密歇根天然氣 (DTE) 2007 Q1 法說會逐字稿

Good day, everyone, and welcome to the DTE Energy's first quarter 2007 earnings conference call. Today's call is being recorded.

At this time for opening remarks and introductions, I would like to turn the conference over to Mr. Dave Meador. Please go ahead, sir.

Thank you and good morning and welcome to our 2007 first quarter earnings conference call.

Before we get started, I encourage you to read the Safe Harbor statement on Page 2 of the presentation, including the reference to forward-looking statements.

With me this morning are Peter Oleksiak, our Vice President and Controller, Nick Khouri, our Vice President and Treasurer, and Lisa Muschong, our Director of Investor Relations. I also have additional staff in the room to help with Q&A if needed.

This morning we'll cover a short business update and then our first quarter financial review. Let me start with the business update on Page 5.

Our utility growth plan is on track. We recently filed Detroit Edison's rate case and our cost reduction and growth capital projects are all on time and budget. The non-utility restructuring plan is going extremely well and is meeting all of our objectives.

As another demonstration of our confidence in that plan, we repurchased another 1 million shares of common stock in the first quarter. Combined with the fourth quarter repurchases, we've now committed about $100 million so far to our repurchase plan related to the restructuring of the non-utility businesses. We're maintaining our guidance of $2.60 to $2.80 per share, and that excludes synfuels and the non-utility restructuring.

Let me move on to Slide 6. Here we have an overview of the Detroit Edison rate case. As we've said, this is a pretty straightforward rate proceeding.

As we have projected, our cost reduction process, our PEP initiative as we call it internally, has allowed us to file for a rate case that is about 50% of what would otherwise be requested. The proposed rate increase is modest, it's $123 million, or about a 2.9% increase and we expect this case to wrap up in about 12 months.

On Slide 7 is an update on our non-utility restructuring plans. As I indicated in my opening remarks, this is going extremely well, both on a timetable basis as well as projected proceeds.

As we have said, we have successfully invested and grown businesses that have provided returns on invested capital in the upper teens and, you know, last year as an example of how successful we've been, we had $225 million of net income. We're now in the process of harvesting much of that value and returning it to shareholders.

Along the way, we will become a more straightforward, easier to value company that will be about 90% regulated and about 10% non-utility. The components of our plan include restructuring the peaker portfolio, we're progressing well here.

We sold the Georgetown unit and we're currently in the process of marketing the Crete unit. These China units are still being reviewed for possible sale or a transfer to Detroit Edison.

The proceeds here after-tax were outlined last fall to be in the 50 to $150 million range. When completed, this also removes about $13 million of earning drags from ongoing losses that we had in that business line.

The next project was to explore the sale of a portion of our unconventional gas business. In January of this year, we announced 146% increase in Barnett reserves and a 34% increase in the Antrim reserves. This project is also going along very well with a very robust group of bidders.

We are in the process of soliciting bids and could expect an announcement in the third quarter of this year. In the meantime, we'll continue to drill wells, 50 to 55 wells in Barnett and 150 wells in the Antrim.

The next component of the restructuring was the sell down of our equity and a recapitalization in the power and industrial business. Just like the other initiatives, this project is on schedule and as with unconventional gas, we have a very robust bidding process.

As previously disclosed, we expect the final bids by the end of the second quarter and the proceeds here previously announced were in the 400 to $600 million range.

And then the last portion of the initiative is the exploration of our strategic options on energy trading. Last fall we announced that we expected to generate more than $800 million in cash from these initiatives. I'm pleased to say that based on the strong interest to date, I'm confident that the $800 million is very conservative.

Since we're in the middle of some very sensitive negotiations right now, that's about all we can say, but I have a high degree in confidence that we can announce some of these deals by the end of the second quarter.

As we've said before, we will use the proceeds for debt pay down and expect to use 50 to 75% of the proceeds for stock buy back and we're going to push as much of that towards the 75% level as possible while achieving our balance sheet goals. We are very committed to this plan and one indication of how serious we are, Tony, Jerry, and I have about 20% of our annual incentive plan based on the timing and proceeds from this restructuring, which is the same weight that we have on earnings per share.

These two items, earnings per share, and the restructuring are the heaviest weighted items in our annual incentive plan. So we are very committed to deliver. Needless to say, we take our incentives very seriously.

So with that background, let me turn it over to Peter Oleksiak who will take us through the quarter.

Thanks, Dave, and good morning to everyone.

Before we jump into the details, I'd like to start with Page 9. Some of the highlights for the quarter. First quarter we continued to see solid performance on both our utilities, actually, some positive and some negatives.

In terms of Detroit Edison, the results were impacted by a January ice storm, actually, much of the nation saw this storm. Our customers were affected. We had approximately 120,000 customers out.

Also impacting the quarter was a temporary rate reduction from the show-cause settlement. However, on the positive side, we continue to see increase in earnings contribution from the decline on Electric Choice sales. We also had near-normal weather and strong storage performance for MichCon and it is on track during its authorized return in 2007.

On the non-utility side of our business, we saw improvement in our power and industrial segment driven by industrial project performance and the benefit of restructuring actions taken last year. These are primarily around our peaking units. For the quarter, energy tradings results were impacted by mark to market (inaudible) timing.

Let's turn to Page 10 for the detailed results for the quarter. For the quarter operating earnings per share for DTE was $0.85. I'd like to remind everyone that a reconciliation to GAAP reported earnings is contained in the appendix.

Both utilities were major contributors in the quarter's results. Edison had $0.27 and MichCon had $0.36. The non-utility segments combined contributed $0.32.

The primary drivers to the non-utility quarter results was synfuel at $0.21 aided by a true-up of a 2006 (inaudible) percentage and continued solid performance by coal, gas and midstream business of $0.07. Finally, corporate and other was a loss of $0.10.

Moving on to Page 11, where we can see each segment and a summary performance for the quarter. I will be covering each segment in more detail later in the presentation, but you can see on this slide that overall operating earnings are down $22 million, including synfuel, and are down $18 million when you exclude the impact of synfuel.

As I mentioned on the previous page, performance at Detroit Edison was impacted by higher storm expense and she show-cause settlement rate reduction. However, this reduction was mostly offset by improved results at our MichCon business. In addition, the quarter had increased earnings from our power and industrial project segment and a drop of energy tradings contribution due to a large accounting timing gain recognized in the first quarter of 2006.

If you recall in 2005, we had significant accounting timing. In that year most of it rolled back in the first quarter of 2006. Actually, this business unit from an economic profit perspective is on plan and you'll see in our guidance we are holding guidance out for this segment.

Let us continue on to Slide 12 and go through some of the details, beginning with Detroit Edison. Operating earnings for Detroit Edison was down $48 million -- was $48 million, down $19 million from the prior year.

A key driver of our electric utility was a temporary rate reduction from the show-cause settlement, but the continued decline in Electric Choice sales almost offset the impact of the rate reduction. We experienced lower residential usage and colder weather in the quarter, which resulted in a slight decline in earnings.

Overall, we are still projecting flat sales on a temperature-normal year-over-year basis. As mentioned earlier, we had an ice storm in January that increased storm restoration costs in the quarter. 12-month rolling operating ROE for Edison is 11%.

Moving on to Page 13 and a review of MichCon's performance. Operating earnings for MichCon was $62 million, up $14 million from the prior year. Weather for the quarter was just slightly warmer than normal, actually down just 2%, but significantly colder than the 2006 first quarter.

Increased storage capacity and higher margins contributed to increased storage revenues and the quarter's improved performance. We also continued to see increased customer conservation in the quarter, but actually is coming in less than expected. The 12-month rolling operating ROE for MichCon is 10% and almost 12% when weather normalized.

Let's turn to Page 14 and the non-utility business segments. Total non-utility operating earnings for the first quarter of 2007 are $56 million compared to $72 million in the first quarter of 2006.

Power and industrial was up in the quarter due primarily to improvements in their steel and auto projects within our energy service business, and the restructuring actions taken last year related to our non-utility peaking plants and our biomass business. As previously mentioned, energy trading was impacted by the significant accounting timing gains in 2006.

On Page 15 is our 2007 operating earnings guidance. As Dave mentioned up front, our guidance of $2.60 and $2.80, excluding synfuel, and the impact of non-utility restructuring transactions remains unchanged. As we've mentioned before, we'll provide updates to our 2007 guidance as we announce the transactions that Dave outlined earlier from our non-utility restructuring efforts.

With that, I'd like to turn discussion over to Nick Khouri and a discussion of cash. Thanks, Peter, and good morning.

Improving cash flow and balance sheet strength remains a key priority for management and the Board of Directors.

And as expected, cash flow in the first quarter continues the improvement from levels seen in the last couple of years.

Page 17 compares first quarter cash this year with the same period in 2006. DTE's cash from operations, including synfuel payments, totaled $737 million in the first quarter, up nearly 8% from 2006.

As the financial health of the utilities has improved and as synfuel's turned from cash negative to cash positive, the graph on the bottom of Page 17 shows a remarkable improvement in DTE's cash position during the last five years, up from only $157 million in the first quarter of 2003.

Including capital and the dividend, net cash was positive $272 million in the first three months of this year. However, the first quarter is usually the strongest for DTE's cash position.

Our full-year forecast for cash and capital has not changed and is detailed in the appendix. Capital spending for the first quarter is detailed on Page 18.

Capital spending at Detroit Edison is up $8 million from the prior year. Higher environmental spending was offset in the quarter by lower base operational capital.

The drop in operational capital at Detroit Edison from $175 million to $148 million was driven by one-time spending in 2006 for refueling at our Fermi nuclear site. MichCon capital totaled $52 million so far in 2007, up substantially from 2006. Leading the increase was the first phase of capital for expansions in the distribution system on the west side of the state.

Non-utility capital totaled $71 million for the quarter. More than half of that spending was in the unconventional gas businesses. In summary, a solid start to 2007 for both cash and capital.

Now let me turn it back over to Dave. Thanks, Nick.

Let me wrap up on Slide 20. This is a very exciting time for the management team at DTE Energy.

As we've outlined, we expect to create significant value by growing our utilities 5 to 6% with a customer-focused investment program, ongoing cost reductions and periodic rate cases. The non-utility plan will better align the Company with your interests.

We've created significant value over the last 10 years and we're harvesting and returning that value to shareholders right now. We'll retain our coal and gas midstream business, where this year we'll invest 60 to $70 million, and about half our power and industrial business. With those two, they'll complement the utility growth which will provide an overall 6 to 7% growth rate.

As Nick has outlined, our balance sheet continues to be stable and we expect the restructuring to enhance our business profile going forward. And our dividend at $2.12 a share is attractive.

I encourage you to listen to Tony and Jerry this morning. They'll be talking at our annual shareholder's meeting at 10:00 a.m., which will be webcast and the Web site is listed on Slide 21. And our next major IR event will be at the Spring EEI and we look forward to seeing you in New York in a couple weeks.

With that, Candace, we'll open it up for questions.

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

Good morning.

Good morning, Dan.

Can you just talk a little bit about trading results in the first quarter? It was probably a little lighter than we were expecting but just from a timing perspective as we think about the rest of the year?

Sure. Let me just start and then I'll have Peter join in. As we've indicated in the past, we manage our trading operations on an economic profit basis, so we'll talk to economic profits and then the accounting net income moves sometimes up and down relative to mark to market earnings, primarily driven by storage accounting.

Historically, this is a business that earns 30 to $40 million in accounting net income. Last year we had a very strong economic and accounting and realized earnings net income.

But with that background, let me just turn it to Peter and he'll explain the quarter-over-quarter.

A couple things going on, Dan.

First, if you remember back in 2005, we had some significant accounting that occurred as gas prices were running up. We do have a mismatch around accounting. A lot of that rolled back in the first quarter '06. So '06 was inflated the first quarter.

For this year, actually, when you looked at the prices of the gas, our trading company decided essentially to roll storage again and not to deliver and then essentially we had some mismatch that happened again in the first quarter of this year. Essentially pretty flat earnings. Actually, I think it was like $1 million we had for trading for the quarter.

Now, as Dave mentioned on an economic basis, really as how we drive the Company and drive incentives out there, they are strong and they are above plan at this point in time, forecasted to be above our plan, which really is, we've given some of this accounting going on, we're going to be maintaining our guidance.

If you actually annualize even that first quarter result, they are on track to be over our traditional what we expect from that business unit from an economic margin perspective. So strong results and a lot of the economic performance that's happening really is going to compensate the accounting drops that we're seeing.

So just to recap on that on that. Last year, economic profit was close to $200 million and the accounting profit was just under $100 million.

In the first quarter of this year, economic profits around $45 million, which is down slightly from economic first quarter last year, but still if you look at the economic profit, it supports our view of how the accounting will work out that will get you back to your accounting net income guidance that we've previously given and that we're going to hold.

Got it. Thank you.

And then on, just think about the strategic options for the trading business. Is there anything, without showing your cards, what you guys are thinking about or what you're seeing out there for outlets for that business?

We probably can't say much more. We like this business. We started up our trading company about 10 years ago.

It's done very, very well, not only in average net income and helping us to enhance our other assets, but it's also been a business that has had positive cash flows for us. So last year two-thirds of that accounting net income was realized, earnings, cash flow operations from trading last year was $70 million.

But there's limits to growth given our balance sheet so what we have said about doing is trying to look at the options, everything from retaining to are there ways to credit enhance the business to possible joint ventures to exploring possible sale. And we are in the middle of a process right now that other than that, I probably can't say much more.

Okay. And then I guess one last one.

Just remind us on the process if East China were to go to Detroit Edison, the process for getting that into rate base?

Dan, do you want to comment on that?

Sure. The first exploration right now, we're running it parallel to say what the market and who can we sell it to? These assets are contracted right now through 2010, I believe.

Yes. But go ahead, Dan.

The process in the state as we would put out an RFP and then through that RFP then obviously East China as a separate entity would bid on the RFP and it would establish a market value from which then the assets would be transferred, if they were selected as the winning bidder on the RFP.

Okay. Thank you, guys.

Okay.

We'll move now to Paul Patterson with Glenrock Associates.

Good morning, guys. Can you hear me?

Good morning, Paul.

I wanted to sort of follow up on the buy back. If I heard you correctly, it was 75% might go back to a buy back. You're trying to push as much to that as possible. Is that correct?

Yes.

And I'm just wondering, looking as we get closer to the finalization of this restructuring, have you thought about how that buy back might happen?

And I guess what I'm wondering, since you guys are so confident, you guys have bought back a couple million shares, might you want to step that up maybe before the transaction, or are you planning to do a tender? Any thoughts on that?

We've not made any final decisions. As you would expect, we're exploring all of our options and trying to go about this in a way that optimizes value for our long-term shareholders.

As we go into actually doing the transactions, chances are that we will not say much about how we're going to execute, other than our overall goal is we realize this is a transition year and we'd like to start next year basically with a clean slate and having this all behind us. So our overall goal is to consummate the share repurchase plan, no matter how we do it, by the end of the year.

Okay.

And then in terms of the, could you remind me what the balance sheet objective is? And also if the credit metrics might change a little bit with the consumer choice legislation, or the legislation to sort of, I guess, modify consumer choice, would that have any meaningful impact on your business profile and perhaps your potential for leverage if that were to be enacted, or does it matter that much?

Well, first of all, the first question, our overall, you know, we strive for a strong Triple D rating. Our leverage target is 52 to 54%.

As we go through the restructuring, I think there's a couple things in play. One is that as we go through the restructuring, we'd become a less-risky business and we would have an enhanced business profile. So I think there's a good chance that we could put forth an argument that our business profile would change, which would give us headroom on all our metrics.

That combined with -- it's not just customer choice and legislation, but it's just the whole regulatory environment in Michigan. As you know, when Choice was pushing 20% of our load and things had at a point in time in the 2003 time frame got pretty contentious, that's behind us now.

The regulatory relationships and environment's really positive. Choice is very, very low at this point in time. I think it's more of just the regulatory construct in Michigan affecting our credit rating more than whether we have Choice or don't have Choice.

Okay -- (overlapping speakers)

In all, I think they're all pointing in a very positive direction and we'll see how this plays out. But this rate proceeding will not be like the last rate proceeding that we had at Detroit Edison and I think you'll see a very straightforward and collaborative process as hopefully you see on all our rate proceedings.

Okay. Great.

I just was wondering if you could maybe quantify where you think it might, you know, just hypothetically, I realize that there's a lot to be done and you guys don't want to obviously commit as to where you are in the restructuring, but just sort of a little flavor as to what we might be able to see in terms of additional leverage, assuming that's, let's say, even you guys hit at the low end of $800 million number and all the things that you just mentioned, where then would your balance sheet target be?

Any thoughts about sort of direction? I mean directionally, we know where it would be, but perhaps just a little flavor on that?

For right now, our targets are staying where they are. Down the road, if for example our business profile changed and the business mix changed and we get through this rate proceeding and eventually if Choice is either capped or is repealed, perhaps it could be different, but I don't think it would be dramatically different.

You could see a 100 to 200 basis point possibly difference, but it's going to be pretty close to the range that we're targeting right now.

Okay. Thank you very much.

We'll go now to Paul Ridzon with KeyBanc.

Good morning. How are you?

Good morning, Paul.

The higher expectations for proceeds, is that a function of price for a fixed set or are we seeing more assets thrown in the mix, or is that some combination?

I would just describe it as a combination. What we're trying to signal without -- because we are in the middle of a marketing process is that the process is very robust. There's a lot of interest in the assets. I think this is going to prove out exactly like we've said, that we've made investments that had very good returns on invested capital that create a lot of value.

The big variable that we're still going through the process and there's not been a decision is there was a big range on unconventional that we put out there and we're going through the process as we are getting in the initial round of bids to decide how much of that we will let go at this point in time versus what we will retain.

And again, there's no decisions, other than what we wanted to do is just signal the confidence that we had, not only in the process, but our ability to execute and deliver at least $800 million.

As you look at -- we have extremely loose credit markets, we have a market that's extremely, seemingly insatiable for energy assets. It's arguably a very hot market. How are you thinking about that with maybe striking while the iron's hot?

You're right. It's a hot market and we're trying to be careful about what has mature value and a lot of transparency that we think that we can optimize by selling versus things that are not mature yet, that even though it's a hot market, I can do better long-term by retaining.

I would say that's primarily in the unconventional area. We're trying to sort through what mixture of those assets are mature, value's very transparent and I will not add a lot of value to my shareholders by retaining versus what do I want to retain.

(Inaudible) a change in your language around the earnings mix, 80/20 was my previous recollection and I heard 90/10? (Inaudible)

I want to be careful there that we've got to, what we're saying in the 90/10. And, you know, when we look at our midstream assets that are FERC-regulated assets, you know, pipes, and on the storage that is contracted very long-term, it's very utility-like.

So if you were just saying Detroit Edison and MichCon, it's more of the mix you're talking about over saying regulated assets which either are state-regulated or FERC-regulated, it gets you more into the 90% range. By the end of the year, we'll lay this out very clearly by group anyways and then people can aggregate it the way they want.

Detroit Edison and MichCon will clearly make up X percent and then you can see the other categories, but we do see that gas midstream group as very utility-like and very stable and that's partly what we'll want to convey as we come out of this, that if you look at the utilities in the midstream, it's a high utility-like mix with very stable earnings.

And (inaudible) compensation is tied to execution at the top level, how far down in the organization does that skin in the game penetrate? The guys on the ground actually doing the footwork, what do they have at risk?

Because, you know, as you would expect at the senior levels, we have other things we're focused on, whether it be safety or diversity or the operations at our nuclear plant. As you go down into the groups, depending on the individual, you know, if you went down to unconventional or power and industrial, they would still have a mixture of operational goals and then transaction goals, but you get to some point, there are some people that are on point for the transactions that have a significant majority of their incentives at risk relative to the transactions.

We designed it that way to say we want people to have skin in the game and not run the risk that the very people that develop these assets won't want to let them go and wanted to be fair about it, too, to the people and in some ways kind of treat these teams the way that private equity might treat businesses, to say, we want to incent you to do the right thing for the shareholders and we'll take care of you in the process.

Thank you very much.

Okay.

We'll move now to Mara [Shonessy] with MSS.

Good morning.

Good morning, Mara.

A couple of questions.

First, in terms of the temporary rate reduction, which shows a $12 million operating hit, and I think it's $75 million in revenues, I'm not sure about that. How does that work? Does that go away in April of '08? How does that actually work?

This was a temporary reduction that automatically goes -- it's a reset back. It was 12 months after we filed the case, which was one of the reasons that we were motivated to file the Detroit Edison rate case early and not wait till the June deadline.

Right. So --

So you'd view it as an automatic reset.

Okay. So am I right? Is it annualized like a $75 million rate revenue? What's the annualized number?

It's $79 million.

Revenues?

Revenues, yes.

Okay. So that automatically goes away and then you also have the rate -- the potential rate increase from the case impacting sometime mid '08?

You have to add them together.

Yes, okay. I'm sorry?

You add them together, you're right.

Okay.

In terms of the P&I business, benefited from the restructuring, mentioned the biomass and the peakers. What did that business do on sort of a real basis year-over-year? Were there any new projects coming in? What is that business doing ex-ing the restructuring?

There are some new projects that are coming in and the one that has just closed and will become operational mid-year is a 25-megawatt plant that we refer to as the Pontiac North Plant. It's a site that we acquired from General Motors. It had been out of service, we're bringing it back into service and that will be operational mid-year.

So there are incremental projects that are coming online and that would be an example of one of them. We still expect to continue to make investments in that group during the year.

The power and industrial group would include biomass operations, which we are -- the restructuring included taking some charges but also we have some operational improvements that we're making at some of the sites that we would expect profits, even though very modest, to improve there.

And then in the coal and gas midstream, we're also making investments. It's a different group, but we have a new coal terminal in Chicago that we made investments in that actually started shipping coal this month, and then we have ongoing expansion investments, and then the millennium pipeline will start construction later this year.

So in the guidance of the power and industrial business, the $10 million guidance, that excludes all of the restructuring that you had just mentioned? On the biomass, et cetera, on Page 15 on the slides?

Yes, it does. The one piece that's still in there when I speak of restructuring is the East China peakers.

Those are still in that number?

They're still in that number. So there's about a 4 to $5 million earnings drag in that number relative to the East China plant that either goes into Detroit Edison at book value or it gets sold.

And then at that point in time, you would expect that group to benefit from the removal of that earnings drag. That's really the last piece of the restructuring relative to operational restructuring versus a sale.

And what was the P&I business on an '06 operating earnings basis? Operating earnings basis? What did they report?

You're asking for total calendar year?

Yes. Just topping it against that 14 to $15 million.

It was $10 million last year.

Okay. Okay. So we have some modest projects coming in, but -- okay.

Modest projects coming in and then the other is the benefit from East China, eventually.

Okay.

In terms of just interest expense, it was up modestly this quarter, $4 million or so. Can you just talk about what -- how we should think about the -- if 25% of the proceeds are going to debt pay down, what sort of assumed cost to debt should we be using, and I was a little surprised that interest expense was up year-over-year.

Most of the debt -- most of the pay down -- most of the debt pay down will start as short-term debt, but eventually it will be a reduction at the parent company of long-term debt. So using an implied average rate of about 6% is the best way to go.

Okay. And then in terms of the first quarter having it up modestly, is that?

Yes, that is a part of the utility borrowings that are going on and we do expect that to go down as we execute monetization, both between now and year-end and then into '08 will be lower than '07.

Mara, back on power and industrial, I gave you the wrong number. Our actual number last year, and you've got to remember, the restructurings and the write-offs happened late in the year, so we bore a lot of operating losses, for example, almost a full year of losses from the merchant plants, last year we had a $9 million loss, which was our operating earnings for power and industrial last year.

Okay. Okay.

And when we think about restructuring the power and industrial business, what sort of debt capacity would that business be able to take?

Because of the long-term contracted nature of the contracts, it would take quite a bit of leverage, around 70 to 80% -- 70%, let's say.

Okay.

And the last question is on the MichCon rate strategy. Can you help out a little bit? There's some proceedings going on with the commission right now. If they go all right, you might push it out a year so can you just update us on that again?

Sure. I'll let Dan Brudzynski.

Mara, as you mentioned, we have the base gas sale as well as some storage expansion initiatives that have been sort of consolidated into a proceeding. They continue to progress positively. We're keeping a dialogue open with all parties.

We hope to have some sort of resolution to those proceedings later this year. And really at that point, then we'll be at a position to assess whether we need to proceed with a rate filing or not or just some sort of settlement or orders out of that case to delay a filing for a year because of the attractiveness of that settlement.

When we look at this, as you know, our goal on the utilities are to earn their authorized return and we believe that we can earn our authorized return on either path. The settlement proceedings are -- would be positive because it would bring certainty now versus waiting for a rate proceeding that, you know, we'd file a rate case later this year and that would play out over time. But financially, when we model it, we can get to our target either way.

Okay. Great. Thanks a lot.

We'll move now to Daniele Seitz with Dahlman Rose.

Thank you. Actually, most of my questions have been answered.

But I was wondering, you were in a process -- you had a program of cost reductions and so on. Are you done with that or is there still more to come? And also, what would have been your earnings without the one-time storm and all that for the first quarter?

Good morning, Daniele.

Hi.

On the first question is, as you remember, it's a multiple-year project that will take us through 2008. Last year we exited the year with $165 million in savings that would be O&M and capital and fuel savings that were passed through to our customers.

This year there's an incremental $100 million that are targeted and that will play out during the year. Actually, more back-end loaded and everything is on track in terms of delivering those savings.

Our head count last year is down 900 full-time equivalents and there will be additional reductions this year. So we're continuing to move forward.

As you can see in the Detroit Edison rate filing, this is playing out exactly as designed that we want to drive our operations to first quartile performance on operational measures and also customer satisfaction, and we want to have our cost structure in a position that if and when we need a rate increase, as I described it, we've earned our right to that.

In an environment with high energy costs, it helps manage the rate increase. So we were able to go into this Detroit Edison rate proceeding with a very modest rate increase that was half of what it would be otherwise, so it's working as designed and everything's on track. On the second question, the storm was about $13 million.

About $10 million after-tax, approximately $15 million pre-tax fir us over the five days that we had the outages.

Usually, we wouldn't see an ice storm of that nature -- it's not how we budget and forecast. So hopefully the rest of the year -- to step into our storm budget that early, hopefully, the rest of the year will play out well and this quarter is playing out well. The weather is beautiful here right now.

Two quick ones. Would you be asking for a rider on environmental expenditures?

No. Our current strategy is just to file the rate case and ask for recovery of the expenditures through the rate process and not ask for a rider or a tracker.

Okay. The 6 to 7% growth rates that you are measuring, does that include everything you have talked about, stock repurchase, excludes synfuels, et cetera., et cetera?

Yes.

And this is for a period like 2007, 2011?

Yes, that's right.

Okay. Great. Thank you.

Thank you.

We'll go now to David Grumhaus with Copia Capital.

Good morning, guys.

Good morning, David.

A couple questions for you.

Dave, back on the E&P sale, have you essentially put everything out there and then are just asking bidders to come back with different proposals for what they're interested in?

We've described from the beginning that we wanted to explore all our options, so given what we said in the past that we wanted to explore the possible different ways that we could package us where it could be Antrim only, Antrim and Barnett, Antrim part of Barnett, part of Barnett only, we were looking at all the options and we were exploring with various bidders how they would see the value there, so the answer is yes. We were looking for a wide range of options on a preliminary basis. Now we're starting to narrow that down.

Okay.

And, again, your confidence in your proceeds number are very conservative. That's a combination of both robustness of the auction process as well as potentially selling more rather than less of the E&P business?

That's correct.

Okay. Second question for you.

Any well results from the Bosque County? I think you guys had production online there and were drilling wells in the end of year call and we haven't heard any results there. I'm just wondering if we can get an update.

I've got Dick Redmond here with me and my only caveat on questions for Dick is Dick is here to answer any operational, production questions that you might have, but I'm not going to let him answer any questions relative to the sales process, because we really are at a sensitive moment right now. Dick, why don't you go ahead and answer David's question on this.

Sure. At year-end we talked about both Bosque and Erath. And in terms of Bosque, we still have to have, we've got some preliminary rates, we haven't got a lot of data. The rest of the industry's been there, too.

We're going to have to have some sort of combination of cost control and technology enhancement to get really excited about that area. It's producing gas, there's gas in the system, but we still have more work to do there.

The other one we had going at year-end is in Erath County. We've got a couple of wells in there, one with a test now, and that area looks economic to us, the rest of the industry is finding out the same thing. So we've been somewhat excited about our Erath County acreage as of late.

Great. That's helpful. Thank you.

Okay. Thank you.

We will take our final question from Ashar Khan with SAC Capital.

Hi. How you doing?

Good. Good morning.

David, if I'm right, (inaudible) you're saying 25/75 debt, say the proceeds are 800, 900, but if they go really higher, is it fair to say that the higher proceeds would all be used for buy back of stock?

No. I'm not sure I would describe it that way.

I had a similar question several weeks ago that the question was something like, if you -- do you get to a point where every next incremental dollar's towards repurchase? And I would describe it more as the proceeds go higher, it would give us the flexibility to shift, you know, that's the answer to how do you get to 75%. What would cause this to be towards 50% and what would cause this to be towards 75%.

When I look at the decision-making process, I want to set my balance sheet, I want to make sure I have enough capital to fund the growth engine here, and then the remainder would be returned to shareholders. So higher proceeds would be the driver that gets me to the 75% number.

Okay.

But all the proceeds are going to be used for debt and equity.

Is that another -- if the proceeds are higher, they are going to be used for debt and equity?

Yes.

Is that a fair conclusion?

Yes.

Okay. And second, I don't know, I might have missed it.

How much allocation -- buy back allocation do you have left authorized? And are you still buying stock in the second quarter? Well, I can't answer the second question, and we won't during the year. We've made a decision that we want to describe this program to say our goal is to complete it be the end of the year, but we're not going to tell you whether we're in the market or not. But on the first question, Ned, do we have current authorization?

The current authorization is $700 million of which we used $100 million, so we have $600 million left.

You have $600 million still left right now?

Round number, $605 million, yes.

Okay. Okay. Thank you, sir.

Thank you. And thank you, everybody, for joining the call. And again, I would encourage you to listen in at 10:00 a.m., if you could, to our shareholder's meeting which will be webcast. Thank you.

That does conclude our conference for today. Thank you all for your participation and have a great day.