密歇根天然氣 (DTE) 2006 Q1 法說會逐字稿

Good day everyone, and welcome to DTE Energy's first quarter 2006 earnings results conference call. As a reminder, today's call is being recorded.

At this time for opening remarks and introductions, I would like to turn the call over to your host, Mr. Dave Meador.

Thank you. Good morning everybody, welcome to our first quarter conference call. I encourage you to read the Safe Harbor statement on page 2 of our presentation, which is on our website regarding regarding forward-looking statements. And I am going to start on page 3.

With me today is Nick Khouri, our Vice President and Treasurer, and Peter Oleksiak, our Corporate Controller. I have also additional remembers of the team with me, I might call on during the Q&A session. We just did an Analyst's Meeting in New York on April 6th, and hopefully we answered most of your questions at that time. Tony and Gerry will be making a presentation this morning at our Shareholders Meeting, which will be webcast at 10am, I encourage you to listen in to that call. Given that, our attention is to focus on the quarter and the outlook for the year in this call this morning.

Let me provide an overview on page 4 and then I'll turn it over to Peter. Overall the first quarter of 2006 was a strong quarter, with an 11% increase in operating earnings over the prior year. Year-over-year improvements at Detroit Edison are driven by the expiration of the residential rate caps, and then lower choice volumes.

We had flat earnings at MichCon year-over-year, and that was driven by the rate increase, which was offset by significantly warm weather in the first quarter of 2006. The nonutility earnings increased due to the flow back of timing related impacts that we talked about previously, and this was partially offset by higher synfuels deferrals in the first quarter of 2006.

We are maintaining our guidance for the year, and this assumes no legislation and no phrase out, and we'll talk more about that in the presentation. This forecast is a 10 to 20% increase in operating earnings for 2006 over 2005, and as we detailed at the business plan update in New York on April 6, we're planning a substantial amount of investments in our utility and nonutility businesses. Nick will take you through capital spending for the first quarter. This provides the potential over time for an average operating earnings growth of 9 to 10% over the 2006 to 2010 timeframe.

With that overview let me turn it over to Peter, who will take you through a brief overview of the quarter.

Thanks, Dave. And good morning to everyone. I would like to start with slide 5 and a summary of the quarter's results. For the quarter operating earnings per share for DTE was $0.96. I would like to remind that a reconciliation to GAAP reported earnings is contained in the Appendix. Primary contributions for the quarter was Detroit Edison at $0.37, and the nonutility segments at $0.42, fuel transportation and marketing was the biggest nonutility contributor, driven by the accounting timing flow back that we outlined in the year end call.

Moving on to page 6, where we can see each segment's performance year-over-year, we'll be going over each segment in more detail on the following pages. Overall earnings are up 17 million, including synfuel, an increase of 45 million when you exclude synfuel. As indicated on the previous page, fuel transportation and marketing is a significant contributor to the quarter-over-quarter increase for the first quarter withdrawal of gas storage.

Let us continue on to slide 7, and go through some details beginning with Detroit Edison. The key driver for our electric utility was the residential rate cap expiring this year. We also experienced a step-down in the volume of choice, which has been impacted by the increase in commodity prices. Weather related impacts for the quarter were a combined 13 million net income decrease.

Moving on to page 8, and a review of MichCon's performance. MichCon was flat quarter-over-quarter, with the rate increases from last April's rate order offset by a drop in demand, due to an unusually warm winter. With the final rate order, merger interest is no longer billed down to MichCon, which provided 6 million of income increase, there's an offset for this increase at the parent.

Moving on to the nonutility earnings with slide 9. Total nonutility operating earnings are up 16 million year-over-year. Synfuel was down in the quarter due to higher deferrals of revenue. The next page will go into more detail on synfuel operating earnings. On conventional gas, it was flat year-over-year, with higher startup expenses offsetting increased production. This is an update on Barnett shale later in this presentation.

Turning to page 10, and synfuel related changes quarter-over-quarter. As the table shows, production volume and production income is consistent with last year. The biggest change is the increase in the deferrals. The higher level of deferrals is due to the increase in oil prices, and the accounting associated with the partner payments which are contingent in nature. This will reverse if prices fall below the phase out range, or if legislation passes. Details of the revenue deferral and overall synfuel operating earnings can be found on page 25 in the Appendix.

Now to page 11 which provides an update on Barnett Shale. During 2006 we plan to significantly increase production. We exited 2005 at 4 MMCF per day production rate, and ended the first quarter at 6, and we are currently at 9. We are projecting to reach 15 to 20 by the end of the year. For this production profile, the income for Barnett will be weighted to the second half of the year.

With that, I would like to turn the discussion over to Nick Khouri.

Thank you, Peter, and good morning. Improved cash flow and balance sheet strength remains a key priority for management and the Board of Directors at DTE Energy. And as expected cash flow is improving from the levels of the prior couple of years. Page 12 shows cash flow and capital expenditures for the first three months of 2006. The tables compare the first quarter of 2006 to the first quarter of 2005.

Starting on the left-hand side of the page, adjusted cash from operations was up over 40% from the prior year, from 476 million to 685 million. This large increase is due to a combination of factors, including higher synfuel production payments, and a seasonal improvement in the net cash at the nonutility businesses.

During the first quarter, even after an increase in investments, net cash after the dividend and capital, was positive by over $250 million. For the full year 2006, guidance for cash flow and capital expenditures has not changed, and is shown in the Appendix. Cash flow tends to be higher in the first quarter of each year, due to the seasonality of the gas business. Nevertheless, by the end of March we were over 40% of the way to our full year 2006 guidance.

The right side of page 12 details capital spending in the first quarter of 2006. In total, year-over-year capital spending was up from $198 million to $368 million, $170 million increase. The largest year-over-year dollar increase was for operations at Detroit Edison reflecting the first quarter 2006 refueling outage at the Fermi nuclear facility.

Environmental spending was also higher consistent with our expected annual spend of approximately $200 million for environmental remediation this year. On the nonutility side, capital in the first quarter increased 78 million year-over-year. The major components include increasing the ownership at one of our exist coke battery facilities, capacity additions at an existing Michigan gas storage facility, and the ramp-up in CapEx in the Barnett unconventional gas business.

Page 13 lists the major balance sheet metrics, followed by us and the rating agencies. We continue to target a strong BBB/BAA2 credit rating, reflecting the improvement in underlying cash, funds from operations, divided by total debt, increased year-over-year from 19% to 24%, continuing our move to the long-run target of 26 to 28%. Leverage stayed flat at about 52%, for the remainder of the year leverage may increase slightly, depending on actual capital spending, and as mentioned by Peter and Dave, the estimates for the full year assume no synfuel credit phase out.

Now let me turn it back over to Dave, to review the full year 2006, and provide a wrap up.

Thanks, Nick. On page 14 is the guidance slide, it's the same slide we had in the presentation on April 6. Detroit Edison and MichCon are projected to have a strong year-over-year increase for the year, as they return to their full financial health, and return back to their authorized ROE levels of 11%. In the nonutility group it's projected to earn 325 to $345 million this year.

Total guidance is $3.60, to $3.90, as I indicated earlier, that's a 10 to 20% improvement over 2005 operating earnings, and as we commented in New York, we will continue to show operating earnings with and without synfuels, and you see on the bottom, excluding synfuels the projection for the year is $2.41 a share to $2.66 per share.

Our current guidance continues to assume no legislation and no phase out. If oil prices remain high, and without legislation there could be a phase out. I'll go through the details on the next slide. If legislation does happen that provides certainty for 2006, and potentially some earnings upside for this year, and we'll update guidance during the year as the events merit it.

Page 15 is a repeat of a slide I used at year end during our conference call. It shows the 2006 impact on cash flow and net income resulting from no legislation and phase out, at different gradations of phase out. This analysis is before any asset impairment or goodwill impairment for the segment, but we have done this in the past, and I think it has work well to show you the math at different levels of phase outs, how this would impact cash and net income, which it impacts the two slightly differently.

As I indicated it's very early to predict whether it would be a phase out, and whether that would or wouldn't happen, or whether legislation would also happen, which would make this a non-event for 2006. We believe that this primarily will play out during the year, but we're really looking at the second quarter, for a timeframe that we would see a lot of this play out.

On page 16 is the summary, our guidance indicates as I have said, a 10 to 20% improvement over our 2005 earnings level. The first quarter is off to a great start with earnings up 11%. As we outlined in New York on April 6, we plan significant investments over the next 5 years, in both the utilities and the nonutility group. Our utilities are positioned to grow 6%, based on our customer focused investment plan, and three nonutility businesses excluding synfuels, are projected to grow 20% on average between now and 2010.

Cash flows from the nonutility group excluding synfuels, also will increase dramatically. This year we're projected that cash flows from that group excluding synfuels, will be 115 million, and that will grow, when you get into the post synfuel period, it will be an annual estimated cash flow of 300 to $350 million from our nonutility group excluding synfuels, and as we have said, the balance sheet is stable and we have the flexibility to execute our plan. The dividend is attractive, and as the pay decreases over time, we are more than open to consider an increase in the dividend.

On page 17 as I commented our Annual Meeting this morning starts at 10:00 am, both Tony Earley and Gerry Anderson will present. And we will also be presenting at the AGA Financial Forum that will be led by Steve Ewing on Monday May 8th. Both events will be webcast. I encourage you to listen in at 10 a.m. this morning if you could.

And with that Jeff, we will turn it over back to you to take questions from the group.

Thank you. [OPERATOR INSTRUCTIONS] And our first question today will come from Credit Suisse's Dan Eggers. Please go ahead.

Good morning, guys.

Good morning, Dan.

First question can you just give a little color on when do you guys decide to start gearing back on synfuels? Do you keep pushing hard through the second quarter or until presumably there's an indication one way or another out of Congress and then you make a decision, or when should we look for this to start idling back to preserve some of the earnings.

We have not made any decision to curtail production at this time, so we are running full out, and as you know the discussions in legislation right now are very active.

So my sense is, that we will watch this closely over the next 60 to 90 days, and if you got to a point, you know, later in the second quarter, and you had no legislation or no end in sight on legislation and continued high oil prices, you know, we will certainly have to look it at that point in time.

And you know, my sense is that if we got to pint where we were curtailing production, and there could be some flexibility to make up a curtailment later in the year, but if we really got to a point where we were curtailing production, and we thought we also couldn't make it up, it would be an inflection point, where we would in essence have to come back to you and say guidance is changing for the year, but up until now we're still running full out, and we're sticking to our numbers.

What are your obligations to customers, the off-takers of the synfuel [coal]? Is there an an announcement or a warning period you need to give them before you stop delivering?

We work pretty closely with them, and we're in constant communication, and we have the ability if we needed to, to shut down very rapidly and start back up very rapidly. We have contractual terms with them, but I think because of the constant communication and everyone is pretty well-informed and tuned into this, we can react both ways very rapidly, if need be.

And your financial partners, what are their clauses for their ability to I guess pull the plug, or say we don't want you to run any more? Do they have some level of veto power at some point?

Sure. We as operators have the flexibility, as Dave said we are in constant contact, but as operators we have the flexibility to ramp down production or increase production.

So they have no input or veto power on the issue.

As Dave said, we are in constant contact with them, so it's not like they are not part of the process, but at then of the day as operators we have the responsibility.

It's ultimately our decision.

Can you give any updates on kind of Michigan and procedural schedule at this point in time, as far as them looking into your earnings?

You are referring to the show-cause order?

Yes.

I have Don [Stansak] with us from our Regulatory Group, and I might just ask him to comment in terms of schedule, and how that will play out for the year, just to remind everybody.

Yes, the schedule as it sits today is we file our case on June 1, the Commission staff and other parties file on August 23, and then there's, the actual hearing is the end of September, expected Commission order by year end.

Great. Thank you, guys.

Thank you.

And our next question today will come from Shalini Mahajan, UBS.

Morning.

Good morning.

I had a question on page 29, you give the estimated phase out plan. It seemed to bode for '06 and '07, there seemed to be almost $2.00 less than some of the other companies that have given out their phase out ranges.

These are estimated phase out ranges, what we try to do is convert the actual phase out that is used in the IRS, to a NYMEX equivalent. What we're showing here is a NYMEX equivalent. And there's some uncertainty between the two. Number 1, I'm not sure what other companies are showing, but generally there is some uncertainty, not just in the overall price of oil, but converting that from the NYMEX to the IRS requirements. More of an average oil head price.

Okay so the differential assumption is this difference between the companies?

I'm not saying-- I don't know what other companies are doing to be honest with you, so I can't say specifically what the difference is, but my guess is I know that's an additional uncertainty that we look at each month.

Okay. And just to clarify on slide 12 when you indicate in your cash flows the central production payment, does that take into account the partial phase out of that?

No, on slide 12 the synfuel production payment assumes no phase out.

Okay.

And this is the cash flow statement so we're not reserving, this is cash that has actually come in the door.

Okay. So I mean, how do I tie this back to slide 15 where you are giving the phase out impact on cash flows as well?

I think what you would have to do is look at the total year forecast, which is in the Appendix, that's your start point to look at your total year cash flow forecast on page 30 in the Appendix.

And then you might want to turn to page 23, which clarifies some of the cash flow implications of synfuels. On slide 23 you see for 2006 we're estimating without any phase out, we would generate on a net basis somewhere between 450 and $470 million of synfuel cash flows.

You'll also see given that our hedge position and some of our tax-credit carry forwards, that are not related to oil prices about 70% of that cash is protected, so 460 is what we think with no phase out, so there's at risk about $140 million, which is 30% of 460 million is probably the best way to think about it.

Okay. Okay. And then one final question, what would be the trailing 12 months regulatory ROE at Detroit Edison.

9.5% for both Detroit Edison and for MichCon, the trailing 12-month.

And what, is this combined or 9.5% for both?

That's 9.5 for both.

Thank you so much.

You are welcome.

We will now hear from KeyBanc's Paul Ridzon for our next question.

Good morning.

Hi, Paul.

Hello. What was the impact of the mark to market of the oil hedge for the quarter, I didn't see that. Or maybe it didn't jump out at me.

The impact for the quarter was $50 million.

Positive?

Positive. It really reflects the [bulk] and the value we basically excluded from earnings last year, a portion of the '06, and then it also increased again in the first quarter, so it was the full amount.

And relative to kind of the assumptions that form the basis of guidance, what are you seeing on the return of customers, is that accelerating given the current energy market?

No I think it has not changed from the forecast on choice that we provided on April 6th.

Okay. Thank you.

Okay.

And our next question today will come from Paul Patterson from Glenrock Associates, please go ahead.

Good morning, guys.

Good morning, Paul.

Just wanted to first of all go over weather. I guess it's about a $28 million impact versus last quarter, or excuse me, Q1 '05, but could you tell us what out was versus normal?

And then the-- the second question that I have is when we spoke in New York earlier this month, you guys mentioned that the tax reconciliation bill might be one way this is done, but it might be done, this the synfuel legislation, that it might also show up in another bill, and I was just wondering if you could elaborate a little bit more on what your guys in Washington are seeing on the ground, in terms of where things might be coming without that synfuel in little more detail, that legislation.

Well, you know as we said in New York, and you know that the negotiations are underway. There's a lot of activity at this point in time, and we're hopeful on passage, but it's difficult to really determine you know exactly when this will happen, and does it come through in one bill or two bills? So it's something that we are all watching very closely,

But as you know this was scored as a revenue enhancer, and whether it's one or two bills, they are looking for ways to close the gap on revenues. So the fact that this was looked at a second time and scored positively, puts it in at least the positive column, no matter how it's addressed or when it's addressed.

Okay. And you mentioned the timing of 60 to 90 days, is that how long you think the conference committee is going to go on, or-- ?

No. No. I am not good at predicting any of this because it's just really hard to present. You know, at one point in time I think we all hoped this was going to be resolve before the spring recess, and now they are back at it.

The good news is there seems to be a lot of activity, and you know, I think to say whether this happens in 2 weeks or if it's 4 weeks is speculative. What I was just referring to, is really if it doesn't happen, and either it completely goes away, or for some reason it seems to be just in continued suspension, and we have oil prices where they are, we are going to have to seriously look at curtailing production, but that's the 60 to 90-day timeframe they was referring to.

Okay.

And Peter--

Yes, Paul I know you were asking about the weather. Last year the quarter, we were pretty close to normal about 3% better in terms of heating degree days. This year was 13% down, so essentially the variance you are seeing this year are deviation.

So this year's deviation versus last year's is pretty close to what it is for normal.

Pretty normal, yes.

Okay. Thanks a lot guys.

Okay.

[OPERATOR INSTRUCTIONS] And our next question will come from Daniele Seitz, Dahlman Rose & Co.

Thank you, just as we're doing, when do you intend to file for your next rate case, and also there seems to be in Michigan, the capacity needs, capacity requirement review. When is this going to conclude? And do you already have to present some of the plans for the next capacity?

Let me start with the rate cases and then I'll ask for Don's help on the capacity needs forum. On the rate cases, as we mentioned, the two utilities will be in different cycles.

MichCon given the nature of the business could be in more frequent rate case cycles, and our current thinking is we will file a case later this year, but that that might change. We might decide not to do that, but our current thinking is later this year.

If you recall on Detroit Edison side, when the rate deskewing case came out at the end of last year, we were mandated to file a case for Detroit Edison by mid-2007. In the meantime, we have this show cause order that will play out through this year, and the timing for that is to wrap up at the end of December, so if nothing else happens, we would be filing a Detroit Edison case in 2007 is the current thinking.

But given also our Performance Excellence Program that we have initiated, if we are able to execute as planned, Detroit Edison actually would not need a rate increase until the 2009 timeframe is our current thinking. So, you know, that's kind of the timeframe on rate cases. And Don, do you want to comment on the capacity forum and how that will play out this year.

Sure, Dave. What the status on the generation capacity need forum is, the Commission during last year conducted a review and pursuant to that, the Governor just last month directed the Chairman of the Commission to development a comprehensive energy strategy for review. So that's really where we're at right now. The Chairman of the Public Service Commission has just started that process, and as I recall there's four subcommittees, that he has put together, and that will probably take the better part of this year to get through that process.

Okay.

With an ultimate recommendation to the Governor, probably towards year end or the beginning of next year.

And do you have to, are you contributing some filing for that or not?

We have participants representatives on the various subcommittees.

Okay. Just from the point of view of the first item, the environmental costs, are they automatically recovered, or do you have to file for that eventually?

We, just as a reminder, our previous environmental costs we, you know collected 100% of the incurred environmental costs in the last rate case of Detroit Edison, and that future environmental costs have to be currently under today's structure, recovered through a rate proceeding. So this will be, it will certainly be part of the show cause filing, and it will be part of this rate case that gets filed in 2007.

As part of that 2007 rate case we could also look to seek other mechanisms to recover environmental costs going forward, but that would be part of that filing that will be made next year.

Great. Thank you.

You're welcome.

And our next question today will come from Dwight Asset Management's, Phyllis Gray. Please go ahead.

Good morning. I have a question about the electric gigawatt hour sales figures on page 8 of the supplemental information.

Okay.

It shows industrial sales going up 9%, and I wondered how much of that was due to choice sales migrating to the industrial category?

Yes, I can take that one. Overall when you kind of exclude weather, exclude choice, our non-residential load was up close to 2% quarter-over-quarter. So a good portion of that is choice returning.

And do you know if you combine the choice, the industrial choice customers with the non-choice industrial customers, what the electric deliveries to industrial customers did quarter-over-quarter?

That would be, you know, there's impacts of some weather but overall that is really the 2% that I mentioned earlier. If you look at the service territory, which is a combination of choice and our bundled customers, which covers that, electric deliveries.

Thanks very much.

You are welcome.

We will now move on to Gregg Orrill from Lehman Brothers for our next question. Please go ahead.

Thanks my question has been answered.

All right. Moving on, we will hear from Ashar Khan from SAC Capital.

My questions have been answered. Thanks.

[OPERATOR INSTRUCTIONS] At this time, we'll take the last question in the queue at this time from KeyBanc's, Paul Ridzon. Please go ahead.

Just kind of follow up, you gas rate case implemented a bad debt tracker, but it looks like uncollectibles were still negative, and I guess any flavor you have on demand destruction?

Well, we had indicated with the high gas prices, that we are seeing demand destruction at MichCon, my recollection at the year end call we said we thought it was going to be about $10 million at MichCon, and this works both ways now, with the milder gas prices, we're actually seeing the bad debt expense come in lower than we thought it would, and then we still have the tracker there.

So you know, slight demand destruction and as you know with gas prices going up and down, there are some things that are affected positively, and some things that are affected negatively.

How are the dynamics of the bad debt tracker working? I mean, incrementally it got worse.

Dynamics are working really well, and actually you know I think our experiences on the collections side, whether you look at just arrearages, or the actual bad debt expense, the numbers are much lower than we thought they would have been, and a lot of that has just been attributed to a combination of mild weather and lower gas prices.

Okay. Thank you.

Okay. Thank you and thanks again, for joining us. I encourage you to dial in if you get at chance at 10:00 for Tony and Gerry, and we look forward to seeing you at the AGA Financial Forum. Thanks.

Thank you everyone for your participation. That does conclude today's conference, and at this time you may now disconnect.