密歇根天然氣 (DTE) 2006 Q2 法說會逐字稿

Good day, everyone, and welcome to this DTE Energy second quarter 2006 earnings 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 Mr.Dave Meador, please go ahead, sir.

Thank you. And good morning, everybody, and welcome to our second quarter conference call. Before we get started, I refer to you the Safe Harbor statement on page 2 and encourage you to read that page. With me this morning is Nick Khouri, our VP and Treasurer; and Peter Oleksiak, our Corporate Controller; and a few members of the management team that I might call upon during the Q&A session, I am going to start on page 4 of the slides, which are on our website if you haven't pulled them down.

I want to start by reviewing our year-to-date accomplishments on this page. The two utilities have had solid results and our accomplishments that we will lay out to meet the objectives that we put in front of you late last year. The nonutility earnings have been impacted by the probable 2006 tax credit phaseout and also by the timing of accounting earnings at energy trading and we'll take you through that. We'll go into all of this in detail, but I just wanted to remind you that even with a full potential phaseout of synfuel tax credits in 2006 and 2007, the projected synfuel tax flows are about $1 billion that we still expect to receive between now and 2009.

We are communicating guidance excluding synfuels going forward to demonstrate the earnings power without synfuels and also to recognize that many people do look at synfuels on an MPSC cash flow basis. We are on track for our operating earnings, ex synfuels for $2.41 to $2.61 per share, which is consistent with our prior communications. In addition, we are meeting our objectives on our performance excellence plan, that we've referred to as our PEP program. To date, about 350 employees have accepted voluntary separation offers and we are on track to deliver savings of 50 to $100 million this year and that's before our cost to achieve. We are executing our growth plan and we'll take you through that in both the utilities and nonutility businesses. Year-to-date, we have invested $80 million in environmental expenditures as planned at Detroit Edison and we have inspected 170 miles of gas pipeline at MichCon also as planned.

On page 5 is an update on some of the nonutility businesses. At our power and industrial businesses we have invested $49 million year-to-date. Our accomplishments here include working with an existing customer to manage and sell gas that was previously being flared. We are near agreement on another energy services project in the auto sector and also a pulverized coal project with the steel company. We entered into on out-take agreement with one of our speakers as we try to drive that group towards profitability. And additionally we expanded operations at the Daimler-Chrysler Jeep plant in Toledo, Ohio. It's evidence of a relationship that is going very well with that business.

We continue to make great progress in our unconventional gas business where we've invested almost $90 million year-to-date. We are hitting all of our objectives there, with one exception, and that is the 2006 net income. This business is in early stage development so our focus is on things like acreage, number of wells, the increase in production and also proving out the acreage as we try to drive up our year-end reserves. We're hedging the output of that business as it comes on line 3 to 5 years forward. While the forward market if you go out into 2007, 2008, is a $9 market, the prompt months have been driven down as a result of weather earlier this year and very high storage positions going into the storage cycle, which has driven down gas prices this year and that's affecting net income in that business, but the fundamentals are on track.

And last is fuel transportation and marketing where we invested $44 million year-to-date in projects including a new Great Lakes coal terminal that is being constructed in the Chicago area and nonregulated storage expansion of 14 bcf of storage in the Michigan basin. With that, I'll turn it over to Peter Oleksiak who us going to take you through the results for the quarter.

Thanks, Dave, and good morning to everyone. I'd like to start with slide 6, and a summary of the quarter results. For the quarter operating earnings per share for DTE was a loss of $0.01. I'd like to remind everyone that a reconciliation to GAAP reported earnings is contained in the appendix. A major contributor to the quarter's results was Detroit Edison at $0.46 reflecting return to financial health for our electric utility. The nonutility segments were a combined loss of $0.32, the primary driver to the nonutility quarter results was the power industrial segment with a loss of $0.26. The synfuel business contained within the segment had a loss of $0.24 reflecting the suspension of production and recording a reserves for the forecasted phaseout of tax credits in 2006 and 2007. Details of the synfuel impact on the quarter will be covered later in the presentation. Fuel transportation and marketing was a $0.07 loss for the quarter driven by accounting timing at our trading business.

Moving on to page 7 where we can see a summary of each segment's performance quarter over quarter. I will be covering each segment in more detail later in the presentation. Overall operating earnings are down 41 million including synfuel, up 15 million when you exclude the impact with synfuel. As I mentioned on the previous page, the tax credit related reserves and trading accounting time were the significant drivers of the quarter over quarter decrease.

Let us continue on to slide 8 and go through some details beginning with Detroit Edison. Operating earnings for Edison was up 35 million in the quarter. A key driver for electric utility was the residential rate cap expiring this year. Allowing the flow through of the November 2004 rate order. We also have experienced a step down in the volume of choice which has been impacted by high commodity prices. The 12 month rolling ROE for Edison is 9.9%.

Moving on to page 9 and a review of MichCon's performance. MichCon was down 8 million-quarter over quarter impacted by the drop in demand due to mild weather and increased conservation. And a rather normalized basis, our gas utility is performing as expected.

Let us turn to page 10 and the nonutility business segment. Total nonutility operating earnings for the second quarter of 2006 is a loss of 55 million, compared to earnings of 20 million in the second of 2005. Power and industrial excluding synfuel was down in the quarter, due primarily to the impacts of the tax credit phaseout at our biomass business. As previously mentioned, our fuel transportation segment was impacted by accounting timing associated with our trading business. I will cover synfuel and unconventional gas in the next two pages.

Moving on to page 11 and the details of the synfuel earnings for the quarter. Production related income was down for the second quarter reflecting the suspension of production on May the 12th. Given recent oil price forward curves we have assumed a phaseout for both 2006 and 2007. As a result of this assumption, we recorded an impairment of 6 million for the assets on our books representing our share of the ownership. This charge is part of the reserves in deferrals of 107 million recorded in the quarter. The remaining reserves are mainly related to payments received year-to-date that are refundable and synfuel-the related receivables for both 2006 and 2007. More synfuel earnings details included in the appendix.

Page 12 provides an update on Barnett Shale. In the first half of 2006, we have met our plan to significantly increase production. We entered the year at 4 Mmcf per day production rate, and have increased to 11 at the end of the second quarter. We currently have an additional 10 awaiting pipeline completion. With this production profile, the income for Barnett will be weighted for the second half of the year. This segments year-to-date income performance has been impacted by the drop in gas prices. With that, I'd like to turn discussion over to Nick Khouri.

Thanks, Peter. On page 13, improved cash flow and balance sheet strength remains a key priority for management and the Board of Directors. As expected, cash flow is improving from the levels of the past couple of years. On page 13, we compare year-to-date cash this year with the same period in 2005. DTE's internally generated cash including synfuel payments totaled a little over $1 billion for the first six months this year, nearly 30% higher than a year ago. In addition, as the table shows, capital expenditures are up about $300 million from last year. After capital and dividend payments, net cash was positive, 172 million, during the first half of 2006. A solid first half result for cash.

The right side of slide 13 details capital spending. As you can see, we are stepping up our investment to the utility and the nonutility businesses. Detroit Edison's capital totaled $500 million so far this year with increases in both base utility operation and environmental remediation. For the nonutility businesses, as Dave mentioned, during first half of this year, we were able to invest in projects meeting our strict risk adjusted return requirements. In total nonutility spending reached 182 million for the first 6 months of 2006 compared to 59 million last year.

Page 14. On this page we continue to target a strong BBB BAA2 credit rating. This page shows some major balance sheet metrics followed by us in the rating agencies. Second quarter, 2006, compared to 2005, showed improved cash to debt coverage metrics with FFO to debt rising to just under 22% while leverage stays around the 52, 53% mark.

Finally, on page 15, we detail the expected cash from synfuel. Given its short remaining life we have consistently focused on net cash generation not earnings power as a measure of synfuel success. Even if the facilities never run again, we expect about $1 billion of net cash between now and 2009. The largest component of the $1 billion is made up of tax credits that were earned but not used in prior years and will now be converted to lower cash taxes between now and 2009. Moreover, this slide assumes no legislation on tax credits and oil prices of all the phaseout range. Should either of those assumptions prove conservative, synfuel net cash will increase. With that, let me turn it over to Dave.

Thanks, Nick. On page 16 is our 2006 operating earnings guidance which is 425 to $470 million or $2.41 to $2.66 per share. I think earlier in the presentation I said 2.61. It's $2.66 per share. And that excludes synfuels. As you can see, it's a significant 47% improvement over the 2005 actuals on a comparable basis. We'll continue to provide updates on synfuel cash flow and earnings as oil prices change and we also go through the legislative process, which we can talk about in Q&A, but it's something that is actually happening even possibly today as the legislative process continues to look at the pension bill and the possibility of including ing that the tax extender items, including section 29 credits. But what you can see in this guidance as we show you this ex synfuels, we're attempting to position synfuels on a cash basis, which as Nick laid out, is very positive. But on the whole, as you get updates from us in the future, we want to position this that there's potential upside and as we update you down the road, hopefully we'll be giving you positive news and kind of set synfuels aside as a potential cloud over future earnings and cash flows.

On page 17 are some of the earning drivers for the remainder of the year. At the utilities, these include the local economy, summer electric load, add MichCon it includes weather, this is a business that makes most of its money in the heating season. So obviously we're looking forward to, after a very mild beginning of the year with MichCon, we're looking forward to the heating season at the end of the year and is ongoing conservation. And then at both utilities, another driver is the PEP related 2006 cost reductions. At the three nonutility businesses, the drivers include impacts of tax credits, natural gas prices, and production levels at Barnett. And then the timing of accounting earnings at energy trading. And then last, higher storage margins at our pipes and storage business.

On page 18. Looking ahead for the year, we'll continue to execute our growth plan. We are on track so far this year, and we have every expectation to be able to meet our milestones for the remainder of the year. At Detroit Edison, you will see us continue to spend our planned environmental spend where we will spend this year, 200 to 225 million. The 15 to 20 million of pipeline integrity spend at MichCon, which is on track and then the additional 17 bcf of utility storage at MichCon. We have two storage projects. There's a utility storage of 17 bcf and we also have a nonutility storage project.

On page 18, as I -- I'm going to continue on, I'm sorry on page 18, as I mentioned the performance excellence project is on track and as we mentioned before, this is a customer focused investment plan. We expect to deliver 50 to $100 million this year in savings and that will grow to 200 to $250 million next year.

On 19, we will continue to deliver on our nonutility plan as I laid out. We've met a lot of milestones so far already this year. The things that you can look forward to for the remainder of the year, in the power and industrial group, we are working on a potential PCI project in the steel business. We are also going to continue to work on our biomass business, as was indicated, the phaseout of tax credits affected that business and we are going to work on restructuring the biomass business to be profitable without tax credits. We'll continue our Barnett drilling and proving out the acreage and a lot of that southern acreage is not included currently in the reserve analysis that we show you. And then the continued development of the Vector expansion and the Millenium pipeline construction project. We will also continue to evaluate and potentially acquire additional storage and pipelines in the midstream business.

Let me wrap up on page 20 and is then we'll open up for questions. Although the quarter didn't meet our expectations in terms of earnings, our long-term growth plans are on track. We've made progress as I've laid out for you and we're very confident about our ability to execute our plans over the next five years. The two utilities are positioned to grow 6% annually between now and 2010 and the nonutilities are projected to grow 20% in earnings over that time frame. And increase our cash flows at synfuels which are about $100 million projected this year and expected to grow to $300 million per year starting in about 2008 time frame. Our balance sheet continues to be stable and the dividend is very attractive. We are open as we've communicated to a dividend increase as the payout decreases, based on our growth projections that we've laid out for you. With that, we would be happy to take questions now, if you would like to open it up for questions.

Thank you. [OPERATOR INSTRUCTIONS] And our first question will come from Margaret Jones with Citigroup.

Good morning. I had two questions. The first one was, could you update us on the possible synfuel provisions with the pension bill? And secondly, I missed a word of what you said there about additional cash flows in your last sentence.

Okay. In terms of the legislation with the pension bill, the best way to describe it is the way it was described to us, which is very fluid. The house is in session today. And expected to recess for the summer after today. There is a possibility of what has been described as the tax extenders, which includes things like R&D tax credit, estate taxes, deduction per state taxes and so on and section 29 in the pension bill. And that discussion is going on right now. As also described to us, the issue is around estate taxes and whether the estate tax deduction will be permanent or not. So it's very possible that all of the tax extenders, including section 29, could be in the pension bill. And it's also possible that they can as we've talked about in the past, it's very hard to predict the outcome on these.

So this is something that we should all watch today and I think by the end of the day, we'll have some insights. There's a possibility that these get pulled apart, that the pension bill goes on its own, that the tax extenders are put on a separate bill even today or at a different point in time. So again, just describe this as very fluid and something I think by the end of the day, as we read the papers in the morning, we will all have the answer. If legislation does happen, obviously it's very significant good news for us. And we would, after analyzing that and the impact on the Company, we would come back and give you an update on the impact on 2006 cash flow and earnings.

And then my last comment just to clarify, if you look at the nonutility businesses on setting synfuels aside, this year we expect the cash flow from operations to be about $100 million. And as we make investments in the three groups and they grow, some of the businesses start throwing up cash and are cash accretive very quickly. We expect, you go out three years, that group again without synfuels, the cash from operations will grow from $100 million to over $300 million per year given the investment pipeline that we have.

And what would be the key components of the 300 million?

The drivers there -- the bigger drivers, actually comes from all three groups, midstream, and then power and industrial, but then also the Barnett, which Barnett gas investments are very cash accretive.

Thank you.

Thank you.

[OPERATOR INSTRUCTIONS] Our next question will come from Jonathan Rojewski with Peacock Capital.

Good morning, everyone.

Good morning.

Dave, I was wondering if you could tell us what the return target on cash investment the nonrate company that you guys have built into your growth assumptions?

It really varies with the three groups. But if you went back, 1998 to 2005 as an example, as we started making investments, our actual return on invested capital in the '98, to 2000 time frame was 13 to 15% and then the actual actually grew as synfuels and others came in. So 2002 to 2005, it's in the 18% to 21% range. But the targets for the three groups are that unconventional gas is 15 to 20%. The fuel, transportation, and marketing is 10 to 20%, which that's midstream and coal services. And what you would see there is that coal services would probably have, be at the lower end midstream -- actually the opposite, midstream at the lower end, coal services at the higher end. And then power and industrial is 8 to 15%.

8 to 15?

Right. And if you look out on our website and some of our previous presentations, we actually lay out the expected capital by group. So you can kind of get a sense of how much capital will you deploy at those targeted levels by year.

Right, so the 300 million that you're not going to get in cash flow if synfuel doesn't come back on, so we just apply sort of an average to that?

Not necessarily. Our current thinking is right now, is that even though we're taking a prudent position of assuming that there's a phaseout for both years, as we go through our planning process this fall, we'll all of a lot more insight. We'll know whether we have legislation or not. We will also have a better sense on oil prices for next year and be able to calibrate is it going to be full phaseout or partial phaseout? There's also other things that are moving including the phaseout ranges which are impacted by inflation and this basis calculation.

So, our sense is that as part of our planning process, we will go through our prioritization and come back to you and tell you, this is our thinking in terms of how we will adjust our capital spending going forward. But for now, if you want to use an average weighted average of the three, that's probably reasonable, but I think we can help you this fall as part of our planning process in terms of what capital we might defer, what we might prioritize in different ways and then is there a possibility also of monetizing some of the assets in some of our mature business lines as a way to fund some of the growth in investments that actually have higher returns, and we're going through that process right now. So we feel we have a lot of flexibility, would like to come back to you this fall and give you some more insights.

Okay, great. Look forward to it.

Okay. Thank you.

And at this time there appears to be no further questions in the queue.

Okay. Well, thank you, everyone, for joining the call. And as we said as I was talking about legislation, we'll watch this all today and hopefully we'll get some good news. We'll see, and if that happens, we will be back to you with an update. Thanks again for joining the call.

That does conclude our teleconference for today. Have a wonderful day.