密歇根天然氣 (DTE) 2005 Q1 法說會逐字稿

[OPERATOR INSTRUCTIONS] I will now turn it over to Mr. Dave Meador.

Good morning everybody and thank you for joining us for our first quarter conference call. With me this morning is Dan Brudzynski our Vice President and Controller; Nick Khouri our Vice President, Treasurer; Don Stanczyk who's been joining us on the call, Don is our Director of Regulatory Affairs; and Dina McClung our Director of Investor Relations. I'm going to start on page 4 and provide an overview and then I'll be turning it over to Dan.

Overall the net income for the quarter came in at $0.88 per share, which is flat compared to the first quarter of 2004. Some of the key drivers for the quarter we list here, and they include the benefits of the Detroit Edison rate case, the deferral of co energy accounting process to the next storage cycle and we'll cover that in more detail. Then a deferral of a portion of the synfuel net income, not all of it, but a portion of that, we'll also take you through that. That was offset by the mark to market in the oil hedges that we are using for the 2005 cash flows. If you adjust for timing related items the earnings power for the quarter was much higher, than reported and it's about $190 million. Dan will take you through the details of that in a moment.

On the cash front cash flows are higher than last year and as a recognition of our improving credit quality Moody's moved us to stable outlook last week to acknowledge some of the progress we're making. We are maintaining our cash and earnings guidance for the year and we continue to make progress on the regulatory front. We are on the agenda today with the MPSC for the MichCon rate case and a handful of other cases. That meeting is at 3:00 this afternoon so it's another milestone for the Company. And last but very importantly we are busy on the development front and we've made some modest growth investments, and I'll update you on other activities on the development front towards the end of the call. Now let me turn it over to Dan and he will update you on the quarter.

Thanks, Dave, and good morning to everyone. Moving on to slide 6 and a rundown of first quarter earnings performance, operating earnings were $0.88 per diluted share while reported earnings per share for the quarter were $0.85, and there is a reconciliation between reported and operating earnings for both 2005 and 2004 contained within the appendix of the document. Contributions in the first quarter were spread across all our businesses including energy gas, reflecting the seasonality of their first quarter heating demand, energy gas actually contributed $0.35 per share with energy resources at $0.33 and energy distribution at $0.23 per share.

Moving from left to right on this slide, energy resources' first quarter contributions were primarily focused in the regulated generation side of Detroit Edison and the energy services portfolio of businesses largely the synfuel projects. These are partially offset, as David mentioned, by mark to market adjustments within our co energy business. And I'll cover that off in a little bit more detail. Energy distribution contributed $0.23 to the quarter primarily in the regulated distribution side of Detroit Edison. Energy gas contributed $0.35 as I mentioned primarily due to the heating load at MichCon, our regulated gas distribution company, and had contributions from our mid-stream non-utility gas businesses also. Corporate and other included unallocated interest and tax-related adjustments at the parent.

Moving on to slide 7 and first quarter look versus comparable 2004 levels, beginning on the left again operating earnings for the first quarter 2004 were $0.89 per share. Improvements at Detroit Edison and our non utility businesses were offset by deteriorations at MichCon. For the quarter the EPS contributions were pretty evenly spread across the two utilities and our non -- and our portfolio of nonutility businesses as you can see on the bar on the right-hand side.

Continuing on to slide 8 and a look at the components in a little more detail. Detroit Edison, our electric utility, showed improved performance in 2005 with operating earnings of 57 million. Key drivers in the quarter included a full quarter of final rate relief following the November MPSC orders and the expiration of rate caps for certain commercial customers. Again, as a reminder, only the residential customers remain capped through 2005. Service area sales in the quarter were down 1% reflecting the soft local economy in our territory. System sales on the other hand were flat with the decrease in sales due to the economy being back-filled with choice migration of customers back on our system at the beginning of 2005. The economic impact of the decreased demand in our territory due to the economy was a decline of 7 million for the quarter.

While the volume migration back from choice was upside for the quarter it was made up of our lower margin industrial and primary commercial customers. Consequently, this volume improvement was offset by a negative sales mix impact as a larger percentage of our higher margin commercial secondary customers remain on choice as you compare it to the earlier choice run rates at the beginning of 2004. Our real more reflective comparison for the quarter though is the choice volume look first quarter versus the 2004 run rate exit point at the end of the fourth quarter and I'll address this in a little more detail on an upcoming slide. Staying with this first quarter waterfall chart other margin and power supply changes, some timing related, also tempered first quarter margins. Regulatory deferrals, primarily for stranded costs in 2004, were down as expected in 2005 due to the expiration of the rate caps and lower overall choice levels.

In addition the amount billed to Detroit Edison for merger interest also was a first quarter factor which was retained at the DTE parent level as we reflected earlier in the year in our guidance reflecting the disallowance of merger-related costs within the final rate orders in November. Operating costs were also slightly up in the first quarter due to increased scope of some of our periodic planned plant outages and higher maintenance and trouble work within the distribution side of the business.

Let's continue on and look at choice volumes in the quarter on slide 9. Choice volumes in the first quarter were 1914 gigawatt hours, or 13% of service area sales this is down 228 gigawatt hours, or approximately 10% from comparable first quarter 2004 levels. As you can see on the chart the decline in 2005 versus first quarter of last year was all in the lower margin commercial primary and industrial customer classes. While customer -- commercial secondary customers did experience migration back from choice, the first quarter 2005 levels were actually slightly higher due to continued migration that happened in this class to choice during 2004, so for a quarter to quarter look at first quarter, again, the lower choice volumes were offset by a higher margin loss per gigawatt hour due to the higher mix of higher margin commercial secondary choice sales loss. Actually the commercial secondary was up about 28% quarter to quarter.

Again, as I mentioned earlier, probably a more reflective look at choice is the first quarter level as compared to the run rate exit point of the fourth quarter 2004. There you can see choice levels are down in all affected customer classes in total 649 gigawatt hours. Margins are improved off of this higher fourth quarter run rate and Detroit Edison will begin to demonstrate these year-over-year improvements in the latter parts of 2005. But again these are certainly dependent on the level of choice volumes and the mix of customers off system.

Now continuing on to MichCon and slide 10. Gas utilities -- gas utility earnings were down from 2004 levels. Incremental interim rate relief in 2004 was offset by lower industrial volumes and some nonrecurring billing adjustments in the first quarter 2005. Weather for the quarter was slightly favorable. Uncollectible and healthcare expenses continue to be up and you see that on the graph for the quarter to quarter look versus 2004. Again, due to higher gas prices, local economic conditions, the availability of low income customer assistance funding and the continued benefit escalation of healthcare costs. These are all issues contained in the current rate proceeding and therefore delays into 2005 of the issuance of the final rate relief as part of those proceedings has negatively impacted the first quarter 2005. Tax adjustments within the quarter also affected -- that were primarily timing in nature. Overall MichCon's performance was 21 million off 2004 levels with over half of it being really timing related due to that tax and tax adjustments.

Moving on to nonutility earnings and the changes quarter to quarter as outlined on slide 11. Nonutility operating earnings were 51 million, up 5 million from 2004 levels. Key drivers include higher production volumes in our synfuel projects of 4.9 million tons which yielded 19 million of incremental income. Revenue within the quarter related to this production was received from our partners but portions, as Dave had mentioned, were deferred due to the oil price volatility so far early into the year as part of an overall gain recognition accounting principle. A little later in the materials Dave will walk us through the mechanics of this accounting.

Also affecting first quarter performance was the mark to market movements of our oil options put in place for 2005 to protect this year's cash flows this was 32 million in the first quarter. Since these are short-term in duration and will settle this year this mark to market gain together with the deferral of first quarter revenues should there be no phase-out of tax credits will reverse before year end. Also during the quarter we experienced positive performance from our midstream gas businesses due to higher revenues and our coke battery projects due to higher coke prices. Offsetting some of these gains was mark to market timing and energy trading and mark to market deteriorations quarter to quarter within the co energy portfolio. This was primarily driven by a shift in storage withdrawals from inventory based on some favorable forward curve economics. This is also another item that Dave will cover in a little bit more detail. As I mentioned earlier, as these adjustments in the first quarter settle the ultimate recognition of revenue, the settlement of the oil options, and the withdrawal of storage inventory the underlying strength of first quarter earnings becomes more apparent.

On slide 12 we've attempted to filter through these accounting adjustments to better reflect the earnings strength of the first quarter. After adjusting for the first quarter variables of the oil options, the synfuel revenues, the co energy storage accounting, and the timing adjustments at MichCon the quarter is actually $38 million higher than 2004 comparable levels with operating earnings of close to 190 million or $1.09 per share.

So piecing these performance changes for the first quarter together and looking forward to the remainder of 2005 key drivers of full-year performance are outlined on slide 13. Detroit Edison's year-over-year performance should improve driven by more normal weather demand and higher margins in the traditionally higher volume times of the year, primarily second and third quarter. Keep in mind that the reinstatement of the PSCR mechanism serves as a normalizing factor on power supply costs that produces an averaging effect on gross margins across the year, therefore the profile of gross margins and therefore the earnings at Detroit Edison now follows again the volume profile of sales revenue. In addition Detroit Edison will see incremental rate relief over the year providing further improvements as well as the continuing impact of lower choice levels that I mentioned earlier in the presentation.

MichCon's performance early into the year was partially timing related but also reflected the delays in the regulatory process. As Dave had mentioned, we expect final rate orders today which should determine 2005's forecast. Again as I mentioned on previous slides non utility earnings were up in the first quarter in light of some larger accounting swing items which are expected to settle in future periods and will be dependent on the withdrawal cycles at co energy -- in the co energy portfolio. Overall gas prices and no phase-out of the synfuel tax credits.

Operating earnings guidance on slide 14 remains at $3.30 to $3.60 with the components this early into the year remaining unchanged. As more is known and becomes apparent as the year progresses we will update as needed the mixes across the various components. With that now I'd like to turn over the discussion to Nick Khouri and an update on cash flow.

Thank you, Dan, and good morning. Improved cash flow and balance sheet strength remain a key priority for management and the Board of Directors, and as expected cash flow so far in 2005 have improved from the levels of the prior couple of years.

Turning to page 16, year-over-year adjusted cash from operations climbed over 50% from the first quarter in the prior year, including net cash from the synfuel business adjusted cash from operations totaled 476 million in the first quarter, up from 306 million in 2004. For the same year-over-year comparison capital spending was up slightly and asset sales were lower but in total net cash after dividends and capital spending was positive 183 million for the first three months of 2005.

Page 17 summarizes the underlying strength of DTE Energy's balance sheet. A key metric used by us and the rating agencies, funds from operations, or FFO divided by debt, FFO, a measure of cash flow before changes in working capital, as a percent of outstanding debt, rose from 17% in the first quarter of 2004 to 19% in the first quarter of 2005. We expect this key ratio to continue to improve moving to our long-term goal of 26 to 28%. Excess liquidity remains more than sufficient, and as a reminder approximately 170 million of DTE shares will mandatorily convert in August as part of the 2002 equity offering. Overall leverage stayed flat at about 52% after incorporating the refinancing of 385 million of trust-preferred instruments reducing interest expense by over 9 million annually.

Page 18 details capital spending in the first quarter by business line. In total CapEx was 26 million higher in the first quarter of this year, reaching 205 million. The largest driver of the higher capital spending has been the ramp-up in the new SAP platform we call DTE 2. Capital spending for DTE 2 should peak this year at approximately 130 to $135 million. Page 19 and page 20 reconfirm our prior guidance given for both cash flow and capital spending for the full year 2005. With that, let me turn it over to Dave to describe in more detail some of the issues and opportunities this year.

Thanks, Nick. I am going to move up to page 22. And talk first about synfuels, then a little bit about co energy. On page 22 the quarterly earnings from synfuels are comprised of two pieces. The first piece is the quarterly payments that we receive from our synfuel partners. This earnings stream is subject to the conservative gain recognition requirements that are set forth in GAAP. The second piece of the synfuel earnings stream is the mark to market movement in the oil options that you heard about as Dan was describing the quarter. We entered into these options to protect a significant portion of our 2005 cash flows.

On page 23 I want to talk a little bit about the accounting. The accounting recognition for this type of revenue stream -- when I say "this type," I'm talking about the synfuel revenue, is based on the accounting literature that addresses the sales of ownership interest. Just to help recall that, when we sell down our positions here we're actually selling partnership interest. And the accounting literature basically says that the gain must be virtually certain to be recognized or you're required to defer the recognition, and this is even if you have received the cash payments as we have in the first quarter. Now, while most forecasts of oil prices wouldn't lead to a conclusion that a phase-out would happen, and we view the chance of a 2005 phase-out as remote, it's very early in the year and there still is some uncertainty so we did not recognize a portion of the synfuel revenue, and I'll take you through the details in a moment. We wanted to point out that we have adjusted upward our projection of the phase-out range. It's been moved up so our projection right now is that the initial phase-out would start around $57.80, and the complete phase-out at $70.82.

Now, this is our projection. The actual reference price and phase-out range is set by the government in the quarter after the year end so we will not know the actual phase-out range for 2005 until 2006 but looking at history we're comfortable with the numbers that I gave you which is good news that the phase-out range is actually higher than we had previously talked about. If you look at the year to date average for oil, oil's averaged slightly under $53 a barrel, and if you look at the remainder of the year, you'd have to average over $61 a barrel for the rest of the year to hit the low end of the phase-out. So to hit the 57.80 roughly, you'd have to be over $61 for the remainder of the year. Just to give you a couple data points if you thought about a midpoint on the phase-out you'd actually have to be over $71 for the rest of the year. If you add full phase-out you'd have to be over $81 for the rest of the year. It's a kind reference versus where we are.

This quarter we received all the cash payments relative to synfuels and the machines are running well with higher than projected production for the quarter. So relative to revenue recognition we'll evaluate that each quarter, we'll evaluate it again at the end of the second quarter, and assuming there is no phase-out this should be thought of as a timing item.

Page 24 breaks out some of the components that I mentioned. On the left you can see the fix no payment, the variable no payment, and so on. Starting with the fixed no payment this is a component that has received -- when received it's not refundable so as long as we receive cash we recognize the revenue under that -- under the principle I mentioned, and that's 25 million. The variable no payment was received, the 27 million, and assuming no phase-out you can see that it will be recognized in future quarters. So we did not recognize the 27 million. You can see the estimated components for Q2 through Q4, then down below that the retiming of the 27 million to a future quarter.

There are some credits that we're recognizing to our own account which is the next line. Then the last couple of lines you can see the oil hedges. As was mentioned earlier the mark to market gain for the 2005 hedges was 32 million. And assuming no phase-out you can see that reverse out in the future quarters, then the net expense for the 2005 options is below that, the 11 million. So if you go to the right-hand column and go all the way to the bottom of the right-hand column you can see that you get back to our guidance of 215 to $225 million.

The final point here is that we have started to hedge a portion of our 2006 synfuel cash. We're holding that out of operating earnings. We believe that that mark to market really relates to next year's earnings so we're going to hold that out but we'll report it to you. For the first quarter the mark to market gain for the 2006 hedges was small, it was $3 million.

Page 25 shows the amount of 2005 and 2006 synfuel cash flow that is now protected. So for 2005 as I take you through this we have now protected 70 to 75% of the 425 million. We've done this through the purchase of oil hedges. We are also using prior year tax credits. We have tax credit carry forward, and then also the receipt of fixed payments. So during the year as you go through each quarter and you actually receive cash payments that just means you have more certainty around that calendar year's cash flows. For 2006, on the right-hand side this assumes no phase-out for 2005, we have about 55% of the 490 protected, again, and that's through a combination of the oil hedges and the use of prior year credits and the receipt of the fourth quarter 2005 payment in the first quarter 2006.

Now let me shift and talk about co energy storage. I want to step back a little bit just to talk about the nature of the business and how we think about this strategically for us. Co energy storage is a portfolio of businesses that includes our nonregulated storage and long-term transportation contracts. Nonregulated storage here is about 55 bcf. 25 of that is managed by buying gas in the summer and we simultaneously lock in a forward sale. So the economics are locked in at the time of the transaction. So we manage this business on an economic profit basis.

As we've discussed before, there's an accounting treatment, it's not an accounting treatment that I like or I agree with, and we actually might pursue getting this changed with the FASB or the SEC but today it is what it is. We have to live with GAAP. But the accounting treatment is that the gas in storage is accounted for at average cost while the forward is mark to market. So you end up in these situations where your economic profit is known and it's locked but you have this mark to market movement until the gas is delivered and taken out of storage. It's a good business for us and it consistently makes economic profit targets year in and year out but we do have a reported earnings fluctuation due to the mark to market that I just explained. With that said, even with that mark to market, when we give guidance and think about budgets the accounting profit we usually target is around $5 million for this business.

On the top of 27 I want to take you through a little bit through the injection withdrawal cycle then talk about what happened with this roll of the storage withdrawal. If you start on the top left of page 27 this is an illustration of a typical storage and injection cycle. We sell forward gas at the time of the transaction and then we inject that gas during the April to October time frame. That's the injection season. Then we deliver the gas from November to May of the next year. So as you can see that withdrawal cycle actually bridges over a calendar year. Also sometimes, and this happened over the last several years, we're now starting to experience summer withdrawals as gas is used for peaking power in the summer. One point to note is that the injection season falls within a calendar year but the withdrawal season bridges a calendar year so you could actually have a situation where it's hard to predict the timing of what the -- the reported accounting coming out of storage and depending on gas prices and also when you actually withdraw the gas out of storage. So the top is just an example over two cycles.

On the top right is the NYMEX gas curves for September of last year, then March of this year. Last fall as you can see the curve was backward dated, but then in the first quarter of this year the curve shifted. The current price, or the prompt price, dropped dramatically and the forward jumped dramatically. And in this business, as I mentioned, we manage this business on economics and we focus on value creation and cash, so with that in mind we took advantage of the market and we contracted to sell the gas next season, which is basically depicted on the bottom left hand side. So we did not withdraw, nor will we inject into storage in this cycle. So basically what happens is you skip a winter withdrawal/summer injection season. This was positively economically for us and it also positive to 2000 cash flows. However, the accounting creates a mark to market loss, that will reverse in the next storage cycle.

We expect to see about half of that in the calendar year but it's hard to predict. It could be possibly more because it's dependent on gas price movements between now and withdrawal so for example if gas prices, which are high, dropped, you will see mark to market gain come back through the accounting rules, then the other factor is withdrawal rates and withdrawal rates can be dependent on what happens this summer as well as the winter withdrawal season. And we'll be able to update you more on this in July at our analyst meeting.

Now I want to shift again and talk about an update just on some of our 2005 opportunities on page 29. As I mentioned earlier we continue to make progress on the regulatory front. We had a good year last year on this front and we are hitting another milestone today with the final order on the MichCon rate case. There's also a GCR case and there's several Detroit Edison cases relative to customer choice implementation costs and so on, so the meeting is at 3:00. We're not sure if documents will be posted at that time or if it will happen later in the day so we will, just like you, be looking forward to seeing the results from that. On the Detroit Edison front while the final rate order was a significant step for us we've made a number of recent filings that as we've played through this this year will continue to provide increased regulatory certainty for that business. The most significant one is the rate restructuring proposal that we have filed to unbundle and de-SKU rates.

The next major event on the timetable here you can see is on June 9. The staff and interveners will file their testimony. Until then things will be pretty quiet publicly on that case. Overall timing we expect to wrap up that case before year end and it's important, as you know, to the 2006 calendar year. The second one is the other post-employment benefits tracker which we were invited to make a filing on. Next major event is July 28, the staff and interveners will file testimony. In that case we expect to wrap up in the first quarter of next year. Then the last case is the stranded cost case for 2004 stranded costs, then the PSCR reconciliation, there's not a timetable yet for this case. There's a pre hearing set on May 17, and we will be able to give you the timetable after that case but we generally expect that case to play out in the first quarter of next year also.

On page 30 I just wanted to mention a handful of management changes. We have spent a fair amount of time building a very strong management team here and the team continues to get stronger. First, Paul Hillagance will be joining us as our Senior Vice President of Corporate Affairs, he joins us rom Detroit Renaissance which is a business group in Detroit. He's the former Speaker of the House in Michigan and he's replacing Martin Taylor who is retiring as our EVP of Human Resources and Government Affairs. Chris Brown joined us as the Executive Vice President of Energy Resources. He comes to us after sometime at Singapore Power, and we are actually aggregating several of the nonutility businesses under Chris. So he will be heading up energy services, coal services, and biomass. Steve Mayberry was promoted to the President of our trading business. He is replacing Randy Bellhorn who had an opportunity to leave and Randy had built a great team and we were able to promote from within one of his leaders to run that business. So Randy left to go to a financial institution. We're sorry to see him leave but we had a strong bench and we're confident in Steve's ability to run that business. Jeff Jewel joined my organization from Duke as our Chief Risk Officer, and then the last change here is Sue Beal who will be retiring as our Vice President and Corporate Secretary and has served the Company for many years.

Page 31 is a page that you have seen many times. Just wanted to remind you, the 2005 to 2008 projected cash available and the debt pay-down, projected, our projected parent company debt pay down is 600 to $700 million and the cash available for investment or buyback is the 950 to 1.50 billion. We're still using the original numbers for 2005 which showed $200 million of parent company debt paydown and 250 to $300 million of cash available. We will be refining these numbers as the year goes on and I anticipate at our July analyst meeting would be a -- an appropriate time to update that looking at where we are on a year-to-date basis.

I had mentioned earlier that while we are working on many fronts, whether it be cost reductions or the regulatory fronts, we have the teams working hard on the development front, and just a very quick update on page 32, that talks about some of our key business activities here. On the on-site energy business, and this is the business line where last year we had closed the DaimlerChrysler project, we are looking at a six site transaction for one of the major auto manufacturers, the Daimler deal brought a lot of brand recognition to our abilities here and we're currently in negotiations there. We're also in negotiations on a two-site project in the pulp and paper industry. In that same industry we are also constructing a facility, it's a pep-coke facility, and it's basically an alternative fuel that displaces high natural gas in that industry and that's our first site and has the possibility to become a multisite operation.

On the steel side we're in negotiations right now on several coke battery projects and as time goes on we're getting more confident that one of these could close this year and we've been asked about where we will deploy capital and this is just one that is starting to look like it has higher possibilities and as the year goes on certainly at our July meeting we will be able to provide you more upside on that and the next item, which is our waste coal business, peptech business. We continue to work our site in Ohio where we're testing a new excavation process for the landfill process, and our goal is also to prove out two in-line processes this year and we're in negotiations right now where we would place these at the coal mine at their prep plant to basically clean the coal and actually take out some of the waste coal before it's discarded.

On the gas pipeline and storage front playing an active role in the millennium pipeline, working to get that pipeline to the subscription level where the team would feel confident to go ahead and announce that it is going to be constructed, we currently have a 10.6% ownership in millennium and we have an opportunity down the road to increase that. We're pursuing economic expansion in our nonutility gas storage. This is our contracted storage business. And also on the vector pipeline there's an expansion project underway right now that we would expect to be in service in 2007. Then on Barnett Shale, which I know there's a lot of interest in and we will be in a position to provide a lot more information midyear, we've leased more than 50,000 acres at this time, primarily in the southern region, the expansion region south of Fort Worth and we expect that acreage to increase to 60,000 acres by year end and our plan this year is to drill 20 test wells, some of those tests are underway and we're also in the process of doing seismic tests at this time.

So in summary, on page 33, we're excited about the position the Company is in. For the year we expect significant increases in earnings and cash flow. The improved credit outlook from Moody's is an indication that we've turned the corner on the credit side. We've made progress on the regulatory front and today is another significant milestone for the Company as we get the MichCon rate case behind us and hopefully all of these regulatory proceedings as they close out this year will put us on solid footing for 2006 on the regulated side of the business. As part of our redeployment strategy, we're pursuing a number of very interesting opportunities and as these play out I look forward to being able to provide you much more details on that front.

Our annual meeting is this morning and I encourage you to listen in to hear Tony, our CEO, and Jerry Anderson, our President talk. That will start around 10:15 and the way to access that is through our website at the bottom of the page there. We will be at AGA Monday. We're making a presentation at 3:30. Hopefully we will be able to get through the MichCon rate case this afternoon and the other proceedings and give you some insights into our perspectives on those rate proceedings at that time. With that, we would open it up for questions now, Alicia.

[OPERATOR INSTRUCTIONS] The first question comes from Paul Patterson of Glenrock Associates.

Hi. Can you hear me?

Hi, Paul.

Just on the rate case it's been some time as this rate case has proceeded. I just wanted to make sure, that this is sort of review it again, you guys asked for $194 million with 11.5% ROE. The ALJ, I think was the last one that came out, 60 million with 11% ROE. You also had an interim rate increase of about $35 million, right?

Right.

So if you would get everything that you wanted, theoretically, it would be like $159 million or something incremental increase over the interim rate case?

No.

No? Okay. How would it work?

I'll start on it Don -- Don Stanczyk is with me. This is one of his cases. When we provided guidance in December, our guidance assumed $80 million. Remember, too, when we go through this, it's not just rates. There are other factors in here including how MichCon's pension will be treated. Then a very big factor is the bad debt expense where we're looking hopefully to receive a tracker mechanism which will provide us some relief on that. But, Don, do you want to just touch base on the economics?

Yes. Just one quick comment. We did start out asking for 194 million. Our position was modified through the course of the case so our final position was about $150 million, plus the things that Dave just touched on, the zeroing out pension expense and the uncollectible tracker.

So the 194 went down to 150?

Right.

You guys got 35 million from an interim rate increase?

Yes.

Now, so, in other words, you would subtract that $35 million and that would give you an idea -- would that be an approximate -- you get a, I don't know $115 million in theory, I realize that you may not get everything you're asking for, but does that make sense?

Yes, that's the net incremental amount that we're seeking.

Okay. 115 million. Now, the second big question that I have for you is the synfuels. Just to clarify this it looks like there was a big jump in synfuels, from 64 million versus the 40 million. You do mention in the press release that you guys had more production. With that number would it seem that your number of $215 million might be a little conservative. Could you comment a little bit on that?

Well, the $215 million had embedded in it our estimate of the cost of hedges for the calendar year. So the calendar year hedges that we entered into -- that we entered into last year was 24 million pretax, 17 after tax, so that's netted in there. So if you backed out the hedges you would get to the gross synfuel number which would give you a sense of the higher production.

That makes sense. This new -- I guess it looks like you're sort of hedging the 2006 production, too, so we should assume something similar to that for 2006, similar cost, or would that cost be higher?

Certainly the market has changed so some of the hedges that we're doing are costing more than they cost last year but we've not finalized the actual dollar amount yet that we will spend or the dollars that we will cover but our thinking is to take advantage of the market from time to time and our preference because synfuel cash as you know is important to our redeployment strategy is to get some portion of this cash protected.

Sure. Then finally, just a little bit of confusion that I had on the cash flow statement, you mentioned the payments that you received from your counter parties and what have you with the synfuel but it also looks like it's a negative $82 million on the cash flow statement. And I'm a little confused by that. In other words, it looks like it's a detriment to cash of $82 million versus net income. Could you clarify that for me?

The cash from synfuels comes in several different places. You have -- there's actually three payment streams. There's a reimbursement for the NOLs that comes in and it's all consolidated on our books. Then we receive the variable payment and the fixed payment and they all come through the cash flow statement in multiple places but I don't have the exact number but the cash is in those different line items. Some of it is in cash from operations, and some of it is in the financing section of the cash statement.

Thank you. The next question comes from Ashar Khan of SAC Capital.

Dave, can you just mention the implications of the remaining things which are on the agenda? You had mentioned there are two or three other stuffs relating to MichCon, Detroit Edison, how we should read those things? Could you just tell us a little bit more about them?

Well, I said, I'll start and I'll ask Don for help. There's a GCR case filing for the MichCon case, then there's, for Detroit Edison, it's a 2003 customer choice implementation case. That one -- we've been through prudency reviews and we did a good job of segregating our costs there so I think that's just finalizing that case. There's also one final item that there was a complaint that was filed by one of the alternative suppliers that we weren't connecting customers quick enough and this is what we think of as a 45-day case. Recently there was an administrative law judge recommendation that there was just a size that there was a penalty he was recommending around $800,000. We still disagree with the positions of the interveners, but we'll see where that goes. Don, do you want to comment on the GCR case or these other two cases?

Sure. The GCR case Dave is talking about is a fairly old case. It's the 2002 reconciliation case and there were a number of issues that were addressed by the parties, and this will really just put that case to bed. But it's fairly old, it relates back to when we transitioned out of a fixed GCR price period. Then, again, Dave touched on the other Edison cases. The complaint case, as Dave said, we don't agree with the other parties, and it remains to be seen what the commission will say. And the choice implementation cost I believe is just a rehearing request.

Okay. So marginally they're not of much significance, if I'm correct, the main thing is this gas case, correct?

The gas case there are some potential disallowances in the GCR case but going forward the gas rate case is by far the biggest.

The gas case as you mentioned, what you expect, if they allow these trackers we should not see these uncollectibles and pension healthcare negatives going forward. Is that a fair assumption?

Well, that's a fair assumption on uncollectibles. There is no tracker proposed in the proceeding for retiree healthcare, and what's been proposed on pension is because MichCon is overfunded, it's been booking negative pension expense, so the proposal is to zero out negative pension expense, and what that does is it improves cash flow.

Okay.

So just to put these side by side on Detroit Edison we have a pension tracker. MichCon is basically the proposals to remove negative pension expense, which helps us on the cash and credit side of that business. We have a retiree healthcare filing right now for Detroit Edison longer term we would like to also do something like that on MichCon. It's not in this case. Then on bad debt both businesses have bad debt challenges but the gas is much different. Bad debt at MichCon last year I think was close to 60 million and what was proposed and recommended by staff was a number of giving us something like 37 million in base rates and then a tracker where we would receive $0.90 on the dollar for anything over that so it takes a significant portion of the bad debt expense risk off the table for the gas business.

Thank you. The next question is from Daniele Seitz of Maxcor Financial.

Thank you. I just was wondering how much was the -- in the MichCon case I think that there was a a disallowance regarding the merger premium or merger return and how much was that? Can you remind me of that?

It was $20 million and that was a proposed disallowance by the administrative law judge.

Okay. On the redeployment of cash you are listing roughly five areas. Could you give a sense of where most of the cash is going to be spent among those five areas?

Still a little bit difficult. There's a page in the appendix that talks -- difficult, when I talk about 2005, on the appendix there's a page on page 47 that -- it's the page that we showed in December, which shows you 3 to 450 million in the power and industrial which is where we would do the DaimlerChrysler-type projects, coke batteries, and the waste coal, 250 to 350 in unconventional gas and the capital consumers there would be Antrum Shale and Barnett Shale. Antrum Shale we just recently acquired 10,000 expansion acres in Northern Michigan and we're drilling test wells there right now also. So there will be much more known midyear not only about Barnett but also Antrum. The last group was 50 to $100 million and that's the, really the investment in expansion of storage, the expansion of the vector pipeline and then the millennium pipeline and I think when you think about this year the areas that we could actually spend -- or make commitments to a sizable scale but we won't know I think a lot more until midyear is our items like on-site energy, coke battery, and then Antrum and Barnett are really the four areas right now that are starting to line up that look like there's a higher probability but again, we won't know until midyear and I think at our conference midyear we will be able to tell you much more about scale and timing for this year and next year.

Thank you. The next question is from David Grummhaurs of Copia Capital.

You all had a mark to market on the synfuel I think last quarter of maybe $7 million.

Right.

Doesn't that go against the 32 million in terms of what will reverse, or am I misunderstanding that?

If you look at the page where I outlined the synfuel expense for the year, you see that $11 million on page 24. The total net after tax was 17 million.

Okay.

And that's because we really recognized part of that in 2004.

Okay. That makes sense. Secondly on the co energy and the trading obviously you have the big mark to market. Is that all of it? Even if we add back what you talk about in the press release there still seems to be some losses there. Are those seasonal? Obviously you haven't changed the guidance but can you give us a little more flavor about what's going on there?

There's really nothing going on there. It's seasonal. We do have a combination of storage and there's a couple other businesses like the long-term transportation contracts that get marked to market but 99% of this is storage, and it's something that unlike other marked to market situations that are hard to predict, in this business line you're locked in your economics so you can really stand back with confidence and say this is timing.

Thanks for the time.

Thank you. The next question comes from Zack Schreiber at Duquesne Capital.

Just a question in terms of the synfuels and the portion that was not recognized versus the portion that was recognized. The 27 million versus the 32. First, I assume that's all apples to apples, all up pretax, right?

No, this is all -- everything on this page 24 is net after tax.

Oh, that's all net after tax. Okay. That's helpful. Second question is, is on what basis do you defer revenues, i.e. -- it seems like part of it is a qualitative assessment, right.

It's qualitative and quantitative. I mean, we're looking at the forward curve and probability through an options pricing model, we're talking to economists, we're looking at research reports. It would be a lot easier if, for example, oil was $42 and not volatile but when oil was bouncing 50 to $56, and had much more volatility, this early in the year it's just challenging. So as time goes on it could be different and I know to some of you this is conservative accounting. We would rather if we're going to lean on one side of the line we'd rather be conservative versus be aggressive on revenue recognition and have the SEC chasing you down. So I know it's disruptive to the quarter but if we're right, this is timing and it all comes back.

Got it. Can you just sort of talk about what's going on with the Detroit economy, the $7 million negative in the quarter? Is that stuff that you think you get back over the course of the year? We read a lot about what's going on with GM and then some of the ripple effects through the automotive industry sort of food chain with the suppliers.

Right, right. It's a good question.

Do we have enough sort of head room and flexibility in some of the rate increases that we've been granted that even if kilowatt hour growth is 1% lower, 0.5% lower that you can absorb that?

That's a good question. First of all, I think our forecast for our load has not changed. We're seeing some mix change among customers right now but you read about GM and Ford and others in the paper every day. The automobile sector, if you took the direct automobile accounts for Detroit Edison it's about 14% of Detroit Edison's sales, 10% of the revenue. Now, when everything normalizes, keep in mind Detroit Edison is half the Company so it's a smaller portion of the total DTE pie. If you look at Detroit area light vehicle production, so this is -- and it's in the appendix on page 49, this is what you need to watch for our load because the factories drive the electric load. Detroit area production has been flat on this chart and it's projected to be flat. So that -- I think what we're getting impacted more is not the fact that -- the factories are running out. We're impacted a little bit more just by what I describe as a secondary impact. Unemployment has been slightly higher in Michigan during this entire recession.

And the other point to make is on page 48. The state continues to work hard to diversify its economy. We're first in the U.S. in terms of new major corporate facilities and expansions, in Michigan, and the number of technology jobs that aren't related to the auto industry that are moving to Michigan, we have a couple high-tech centers, one in Oakland County, one in Ann Arbor, so it's something that we'll have to continue to watch this year. Certainly I know with GM and the headlines sometimes that it overshadows us. Part of it is valid, a lot of it is not valid. We've seen the auto industries go through cycles of digging in deep and getting their cost structures in place and they're going through one of those cycles right now and they've got to address their legacy costs.

That will conclude the question and answer session. Do you have any final comments?

No, I thank everybody for joining us and I appreciate the great, great questions. We look forward to this afternoon and this milestone and look forward to seeing everybody in New Orleans. Thank you.

That will conclude today's teleconference. You may disconnect at this time.