was taken out?

Yes, but we believe that everything that we did was prudent. And what the Attorney General was speaking to, too was just because of timing of the way that things worked out, gas had been purchased prior in the year which, you know, we had to do in order to make sure there was a physical supply. And the price of that gas was then higher than the current market price, and that's -- you end up with the time lags when you are buying gas in advance. But we really, you no, I think the Attorney General's position is something that she has to take given her role in the state. We believe what we did is prudent and we don't see any issues.

What was her specific recommendation as far as dollar hit? And is it an one-time thing? Is it a continuous thing? How would it translate into numbers? In the very worse case if her recommendation is adopted?

Well, I don't see it as having a high probability. The attorney general's position was actually higher than the staff's position. The staff had a number in the $20 million range, and it would be an one-time adjustment we would take in a future year. At this point in time, we are not anticipating that.

So even in the worse case it's $20 million one time?

Possibly.

Okay.

Worse case.

All right.

Let me have Nick talk about the leverage and the debt to to cap.

Sure. Just briefly. Both the board and senior management has targeted high triple B, BAA2 investment rating which we translate into leverage of 50 to 55 percent debt to total cap. In 2001 we move to the top of that range after the MCN merger. We expect to move towards the closer to the middle of that range by the close of '02, 53 to 54 percent.

Thank you. This includes everything, all lease debt and -- but excludes securitization debt, is that right?

Includes all lease debt, excludes securitization. Does include some nonrecourse debt.

Does include?

The total security advertised debt is how much?

1.7 billion.

Okay.

It's closer to 1.6 now. It was originally 1.7 when we issued. Now it's 1.625.

Thank you.

This is Dan. On the wholesale trading and marketing, really just the background on that side of the business. Significant portion of the business is structured transactions that are largely back-to-back in nature based on DTE's business. With a lot of strong linkages around our business such as coal services, our MCN oil and gas exploration production business and really the majority of the business on that side that's being mark to market is relatively short dated and is relatively small portion of our overall business.

So you actually had a pick up in origination activity?

Yes.

Yeah, we did in the first quarter.

What was the actual dollars? Is that in the income -- I just was reading through your releases. The dollar contribution from trading and marketing.

That was -- this is Peter. In the first quarter we had $18 million.

I see it, 18 versus 2 million. Mostly because of the pick up in activity?

Yes. There's a piece of that is the energy trading business which really on the electric side we had a lot of volume pick up.

Okay. Thank you.

You bet.

Thank you, Terry.

David Frank, you may ask your question.

Hi. Good morning.

Good morning, David.

I was wondering if you could quantify the actual impact of the weather on the quarter in terms of earnings per share?

The two pieces on the gas side, the impact was 8 cents per share and on the electric side about 2 cents. So total 10 cents.

10 cents. That's excluding the ice storms?

Yes. That's excluding ice storms. What I would categorize as mild weather affecting demand.

Okay. And I just wanted to go back to something Terry asked about on the fuel case there the GCR for MCN. If for some reason the initial rate was set below what you had requested for your gas recovery and what the attorney general asked for, would you, at the end [INAUDIBLE] year, be made whole for any under collections?

Yes. Actually it's the following year because you end up in a reconciliation after you close-out the year. Sometime, I don't know exactly when, say the second quarter of the following year after the year is closed out.

Basically even in the worse case kind of a timing issue. You would ultimately be made hole but that's a lag?

There's timing issues on a cash standpoint you end up with over and under recoveries potentially at any point in time. At the end of a year you close-out the year and there's a reconciliation of your cost versus what ultimately is approved and there could be a small adjustment. That lags a year on the reconciliation basis.

Okay. And could you just remind us what merger synergies you are targeting for this year?

Peter, do you want to take that one?

We have targeted 110 million pre tax in synergies this year.

Okay. And that's all synergies that would flow through to the bottom line?

Yes. We think that will be pretty flats on the quarter-to-quarter basis over the course of the year.

Okay. Thank you very much.

You bet.

Thank you.

Alotta Chan, you may ask your question.

Hi. Good morning. Just a further clarification on the trading contributions. Did I understand you correctly that most of the 18 million was derived from the electric volume pick up? Or was that spread across the coal-based businesses as well?

Well, the 18 million is a combination of electric and gas, wholesale marketing and trading. A piece of it is from the electric side which is 4 million out of the 18 million. When I was talking to Terry, I was thinking about the piece that grew since the first quarter of last year. And I think in the first quarter of last year we had about a million or so on the electric side. The remainder is in the gas trading business or co-energy trading which we acquired with the mcn acquisition. That was the 14 of the 18.

Okay. So to the extent that you are doing any trading, resolving around coal or those other things, it would be included in coal services as opposed to trading?

It's actually split. When we do a coal totaling transaction the piece of that income is booked in the coal services business and a piece in the coal -- in the marketing and trading business. You know, both of those business units are working together to execute the transaction.

Right. Okay. All right. Thank you.

John Bartlett, you may ask your question.

Dave, a quick piece of clarification on the storm damage this year. You mentioned $25 million pre-tax. I was wondering if that was net or gross of the reserve you had taken? And what the size of that reserve was typically for this quarter?

I'm sorry, it was my understanding you had some sort of storm reserve?

Not necessarily a reserve. We budget storm just from a financial perspective. When we gave the guidance of 3.70 to $4, we would have had embedded in there, assumed a normalized storm budget in our guidance which we have, basically, used up already this year.

I see.

The point we wanted to make is we have another storm, we will have to work to offset that additional cost in order to hit our numbers. Which we do, also. But it's just to have two major storms this early and to have the storm budget already chewed through just means this year will present a greater challenge if another catastrophic storm came through.

What's the normal amount of storm damage for the first quarter then?

Typically, John -- this is Dan. Typically, I guess from a mother nature standpoint there is no typical storm.

Sure.

But we usually typically budget between 20 to 25 million a year.

Okay.

And usually that includes an one catastrophic storm and some smaller storms throughout the year. Typically in the summer time we see high winds with the leaves on the trees or we may see an ice stormy they are in the either end of the winter heating season. So that's kind of how we plan on more of a normal basis.

Okay.

But we got socked twice this year so early in the year already.

Understood. Thank you very much.

Thanks, John.

Winifred Fruhoff, you may ask your question.

Regarding goodwill amortization, how much goodwill would you have amortized in the first quarter? On an EPS basis or total dollar basis.

I'm working from memory here.Let us work that up and I'll give that out.

Winfred, the goodwill was 8 cents in the fourth quarter last year. Dan, would that be typical for the first quarter?

Yes. It would have been straight lined across the year.

Okay. Thanks. What was the first quarter operations and cash flow from operations versus a year ago?

The cash flow from operations, just let me state for the total year is very similar. You would see cash flow from operations, that being a billion to a billion one. When you do a quarter over quarter analysis, just as in earnings you have to be a little careful because mcn was not in the numbers last year it was a typical old Detroit Edison this year it's new combined company. The cash flow from operations of MCN basically are hitting the combined company a little bit. So if you look at -- I don't have the quarterly number handy, but I believe if you went back to last year, cash flow from operations is down slightly quarter over quarter. We expect the total years to be very similar on a pro forma basis of a billion one.

Okay. Correct me if I'm wrong, but the impression I have of your company is that you are increasingly adding non-regulated business to your regulated business; is that correct?

Yes. If you look at our outlook of an increase in -- well, the majority of our growth is coming from our non-regulated business.

Okay. That being the case, when I look at your current ratios, current assets versus currently built, you still seem to resemblance very much an utility with negative working capital. The ratio was at the end of March 0.79, down from 0.88 at the end of 2001. I'm wondering whether you are satisfied that you can continue to operate with negative working capital in the order of magnitude that you have it now?

That was the issue that Nick addressed in the call, and that is there are some quarterly -- it's not -- the profile is not the same on a quarterly basis. You would expect to see a deterioration in working capital in the first quarter, particularly because of the build up in inventories and receivables. So, you know, that will -- we are comfortable with what we are seeing relative with what we would expect to see given our businesses. To your question 70 percent of current -- when you look at the balance sheet, it's not unusual to expect to see a lot of the assets and liabilities still tied to the core electric and gas regulated businesses.

Fair enough. The last question I have is because of my ignorance of the matter. Absent the discussion that you had earlier regarding the prudency of gas costs, is the pass-through policy of your regulator still involving a prudency test on an ongoing basis?

Yes.

Okay. Thanks very much.

Thank you.

Carrie Stevens, you may ask your question.

Good morning.

Hi Carrie.

How were you?

Good. How are you?

Great. Just a couple of questions. When you were talking about the range of guidance, you said you were optimistic that you would kind of come up from the lower end of the range. Is that what you said? I don't want to mis-interpret that.

We have given the range of 3.70 to $4. The first quarter met our expectations. We are starting to see indications of a stronger electric side of the business. However, as we have indicated, our storm budget is used up and there's a couple other open questions. One of them being customer choice. So when we look at the total year right now, we want to hold our range, but I am more confident in the low end of the range and, you know, we are going to work hard as a management team to push our earnings as far as we can into the range. So we are just reluctant, at this time, to give a specific number or to raise up the bottom end of the range and feel that we will do that in our mid-year update in July.

Fair enough. The energy gas business on the non-regulated side, what is that exactly? Is that trading in marketing as well?

No. No. Carrie, the chunks are mostly Michigan production. You know in Northern Michigan we have gas production wells.

Emps]?

We think of it more as production because they are known reserves.

Okay.

That's the biggest chunk. We have Bector in Portland and non-regulated storage.

Okay. What's -- couple questions on the non-regulated. You mentioned strength in coal. When I'm looking at your net income that was down quarter over quarter. I was curious why you were mentioning the strength in the coal business when results were down?

Well, I mean basically, you know they are flat. Flattish. Three one to two six on a quarter to quarter basis.

Okay.

That business continues to increase its volume. We have a five-year target. You know of 100 million. We are getting close to 60 million tons of coal. So that business continues to grow over time.

Okay. It looks like the [syn] fuels business was slightly down. I just wanted to know if that was anything in particular?

And also if you are expecting to add projects this year?

Actually, the syn fuels business is part of that energy services line.

Right.

When we do the breakdowns.

Right. That was down.

Well, no it wasn't down, actually. On a total basis it was relatively flat, 2 million down. Let me tell you what's going on within that line. What we had is when you look at first quarter of last year, that was mostly earnings from batteries. When you look at that line this quarter it's mostly earnings from the syn fuels plants.

Are there any incremental additions throughout the year?

In syn fuel?

Yes.

We have nine plants all together. Five of them are up and running right now. The other four have been cited. You will expect to see a ramp up in that earnings stream over the course of the year.

Okay. Great. And just two more quick questions. With energy trading obviously at a very strong quarter, very robust, is that -- I don't know if you guys had a target from that business for the year and where you are versus that target for what you are expecting on an annual basis?

Yes. I think -- I'm thinking back to the February, I think the number was about 20 to 25 was our outlook for the year in that energy trading business [INAUDIBLE] okay.

And lastly, I know you mention that MCN was below plan and I just wanted to make sure that the only real driver of the results being below plan was the weather?

Yes. On the gas business, yes.

Okay great. Thanks, guys.

Sure.

Paul Writson, you may ask your question.

Could you give more detail on syn fuel production in the quarter and timing on question the four incremental projects roll into 2002?

We'll try to big up the production numbers, Paul. I don't have them at my finger tips. The four additional plants have been cited. Three of the four have definitive agreements associated with them. They will ramp up over the course of the year and be fully operational by year-end. We are anticipating when they are all up I think it was 9 to 10 million tons a year. In the first quarter, it was about 1.4 million tons were in production.

Three of the four are coming on this year?

No, four of the nine. So five are in operation, four additional ones have been sited and will be in operation over the course of the year.

Do you have a sense of when in the year?

You no, I don't have a quarter by quarter, month by month schedule. But, you know, they'll ramp up sequentially over the next eight months or so. Probably the may to September time. By then, I think we should be fairly close to having them ramped up. We really are assuming a full ramp-up by the end of the year.

Are you the full owners of these plants or do you have partners?

We are full owners in all except one.

And just a clarification on David Frank's question. You said weather was a 10 cent negative eight at electric -- was that relative to 2001 or was that relative to normal?

Relative to normal.

What was the comp versus '01?

Well, let's see the gas business wasn't there in '01.

So I -- you would have to [INAUDIBLE] out what Mich-con's first quarter numbers were last year. Our electric business was down a bit quarter over quarter, right?

Right. But I don't know that I can explain quarter over quarter weather at this time. We could get back to you, Paul, on that.

Okay. Thank you very much.

Jonathan Arnold, you may ask your question.

Hi. Good morning.

Hi, Jonathan.

Would you guys say, you mention you are expecting in the presentation you say you are expecting a strong economic recovery in the second half. Is this materially stronger than you had previously factored in? You also mentioned you are seeing these signs of life on the electric side.

John that, this is Dan. For the second half of the year we forecasted for the year originally when we put together our guidance for '02 to have about .8 percent GDP growth for the year or roughly flat with a [dune] first half and a more robust second have in the neighborhood of a three to four percent GDP kind of growth. The strength of the recovery, I guess remains to be seen. We want to make sure that as we kind of track through the year, we are comfortable with the signs we are seeing on steel and auto production and just the overall general climate in the state of Michigan.

So would you say your second half recovery built into the guidance is now stronger than it was?

No. It's still in the three to four percent range.

Okay. Thank you.

Zack Schrever, you may ask your question.

Congratulations on a real solid quarter.

Thank you.

Just wondering if you can update us as to where you are on hedging on both the power side and also the full side for 2002 and 2003, and I guess if you took in a substantial amount of your 2003 net short position on the power side when power prices were really low off of gas prices?

We are, for '02 on the power side, as you know we buy to address our reserve needs in the summer we are 100 percent hedged. In '03 the number is 94 percent hedged. On the coal side we are also 100 percent hedged in terms of our coal purchases for our generation. In '03 the number is 91 percent.

I'm sorry for coal you are 100 percent for '02 and 91 percent for '03?

Right.

On the power side you are 94 percent in '03 now?

Yes.

What were you on the power side for '03 at a year-end '01? I think that's increased, right?

I think it was in the 70s, yes. Between 70 and 80 percent.

But to answer your question more directly, we took advantage of lower power prices to lock in power supply.

Great. Great. And as far as merger synergies go the $110 million which you mentioned, Dave, does that include some of the other cost cutting which you guys did in the fourth quarter of '01 and which sort of seemed to be in addition to the sort of base merger synergies? Is that sort of the overall cost cutting number? Or does that not encompass some of the other stuff you are doing?

I think, you know, the 110 as synergies that we will get as a result -- direct result of combining and acquiring mcn. A quarter of last year we did some incremental steps like reduce incremental expenditures and administrative costs and so forth that was incremental. When we talk about trying to offset things like storm expenses and other expenses over the course of the year that will probably require incremental cost reduction in addition to our expected merger synergy.

Mmmm-hmmm. Okay. Great.

All we are doing there, Zack, us using the filing unbundled rates we have with michigan public service commission and using that as the internal price of power generation.

Okay. Great. And as far as syn fuels go, is there a certain after tax margin per ton we ought to be using on that? Is it around 9 or $10 per ton after tax?

Um -- I don't -- you know, Zack, I don't have that number with me. Why don't you give me a call. We'll try to see if I can dig it out.

Have you guys gotten all of the private letter rulings?

Of the five that are operational, four have private letter rulings and one, I believe, is in application.

And do you think you'll get all of them by the end [INAUDIBLE] of the year?

Yes. We typically -- we don't need them. It gives us additional comfort.

without the DLRs. We wanted to do that and we will continue to do that as we put the plants up in operation.

Final question to you. As far as the question goes, Dave, I'm not sure I understand exactly what you are saying. Are you saying that so far the economy and the indications which you are seeing are sort of in line with the core assumptions for a slow second half recovery underlying your guidance, or are you saying that it's really in line with that but there's some sort of positive indications at the margin that are slightly better than what you expected?

It's really the latter. We are starting to see indications not only on auto production, but also on steel production, and we are starting to see some load increases and honestly across all classes of customers that are giving us some positive indication. What we are trying to understand was this, you know, a trend that is an anomaly or is this an emerging trend that says the year will be stronger. Every quarter for the rest of the year. So we have little bits of data we are trying to analyze right now and really reluctant to project this out to say the economy is coming back stronger and quicker than we predicted.

Is this all driven by the auto offering the zero percent financing or is it more broad based than that?

It's very broad based.

As far as the guidance goes, Dave when you said increasingly comfortable at the low end, are you saying you are increasingly comfortable in this range of 3.70 to $4 are -- I wasn't sure I [INAUDIBLE].

I am reluctant to give a specific number that would indicate exactly where I am at the low end. But I am very confident that at a minimum, we will earn $3.70.

What you are saying is you hope to be able to tighten up the low end at this mid-year review thing in July?

Right. By then we'll know more about the economy and the electric load. We'll have a better sense if we have had anymore storms. And we'll get more indication on what's happening on some of the non-regulated businesses. Especially the project-oriented businesses. The syn fuel machines, it's sighting, getting all the local permitting, getting the operations is another variable in this. We'll have a lot of indication then. Internally we will continue to push as hard as we can even beyond synergies on cost. Come mid-year I will be able to give you a more precise number.

Great. And just final update on the regulatory front. We were expecting to see final orders out of the commission on this retail up and access stuff and all the netting and so forth.

Zack, what we are expecting right now, as you know there's two pieces to that.

Mmmm-hmmm.

On the first piece it's just mechanics of who pays what around metering and telephony. We are expecting an order from the commission might be this week or next week. The other piece on the netting case, we are in the process of filing our revised proposal to the MPSC which we expect to file sometime in the next month. And have then asked for expedited treatment of that. So we should be able to deal with that issue fairly soon as well.

Can you talk about the shopping which you have seen to date in the state and how that compares to your assumptions of five to eight percent?

So far we have seen, you know, a couple percent. I think it's about three percent, you know, of load go to choice. So when you look over the course of the year, it's -- it's pretty much within the range we would expect to see given that five to eight percent outlook.

This is the final question.

Final question?

I'm sorry, Peter. As far as the way the deregulation and the shopping worked, I had thought that the loss margin from shopping was effectively deferred in some sort of a regulatory asset and that it wasn't really a near terms earnings issue. It was much more of a near term cash issue with a relatively quick pay back as it worked its way through the rate structure. Number one, do I have that right or am I misunderstanding it? Because you guys always sort of allude to one of the uncertainties in that range being open retail access. To me that was always a ca -- cash issue not an earnings issue.

You are right. It's largely a cash issue, but there's also some earnings impact. Really to do with where we end up on the regulatory, you know on the regulatory side. You know, there will be minimum earnings impact. But, you know, the reality is it's fair to think of it as largely cash, but also some earnings impact.

Great. Thanks, guys so much. Great job.

Thank you.

Carlotta Chan, you may ask your question.

Thanks for the follow-up. Dave, could you just give us an update on the merchant plant development in Michigan? There have been a number of cancellations thus far this year. I'm curious what your outlook is for generation additions? And, also, on syn fuels, just quickly. Do you envision carrying all nine plants as everything comes on line, or do you think that you will hit up against some kind of, you know, a maximum efficient tax usage or because the coke batteries are falling off over time does this sort of layer in? I think that was your plan, but I'm curious if you have the full tax appetite to use the credits from all nine plants?

Let me answer the first question. We see the reserve margins in Michigan to be very healthy to the point where it's not clear a lot of the announced plants that have been announced in the state will be put on hold, or whether they be cancelled. We have one non-regulated merchant plant that was a michigan one plant, a 320 megawatt plant that will come on line this spring. We have no additional plant capacity additions in the region or in Michigan beyond that plant. Our sense is the region is in an overbuild environment and will stay that way for several years. So the plants that are under construction, it's not clear who will complete plants, who will cancel plants and it's something we will have to watch as the year plays out here. In regard to syn fuels, we have always said that the entire population of syn fuel plants generate more credits than we could use efficiently. And our plan always was to [INAUDIBLE] those. We described last year at the analyst meeting we believed we could [INAUDIBLE] those in a way where the earnings and the cash would flow very similar as to if I owned, earned and used the credit within the year. We are in the process of doing that. We sold down one of the partnerships that holds one of the units. It's a project where we sold 9 a percent of our interest in the first quarter. And the earnings and the cash will flow very similar to as if I owned and retained those credits. So we are going to manage that tax credit, carry forward as we have talked about before. And it's something we will monitor year-to-year. The one thing that will happen and we will have to help people as this goes on, is the earnings related to these projects right now in many cases are in our tax line. As we monetize this it will move out of the tax line and move into gross margin. The net income will be the same, it will just show up in a different place in our income statement.

Thanks a lot.

Mary, we will probably have to have just one more question. Q3 we need to run to an annual meeting in a few minutes.

Sir, at this time there are no further questions.

That's great.

Good timing.

I thank you everybody for dialing in. Again I would encourage you to listen to Tony today at noon on our website.