密歇根天然氣 (DTE) 2006 Q4 法說會逐字稿

Good day, everyone. Welcome to DTE Energy's fourth quarter and year-end 2006 earnings conference call. 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. I encourage you, before we get started, to read the Safe Harbor Statement on page 2. With me this morning to start with introductions is Peter Oleksiak, who was recently promoted to the Vice President level, so now he's our Vice President and Controller. Lisa Muschong, who many of you know from her time in Investor Relations six years ago, Lisa was recently promoted to become our new Director of Investor Relations, and I would like to congratulate her.

I also want to take this time to thank Mike McNally for his leadership over the last year in our IR group. Mike did a great job for us, and we shifted Mike over, and now he's leading our Renewable Energy team in response to the state's 21st Century Energy Plan. Nick Khouri did such a great job last year on cash. We actually let him take a vacation week this week, and we have Paul Stadnikia out of his group in his place today, and he'll help us with Q&A. I'm sure he'll do a great job. I also have members of the management team that I might call upon during the Q&A session, including we've got Dick Redmond on the line, who leads our Unconventional Gas group.

Let me start on page 4. Last year was a very good year for DTE Energy. Our operating earnings were higher year-over-year, and this was driven by stronger performance at Detroit Edison. Our performance improvement plan contract, it's delivering strong results first in 2006, but more importantly, it's laid the ground work for higher savings in 2007. Last year, we continued our investment plan in our utilities. We invested $1.1 billion in the two utilities, and as you heard at EEI last fall, we've developed a restructuring plan for our Non-Utility businesses. Finally, to wrap up the year last year, we increased the dividend 3% to $2.12 a share, and we repurchased 1 million shares of stock.

Now I'll provide a business update before I turn it over to Peter, who will take you through the earnings and guidance, so if you could go to Slide 6. Last fall, we laid for you our growth plans. At both utilities, we target 11% return on equity, and we will target growth in those businesses 5% to 6%, which is going to be driven by mandated expenditures like the environmental improvements at Detroit Edison. We'll continue to increase reliability and customer satisfaction while reducing our cost structure. Our goal is to move the higher capital expenditures that we'll be making into rates in a timely fashion.

On the Non-Utility side of the business, the restructuring that's underway right now will provide over $800 million in proceeds, and when combined with the higher synfuel cash, will provide over $1 billion in proceeds. In the meantime, we expect to take continued investments in all three businesses, not only before, but after the restructurings.

On Slide 7, as you know the state of Michigan recently released it's collaborative 21st Century Energy Plan. We applaud the MPSC for their work and their thought leadership that you can see throughout the plan. The plan points towards annual demand growth in Michigan of 1.2%, which results in the need for an estimated 800 megawatt of base load capacity and 2,200 megawatts of peaking capacity by 2015, and that's expected to be built by the state's utilities. The plan also has two other important recommendations. First, it advocates legislative changes as an option to fix the the state's electric regulatory structure and customer choice, and it also recommends a statewide RPS of 3% by 2009, and 7% to 10% by 2015.

On Slide 8, just to give you a preview on our rate cases for the year, Detroit Edison will file its rate case during the second quarter, and we expect new rates would be effective about mid-2008. Some of the areas that this case will focus on include the full and timely recovery of capital expenditure, especially environmental capital; continued progress on rate de-skewing, we continue to make progress step by step, and we look forward to making more progress; and our continued progress in addressing Michigan's unique regulatory structure. For MichCon, our plans are to file a case this year, and that would focus on revenue decoupling and also on capital recovery, because we have higher capital expenditures in that utility also.

On Slide 9, we've showed this slide before. It's an illustrative slide that basically lays out the approach that we're taking on our performance excellence plan. we also refer it to as our PEP process. The PEP process is focused on customer satisfaction and driving down costs, and this will allow us to consistently achieve our ROE targets and minimize the impact of the higher capital spending on our customers. And if you go to the next slide on Slide 10, just to provide you an update on this process, we made real good process improvements in 2006, so the program overall is doing really well. The program looks at all elements of performance in order to drive both high customer satisfaction and low cost. And I wanted to at least highlight one of many examples we have.

We have about 2,000 projects underway right now. And just to give you an example, one of these that we're working on because I think it exemplifies what we're doing in terms of the trying to take out costs, but at the same time improve customer satisfaction, and this is an example of our line clearance area. Some people call it vegetation management. This is very critical to improving customer satisfaction, because it eliminates a cause of momentary outages, or it also minimizes storm damage and the amount of time customers might be out, because storms get exacerbated when you don't do good line clearance. The project that we have underway will enable us to clear more miles per year. We have been clearing about 4,800 miles a year. We're going to clear 6,800 miles a year, which will put us on a 4.5 year cycle for that part of the business. But more importantly, we will do more miles at lower cost. The team spent some time re-engineering the process, and by 2011, we expect a 40% reduction in the cost per mile. So substantial reduction in cost per mile, more miles cleared, saves us money, drives higher customer satisfaction, and lowers storm cost over time.

Overall for the PEP process, the total O&M and capital savings for 2006 was $45 million. That does not include another $50 million in PSCR savings that will flow through to customers. The run rate at the end of the year for O&M and capital was $160 million, and that leads to a $250 to $350 million reduction by 2008. The net headcount reduction for the enterprise was 900 people last year.

On page 11, both utilities are on tracks with their growth investments. At Edison, as I mentioned, the environmental project is meeting all of our milestones. In addition, two weeks ago we announced we are pursuing a license for a new nuclear plant at the Fermi site. We're also investigating advanced metering, and as I've mentioned a couple times, potentially renewable investments enabled by the state's new energy plan, and that's what Mike McNally is off working on.

At MichCon, we're on track with the Jamestown expansion in western Michigan. We also are on track with the regulated storage expansion project. We have both regulated storage and non-regulated storage, so this is on the MichCon side of the business. We also have a Panhandle pipeline connection project underway, and then the ongoing pipeline safety work continues for that business.

Now if you go to Slide 12, we'll give you an update on the Non-Utility restructuring plan. At EEI, we announced the restructuring of our Non-Utility businesses to provide less earnings volatility, to reduce valuation complexity, and also to enhance transparency. The key components of the plan are listed here on the slide. First, was the restructuring of our peaker investments. The second one, exploring the sale of our Unconventional Gas reserves. The third one was exploring the sale and recapitalization of a portion of our Power and Industrial business. And the ast one was exploring strategic options for Energy Trading. As a result of these decisions, we took a number of impairments in 2006, as we streamlined our businesses and simplified our story. All projects are proceeding as planned, and I'll give you an update on the next several slides.

First on Slide 13, there's an update of the peakers, which was the first component of the plan. Our Georgetown facility, we've executed a purchase agreement for that plan, and as the proceeds, we'll provide you more information on that, but we have consummated a sale there. For Crete, the sales process has been initiated and we will have final bids by the second quarter. On the East China facility, since Detroit Edison will meet peaking capacity in the near term, our preference is to move those units in to the utility. However, if we can't do that in a timely fashion, we will sell those units. River Rouge was shut down and written off, so we've made progress on this part of the plan. Last fall, we announced that when we completed these actions for the merchant fleet, we will remove $13 million of losses on on annualized basis from our earnings stream.

In addition to these actions, we also took actions to eliminate ongoing losses from our PepTec or our waist coal operation last year. We closed that facility, and we wrote off our investment. And also, we recorded an impairment for our biomass operation. So the operations that had earnings drags and added some complexity to our story were all removed from the earnings stream.

On Slide 14, there's an update on the Power and Industrial group. This is a group where we have a very successful portfolio of assets that service large energy intensive industrial customers. We're planning a 50% sales of this group and also recapitalizing the balance sheet. The project is on track. We have retained Morgan Stanley as an adviser, and we have received very strong interest from potential investors. After we made our announcement, we were contacted by over 50 serious investors, many of who have now signed confidentiality agreements. Our timing on this project is to receive final bids by the end of the second quarter. We are in an active marketing process, not only on the peakers, but here and then on the Unconventional Gas business. So it's going to be difficult to say much more regarding these initiatives than I have on these slides.

Slide 15 is an update on the Unconventional Gas business. We announced in February our updated reserve data, where we made tremendous progress last year. We has 146% increase in the Barnett reserves, which is now at 440 Bcf, and a 34% increase in the Antrim reserves, which is now at 501 Bcf. So the total corporate reserves are now at 941 Bcf. Our plan is to harvest value from our mature holdings while we keep the upside benefit from the less mature properties. We have retained JPMorgan as an advisor, and as with the P&I group, we have received very strong interest from investors. We're in the process right now of meeting with many of those investors as we speak.

On Slide 16, there's an update on our investment profile. Our midstream business, which is our Coal and Gas business, has been very successful also. We're not monetizing any of those assets, and this year, we expect to invest $60 to $70 million in that group. We've had several exciting projects going on with that group, including a storage expansion project in Michigan. Now this is our non-regulated storage. A Vector Pipeline expansion, and then the new Millennium Pipeline, which is getting underway. With the Power and Industrial group, we continue to identify new investments, including our new PCI project and a new energy project for a paper mill.

And then the Unconventional Gas business, we continue to drill wells primarily in developing properties. Our base plan there is drill 50 to 55 wells this Barnett this year and continue our 5 to 6 rig program. Overall, our pre-monetization plans are to invest $300 to $400 million in our Non-Utility businesses.

On Slide 17, there's an update on synfuels. Prior to last November, just to take us a step back, I want to ground you on some of our previous data. Our 2006 to 2009 synfuel cash flow guidance was $1 billion. At EEI last fall, we raised that estimate to $1.2 billion, and we discussed another upside of $200 million, so it's a total potential of $1.4 billion. Due to additional hedging and lower oil prices, we now anticipate a minimum of $1.3 billion with a potential upside to $1.4. So what we've done here in our guidance here is we've brought up the bottom and tightened the range. So the range of outcomes here is $1.3 to $1.4 billion.

If you now convert that those previous numbers were 2006 to 2009. If you look at that on a 2007 to 2009 basis, and you can see that on the bottom, the cash flow for the remaining years 2007 to 2009 is now $900 million to $1 billion. We expect to run full production this year of $21 million, given our hedging program that we'll be able to run full out. And the last point here is of the $900 million, about half of that represents tax credit carry forwards, so it's independent of production and oil prices and hedging and things like that, and it's basically the utilization of the tax credit carry forwards. So with that background, let me turn it over to Peter who will take you through the 2006 earnings and a guidance update for 2007.

Thanks, Dave. Good morning, everyone. I would like to start with Slide 19 and a summary of 2006 accomplishments. Overall, utilities had solid performance in 2006. Detroit Edison results benefited from choice customers returning to full service and the expiration of residential rate caps that allowed us to realize the full impact of the 2004 electric rate order. MichCon earnings were impacted by a mild winter weather, however we were able to use our regulated storage assets to catch a favorable storage margin and partially offset the impact of weather.

On the Non-Utility side, we also benefited from high storage margins with our non-regulated assets, and realized increased coal marketing activity with our Coal Gas Midstream segment. Our energy trading business benefited from a flowback of accounting timely related impacts from '05, which are even stronger than we anticipated. We continue to develop acreage and increase production on the Barnett Shale properties. On the down side, our Power and Industrial projects segment was impacted by the decline of biomass earnings, and our Synfuel segment was impacted by a four-month production shut down in reserves for partial tax credit phase out.

Let's move to page 20 and a summary of the '06 results. First off, I would like to point out for the year-end, we divided our nine utility Field Transportation and Marketing segments into two new segments in our SEC reports. Our Coal and Gas Midstream segment will include coal services and gas storage and pipeline businesses, and Energy Trading will now be shown as a stand-alone segment. For the year, operating earnings per share for DTE was $3.33. As noted, operating earnings included [inaudible] was $2.89 for '06. I would like to remind everyone that our reconciliation to GAAP reported earnings is contained in the appendix.

The major contributor to the year's results was Detroit Edison at $2.03, reflecting a strong return to financial health for our electric utility. MichCon contributed earnings of $0.36. The Non-Utility segments combined to contribute $1.28. The main contributors to the Non-Utility results were Energy Trading at $0.54, Synfuels at $0.44, and Coal and Gas Midstream at $0.29. Corporate and other loss for the year was $0.34.

Moving on to page 21, where we can see a summary of each segment's performance year-over-year. I'll be covering each segment in more detail later in the presentation. Overall, operating earnings are up $16 million including Synfuel, and up $214 million when you exclude the impact of Synfuel. As I mentioned on the previous page, performance at Detroit Edison continues to improve. In addition the year had significant increases in earnings from Energy Trading due to the flowback of large accounting timing related losses in '05. These improves were offset by the decline in Synfuel earnings.

Let's continue to on to Slide 22 and go through some of the details, beginning with Detroit Edison. Operating earnings for Edison was up $91 million, or 33% in the year. A key driver for our Electric Utility improvement was gross margin increasing earnings $169 million, driven by the residential rate caps expiring at the end of '05, allowing the flow-through of the November 2004 rate order. We also continued to experience a step-down in the volume of choice in '06, which contributed significantly to the margin improvements. Choice levels were 5% of sales in 2006 versus 12% in the previous year, With the expiration of residential rate caps, we also began to recover and amortize the regulatory assets established during the years that rate caps were in effect. Spending for maintenance related repairs to realign the plant also increased in 2006. During 2006 we recognized a one time asset retirement obligation charge for Fermi 1, and also a made significant contribution to the DTE Foundation. Earnings in '05 benefit from a one time tax benefit. In 2006 the ROE for Detroit Edison was 11.9%.

Moving on the page 23 and a review of MichCon's performance. Earnings at MichCon were down $6 million year-over-year, impacted by mild winter weather and high customer conservation. Partially offsetting these items were strong storage margins and full year impact of the April 2005 gas rate order and lower operating costs. MichCon's ROE for 2006 was 8.5%, and when you weather-normalize it, it ends up being 11.6%.

Let's turn to page 24 and the Non-Utility business segments. Total Non-Utility operating earnings for 2006 of $225 million compared to $287 million in '05. Power and Industrial was down due to partial phase out for the biomass tax credits and start up performances at new landfill sites. Increased earnings in our Unconventional Gas segment was driven by higher production in our Barnett properties, which Dave mentioned had a 146% increase in reserves. Our Coal and Gas Midstream segment continues to be have solid performance and higher storage margins, and coal marketing activities increased earnings 13% over 2005. As previously mentioned, Energy Trading benefited from the flowback in '06 of timing related losses. Finally, Synfuel's earnings were down significant in 2005 levels due to the shutting down of production for a portion of '06, and establishment of reserves for the partial phase out of tax credits.

Let's move to page 26 and an update on the 2007 earnings guidance. In 2006, operating earnings, excluding Synfuels, was $515 million, and earnings per share of $2.89. Consistent with our guidance release in December, we expect to deliver operating earnings, excluding Synfuels, of $460 to $495 million, which translates in to an EPS of $2.60 to $2.80 in '05. As noted on the slide, the '07 outlook excludes on Non-Utility restructuring activities, and we'll be updating you throughout the year as those activities occur. We continue to see solid performance in our utilities, and continue to target authorized returns in both Companies. We see growth opportunities in our Power and Industrial segment, being aided by some restructuring efforts that Dave mentioned earlier, and an improvement in our contribution of some existing projects.

Unconventional Gas results will continue to improve as we bring additional wealth on line in our Barnett Shale region. We see this segment more than doubling its contribution in 2007. The significant contribution from Energy Trading in 2006 will return to a normalized level in '07. We are holding guidance in this segment, since we are continuing to see strong deal flow. Corporate and other losses will increase slightly as was aided by some tax benefits in 2006.

Page 27 summarizes the year-over-year changes. As you can see, we expect growth in Utility and Non-Utility segments, offset by return to normal earnings in our trading business.

Turning to page 28 and a review of our annual earnings growth rate for 2005. As shown on the graph on the left, our annual earnings growth when you exclude out the Energy Trading and Synfuel segments was 11% for 2005. This growth has been balanced between our Utility and Non-Utility segments. With that, I would like to turn the discussion over to Paul Stadnikia.

Thank you, Peter, and good morning. Strong cash flow and balance sheet strength remain key priority for management and the Board of Directors. And as expected, cash flows are improving from the levels of the last couple of years. Page 30 shows DTE's 2006 adjusted cash from operations of approximately $1.7 billion. This is an increase of $350 million, or over 25% from the 2005 levels. Driving the improvements this year is one time working capital improvements at MichCon, due to the natural gas price swings between 2005 and 2006. The increase in internally generated cash in 2006 was offset by increased capital expenditures of approximately $350 million.

As shown on page 31, total capital expenditures for 2006 was approximately $1.5 billion, with investments in the Utilities totaling over $1.1 billion, and the Non-Utilities of over $300 million. A comparison of the 2006 and 2005 cash from operations and capital expenditures is included in the appendix. As mentioned earlier by Peter, our 2007 guidance does not include the impacts from Non-Utility restructuring. 2007 is expected to be another strong year for internally generated cash flow to support the increased capital investment program of the Company. We expect our internally generated cash flow to range between $1.6 and $1.8 billion, and to be sufficient to fund our capital program and the dividend.

Finally, page 32 lists the major balance sheet metrics followed by us and the rating agencies. We continue to target a strong BBB, BAA 2 credit rating. Both leverage and FFO to debt ratios are within the range to maintain our current credit ratings. Now let me turn it back over to Dave.

Thanks, Paul. And going to Slide 34. This is a exciting period for DTE. We plan on creating value for our shareholders over the next five years, starting with the Utilities which are well positioned to grow at 5% to 6%. The Non-Utility restructuring will better align the Company with shareholder interest and provide clear evaluations. I know you are interested in the amount and timing of the stock repurchase and the debt repayments as a result of that restructuring. We expect to be able to provide more insights as each project is announced. But before that time, it's going to be difficult to say much more than we're providing today.

So as we announce each project, I would hope to give you some insights in terms of adjusting guidance, adjusting forward CapEx numbers and forward growth numbers. Our balance sheet is stable, and we have sufficient flexibility with the $900 to $1 billion of Synfuel cash, and the $800 million expected from the restructuring program. The dividend on both a payout and a yield basis is attractive, and we will periodically revisit the dividend for potential increases.

On Slide 35, just upcoming events, we look forward to seeing you at EEI in London, and also at AGA in Orlando. Our first quarter earnings release and shareholder meeting, which [inaudible] is always webcast, is scheduled for May 3rd. And now we'd be happy to take your questions.

Thank you. [OPERATOR INSTRUCTIONS]. We'll take our first question from Dan Eggers of Credit Suisse.

Hi, good morning.

Hi, Dan.

You guys did a great job in the Barnett this year as far as the reserve additions. Can you just talk a little bit about the success in the more developed versus the less developed markets? And on the less developed end of your acreage, does it make sense to stick this out at least another year and try and beef that up like you did the rest of the reserves?

Dick, do you want to take that call?

Sure. I think as far as -- I guess the focus is really on the less developed. If you look at -- I think there's a map in the back in the appendix, page 48, and we continue to -- last year we drilled four test wells. We drilled in southeast Hill and Erath, and in Bosque County. And over the course of the year, we've high graded some of that. We see Hill County on line, we have some Bosque production now. And we're going to continue to look at that acreage portfolio.

In terms of the developed side of it, we have had some core acreage, and also up in the western part up in Jack County, we have had fairly successful -- well, if you look at the reserves, a lot of that was driven by the 60 wells we drilled last year, and adding proved undeveloped reserves to the portfolio. So we have had pretty good success. Obviously everybody's had success in the core, but we also had good success in the Jack County area as well.

So you did add some reserves in the exploration area in 2006?

We did.

Small relative to the overall pie?

Small in Bosque County. Over in Hill County, we've had some decent additions, but the majority of the additions were really in the core and western area.

That being said, without giving specifics by county, I would just say that our intent is -- is not to monetize some of the properties where we expect to go up the development curve. So to answer your question a different way, Dan, I would just say that we're looking at the mature properties, and to the extent that we see development opportunities, our general approach is going to be not to include those in the restructuring process.

Okay. Great. Dave, could you just talk a little bit about the recap on the Industry projects business. How we should think about coverage ratios, or what we should be thinking about as far as the cash raising opportunity there?

Well, the -- the -- at this time, since we're -- as said we are in a very active marketing program, we're going to just stand by the numbers that we provided last fall. We're not updating them at this point in time. So if you went back to the EEI presentation for example, we indicated that the market value for that group was $850 million. We add about $500 million of invested capital, and then our thinking was that if you did about a 50/50 monetization and -- and restructured the balance sheet, we would be able to pull out about $500 million after tax. And those were the estimates that we gave last fall, and we're not going to update them at this time only because of the fact that we -- we are in a very active marketing stage of the project right now.

Okay. Very fair. I guess just one last question, $160 million of total savings benefits between capital and operating expense and you guys, what, had $40 million in '06. How much of O&M expense savings do you anticipate incrementally in '07 off of '06? Has that been updated or changed at all?

It's $100 million incrementally, year-over-year.

Of actual O&M expense relative to O&M and capital?

Yes.

Okay. Got it. Thank you, guys.

Okay. Thank you.

Thank you. We'll take our next question from Paul Ridzon of KeyBanc.

Just a follow-up to that O&M question. Is that -- year-over-year O&M should be down $100 million, or is that the savings against which we have inflationary pressures eating in to it?

It's the actual savings that -- we tie all of these 2006 projects have very specific tracking on them, and we track the savings back into the budgets and then the actuals. So there will be inflationary pressure against that. That being said, I would expect O&M, if you looked at the published financial statements, actually to be down year-over-year with that amount of incremental savings.

The PEP is offsetting inflation and then some?

Yes, that's correct.

And just when you gave your EMP reserve update, can you break out how much of the -- I guess it was 146 -- a 146% increase. How much of that was through the bit, and how much was through acquisitions?

It was almost all through the bit.

Okay. Thank you.

Thank you. We'll take our next question from Ted Heyn of Citigroup.

Good morning.

Good morning.

I wanted to just get a little more color on your guys' take on the 21st Century Energy Plan. I know that that has been proposed. And wanted to get a walk through of how that gets codified into law, and what your thought processes are on filing an internal -- a resource plan, and also what you -- on the renewable side if you are looking to build versus buy and when, then do you have sites available to actually site win in your service area.

Sure. Let me get started, and then I have [Don Stansic] with us from our Regulatory Affairs group that I'll ask for some help. The elements of the plan, we think, make a lot of sense for the state, and they work very well for DTE, and we're have interested as an example in adding new generation. We're very interested in things like renewable energy and demand-side management. That being said, the structural issues in the state relative to the electric business needs to change, and I don't think you'll see us or others making investments until that does get changed. So this all hinges on legislation, and we would expect legislation to be introduced by midyear and hope that this could be resolved within the calendar year. And until then you'll see us doing preliminary work, but you'll not see us making significant investments because we have to have a clear path to recovery. Don, if you want to add --

Dave, I think that really covers it. I think this is a great first start by the commission. They've identified the relevant issues. But as Dave said, to really solve the issues, we're going to need some legislation.

Great. And then just to clarify, on -- I know that you guys are involved in the sale process so you can't disclose too much, but the previous valuation for EMP seemed to be -- seems like you haven't changed your numbers that much. Were the valuations were -- at EEI last year based on your expectations of where reserves are going to be? Or is that incremental data point of the announced reserves going to be a positive relative to that prior number?

I can start, and then I can ask Dick for help. When we provided reserves all last year including at EEI, they were 12/31/05 numbers.

Okay.

So they were stale in terms of the reserves in the ground. If you look at the reserve numbers that we provided they were substantially higher, and it's something we only update once a year. So there was significant progress. Now last year, we did give some indication of what we thought the 12/31/06 numbers might be, and the actuals far exceeded what we had previously disclosed, so there was significant step-up in the Bcf numbers.

But your valuation range for the entire restructuring process hasn't really changed, but the increase in your reserves has changed substantially. So it is right to assume you guys have not changed your numbers because you are in a sale process?

Yes.

Okay. Great. Thank you very much.

Okay. Thank you.

Thank you. Moving on, we'll hear from Paul Patterson of Glenrock Associates.

Good morning, guys can you hear me?

Sure, good morning, Paul.

Most of my questions have been answered, but I was looking at the balance sheet. It looked like accrued post retirement liability went up by a lot -- by like $1 billion, and I didn't notice that last quarter. And I was just wondering what -- what is driving that?

There's a year-end issue pronouncement from the -- actually No. 158 dealing with pension and false retirement. Really this is going from an cumulative benefit obligation to a projected benefit obligation, and recognizing that on the balance sheet, so really -- what's your projected obligation versus where your funds are at today. Most companies are having a sizable gap. Expenses does have to be recognized as it was before as they have to find benefit plans as we do. Expenses ought to be recognized as it was before. And actually, this is always disclosed in your footnotes. It's really taking that and putting it into your balance sheet. We actually did get regulatory offset on this with our Utilities, so we have a regulatory asset. So this actually would fit your comprehensive income and taken down your equity levels within the utilities, so we're actually able to get regulatory treatment on that.

You'll see the offset if you look at the balance sheet and regulatory assets went up by about the same amount.

Okay. Okay. Thanks a lot.

Okay.

Thank you. Our next question comes from John Kiani of Deutsche Bank.

Good morning.

Good morning, John.

Understanding that you are working through different options to monetize or sell a portion of the EMP business, what options do you have or what are you thinking of doing with the legacy EMP hedges?

We have several options. One is we could -- first of all, you are talking about the legacy Antrim hedges.

That's right.

And they start rolling off, actually when you get to 2008, about a third of the hedges have rolled off by then, and then they rumble off through 2014. One option is we just continue to wear it, a second option would be is that this is settled as part of a transaction. A third option is just to settle them with a financial partner, and we're currently exploring all of those options. Obviously, when this is all done, I want the cleanest, simplest story as possible. And we'll be able to, I think by midyear when we get through some of these transactions, you'll understand which path we're going to take.

So some of the cash proceeds could be used to buy back or unwind a portion of the hedges?

Right. And that's something that we would be interested in doing subject to our sense of value if -- if the discount is -- is relatively minor, then we can settle those and take that out of our story, I would like to do that. If we feel that the discount is too great, we'll look at other options.

Great. Thank you.

Okay.

Our next question comes from [Kathleen Jidich] with WH Reed.

Hi, Dave.

Hi, Kathleen.

I was wondering if you could talk a little bit about the environmental spending. Is there going to be regulatory drag on recovering those dollars? And have you seen much in the way of cost escalation? And finally, is there any way to get preapproval for that spending that it gets in to rates on a more current basis?

Sure. Just to back up a little bit on this, Kathleen, just -- in the last rate proceedings, we were able to recover everything that we have spent through that time, and it's something that we have never experienced a disallowance on, so the issue is more of a timing question. We have to file a rate case at Detroit Edison, and we'll file that in the second quarter, and that will include the update in terms of the we've spent since our last rate case. One of the things that we are interested in in trying to achieve out of this rate proceeding is to look for an environmental tracker that would minimize the regulatory lag on those expenditures.

In terms of cost escalation, I would say that I think everyone is experiencing inflationary pressures, especially as -- not only we, but there's other construction projects in the United States. We're all completing for the same resources, but at the same time we are taking our PEP type initiatives, including our strategic sourcing initiatives, right into those projects to look for offsets. So right now our cost estimates are not going up, and if anything, I'm going to continue to put as much downward pressure on those. Obviously, even though capital is good in the regulatory process, we are looking at every dollar, whether it's capital or O&M to make sure that we're being as effective and as efficient as possible.

Great. Does the project have to be inservice for you to be recovering the capital spend in rates when you file the rate case this year? Or can you just have money spent but the project not yet finished go into rates?

It -- the answer to that question is kind of it depends. If it's -- if the project will be in service by the end of the projected period that the rates are going to be in effect, I would expect we get that project and rate. If it's a project that's in process and we're not collecting or booking AFUDC, that's going to be the -- the cost of that is going to be in rates. So, we work with the Commission and the other parties to minimize any lag associated with those kind of timing issues.

So out of the numbers that we have talked about, for example, at Monroe the unit 3, SCR, which is about $150 million, the inservice date is 2007; the unit 4 scrubber and common infrastructure is another $300 million, and the projected inservice date for that is 2008. So, of the $800 million we're talking about, $450 million of that will be in service by the end of 2008.

So we would include those dollars in our rate case, and presumably, we should expect recovery.

Great. Thank you so much.

Okay.

Thank you. Next we'll hear from Daniele Seitz of Dahlman Rose.

Thank you. I was wondering, out of all of the assets that you intend to sell, do you -- could you assess the average drag on earnings that you used to provide? And since you are not going to have them once they are sold?

Well, the assets that actually we're incurring losses, Merchant Power as an example, that was $13 million in losses per year, and we've written off those, and we would expect the sales price to be very close to book -- the new back value. In addition, we did close down, as I mentioned, that PepTec operation, and then we have also impaired our biomass operation, so that sets aside the earnings drag. In terms of what we would lose in ongoing earning stream from the businesses, the Unconventional Gas business and the Power and Industrial business, I think that's something that we will talk about when we transact those businesses because as you know, it's highly dependent on what percentage of the business we ultimately let go.

Yes. And in -- in terms of a debt associated to all of these assets, is there an approximate amount that you can give us, or that too depends on the type of sales you will do?

It depends on the timing and the amount of proceeds that we get. Of all of the proceeds here, if you take the proceeds for monetization, plus the Synfuel cash that's coming in, a portion of that cash is going to the Utilities, in equity investments. Some of it will be used for debt repayment and some for stock repurchase. And we -- we are, again, we're not going to provide any more specifics, other than what we provided at EEI, which is if you look at the monetizations from the restructurings, the range that we're providing is 50% to 75% will be used for stock repurchase, and the remainder will be used for debt repayment.

Okay. Do you see a return to more formal regulation in the new rules that you anticipate, or just an adjustment having to do with just new power plants?

My sense is not only what we're interested in, but I think we're starting to get, as time goes on, more and more alignment that Michigan is moving back to a full regulated environment that's hybrid market of having this -- the state's electric utilities being fully regulated but open to competition. I think people are gaining consensus that that doesn't work. And not only does that not work, when people look around the country and what's happening with states that have formally deregulated. I think it's just giving us more momentum to move to a fully regulated environment in Michigan. So I think it's more the traditional environment versus a modification to deal with, new generation.

Okay. Thank you.

Thank you. We'll now from Leon Dubov of Zimmer Lucas Partners .

Hi, good morning.

Morning.

I just wanted to check, on Slide 22, you guys talked about the Fermi decommissioning as being year-over-year negative for Detroit Edison. Could you talk a little bit more about that? Is that -- first of all is that in O&M or is that part of D&A? And also is that truly a one-time item, or is now the new level of decommissioning that we're going to see going forward?

Yes, this is Peter. Actually the reason we're occurring this is there's an accounting pronouncement around asset retirement obligations that you almost need to preaccrue your obligations related to your assets, so this is one as you know we've had quite a while. We're in the process of decommissioning it. So we really had to essentially kind of preaccrue this expense, where normally we would have just experienced over time. This is part of our amortization line at Detroit Edison, but I'll let you know it is not part of rate base that we do hold it below the line.

This is Fermi 1, it's not the Fermi 2 which is the existing nuclear plant.

Right.

And to the best of our knowledge, this is a one-time item.

Right.

As we wrap up the work at that site.

Understood. Thank you very much.

Okay.

Thank you. Our next question comes from David Grumhaus of Copia Capital.

Good morning, Dave.

Good morning, David.

Couple of questions on the regulated side of the business, I assume when you say you are expected to hit your authorized returns at Detroit Edison in MichCon '07, that's on up-to-date capital investment numbers?

Yes.

As opposed to what was in the last rate case?

Yes.

When you all contemplate maybe going in for a rate case at MichCon, is that just to fix structural issues in terms of decoupling and that type of thing? It seems like from an earnings perspective, if anything, you are over earning, not under earning.

Well, it's something that we're evaluating, and we are really interested in addressing the structural issues. We made a lot of progress in the last rate case, but we're also, through the last rate proceeding, able to retain some of the profits on regulated midstream activities. And we have a couple of initiatives underway that we're working with the Commission on. If we're success and we prevail on those proceedings, then there's a chance we might stay out of the rate case process this year for that business. If not, we'll go in. Either way, whenever we go in, we want to address the structural issues. Another way of answering this is if we don't have to go in, we won't go in. However, whenever we file our rate case, we're going after the -- we would like to pursue this structural issue because we don't think that conservation is going to go away, for example, and we would like to work on demand-side management and embrace that and do that in a way that doesn't hurt the bottom line. And the only way to do that is to address the rate structure.

From the electric side you will obviously have to file a case; is that right?

Right. That was mandated, if you recall on the prior rate case, that we had to file by midyear, and we're just going to do that as soon as we can in second quarter after we wrap up closing the books here.

In terms of the restructuring plan, on one of the slides, you talk about $800 million in proceeds this year, excluding Synfuel. That would seem to imply, going back to your presentation at EEI, that I think you said $250 to $1 billion in proceeds from the sale of Unconventional Gas reserves. Is that more a timing issue, or is that more a decision that you are going to sell down less of that business?

I describe it as more of a decision issue. We have not -- as we're exploring with potential partners, how you could structure the Unconventional Gas business. We have different options, and it actually goes back to an earlier question about how much you are going to take off the table now and why, and is there a risk of -- as you do that, do you leave too much value to the buyer. We have a wide range of options there, and if you recall back at EEI, we provided a wide range of potential proceeds, and we have not made a decision yet. So it's more decision-based than timing.

Okay. Last question, you talked a little bit about some of the EMP success down in the Barnett and the Bosque County. It sounds like you have got some test wells in there. Can you talk a little bit about what you're seeing in terms of flow rates and how those compare to other counties?

Dick, are you comfortable?

Yes, I guess-- the place that we have the most data, again, to refer back to the map on 48 is up in Hill County. And we basically divide our holdings in to three areas, and we consider that to be core. We've had results down in that area that I would consider to be core-like results. In Erath County, we have not had a test yet, but there are other industry participants that have had some successful wells there. And I would characterize that, I guess, as more like looking like the western portion of the base. And as to Bosque, the results there have been lower than core area, but still encouraging enough to continue to look at options to bring those on. We actually have been drilling close to the pipeline so that we could bring things on immediately in that area. But that -- in terms of maturity, I would say that the Hill County is most mature now in terms of our understanding. Erath is possibly next after that, but not based on our drilling, and Bosque is still relatively immature.

That's helpful. Thanks for the time today, guys.

Next we'll hear from Erica Piserchia of Merrill Lynch.

Hi, guys I just have two quick questions. The first is just on the trading results for both the quarter and the year. Can you break out the flowback of the '05 losses versus what was realized in new business there?

No. Originally we laid out when the 2005 accounting losses we experienced, we were anticipated around $40 million due to the flowback in 2006 and ended up being $70 million. So that really was the change in the fourth quarter as well as the year-end results.

Okay. And there's no timing issues, I mean what -- is there timing issues that would occur in that '07 number?

We still had some residual timing still there from the '05 losses, just not as much as I indicated in my talk, and we are continuing to see strong deal flow from that business, and we're holding guidance at this time.

And that business is being considered as part of a Non-Utility action plan; is that right?

Yes.

Okay. And then the second question, we have seen several recent announcement on asset sales from other companies, EMP stuff and some of the CMS stuff comes to mind. The market appears to like this, and these companies seem to be getting good prices. That's good for your Non-Utility action plan. But what about the rest? The rest is EMP, and Power and Industrial would seem to be kind of the ideal market conditions to explore medium -- more of a full sale of those businesses. Have you considered that? Would you consider that? And if not, why not? This environment seems to be really positive for-- for that.

Sure. We -- if you go back to the fall, we had always felt that we actually had established a good track record. If you look at our return on invested capital, we really did well in all of the businesses. We also realized we were challenged in terms of some of that value actually showing up on our stock price. Given the track record we have, the management teams in place, our sense, right now, for example in the Power and Industrial group, they have a pipeline of investments. We think we have a very skilled team that is really good at identifying projects, siting, constructing, taking the project off the value curve and monetizing. We would like to not let that go. Our preference is to hold some equity in the existing projects that we have, and then keep this team in place, basically, to continue to identify and create value for the enterprise. We could step out of this completely, but we see enough opportunity out there, and we have an established track record and a market presence that I think has been validated by the number of sellers that have lined up at our doorstep, saying you guys have really done an outstanding job. We would like to continue to do that. We also realized and continue to do it at the scale that we have been doing it and have it as a significant percentage of our business created some challenges. So, I think another way to think about this is we're becoming certainly more utility-centric, where BP will probably, after this monetization, be 80% utility, 20% Non-Utility. But we still see exciting growth opportunities with good solid returns in areas that we have expertise, and we want to pursue those.

So basically, you feel that the returns on those businesses are sufficiently high to overcome the multiple on those types of businesses and the fact there's sort of arguably key asset sales on multiples out there right now. Is that the conclusion we can draw right now?

Yes.

Okay. Thank you.

Thank you.

Thank you. Well take a follow-up question from Paul Ridzon of KeyBanc.

Volumetrically choice sales were 5% versus 12% in '05. If you annualize your choice customers at year-end, where would you expect that to go?

Our annual choice rate was roughly 2,900 gigawatt hours. Now we do anticipate some pressure on those volumes going up. It's really tied to gas price. That's part of the fix we need in this choice space. As gas prices have come down, as you all know, that lower is really around the clock. The benchmark is markers coming in versus our rate. We are anticipating -- even though we exited at a close to 3,000 gigawatt hour level, we are anticipating that going up in 2007.

On top of Erica's question, I think it was December 7th you reiterated '06 guidance, and you materially topped that. What was the upside, was it just trading?

It was trading and Edison a little-- little bit from the Edison, but mainly the trading segment.

And the trading was the market to market movement that basically happened in December after we updated guidance. One of the things to note on trading, I don't know if we said this or not, but -- we normally think of this business of making on an accounting basis $30 to $40 million, last year it was close to $100 million. But almost $70 million of the $100 was realized earnings, and they also threw off very big cash flow last year. So trading had an outstanding year last year, and even with the market to market movement, some of that reversing out in 2007, we also -- we believe that's going to continue, so the business has done really well.

You were looking for 40 million flowback, you got 70. Did that incremental 30 all come out of '07?

Yes.

And you think you can -- what with the run rate of 30 to 40 --

We [inaudible] the underlying fundamentals.

We still have some residual, maybe 10 to 15 million from the '05, we had a significant accounting related loss in '05. Also when we did our internal forecast, the same question you're asking, we asked ourselves. We are seeing that strong deal flow, so right now we are basically even holding them internally to their original budgets, and we're feeling confident with that number.

Even with reversal?

Even with reversal.

Okay. Thank you.

Thank you. Operator, we'll take one more question.

That's all the time we have for questions. At this time I would like to turn the call back to Mr. Dave Meador for any addition or closing remarks.

Okay. I was willing to take one more, but since it looks like we're wrapping up, I just want to thank everybody for our questions today and we look forward to seeing you at our next event which is at EEI in London, which is just a couple weeks away here. Thank you.

This concludes today's call. We thank you for your participation, and have a wonderful day day.