密歇根天然氣 (DTE) 2003 Q1 法說會逐字稿

Pardon me, everyone. This is the Conference Coordinator. The conference will begin momentarily, please do not disconnect. The conference will begin momentarily. There will be music on hold. Thank you.

Pardon me, everyone. And welcome to the DTE First Quarter Earnings Call. All lines will remain in listen-only mode. Following the presentation we will begin the question and answer period. If you would like to ask a question during this period please press star, and then the number one on your telephone keypad. Your questions will be answered in the order they are received. Should any participant should require assistance please disconnect and redial the conference number.

I would now like to turn the conference over to Mr. David Meador. Mr. Meador, please begin.

Thank you, Cassidy. And welcome, everybody to the conference call. Let me start with two housekeeping items.

The first one, in addition to what Peter Pintar said, I just want to express my apologies for the delays in getting items out on the web to you, and the delay of the conference call. Sometimes this technology that we all use to try to help communicate, we all have experienced this personally, and just we’re having one of those technology days.

And we had intended on everything being out on the web at noon to give you a couple of hours to look at the material, and it just didn’t work out that way. Again, I apologize, and we’ll make sure this doesn’t happen again. There’s nothing wrong other than just as I was describing, these technology snafus. And we’ll error proof that and make sure that it doesn’t happen again.

My second housekeeping item is the Safe Harbor language that you see on page two that I just want to make reference to, because we will be making forward-looking statements in this conference call. In addition to the Safe Harbor language on page two there’s a new regulation G that the SEC has put out that I have to bring attention to the fact that we will be discussing some non-GAAP measures in talking about our company’s performance. And you can find the reconciliation of those measures to GAAP measures in the Investor Relation Section of our web site.

So with those two items behind me, again, welcome. I have with me today Dan Brudzynski, our Vice President and Controller, who you have all heard from frequently. Nick Khouri, our Vice President and Treasurer. And Peter Pintar, the Director of Investor Relations.

I am going to kick-off the presentation, and then turn it over to Dan for most of the presentation, and then come back at the end, and then take your questions. And so let me start on page four by reviewing the objectives of this call.

In prior sessions with you including our February 12th meeting in New York, we’ve talked about several transactions that we are pursuing. One being the sale of the transmission system or we refer to as, by the name ‘ITC, International Transmission Company,’ and our thermal business. Both of those transactions were very financially attractive to us, and it’s been difficult as we’ve been going along to predict the timing of those transactions. But as we’ve said on February 12th it looks like both were going to land in the first quarter. Well, they did.

And in addition to that we’ve had two FASBE driven accounting changes that show up in the quarter, and one other item relative to the MPSE disallowing some gas cost relative to us going back on the GCR. But when you wrap that all together with just normal operating variances the quarter presents a communication challenge. And we understand that, and we’ve gone to great lengths in our presentation material to add extra schedules and reconciliations to help us help you work through this.

And so our goal here is to explain the quarter and to be transparent on one-time non-recurring items and accounting changes. And we're going to do that by starting with reported earnings on a GAAP basis and then normalize those amounts back to operational earnings. And so we can talk about operations on an apples-to-apples basis.

In addition, we’re going to cover some shifting within the numbers, shifting from regulated business to our non-regulated businesses which are doing much better than we originally forecasted. And then last we’ll cover challenges and opportunities.

So we would like to limit this call to the quarter only. Originally, we were going to release earnings Monday morning but then came to realize we will be at AGA starting actually Sunday night with hosting a dinner. And so we wanted to release today, and would like this call to basically focused on the quarter, because Tony Earley is actually going out to AGA. We usually haven’t been able to get Tony to that event, but he’s coming out this year. He’s going to make a presentation on Monday. And our intent is to holdback questions relative to broader issues, whether it be regulatory items or broader strategic questions. You know, we’ll be more than happy to handle those at AGA.

So let me kick this off, on page five of the presentation, which hopefully you do have, and it is now out on the web. When you normalize the quarter results for non-recurring items the quarter came in at $1.06 per share compared to the $1.12 per share last year. Within the quarter there are very strong non-regulated earnings driven primarily by [sinfields] and our trading operations. This has been personally offset by weakness at Detroit Edison and ongoing price pressures of MichCon.

For the quarter cash flows were positive and came in very strong. As we’ve said this is going to be a challenging year, but we are on our game plan. However, much of the year is still to play-out. We only have one quarter behind us, but we are maintaining our guidance at this time on a comparable basis to reflect the fact that ITC is now going to be classified as a discontinued operation. And so, again, on a comparable basis we’re holding our guidance.

So with that set-up, let me turn it over to Dan who is going to take you through some of the details for the quarter.

Thanks, Dave. And good afternoon to everyone.

As David had mentioned, this quarter contained a number of non-routine, non-recurring type items. So in order to gain a better understanding of their nature before discussing operating performance I’d like to walk everyone through the one-time transactions and accounting changes that affected DTE’s first quarter reported results, on the next few slides.

So beginning with slide six we’ve grouped these items into categories that reflect their nature and where in the income statement they’ll be located. Our non-recurring or one-time items that are not reflective of future earnings performance are the loss recognized on thermal energy, our steam heating business, the pre-funding contribution we made to our foundation efforts. This continues our longstanding commitment to the community in which we serve which was directly attributable to the proceeds available from our gain on sale of the transmission business.

In addition, we also established a reserve based on the determination by the MPSC related to our storage [decrement] [ph] in 2001 as part of going back on the GCR. Our conversations and efforts on this issue continue.

Within the category of discontinued operations we included our divestiture of the transmission business. This is composed of two months of operating earnings and the accounting gain on sale which is reflective of the net book value of the assets sold, the related gains sharing, transaction costs, and goodwill write-offs.

The classification as discontinued operations will also affect the presentation of 2002’s results within our financial statements to provide a similar basis for comparison. Continuing on, as a means of providing a better indication of quarterly operating performance we will be adjusting our summaries for a timely related item that represents the effective tax rate entry at DTE. This adjustment at the parent normalizes our overall effective tax rate in line with tax credit generation and pretax profits.

If you will recall this is done quarterly and does not affect annual results. It has a zero impact to earnings for the year. Changes in accounting principles also affected first quarter results related to the rescission of EITF 9810, ‘accounting for contracts involved in energy trading and risk management.’ This primarily impacted our inventory accounting methodology and had a negative cumulative affect in the first quarter, with a related offsetting impact in energy trading gross margins, as much of the inventory and, or contracts were delivered and, or settled in the first quarter of 2003.

FAS pronouncement 143, ‘the accounting for asset retirement obligations,’ also had a cumulative affect in the first quarter, and it represents the present value of future legally required retirement obligations of DTE’s assets. This affect is non-cash in nature and has a minimal affect on operating performance going forward.

Now moving onto slide seven, in the financial results for first quarter 2003. Reported GAAP earnings were $155m or 92 cents per share. As we mentioned earlier, these results were impacted by numerous items which are detailed in the financial [log]. The loss on sale of thermal of eight cents, contribution to the foundation related to the ITC proceeds of six cents, disallowance of GCR gas costs of 10 cents, changes in accounting principle with its related offset below of nine cents, the impact of the transmission divestiture including two months of earnings totaling 44 cents, the tax rate normalization of 27 cents, and the impacts of the aforementioned accounting changes. Operating earnings as David mentioned, first quarter 2003 after these adjustments was $1.06 per share.

Now moving onto slide eight and the breakdown of first quarter by entity. Regulated gas had the largest contribution related to the first quarter seasonality of their business, largely driven by heating season gas sales. Higher pension and healthcare costs negatively affected both regulated utilities. Within our regulated electric results there were higher costs related to improvements to our customer service processes and increased outage related costs due to the sequencing of outages year-over-year. Or said another way, we did more scheduled maintenance early this year than we did last year.

Margins were also negatively impacted on the electric side due to higher wholesale electric prices driven by the high price of natural gas. We traditionally do not fully hedge the shoulder months of the year. Mitigating some of these declines were higher non-regulated earnings contributions. Increased sinfield productions and credits retained drove DTE Energy Services’ net income higher. The higher wholesale market prices also resulted in greater realized margins on the power delivered in the first quarter positively benefiting our trading operations. So as you can see, the above are very good examples of the diversity and balance in our portfolio which the many facets to our business can support and complement each other.

Continuing onto slide nine, and the view of the business for the first quarter. This charge shows the largest contribution for the quarter within energy resources, both regulated and non-regulated at 62 cents per share, followed by energy gas at 50 cents per share. The makeup of these areas follows the drivers that I discussed on the previous slide.

Now continuing onto slide 10 let’s take a look at 2003 as it compares to first quarter of 2002. Beginning at the top, reported earnings for 2002 were $1.24 per share. In order to provide a common basis for comparisons, adjustments for the effective tax rate normalization and discontinued operations impacts were also made similar to 2003 to arrive at an operating earnings for first quarter 2002 of $1.12 per share.

Some of the major changes in 2003 include a 12 cent per share decline in the electric margins due to weaker margins on the electric side related to higher purchase power costs and margin loss due to choice, a portion of goods was deferred as a regulatory asset. This was $6m in the first quarter.

We had a 26 cent per share impact of higher O&M driven by higher benefit costs, customer service improvements, and outage maintenance work, which were also partially offset by lower storm restoration costs in 2003. The customer service and plant maintenance items are primarily timing related within the calendar year of 2003. An incremental 12 cent per share contribution from our regulated gas business due to weather sales up side but was mitigated somewhat by higher pension and benefit costs. Some of the other changes are related to other costs within regulated gas, a portion of which also represent re-timing within 2003. Non-regulated earnings increased 16 cents per share driven by sinfields and trading.

Operating performance of the quarter was down six cents per share from comparable 2002 levels, excluding one-time transactions and accounting changes. Overall, the first quarter posted reasonable results with weather up side and favorable non-regulated growth. Mitigated somewhat by higher wholesale electricity prices within the regulated utility. A portion of the O&M change is timing related within the year so we expect to more than make-up the shortfall for the first quarter of 2002.

Continuing onto slide 11 is a summary of cash flow for the first quarter 2003. As you can see, performance was strong with improvements in cash from operations and proceeds from the ITC divestiture. For the year cash flow is dependent on the timing of sinfield monetization and maintaining good working capital management.

So now stepping back in the quarter overall, we feel comfortable with our earnings progress to date and are very pleased with the successful closure of the ITC transaction and the actions taken to strengthen our balance sheet.

Now transitioning to the earnings outlook for 2003 on slide 12. Some of the key themes around the guidance update include, as David mentioned earlier, we are maintaining 2003 guidance on a comparable basis, and reflecting ITC status as discontinued operations in order to aid in the transparency and the understandability of our communications throughout the rest of 2003.

Also, based on first quarter performance the mix of operating earnings in 2003 will likely change as parts of our business track ahead or behind of initial projections. We’ll also outline early into the year some of the emerging challenges and the uncertainties we’re seeing yet to play out.

And so without further adieu, now getting into slide 13 with an update on our operating guidance to reflect ITC status as discontinued operations. Using our previous guidance as a start point we are recasting our projections to reflect the sale of ITC. Remember, the earnings impact of the business overall is considered part of our operating adjustments in the category called discontinued operations. Our original guidance was established before the sale of ITC and reflected full year steady state earnings contributions. The first two bars reflect these adjustments. Removing the months of January and February, and the projected remainder of year earnings.

The next two bars represent the value gained from the cash proceeds for ITC in the short term in the form of interest savings on debt retirement and pension expense reductions as a result of our prefunding actions. Now that we have sold ITC our 2003 operating earnings from continuing operations is expected to be in the $3.75 to $3.95 per share range consistent with previous guidance for these related businesses. Again, we are maintaining our guidance for this year on our base non-ITC businesses, and only reflecting the impact of the ITC sales to operations with the large one-time gain being held separately. Over the longer term our intent is to prudently reinvest the ITC proceeds in businesses with comparable or higher returns.

Moving onto slide 14 and the view of 2003 encompassing all the items that will be included in reported earnings for the year. Beginning with the operating earnings guidance previously seen on slide 13 of $3.75 to $3.95 per share, we add the impact of the ITC sales, both the gain and two months of earnings, then adjust for the foundation contribution related to the proceeds. To pause here, as a quick mental note, the first two items on this page, the gain and the contributions to the foundation coupled with the impact outlined on slide 13 yields a net improvement to 2003’s original guidance for ITC impact of 23 cents a share. That is the 44 cents, less the six cents, and the 15 cents from the previous slide, and so it had an accretive impact to the year.

Continuing on the non-recurring items and accounting changes are similar to those I outlined previously. In addition, we are anticipating closing on the sale of some other smaller, non-strategic assets which could yield seven cents per share up side to 2003. Based on these items our reported earnings should be in the $3.95 to $4.15 per share range.

Continuing onto slide 15, and the anticipated makeup of 2003’s operating guidance. Based on first quarter indications and our rest of the year projections we expect our non-regulated businesses to perform in the $250m to $260m range. A step up from prior levels capturing first quarter’s performance. Our gas business should also be up due to weather related gas sales, but our regulated electric projections are lower reflecting first quarter margin performance and continued cost pressures, whether they be weather related in nature or continuing margin pressures that we see throughout the remainder of the year. Again, much like the first quarter, our full year view reflects a supportive and complementary portfolio of businesses working toward common goals.

Moving onto slide 16 and some of the key assumptions and sensitivities for 2003, on the left side are some of our planning assumptions with updates on the right side that include the economic growth in our service area continues to track original expectations, customer choice is at nine percent penetration and with continued migration expected, we booked a portion of the regulatory recovery of choice in the first quarter, as I mentioned earlier. Early into the second quarter we have experienced weather restoration issues due to ice storm outages which affected over 400,000 of our customers over a period that spanned up to seven days. We are working to find offsets for these costs for the remainder of 2003.

Continued progress on the sinfield front in our monetization efforts. The [Firmy] [ph] outage is nearing completion, but will come in probably slightly above budget. Our summer power and coal needs are thoroughly covered for the year.

In addition there are a few factors that will also continue to play out over the course of 2003, and slide 17 summarizes a few of them. The strength and nature of the summer cooling season, reliable performance of our power plants, also further unanticipated storm restoration needs. In addition, staying focused on cost control and the bottom line, and finally, continued economic growth over the remainder of 2003.

Now at this point, I’d like to turn it back to Dave, who will finish up the remainder of the update.

Thanks, Dan.

On page 18 I would like to give you an update on our financial objectives. First, we ended the quarter with leverage of 51 percent, well within our range that we stated previously of 50 to 55 percent leverage, and continue to maintain our strong BBB+ rating. Cash flows, as Dan indicated, were very strong as a result of solid cash flows from operations and reduced capital spending. As we previously indicated, we did contribute $222m to the pension fund, and we have reaffirmed our dividend of $2.06 per share. And then last on this page, we continue to follow a disciplined approach to investments, risk management, and internal controls.

Let me wrap-up on page 19, and then we’ll open up for questions. The first quarter included the successful divestiture of ITC, our thermal business, and reflected two accounting changes. As you are aware, as far as what Dan is taking you through, reported earnings when adjusted to an operating level reflect a modest under performance to last year’s results, however, we’re still on our game plan for this year. And even reflecting just on the quarter this was a decent quarter for the company.

The year has always been characterized as challenging. We’ve worked hard at DTE to create a culture that attacks unforeseen events, and looks for offsets. I mean we’ve shown this track record over the last several years. And when something shows up at our doorstep that was unforeseen we’ve worked hard to reduce budgets and look for ways to get back to our numbers.

And so with each new challenge that showed up this year we’re working very hard, harder than we’ve ever worked to offset these new challenges, and we’re going to continue to do that. We’re in the process right now of scrubbing down our budgets to say some of the things that have come up this year, including this most recent storm, as an example of, you know, what we can do in terms of discretionary spending or timing to reduce internal spending to offset that.

So given that, we’re maintaining our guidance for the year on a comparable basis. As we’ve indicated, the balance sheet remains strong. This allows us not only to continue to meet our financial goals, but allows us to be very flexible and opportunistic in this market. As I indicated, Tony is going to provide an update on Monday at the AGA. And in addition to that, we will provide a strategy and guidance update mid-year in New York. We’ll do another mid-year Analyst Meeting at the end of July or early August.

And so wrapping up, thanks again for listening in. We’ll now take your questions. And again, I’d like to remind you that we’d like to keep the questions focused on the first quarter, and we’ll address broader issues Monday at AGA.

So with that, Cassidy, we’d be happy to open up for questions now.

No problem. (Caller Instructions.)

The first question comes from Andrew Levy with Bear Wagner.

How are you guys doing? Just a couple of questions. Can you give any second quarter guidance?

No, Andrew, it’s …

I know it’s to the first quarter, but I asked the question anyway.

You asked the obligatory question, I’ll give the obligatory response. Yes, it’s May 2nd. We haven’t really closed April. It’s really too early to tell.

Okay. Any updates you can give us on the sinfield as far as on the tax side? Whether there is any IRS investigation, or any type of update on anything else?

In terms of sinfields let me just cover this right now. As you are aware we’re in the process of monetizing the units. We are still actively negotiating with counterparties on that, and actually have a couple of transactions that are fairly along in the process, and we’re hopeful that we at least will have one or two of the sinfield monetizations closed in the second quarter.

In regard to your question on the IRS, the only new news there is the IRS has temporarily stopped issuing private letter rulings. They are looking at a very specific question regarding chemical change standards. And so right now they’ve temporarily stopped issuing private letter rulings, but we have PLRs on seven of the nine machines that we have. And so that’s one minor new news item that’s come up on that front.

Okay, and basically, I guess what I understand from that right now they don’t have the money to do the investigations, and so even the investigation is kind of on hold right now. Is that correct? Or is that moving along now?

That’s not my understanding.

Okay.

They have retained a chemical change expert. And it’s our understanding that they have communicated to us that they want to resolve this very narrow issue rather quickly, and so we believe that this will be closed up by the end of the second quarter.

Okay, and you’re not the only company involved in this right?

Right.

And let me just look at my list – I think that’s it. Any – last question – any comment on common equity? I mean you’ve done some, are you kind of done at this point?

In terms of issuing equity?

Either common or some type of convert?

You know, we issued equity proactively last year.

Right.

And right now, we don’t foresee issuing equity. The only circumstance is as we’ve indicated before that because our balance sheet is in such great shape if we ever came across a transaction that was beyond what we could fund, you know, with debt capacity. You know, we would obviously look to issue equity. But there’s nothing on the horizon or on the planning board at this time. And so the answer would be, you know, on the unseen future, the answer is ‘no.’

Great, have fun in Scottsdale.

Okay, thank you.

Our next question comes from [Carrie Stevens] [ph] with Morgan Stanley.

Hi, Carrie.

Hi, good morning, or afternoon. I want to ask a couple of questions about the quarter, and then about guidance. First, what is the impact of weather versus normal?

In the first quarter, first is normal, there’s a three cent positive impact.

Okay. And then what is your estimate for the storm cost?

Dan, do you want to go through that?

Sure, Carrie. Right now, the net impact to O&M [the April] that is, is about $24m in gross terms. Now we have some budgeted storm costs that are going to cover a portion of that. We’ve had some work that we’ve had to defer in lieu of storm which should help offset it. The distribution group is also looking for offsets. Right now we see to the at 24 of [Erisca] [ph] anywhere from about $5m to $8m that we’re going after to find further cost reductions.

Okay. Then going to last year’s operational earnings. I understand the adjustment about the transmission. But what I am confused about is this tax item. Last year you would have said your operating earnings was $1.24. And so I am trying to understand how you’re treating this tax impact. Because from what I understand it evens out during the year, and so why we’re adjusting for it now confuses me.

Well, the – let me back-up a little bit, because we’ve had to explain this. The way the accounting works for tax credits, we earned credits on a production basis. And then, and if you look at last year the production was ramping up all year long as the sinfield machines were coming on line. Our production has now peaked, and actually during the year this year as we monetized even though production will stay level credits retained by DTE will go down.

And then, basically, what we have to do is normalize the effective tax rate to smooth that out during the year. And so it means we have these quarter adjustments. It doesn’t affect income in the year, but what’s going to happen this year, actually, is we are pushing some credits that we have generated. And we will recognize those later in this year.

And so what we’re doing is when you’re looking at quarter 2003 over 2002 we took the impact of that smoothing in both years out to try to get them on a comparable basis. If you’re looking at an annual year, analysis year-over-year you wouldn’t see that. It only happens when you look at quarter one-over-quarter one to try to get those on a comparable basis because that effective tax rate adjustment is actually slightly different in each year.

Do you have …

Carrie, the convention that we will use going forward – this is not just something we want to do this quarter. When we show second quarter …

Right. Well, do you have the adjustments then for the numbers for all of last year so we can make sure that we are accounting for that?

I am sorry, say that again?

Do you have the adjustment for the three quarters of ’02, you know, second through four, so that we can take that into account when we’re setting estimates going forward?

Yeah, we can provide that. I don’t have the …

Okay, that’s fine I’ll follow-up offline. Okay, and then lastly, on annual guidance, I am a little bit confused as to why you are now taking the transmission income out. I believe that great expectation and from discussions with you that you knew the sale was going to take place, why had you been talking about higher earnings previously that now you’re guiding towards? Because from what I remember was the basic impact of the transmission sale was supposed to be somewhat, you know, very slightly dilutive, not as dilutive as you’re now talking about. So what has changed from previous guidance to guidance now?

Well, when we were in February at the Analyst’s Meeting, we tried to make clear that the assumption of the ITC in the business was baked into our numbers for the year. What’s changed is that the transaction happened. And we decided not preemptively to classify ITC as discontinued operations because the transaction wasn’t closed. There was a lot of uncertainty around the regulatory approval of the transaction. Once you have that, you think, as you know, reclassify those earnings into discontinued operations.

Well, yeah, I am just looking at some presentations, and I don’t really see that footnoted that clearly. I guess was your, were you always expecting this much significant dilution from the transactions?

We expected that the cash that we would use in the short-term would be deployed to reduce debt, which in today’s interest rate environment is a pretty low return. And so once the transaction closed the accounting treatment of discontinued operations made it clear that those earnings get pulled out.

Okay. And then, I guess, just a further point on this, I mean it seems to me that there may be other areas of weakness in your business that may have come up, that maybe this transmission is kind of masking? I mean it seems to me that this is just such a large number. I mean there is some accounting here for some weaker margins in the first quarter. I guess you had a number on unplanned outages, and you were short-powered, is that correct?

Yes, the transmission, taking out the discontinued operations, the earnings is not masking anything else. The underlying assumptions with the mix adjustment are, you know, are on target. What you see in the first quarter is some deterioration in gross margins because we had higher power prices and gas prices as we were trying to buy powers for plants that were out, in scheduled maintenance.

Can you quantify that maybe then? How much was the impact from the unplanned outages? And how much was the impact from being short power during higher rate periods of time?

The total impact on gross margins for the quarter was about 13 cents. The vast majority of it was due to the higher power prices that we experienced in the first quarter. There were some other ups and downs. There was another down which was customers going to [choice], you know, we lose some gross margins. We also had some good news from the economy and the weather, and so those kind of washed.

Okay. And then lastly, can you provide us with your ’04 hedging statistics?

’04, power we don’t have hedged for ’04. And coal we’ve got – do you remember the number? I don’t remember the coal number off hand, Carrie.

My recollection is in the 60 percent range.

Sounds about right, yeah.

Okay, and so your natural short position is about 1,500 megawatts in the summer?

Yes, about 1,200 to 1,400 megawatts.

Okay.

Carrie, this is Dan. I just want to also mention too, a lot of our outages in the first quarter were planned. In the shoulder months we are naturally short because we get our power plants in shape for the summer cooling season.

Right.

We are in the market buying power during scheduled outages, and so I just didn’t want to leave the impression …

Right, but I thought you had always talked about being 100 percent hedged for ’03. But I guess that’s in the summer.

Summer months.

Summer, right. And so, if we’re short in the shoulder months the impact of higher prices have ...

Can you generally talk about how short you would run in the off-peak or the shoulder period?

I don’t have the volumes, the purchase volumes off hand on the shoulder months.

All right, thank you.

Thanks, Carrie.

The next question comes from Neil Stein with John Levin and Company.

Good afternoon. The first question, I just wanted to follow-up on what Carrie was asking. You know, I seem to remember pretty clearly it was previously that applied from earned on the pension contribution would kind of offset the lost earnings from transmission, I guess would be a little bit of debt [inaudible] in ’02. And therefore, the transaction [inaudible] earnings. Am I not remembering that correctly? I mean it’s very possible you’ve recalculated it and [inaudible].

Let me take a shot at this, Neil. Back in February there were, there was a fortunately, a transaction that we reinvested, and we counted as part of guidance. And it was going to serve to offset the foregone earnings. But clearly when we walked the group from operating to reported there was a ITC net gain net of foregone earnings included in our update in February. And so, clearly, there was an implied this year, at least, we have a large one-time gain using the gain and the proceeds to reinvest in business to go over the long-term to replace the ITC earnings going forward. And so we showed the gain of foregone earnings.

I mean are you, when you refer to a gain are you talking about a the accounting gain? The excess over book?

Yes.

Okay. Because I seem to remember separately you also were just saying, you know, the return on the pension contribution would, you know, plus whatever interest [inaudible] would be equal, whatever you were earning from an operating perspective [inaudible].

This is Dave. I don’t recall saying that. We – and on page 13 of the presentation you see the actual numbers. We always knew that the pension contribution would generate about an $18m savings which comes in at seven cents per share.

The interest component back from when we started talking about this, we probably have lost a little bit there. You know, when we pay-down debt here, and we’re paying down our CP program that, you know, at a percent and a half to two percent, clearly got a little less of a net savings off the interest component.

But as we were describing ITT for 2003, you know, it was clear that we’re selling this business, we’re going to lose the earnings from the date of sale forward. We’ll have some offset this year which was 12 cents a share. But there is a slight negative drag this year. And you know, one of your counterparts brought that up as a question. And we said ‘yes, that’s true, but for this year we do have the gain on sale.’ You know, we think conceptually. We get to match that going forward that’s not reasonable. 2004 and forward those earnings aren’t there, and we will be looking for opportunities to reinvest the proceeds from ITC.

No, that’s fair.

Okay.

Just another one. You know I guess the $6m regulatory asset in the first quarter. Is that straight line over the course of the year? Does that mean you’ll book $24m over all of ‘03?

No, that’ll vary over the course of the year. We originally estimated, I think about 40m over the course of the year. And so, you know, that will vary, and you can’t take that …

What do you [inaudible]? Could I ask about how on the regulatory front, or do people have to wait till Monday to hear about this? The collaborative process, you know, trying to actually, you know, get those lost margins [inaudible] by customers?

Yeah, we’re going to go into a lot of detail on that. And Tony will be doing an update on a bunch of fronts, including the full picture on the regulatory front. And so I’d really rather defer that. We’ll do a better job and can address it in the context of the full update.

Okay, thanks very much. Have a good weekend too.

Take care.

The next question comes from [Terry Shu] [ph] with JP Morgan Fleming.

Yeah, hi, Dave. I guess I wanted to also ask about this guidance issue, because it was a bit confusing. I think at your New York meeting in various, I think, conversations the assumption was that we all knew about the pending transmission sale. And it was incorporated in guidance, and you were supposed to affirm how we’ll re-deploy it. But most likely just pay-down debt. As you said, the interest rates are so low the savings aren’t that much. And, but that’s kind of known even then.

And so I suppose since it’s been rehashed it’s basically maybe some misunderstanding. And the fact that there’s some further deteriorating trends with added costs in the wholesale market, et cetera, et cetera. Is that a fair comment?

Well, first of all, I want to acknowledge that there might have been some confusion.

Right.

You know, back when we talked about from the beginning, the guidance, if you went back to the original guidance of $3.90 to $4.10 we initially gave in July of last year. Transmission sale at that point in time was a hope. And even as the year went on, and even all the way to February it still wasn’t clear because of the first kind of a transaction like this in the United States when it really happened. And so our guidance was a business as normal guidance, and said ‘if we sell this we’ll have a large gain on sale and a large cash infusion, we will lose the earnings going forward.’

Right.

And you were the one that asked the question about how about replacing those earnings in 2003?

Right.

And the answer was we were going to invest in the pension plan, we’ll pay-down debt, we’re going to look for opportunities to replace those earnings, and it’s still possible that we might make some investments this year that can put a dent in a little bit of that 15-cent drag for this year. But that might happen, and it might not happen. Because as you know, we’re pretty disciplined about deploying our capital.

You know, we have several things still that we’re looking at that Tony will talk about, and we’ve talked about this before, including, you know, some [coal fired] operations, and this energy services project was one of the big three. And so that has a possibility still of happening this year, and there could be some earnings this year, and that would help offset some of that. And it might not.

Right, perhaps it was sort of some misunderstanding then, because it wasn’t entirely clear. And now that you explain it each of us could have interpreted it a different way. And so that’s a fair comment. And so, okay. I just wanted to sort that out, because it seemed a little confusing at first whether or not the guidance was, in fact, changed. Okay, thank you.

Thank you.

The next question comes from [Zach Schreiber] [ph] with [DuKane Capital] [ph].

Hi, David. Hi, Dan.

Good.

I guess just on this IRS private letter ruling, chemical change expert. I would imagine that that only applies to the sinfield plants that have not yet received a private letter ruling? And I recall you have nine plants and seven of them have received private letter rulings, is that a correct statement?

It applies to plants that do not have private letter rulings. But as we sell or monetize these machines we always go back to get the PLRs reconfirmed, and so it could also apply to getting PLRs reconfirmed.

But I just want to, you know, remind everybody that this has happened in the past. Two years ago the IRS stopped issuing private letter rulings, and they did a very detailed review on a broad basis. You know, including at that time they looked at chemical change. The outcome of that was that they reconfirmed their position and started reissuing and reconfirming PLRs.

And so we’ve been here before, and as I said, they’ve retained a chemical change expert. And you know, we’ll have to look at this with them. Now, we think as in the past we’ll be able to work through this in the next six weeks or so.

What do you think it is, David, that led to the IRS sort of going back and checking the whole chemical change? I mean has there been anything that they’ve found in other companies, that sort of led them to the chemical changes weren’t quite chemical changes?

No, I think they just haven’t got here yet. You know, we’ve said in the past the question has come up, you know, ‘will your sinfield operations be audited?’ And the answer was ‘eventually they will be audited.’ And it’s just a natural occurrence.

And when they looked at chemical change in the past, you know, they’ve – this is something I’ve just described, it’s something that’s happening in the due course of business. Eventually they were going to get to the point where they wanted to understand the standards around chemical change, and then the testing methodology to verify the actual chemical change happening in accordance with the PLR.

We do that, we have two labs that test on a regular basis, and we have an outside counsel, and we’ve had auditors go in to say ‘are we testing in accordance with the methodology?’ And so we’re comfortable that we operate our machines in accordance with the PLR, and we’re going to just have to work through this.

And so that sort of puts some of these transactions on hold for six weeks, and you’d hope that within six weeks you can resolve this issue on the chemical change, and then you’d consummate some of these monetizations in the second quarter?

When you say transactions on hold I …

I mean not on hold, I guess.

No, no, we are still in negotiations. The sell-downs that we have have always been subject to reconfirmation of the PLRs, and we’re still at this time we have no reason to believe that we won’t continue on the monetization.

And so the sell-down that you did in ’02 was subject to the PLR reconfirmation?

Yes.

Okay.

And they were.

They were reconfirmed. Got it. What is your operating cash flow forecast for 2003, and what is the sort of increase in that cash flow that you assume you get from being able to move the sinfields from a sort of income but non-cash tax credit into a cash royalty stream?

The forecast for cash flow from operations is roughly $1.1b. And if we were not able to monetize additional machines this year the range is $300m to $400m of lower cash flow. And so we would have lower cash from operations from this.

Okay. And just, on the coal hedging, what kind of assumption are you making? I am not going to touch the regulatory button, because you told us not to. But just what kind of assumption are you making in terms of the PSCR being in affect, or not being in affect, for 2003?

And is there any, you know, coal market price risk at all here for 2003 on the unhedged as the coal moves up in sympathy with gas? Or would you say that you don’t have any exposure on coal no matter what the regulatory paradigm is for the balance of 2003?

We -- our coal purchasing, as you know, we have long-term coal purchase contracts and long-term rail contracts that we -- our purchasing philosophy is independent of regulatory. And I, at this time, there’s been no indication with the majority of our coal being, you know, the Powder River Basin coal that we’ve seen any spike-up relative to gas prices in the forward curve for coal, it’s not moved.

Okay, great.

It’s been pretty comfortable there.

Great. That’s it. We’ll see you in Scottsdale. Thanks so much.

Okay, take care.

The next question comes from [Vidula Murte] [ph] with SAC Capital.

Good afternoon.

Good afternoon.

Let’s see, in trying to get back a little bit to this confusion over transmission. I guess when it had been discussed about conceptually, if you go back, discuss even back to last July. You had indicated that if it were dilutive you would not be pursuing that. And so I guess, now I guess the question is that when you look at your plans here that how long would you say it would now take given the, you know, the menu of things that you’re looking at before you feel like you can effectively re-deploy the capital and, you know, fill-in the hole that we have?

First of all, the divestiture of the transmission business made good business sense. And that’s what drove our decision to divest. It made good sense, because it was not an asset that was strategic, and we got an attractive valuation. And so that’s what drove the decision to divest that, you know, that business.

In the short term we have the immediate advantage of that cash and the positive impact on our balance sheet. And the redeployment in the short term of that capital, and some fairly low returning assets to short term debt.

As we’re also very active, as you know, looking for opportunities in the marketplace to grow our business throughout that acquisition. It’s just not possible to say when that’s going to happen, and to what degree. So I can’t put a number on that bucket of capital, when it’s going to get deployed, and what kind of returns it’s going to generate. But the discussion we’re having is important, but what’s more important is that the divestiture of that business was a very good business decision and still is.

Because I guess what we’re trying to, I am trying to get a sense of here is if a redeployment does not appear possible, you know, any time in the near future then, in fact, you know, the base that you’re talking about now is, in fact, what we should be using going forward for 2004 rather than something higher which would reflect some kind of a redeployment. And so I am just trying to make sure that we’re working with the appropriate baseline here?

Yeah, I mean that’s fair.

Okay, and so you would agree that now the appropriate baseline is more 3.75 to 3.95 as opposed to your previous outlook which, you know, would have effectively had assumed that the capital from transmission was re-deployed at a comparable rate of return?

$3.75, $3.95 is a good base. To think of our current earnings power of our existing business. How much growth comes forward from utilities will be dependent on the outcome of the regulatory proceedings, and we’ll talk about that on Monday. How much growth comes from existing businesses, and then new derivative businesses like our coal bed methane, and our new [waste coal] business, we’ll talk about.

And then, still the open [questions] are the opportunities on asset acquisitions. And that’s more difficult to predict we are going to be very, very selective in how we invest and when we invest. And we’ll talk about that, again, on Monday. And certainly, you know, every time we get together we’ll be able to update you.

But I can’t tell you that I will take the $500m from ITC and invest it through asset acquisitions by a certain date, because that’s not how we operate. We haven’t, and we’re not, we’re going to stay disciplined in this market. There’s a fair number of opportunities out there, but I can’t tell you whether I invest the dollars this year, or next year, or at all.

The flip side is we’ve also consistently said if we don’t find opportunities, and we have excess cash flow, we’re more than happy to return them to shareholders in terms of stock buyback or even consider a dividend increase at a point in time. And, but, again, it’s way premature to, you know, even think about those opportunities because there’s a fair number of investment opportunities that we’re currently looking at.

Okay. And maybe two other things here. And if they’re more appropriate for Monday, you know, we’ll deal with them then. You discussed the potential of filing a full-blown rate case in Michigan here, perhaps by mid-year. What is the status of your thinking there?

We’ll talk about it Monday. There’s nothing there to talk about now on it.

And is there anything more you can discuss in terms of coal bed and waste coal opportunities, or is that Monday, as well?

Yeah, well, we’ll go into that and update the progress we’ve made since we’ve talked in February. It’s part of the presentation, as well.

Thank you, very much.

Thank you.

The next question comes from Daniele Seitz with Salomon Smith Barney.

Hi. I was looking at page 10 where you show that O&M expenses just [shaved] 26 cents on the regulated electric. Could you tell me which is seasonal, and what is not, and what was – how much of that was above your target?

The O&M on the regulated side was a combination of increased pension and healthcare costs, which we’ve talked about before.

Right. But can you give me a bit of a flavor as to how big it was, like 26 cents?

Yeah, let me give you a sense. So when you look at the income statement there’s an O&M differential versus a quarter ago. And there’s about 90m that is due to increased O&M at Detroit Edison.

And so when we look at that piece, and that’s a pretax number and so it’s not going to be directly comparable to 26 cents. There’s about a third of that from pension and healthcare [products].

And another third that is the costs related to plant outages. That’s something that you’ll largely be [re-timed]. We did most of that early rather than later in the year as we usually do.

And then there were some other portions, costs related to customer service improvement, and insurance, and some other things.

And so would you say that two-thirds of that is actually likely to be finding itself again in future quarters?

Well, the first chunk that we talked about, the pension …

The pension we will.

Yeah, that’s the piece. You know, this is basically the chunk, you know, year-over-year last year we said it’d be about $140m pretax. And so this is kind of that plan out in the first quarter.

Okay. And also, if you are going to be successful in selling this same [shared machine], do you, is there something that you have in your budget for the second quarter that’s already there, or is it going to be in addition? I mean where are those sales planned, or are they in your budget? I mean in your forecast?

Yeah, we’ve assumed that that three to five, would occur over the course of the year. You know, we haven’t timed it in any particular month or quarter, but that’s really a cash issue, as we’ve talked about before.

Yes.

And so you shouldn’t see any quarterly impact from the positions of both utility versus not.

Yes, okay. Thank you.

The next question comes from Paul Ridzon with McDonald Investments.

I understand the chemical change requirement. I think that the IRS wording is ‘significant chemical change.’ Can you give some flavor as to, you know, how much interpretation there is around significant? And how you deal with that variability in your own internal assessments when you qualify a batch of coal as having met that?

I probably have said as much as I can say about this now. You know, there’s a standard approach to this, there’s a methodology. It’s detailed in the private letter rulings. We operate the plants within the private letter rulings. And we are comfortable that we meet that standard. And that’s probably all I can say at this point in time.

And just remind people, we’ve been here before. I mean this whole issue of private letter rulings was cleared up several times. We worked with the service, and we’ve been successful in prevailing. And chemical change came up two years ago. We’ve worked with them. We’ve got seven private letter rulings, and two reconfirmed as part of our sales process where they’re re-determining this chemical change standard. Now the original seven plus the two sell-downs, nine times.

And so I am trying not to make this a larger issue than it already appears to be. And I think the more I answer questions I am going to make this seem like a big problem, and I don’t want to do that.

So you don’t view there being a lot of interpretation is, I guess, how you …

No.

Take away. Thank you very much.

At this time, there are no further questions in queue. Mr. Meador, please continue.

Well, thank you very much. Again, one more time, we apologize for this starting late. We’ll take care of our technical problems, and we look forward to seeing everybody in Scottsdale starting Sunday night. Take care.