密歇根天然氣 (DTE) 2004 Q1 法說會逐字稿

Welcome to the DTE Energy quarterly earnings release conference call. (OPERATOR INSTRUCTIONS) Today's speakers will be Dave Meador, Senior Vice President and Chief Financial Officer. Mr. Meador, please go ahead, sir.

Thank you, Tracy, and good morning everybody. I hope your day wherever you are is as beautiful as it is here in Michigan. We have an outstanding morning.

This morning with me I have Mike Champley senior vice president of regulatory affairs, Dan Brudzynski who you know our controller, Nick Khouri and Peter Pintar, our Director of Investor Relations. Let me start with an overview on page 4. DTE's operating earnings of 89 cents per share is lower than 2003's first quarter due to several factors one being the Michigan Electric Choice Program; lower year-over-year synfuel production and lower trading company earnings. And as a reminder last year, our energy trading business had higher earnings driven by higher trading margins, which was the result of higher electric and gas prices in first quarter 2003.

Detroit Edison's earnings when you back out regulatory deferrals were $17 million that's down 6% from 2003 levels. We ended the quarter at 49% leverage, which is at the low end of our range of where we want to be in terms of leverage. Our balance sheet is in very good shape and we're making progress on the legislative and regulatory fronts. But we worked through the two rate cases and continue to pursue growth subjects in the synfuel sell down program is going according to plan.

Before I turn it over to Dan, let me comment about a couple of items in our reported earnings category. Our communications when we communicate to you in this package are on an operating earnings basis. But we had two items included in reported earnings that I wanted to touch on. When we acquired MCN energy there was a portfolio of assets or contracts that we assumed were out of market or out of our geographic focus or out of strategy.

We've been have you successful in the post merger process and disposed of over $700 million of assets. We have two of the last couple of cleanup items here that show up in reported earnings. First is the write-down of a very gas LDC in Missouri. We took a $7 million charge for this item and we expect to sell this business this year. It's clearly a very small asset and beyond our current focus. The second item comes from our co-energy portfolio that we assumed with MCN energy.

Co-energy had an exchange contracts per seasonal storage and also had a long-term gas transport contract with the same inter-state pipeline companies. Both these contracts had been in a while through 2015 and on a net basis, when you put the two contracts together were out of market. So as part of an ongoing effort that we've been working on to maximize the value within the co-energy portfolio, we were able to terminate both contracts.

And what that allowed us to do was reduce our demand fees on the transportation side of the arrangement and freed up storage for us that we can re-market which is about 8 BCF of storage. This is a very good transaction for us. It improves cash flow going forward 6 to $8 million per year for the life of the contract.

This translates into an NPV of almost $70 million or over 40 cents per share of cash value. The one time gain that you see in reported earnings as a result of de recognition of the unamortized balances related to the contract and we separated that gain, which was $48 million net of tax from operating earnings. So we've set that aside. So with that background on reported earnings, let me turn it over to Dan now who will take you through the quarter.

Thanks, Dave and good morning to everyone. Let's begin on slide 6 and our standard view by business unit. Operating earnings per share for the first quarter of 2004 were 89 cents per diluted share down 17 cents from comparable 2003 levels. Please note that there is a reconciliation as Dave had mentioned to GAAP reported earnings summarized in the appendix of this package. Key contributions for the quarter included energy resources of 35 cents per share, down from 2003 levels.

The power generation part of our regulated Detroit Edison business within energy resources was at 9 cents per share, also down from 2003 levels. The energy services business unit, which contains our coal-based fuels, set of business the contributed 23 cents a share down from 2003 due to lower synfuel production.

The other business unit of significance was energy trading at 5 cents per share, down from 2003 levels. And I might remind everyone that 2003 was a very strong quarter for the trading side of our business, but it was down due to lower trading margins. Energy distribution contributed 13 cents per share in the first quarter primarily in our regulated wires portion of Detroit Edison. This was up in 2003 driven by higher sales and cost containment activities within this business.

Energy gas contributed 44 cents a share in the first quarter of 2004 reflecting the seasonal contribution of DTE's energy gas utility in Michigan. With that as a background and looking at the first quarter by legal entity, operating earnings for 2004 were 151 million regulated gas as I mentioned was the largest contributor to first quarter results due to its seasonal nature related to heating demand. Regulated electric contributed 41 million, while our non-regulated businesses contributed 46 million. Some of the key drivers in the quarter included relatively weather normal demand contrasted to a very above normal in 2003's first quarter.

The continued impacts of Customer Choice including greater loss margins partially offset by the transition surcharges as part of the interim order and additional regulatory assets recorded within the order. The interim order had a base rate increase but was more than offset by the re-instatement of the PSCR beginning in January 1 whereas the rate increase took effect on February 21.

A key driver affecting our non-regulated businesses again was the production profile of the synfuel businesses, which was more front-loaded in 2003's time frame.

Now moving on to slide 8, and some of the details of the quarter to quarter changes beginning with our regulated electric business, as you can see in the waterfall chart, we had operating earnings of 35 million in 2003 as a beginning point and 41 million in 2004 as the end point. From these we have adjusted out the regulatory deferrals between the time periods and I might mention that contained in the appendix we have a summary of regulatory assets for your reference.

With this adjustment you can see performance in our electric business is slightly down year-over-year from an $18 million level to a $17 million level in 2004.

Now moving left to right on the chart, incremental sales growth in 2004 was more than offset by the additional choice margin losses in the quarter. As I mentioned, we did record a regulatory asset to mitigate some of this impact and we are continuing to work through the process of recovery through the regulatory proceedings. The one-month impact of the interim order served to raise rates slightly, but was more than offset by the reinstatement of the PSCR to customers again without a related rate increase in that January and February time frame.

We also experienced lower power supply costs in 2004 due to the abnormally high gas and electricity prices we experienced in 2003. Healthcare and pension expense continue to be on the rise but were mitigated by other factors, such as lower borrowing costs, tax expense, transmission expenses, cost reductions and retimings within the business.

Now continuing on to slide 9, and a brief update on the PSCR mechanism as it was reinstated in the first quarter of this year.

Contained within the interim order, was a restart of the PSCR mechanism. The factor was decreased for all customers. Cap customers had a base rate increase equal to the decrease in the PSCR factor. Although the base rate increases did not take effect until February 21st, there by customers received a rate reduction for this time period as reflected on the prior slide.

Prior to the interim order, during the rate freeze period, wholesale mitigation sales margins were retained by the company. Post interim order, these sales margins will be used to reduce PSCR costs.

The MSTE staff recommendation for final is to allow these mitigation sales margins to offset the margin impact of customer choice but again final determination will not be known until the commission order is received in September of this year. With the reinstatement of the PSCR, the profile of electric margins will now shift. Moving on to page 10, we have a graphic illustration of the impact of the PSCR mechanism. The factor itself is an annual representation of power supply costs.

When market prices are traditionally lower in the shoulder months due to lower demand, we will be over recovered, while in the high demand months of the summer, the opposite will be true netting to zero by year ends. This will create year over year timing differences for 2004 when compared to last year which the PSCR mechanism was frozen.

The 2004 profile of margins should more closely follow volumes throughout the year, as this PSCR adjustment mechanism will true up gross margins to an average over the course of the year.

Now continuing on to slide 11 in the performance in the first quarter of the regulated gas business. As you can see, this business was down quarter to quarter driven by the above normal heating demand in 2003 and also higher uncollectable expenses due to the higher gas prices. Partially offsetting some of these decline were lower property income taxes offer set by higher healthcare and pension costs, as I mentioned on the electric side.

Continuing on to slide 12 in the non-regulated businesses. First quarter of 2004 was down over 2003 primarily due to synfuel production levels in 2004. As I mentioned, 2003 was more front end loaded with credits being retained for DTE's accounts. 2004 reflects a more levelized production profile more key to our monintorizations.

Trading margins were also down as I mentioned and I also reminder that 2003 was an abnormally strong quarter due to the price swings experienced in 2003 in the gas and electricity markets. Partially offsetting some of these declines was decreased profitability at our Coke facilities due to higher coal prices. In this side of the business in our non-regulated portfolio, we are still targeting 194 to $249 million range of earnings contribution from this portfolio in 2004. And with that, I'd like to turn it over to Nick Khouri and a review of cash flows in the balance sheet.

Thank you, Dan, and good morning everyone. Turning to page 13, cash flow balance sheet strength remains a key priority for management and the board of directors. There was continued improvement in cash flow and balance sheet strength in the first quarter of 2004. As Dave mentioned, leverage declined below 50% in part the decline was attributable to the $170 million equity contribution made in the first quarter by DTE to the pension fund. Combined with last year's pension contribution and reasonable assumptions, we do not expect to have a remembered pension contribution for the next several years. As always we retain more than sufficient liquidity ending the first quarter with 900 million of excess borrowing power.

Page 14 details, cash flows for the first quarter of 2004 compared to the same period in 2003. Adjusted cash from operations reached $306 million in the first quarter, 149 million above last year. Part of the increase was intra year timing and one time events, for example, last year's first quarter included a $220 million cash contribution to the pension fund that reduced reported cash from operations while, as I said, this year's contribution was made with stock. On the other hand in the first quarter of 2004, cash taxes were up approximately 145 million, from the prior year, due in large part to the tax bill on the sale of the transmission system.

Adjusting for one-time items and unusual events, cash in the first quarter still showed sharp improvement from the prior year. What were down this year were asset sales. Last year's $612 million of asset sales included the sale of DTE Energy's transmission system. Even with the lower asset sales in the first quarter of this year, internal cash in the first quarter was more than sufficient to cover CAPEX in the dividend.

For the full year, however, net cash will depend on successful resolutions of the rate case and retail choice. Turning to page 15, this page shows capital spending by business line. CAPEX in the first quarter totaled 179 million, down 32 million from the prior year.

The largest driver of the year-over-year change was the 23 million reduction in Knox environment spending. CAPEX is being held close to last year's levels until we get greater clarity on the regulatory front. Now let me turn it back over to Dave.

Thanks, Nick. I'm going to proceed on page 17. On the regulatory front, the MPSE as you know issued interim reason leave for $278 million. The order removed choice credits and provided a 4 mill transition charge. The PSCR was also restated as Dan covered resulting in a net increase of $152 million. On March 5, the staff recommended in their recommendation for final $441 million in final rates or $315 million net of the same PSCR reinstatement.

The staff also recommended an 11% return on equity on $3 billion of equity. Three out the quarter, including this week, the Michigan Senate technology and energy committee, which is the committee responsible for overseeing utility matters held hearings that have been very constructive on public act 141 and Choice reform. While those hearings are going on, we continue to educate and work with the Michigan clear coalition. If you get a chance, I encourage you to visit the web site www.ClearMichigan.org. Note that it is not a dot com which is the coalition's website. Over 14,000 individuals and a 150 businesses have joined the coalition and I believe we've done a good job in raising awareness in Michigan where we have created a growing consensus that Choice has to be fixed.

On page 18 is the regulatory calendar that there is no changes here to what we've shown you previously. The electric case is starting to wind down and the gas case is getting under way with staff interim report due next Monday. Just like the electric case, it's very likely possible that some policy items that are part of this rate case will not be addressed in the staff recommendations for interim and will be deferred to the final filing that they would make. That's the pattern we saw in the electric case and it most likely will repeat itself in the gas case.

But we have to wait and see when the staff report comes out on Monday while we are down at AGA. On page 19, the Michigan legislation is currently considering reform of electric Choice in Michigan. I want to cover some of the principles that we're pursuing in this legislative effort. The first and foremost for us is limiting Choice to a reasonable level. This is something that we've talked about before that we would like to see Choice not only contained but also stabilized in the stability is important. Second factor or principle would be leveling the playing field. We believe in this principle strongly that the playing field is not level today.

This would include items like return to service provisions and reserve margin requirements for all players. Not just the incumbent utilities. Another principle would be transition charges for recovery of economic harm addressing the current skewing of rates in Michigan. And then the last principle would be a social wires charge formed by our customers for environmental and low income funding. We expect legislation to be introduced soon and to be passed this year.

On page 20, I want to talk a little bit about Electric Choice margin impact and recovery over the slide and the next slide. You have to think about this issue in three distinct time frames. First is the time frame prior to interim, which we've outlined on the left-hand side here. Back in this time frame we forecasted a loss of about $240 million, and at that time we said most of the loss would be covered through regulatory deferrals. Now, if you move over to the right-hand side from the interim to final time frame, now we're in an environment where we have new transition charges and base rates have changed. We currently forecast with no other changes if everything else was held constant, this will result in a margin loss of 200 to $220 million for 2004. So we frequently get asked what is the impact of these transition charges and removal of credits on Choice.

On the positive side what we see is the rapid acceleration of Choice's stock and you see a flattening out. But clearly, you know, what's happened here in interim I describe as a speed bump in the process and we are still pursuing much greater changes to the Choice Program because, you know, we have made some success but we have a lot of work to do. Then you see on the right-hand side of page 20 on the recovery for this loss margin would come from base rate transition charges and regulatory deferrals. At the current time to the level of 200 to $220 million of margin loss, there's still a gap and that gap needs to be addressed in final rates or in legislation.

On page 21, we put a chart together that's illustrative to show you how to think of interim in the post final time frame. There are many variables here that we've listed on the right-hand side that we expect to change or to be addressed for the first time either in the final rate order or in legislation. These are Choice margin drivers and recovery methods. And they include things like base rates, higher transition charges, mitigation sales treatment, future rate skewing, regulatory asset treatment and return to service provisions.

When you couple this with other changes like market prices that impact Choice, this makes the estimating of both the gross margin loss and the net margin loss post final very difficult at this point in time. There's a lot of variables at play that we really won't understand until we get to the final rate order and legislative time frame this fall. Now, let me shift then and talk about our non-regulated businesses, which remain on track for 2004. We've outlined the forecast for 2004 earnings here that have not changed. The synfuel sell down program is proceeding as planned and the market is very active.

On the Coke battery front the Coke market is working in our favor improving both near-term and long-term contracts for our Coke batteries. Our on-site energy project with Daimler Chrysler is tentatively closed and project financing arrangements we expect to be finalized within the next month. On the pep tech or waste coal, we are in the process of developing additional sites. This is part of our build-out strategy and we're working on that this year. And energy trading, despite what Dan described as the quarter-over-quarter declines in the first quarter is on track for the year. And we are comfortable keeping our guidance here for our non-regulated group at our target of 194 to $249 million.

On page 24 is a synfuel update we are pleased to announce first of all, that our four units that were under audit successfully completed their audits last week. That's very good news. And on another front with the IRS two of the units that were recently sold we received reconfirming PLRs on those units. We have two good news items on the synfuel front as we continue to move forward on this. Regarding sell down efforts we are in serious discussions with three prospects as we speak.

As you will know, we've already sold 66% of our capacity. And we're optimistic that the sell down program is going to play out this year just as planned. As we've said though, we will not run the units until the sell down happens. And the result is going to be as the profile quarterly earnings is different than last year, where you will know we were ramped up and then we had to back down on production.

You see our profile this year on this chart, it's going to be the opposite. You are going to have back end loaded earnings for synfuels as we complete the sell downs, we'll rap up the units and our guidance remains at 150 to $190 million in net income for the synfuel business line. In summary, our earnings continue to be depressed pending the successful resolution of the Choice reform legislation and the two rate cases.

We're making progress on both fronts. The discussions with all the stakeholders in Michigan have been very constructive. And throughout this period, we continue to focus on our balance sheet, which is a north star for us and is in good shape right now. On the non-regulated side, our earnings are on track, as I mentioned. This morning, we will hold our shareholders meeting at 10 a.m. Tone Earley (ph) will be making a presentation and presenting at AGA at Monday at 4 p.m. Both presentations I encourage you to listen to, including this morning and they can be accessed via our web site at www.dte energy.com/investors.

And Tracy now we would be happy to take questions if you want to open it up for questions.

[OPERATOR INSTRUCTIONS] Your first question is from Paul Patterson of Glenrock Associates.

Good morning.

Good morning, Paul.

I want to understand and clarify couple of things. It sounds like customer-switching levels have leveled off; is that correct?

Yes.

And then it sounds Customer Choice is costing you about 200 to 220 million in gross margin; is that right?

That's right.

What I'm sort of interested in is it we've had some regulatory relief addressing this issue. And I'm wondering how much of that regulatory relief if things were to stay pretty much the same with the most recent regulatory findings, how much, you know, in other words the final order wasn't going to change all that much. What would happen if PA 141 did not pass? How important is it that PA 141 pass for a financial perspective to you guys?

I want to just double-check on your question because PA 141 is the existing law on book.

I'm sorry.

We're looking to actually amend the law.

Sorry about that.

Just as a reminder 141 provides for recovery by the utility of economic harm from Choice. So I want to make sure I understand your question. Because if nothing else happened and Choice leveled out and we continued to book regulatory assets, I don't think that's the path this is taking. You would have Choice at some level and we would book regulatory deferrals with them that would be charged to some group of customers over some time. That's not the path we think we're pursuing. We are pursuing a path that would have higher transition charges as an example and we don't think, you know, the interim went far enough in terms of addressing some of the Choice issues.

In other words, I guess that's where I'm wondering. Where did the interim fall off and where do you feel that it specifically did not provide enough recovery. And I guess what I'm wondering is that when you say you just booked to full, I guess what you are saying is, did than you have to go through another rate case, another projection to actually recover those deferrals. I mean how would you actually change those deferrals into cash and what kind of manner we are talking about at this point in time?

Let me start to answer this and then I'm going to ask Mike Champley, who heads up our regulatory group, to give me some help. Part of the background on this is we have to realize that starts with rate de-skewing in Michigan. Michigan had this history of pushing down very large industrial rates, residential rates were held low and our middle group of customers, small industrial and commercial had rates that arguably were out of market.

Rate de-skewing had never been addressed in Michigan and then we took those rates that were okay in a monopoly environment and we have opened them up to the market. So about 2/3 of the problem here is caused in rate structure.

So, you know, if you open up the markets and don't address that, there's different levers you have to pull. One way to address this could be rates, another is that if you leave rates skewed as they are, there are different paths that you could take. Mike, do you want to comment on this?

Sure and good morning. Paul, to specifically answer your question, two things. One relative to the interim order, we still have a ways to go to get full recovery of all the choice margin loss. The regulatory deferrals that you mentioned are really nothing more than stopgaps and that, you know, they need to eventually be converted into rates in some form or fashion so that we realize that cash flow. We still have a ways to go and we are optimistic that the commission recognizes this and that this part of the final order in this case will continue to address these issues.

Relative to the importance of PA-141, it is important and it's important for a couple of key reasons. One is there is in spite of what the commission may do in the rate case, there is still structural problems with the current regulatory structure in Michigan. It's not sustainable and so the only way you can effectively address that is through legislation. And so the commission really, in our view, lacks the legal capacity to address all of the issues and ultimately a legislative fix on some of these structural issues will be required.

OK it looks that you guys booked about $37 million in the last quarter. I guess, that's about, we're now to $177 million in terms of regulatory deferrals. Would you still in the current interim order and everything, still anticipate $37 million on a run rate? Or something in that area? Would that number just simply fall and than should it be question of recovering that 177, if you follow me? I mean, in other words, do you still see that you'd have to, under the current interim order still have to, book $37 million or something in that area or in that neighborhood in order to -- because of the Choice issue was or has the commission done enough to mitigate that substantially and it's just pretty much getting what you have spent and lost in the past?

Well, Paul, I'll start and might get some help from Mike and Dan. You got to take each one of these lines separately. Some of these are very straightforward. Choice implementation cost is out of pocket cost to support the program, environmental cost is another example. That's the Knox program deferrals we are doing. But what you're really are asking about is the Choice regulatory asset. And that calculation today is based on a revenue deficiency model for the power generation fleet.

And that is not necessarily a linear calculation because the calculation includes and can be impacted by, for example, weather and demand and prices, and so on. So I would caution you right now to take the $25 million times 4 and say that's the regulatory asset we're going to book. And we really expect all of this to be addressed in final. So the question will be what's the regulatory asset that we booked through now through September and then what happens with that asset, how quickly do we recovery it and then how do you calculate -- how do we calculate any deficiency going forward. And is it really going to be future rate cases, or do we get this addressed in final in a way that is satisfactory to the company. Mike, have I given you enough? Is that good?

Yes.

Your next question is from Paul Ridzon with Key McDonald.

What's your assumption with regards to monetization of the synfuels when you give the 150 to 190 guidance?

Well, the assumption is that we have four units that are not sold. The low end of the range 150 assumes one more sale this year. The 190 assumes all sold by year-end. And the actual profile quarter-to-quarter is going to be dependent on how quickly we sell these. These are, it's going to be lumpy in terms of negotiations and closing.

We might go several months without closing any deals and might get two back-to-back. So we're pressing hard and we're optimistic that actually we're going to be higher than the low end. As I told you, we're in serious negotiation with several counter parties on deals right now, which would get me beyond the one unit I need for the low end of the range.

I had a question on despite milder weather, residential electric sales were up pretty robustly and gas was up across the board. Just kind of wondering what's driving that increased demand.

We believe it's usage. The average home is consuming more energy and that was a pleasant trend that we noticed in the first quarter and we're optimistic that, that's going to continue.

You don't think there's anything underlying as far as timing?

No.

Thank you very much.

Your next question is from Laura Blanco with CSSB.

Good morning. I have a question on the regulatory asset, but I think that you disclosed that on page 27. So the environmental compliance was only $4 million in the first Q '04. And can we assume that it's going to be steady throughout September, like $4 million every quarter? Because that cause, you know right and that's not impacted by weather or anything.

Laura, this is Dan. Yes, the difference when you look at that line item quarter-to-quarter, you can see 14 in 2003, the run rate in 2003 was roughly 9 to 10 per quarter, there was an out of period adjustment made in the first quarter of 2003.

With the interim order, we will continue to defer since there is the residential customers are still capped, we will continue to defer environmental compliance on that category of customer. Since the interim order changed base rates, the environmental compliance costs are assumed now as part of base rates as part of the uncapped customer. So $4 million per quarter is a good bandwidth for the rest of the year per quarter.

Okay. And the other question I have is regarding the outlook for your industrial customers. I mean, what is the sales trend there? Are you seeing any recovery in industrial sales? Because, you know, we've seen a lot of utilities recovery in industrial sales in the first quarter. And how is that playing with the new structure? Because, you know, like they are now out of the rate probably and they can shop (inaudible) around. How is that going to play? Are you going to see a significant impact there?

Let me start just with your first question, which I think is more of a usage question for industrial customers. Our experience during a recession is that our load flattens out. And then as the economy picks up, there is a rebound. So at some point in time, you would see more than normal growth out of the industrial customer base. We're not seeing that yet. You know, Michigan's unemployment is still high and higher than the rest of the country and we're optimistic that we're going to get to an inflection point where the industrial load picks um and that coupled with the residential load increase we're seeing is going to be welcomed because it's been a while since we've seen this type of load increase. Your second question, is that in regard to Choice and industrial customers? I'm not sure I understood.

Yes. Yes. If you think that the recovery that you have seen historically is not going to be as strong for your company because the Choice implementation? You know, they are not going to go back -- those volumes are not going to go back to you, but maybe they are going to go back to somewhere else.

I think you're asking a question about customer classes, but the largest industrial customers have not gone to Choice. So for example, the autos are on long-term contracts and we expect to retain the autos going forward. And so, for example, that customer class, which the load has flattened out, when we see the rebound in load, we will receive and get that higher volume. Your question is the customer classes that have gone to Choice, will we mess that up tick because they are Choice customers. The answer is yes. We will pick up their delivery charge. Any volume increase we see on the wire side we'll get but we'll miss any volume related pickup for customers that are at Choice.

So most of the customers going to Choice are the commercial, small commercial customers?

Right. And it's not clear to me that that group has been impacted economically.

Right.

So for example, grocery stores running 24/7, running the refrigerators no matter how much groceries they're selling. That's different than factories that might have shut off shifts or even temporarily closed down during the recession.

Yes. Okay. That's helpful. Thank you. Oh, I've another question, just a quick one. The measures that the staff recommended in the final rate recommendation case that relate to the how to mitigate the -- I mean, how to fix the customer Choice situation like they have some measures regarding a (inaudible) margins and all those things, are all those things in the same line that you are requesting in the legislative effort?

Some of the staff recommendations, for example, you know, said that future strand to cause caused by Choice would have to be recovered through future rate cases or de skewing. And they had also made a recommendation on a return to service provision, which was new. Today people can switch back and forth and they are recommending that if you leave the utility, you leave for three years. You have to give a one-year notice and you then have to stay with us for a year. And in legislation, the recommendations I think, you know, some of the stuff is in the right direction, but it all interplay's with the level of transition charges.

So, you know, if you got much higher transition charges, there might be offsets to that that you might be willing to give up on. You know, we're looking for a whole package here as we move forward. And some of what they have recommended is clearly in the right direction. We might be seeking to go beyond some of their recommendations.

Okay. Thank you.

Your next question comes from Andrew Levy (ph) with Bear Wagner.

Hi, guys. Obviously you didn't give guidance for the year and that's nothing new. But you did give guidance for the non-regulated. Can you give us any idea on the regulated side? Obviously can't get guidance, but whether you are kind of on track, behind, doing a little bit better?

Well, it's really difficult. And, you know, I'm sorry that I can't provide guidance. We had a long history of being out early and being very transparent and hitting our numbers and we did that for six years. And now we're in a position where I can't do much about this. The electric utility, you know, is still in the middle of its rate case. There's a lot of variability. Until we get to the final rates and understand where Choice is going, that's hard.

In the meantime, you know, we're having to make a lot of sacrifices and taking unsustainable cost reductions to press down on O&M and capital. You saw the capital is down year-over-year; O&M is flat year-over-year. So we're doing the best we can to hold costs and maximize cash flows during this transition period. But realistically until you get out into the fall time frame, we will have final electric in September. We'll push hard to see if we can get it earlier. Hopefully legislation in that time frame, and the gas interim right in that time frame, too. So there will be a very clear picture not only for the calendar year, but there will be a clear picture of where these utilities are tracking for 05 and 06. And we'll be in a much better position in the fall not only to talk about the year but then when we get later in the year we'll be able to lay out where we think we'll be for the next several years, which we just can't do today. I'm sorry. I can't provide any more than that.

Your next question will come from Danielle Spikes (ph) with Max Core Financial.

Good morning. I just assumed given the recommendations that have been made and different the -- assumption that the interim was implemented in January, would the PSCR have been totally covered? I mean just to get an idea if at this point it's not really yet totally covering your costs.

This is Mike Champley. To answer your question, had the interim order taken effect on January 1, rate increase would have more than covered the PSCR reduction. That was the intent of the interim order.

Okay. And just I guess the question is to you as well. In the specific issues coming up in this gas case, aside from (inaudible) is there any issues that just came up?

The gas case unlike the electric is really a traditional rate case and we haven't had a rate case in the gas side for 10 years. So the issues are really the normal types of issues you would expect, that is what are the components of your revenue requirements. We won't know for sure what some of the specific issues are until next week when the Commission staff as well as the other interveners make their first filing. Then we'll be in a better position to assess what the situation is.

But, of course, I mean from your point much view, the major issue is really what type of -- you haven't had any problem about enough information provided or anything that would be of a delay or surprise?

I don't think so. And what we will do after next week or after the filings next week, we will do as we've done in the electric side as well as when we filed the gas case, and that is provide a brief write-up of the case and make it available to the investment community, as well as others.

Danielle, this is Dave Meador. We will be at AGA Monday and I'm speaking at the end of the day. Chances are we won't be able to address this on Monday, like other filings. But then again the length and complexity of the filing, it will take us a day or so to work our way through it. And then we'll get an update out to everybody as we analyze that. But as Mike said, this case, the issue on this case for us is timing. Right now we expect interim in the fall. And final is not scheduled until after the first of the year. We have to work as hard as we can to see if we can pull the timing up and then get the full value of rate release for the heating season for MichCon where you make most of your money in the heating season. We want to see if we can pull that ahead.

Is it a possibility for you to accelerate the timing of the case?

Well, we are certainly going to push very hard as Dave said. The timing of the rate relief is just as important here as the amount of money as well.

Thanks a lot.

Thank you.

Your next question comes from Jeff Gildersleeve of Millennium Partners.

Yes good morning.

Good morning Jeff.

You covered a lot of the near-term issues and calendar is certainly full. As we look longer term, though and we have the synfuel earnings, I guess falling off after a few years here you've talked about deploying the capital, deploying free cash into other growth opportunities. Can you just outline what your thoughts are there at this point?

Sure. We're all looking into the crystal ball here. And we're assuming that things work out in the utilities, you know, we get into, you know, that 06 time frame where the rate caps are out, Detroit Edison now has full rate relief in case. And the combination of that plus the synfuel, we're out in a time frame where we can see our future; we can see our cash flows. You know, as we've done in the past, we're going to look for investment opportunities that meet our strategy, so it's going to be things where we have skills and competencies that's going to be energy based clearly and it would be asset based. We are interested in growing our energy services business. I mentioned the Daimler Chrysler deal. There's another deal we're working on right now that we would hope to close this year.

We will continue to look for expansion there. We've talked about the waste coal business and that's the business we want to grow over the next five date years and though the business that has a net income of $50 million or so. We are still piloting with coal bed methane, that's another opportunity and then the remaining question in that time frame there is still going to be asset, distressed assets that we could look at participating in. Is it another potential possibility. But as we've said in and just say it again, assuming everything works out and we've become in a situation where we have cash flow that we can invest, we will have to look at those investment opportunities and put that up against the alternative of paying down debt and buying back stock.

So the timing of that, the way it sounds, is further out. Of course, when you get past these rate issues at the utilities 05, 06.

Yes and no. I mean we could be in a period for example, by the end of year where I could see our path clearly. I still might be capital constrained for a couple of years, but that just might mean that we have to structure deals in one way that's less capital intensive than another until we finally get out into that 06 time frame. But, you know, the first step for us is to be able to see a clear map of the future and then we can start talking about, you know, what are our options and where do we see us taking the company over the next several years. And we think we'll be able to do that by year-end. We haven't set the exact date yet but we're looking to hold an analyst meeting and say the rate cases are predominantly behind us and where do we see things going here now in the future.

Okay. Given that you have and secure and very healthy dividend, as you weigh investment opportunities would be weighing that against share repurchases?

Yes.

Okay.

I think primarily the reason when I think of excess cash flows if you are in that situation, dividend situation, dividend increases are something that are more permanent in nature. And one of the things we'll have to keep in mind as we have this $1.8 billion of synfuel cash coming back, which is a great story for us, but that cash flow stream ends in 2008. So, the question is how much of that cash flow pays down debt, is used for new investment or possibly, is used as part of a stock buy-back program.

Okay. And finally, those investments you listed a lot of them, of course, you're already involved in on a more modest or smaller level. It sounded like you favor growing the businesses you're already in as opposed to maybe entering a new business or buying generation.

We are interested, you know, always interested in buying new generation and potentially small regulated opportunities. It's really premature to get into that discussion because the first step to us is to get through the rate case, and the second step is to finish our sell down of synfuel. And then I think when we get out towards the end of the year we can start having those discussions. I think just with a little bit more data and grounding than I have today. But, you know, we would be interested, if the right opportunity came up, and we had stability on the other front on the generation side.

Sure. Thank you.

Okay.

Your next question comes from David Grumhaus of Copia Capital.

Good morning, guys. How are you?

Fine. David.

Question for you. You had some nice improvement at the regulated electric, you know, some pickup from interest taxes and others and some pickup from O&M timing. You said something that we'll continue to see throughout the rest of the year. Can you talk a little bit about what generated that and about how we should think of about it going forward?

I'll start here and then I'll let Dan talk about some of it because I think -- I don't know that we can break it down for you right now. But things like interest, you know, we've been very active in refinancing debt at lower levels and, you know, that should carry through. There's also transmission expense savings in there that carries through. And taxes, Dan, I don't know if you can join and comment on taxes. O&M is something that we've got to watch carefully because we have done a lot of one time savings, but we continue to work on our operating system, also, and try to push on other more permanent savings. But, Dan, do you have any additional thoughts on the 13 million and 8 million on page 8?

David, I'd say some of it is flow through, some of it should continue. The balance that are with the healthcare pensions, retiree health number we're going to see continuing trends in that direction quarter-over-quarter through the rest of the year. Another variable that will play into O&M this year is restoration costs and storms, very storm-based, so that's something that will also play into the mix. We'll certainly see that as the summer plays out.

Some of the actions that we are taking right now are unsustainable and temporary in nature just because of the uncertainty with the regulatory environment. We feel that a lot of the requests that we made in the rate filing around cost of service on the electric side of our business are reasonable and prudent and we hoping to get recovery of in final.

That's helpful. The second question, on the Chrysler contract, which I think you are close to signing, my recollection is that has a fair amount of front end loading to it. Will that contract hit as soon as it's signed and in operation and in terms of the profit? Or will it be spread throughout the first 12 months?

You are talking about the up-front fee from putting the deal together. I believe the accounting for that is that's recognized in the quarter that we close the transaction.

And is that likely to be the second quarter?

Yes.

Okay. Great. Thanks.

Your next question comes from David Frank of Zimmer Lucas Partners.

Hi, good morning. Hey, Dave, I was just wondering if maybe hypothetically you could tell us around the 2008 time frame if you just accrued the cash and used it to pay down debt or sit on your balance sheet, roughly what your capital structure, consolidated capital structure would look like in that 08 kind of time frame.

I don't have that number handy. But it certainly would be very healthy. The balance sheet would be much stronger than it is today and it's strong today, you know. We ended the quarter, you know, 49% leverage and the leverage would be much, much better than that. But I don't see that as particularly accurate right now, to say everything else held equal, what would I look like four years from now. But it certainly would put the balance sheet in outstanding shape.

Do you have an estimate of how much -- what your free cash flow generation would be over the next four years approximately? I think -

Not really because the big variables here, as you know, 85% of cash comes from the utilities. So, you know, we can't see the path on the utility cash flows until we understand where the rate cases and legislation will be. I mean, you could always go back to historical look and say if you got to where you were on a normalized level, you could pro forma that. But that's not necessarily a good predictor of the future.

Thanks a lot, David.

Your last question will come from Raymond Lung (ph) of Bear Stearns.

Couple of questions. With respect to deferred taxes on your statement of cash flows, could you sort of describe the big shift in that number? Was it largely tied to synfuel or timing issues? It went from $113 million or something like that.

Go ahead, Nick.

There was a movement on (inaudible) cash flows from about 18 million last year to 113 million. And that's really related to -- part of it is just geography. About half of it is due to the synfuel sell down in 2004. And the other half is due to the contract that Dave talked about in the CTC. Part of it shows up in net income, but that's a non-cash transaction so it's ended up a piece of it showing up in deferred income taxes. So, again that's just geography for the cash flow statement.

Will we expect this to be sort of a flat line for the year?

Well, I'm looking for the full year. You know, we gave you cash from operations. I'm just trying to remember. I don't think we have broken down cash from operations in any more detail than what we've shown. The last time in fact it's in the appendix on page 35 will show you total cash from operations ranging from 18 million to over a billion depending on rate cases. In the past we haven't broken down a forecast below cash from operations.

Okay. And could you tell us what's the status with the rating agencies right now? They both recently changed their out looks. Thanks.

As usual, we don't speak for the rating agencies. And as usual, we are in constant communication with the rating agencies. As you will referenced, they put out a negative outlook both S&P and Moody's did in November and January. You can read their write-ups. Their concerns are mostly centered around the two utilities and having we talked about, successful regulatory outcome and successful fix for Electric Choice.

All right. Thanks.

And Tracy, are there any remaining questions?

Yes, there are, sir.

We'll take one additional question and then we have to run off to get to the annual shareholders meeting. I'll take one additional question.

That will come from Jessica Rutledge with Lazard Asset Management.

Good morning, mine is fast. So we're all in luck. I was trying to understand the tax rate used to calculate the operated earnings from the regulated utilities.

The effective tax rate.

The effective tax rate used in your operating numbers that you broke out.

The effective tax rate for DTE is 28%. You're asking for the utility?

Yes, I guess my question is do you apply that 28% to the utilities, also.

No, no. Detroit Edison is 35% and MichCon is around 13%, this quarter. MichCon is unusually low because its earnings are so low the book tax differences that you would see in a reconciliation are out of proportion to its pre-tax income. So, you know, MichCon has a low effective tax rate that's not where you would normally see it.

Okay. On a year normalized basis is it going to be closer to the 35%?

No. The numbers that I gave you are the estimated annual numbers and that's what you use when you book your quarters.

Okay. Excellent. Thank you very much.

Okay. Well, thank you everybody. And I look forward to seeing those of you that will be at AGA on Monday. Thanks again.