密歇根天然氣 (DTE) 2007 Q3 法說會逐字稿

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

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

Great, thanks, Matt. And good morning, everybody, and thank you for joining us. Before we get started, I'd encourage you to look on slide 2 where we have our Safe Harbor statement and the reference to forward-looking statements and I encourage you to read that. With me this morning, I have Peter Oleksiak, our VP and Controller, Nick Khouri, our VP and Treasurer, and Lisa Muschong, our Director of Investor Relations, and I also have additional members of the Management team. If need be, I can call on them during the Q&A period. I'm going to start on Slide 4 with an overview. We enjoyed seeing many of you at the EEI Financial Conference this week. As you know we made a formal presentation Tuesday morning with Gerry Anderson providing an overview of our growth plans. That presentation is on our website. And if you missed the presentation, I encourage you to listen to it. It is archived there with the slides and with the audio.

And given that presentation, today we want to focus on the third quarter results and the 2007 guidance. On Slide 5 is an outlook summary. A week ago we revised our guidance for 2007. And the primary change there was to lower Detroit Edison's guidance due to one-time costs related to implementing our Enterprise computer systems. Detroit Edison also had incurred higher than normal storms in 2007. Year-to-date we're running at about 65 million versus 39 million year-to-date a year ago. And it started that way in the first quarter with a big ice storm. And we're also experiencing slightly lower territory sales. Overall cash flow has improved for Edison, with a one-time impact of the system implementation resulting in a shift from capital work to O&M. So we're having higher expense, but if you look at the cash flows, we're doing fine there.

MichCon remains on track to earn its authorized return on 11% and we're seeing very strong performance in our non-utility businesses. The detailed guidance is on Slide 6. We're projecting overall operating earnings before syn fuels of $425 million to $450 million, or $2.50 a share to $2.65 a share. For EPS calculations, we're projecting 170.5 million average outstanding shares. Earnings from our syn fuel adds another $150 million to $250 million in earnings, but as you know, the focus here is cash flow, where we expect $900 million in total for syn fuels and $675 million of that $900 million will come in this year. I've covered Detroit Edison and MichCon already in terms of guidance, so let me just comment on a couple of the other lines here. Power and industrial guidance is -- we're taking up and that's a result of a delay in the closing of the PNI transaction, and the driver there is overall higher earnings from our coke batteries which are doing very well. The delay also impacts the corporate line below, with higher interest costs for the year, was the primary driver on that line.

Unconventional gas is at the low end of the range, and that's due to our sale of our Antrim properties, which we closed in June. At the same time, we've raised our midstream guidance due to higher earnings for storage and the energy trading remains unchanged. They're having another very strong year. They did last year and they're doing so again this year. In regard to looking forward, the utilities are on track for next year, Detroit Edison will not incur the one-time computer costs that we're experienced this year. And we also remind folks at EEI that we have two rate adjustments for Detroit Edison next year, the first one being on April 15th, there's an automatic reset of $79 million in rates. That is a result of the reset coming out of a settlement proceeding last year. And then also our main rate case, we expect to wrap up in the third quarter, and in that filing, we seek about a $200 million rate increase. And Detroit Edison obviously then would have a partial-year benefit from that main rate case wrapping up in the fall. So with that background, let me turn it over to Peter Oleksiak and he'll take you through the quarter.

Thanks, Dave and good morning everyone. I'd like to start with Slide 8 and review the year-to-date operating earnings. I'll get into the quarter results after this slide. Overall, year-to-date operating earnings were down $60 million excluding syn fuel. Detroit Edison results are down $65 million from '06, and as you recall, Detroit Edison earnings for 2006 were very strong, with operating earnings up $363 million and a 12% return on equity. 2007 results have been impacted by the temporary show cause settlement rate reduction. This is about approximately half of reduction you're seeing to date year-over-year. The higher storm restoration costs driven by the ice storm earlier in the year, and the start-up costs related to the implementation of our enterprise business system. Underlying earnings for Edison are solid, with results impacted mainly by this one-time implementation issue. The year-over-year impact of the temporary reduction will be reduced in the fourth quarter, since the rate reduction was implemented in early September 2006.

Moving to MichCon our gas utility earnings are up $8 million from 2006 and our (inaudible) has authorized return. The power and industrial segment is up $24 million, as we see the benefit of our 2006 restructuring efforts, as well as higher earnings from our steel-related projects. Energy trading year-to-date results are down $17 million from '06. Energy trading actually had a large income year last year of $97 million, and that business is on track for another strong year, bearing any significant mark-to-market impact on the fourth quarter. Corporate and other is down $19 million primarily due to a higher tax impact. There was a favorable true-up last year that we had at the corporate level. Now let's turn to Slide 9 and the third quarter earnings results. For the quarter, operating earnings per share for DTE was $1.09. I'd like to remind everyone that a reconciliation to GAAP reported earnings is contained in the appendix. Detroit Edison contributed $0.69 while MichCon, which typically has a loss in third quarter, came in at a loss of $0.13, the non-utility segments combined to contribute $0.66. The primary driver of the non-utility quarter results was syn fuel at a full quarter production at $0.27 and energy trading at $0.27 as well. Continued solid performance by our coal gas midstream segment at $0.09 for the quarter. Finally, corporate and other was a loss of $0.13 in the quarter.

Moving on to page 10, you can see a summary for each segment's performance quarter-over-quarter. I'll be covering each segment in more detail later in the presentation. Overall, operating earnings are down $69 million, excluding syn fuel and are down $74 million when you include the impact of syn fuel. As I mentioned on the previous page, performance at Detroit Edison was impacted by the temporary rate reduction and system start-up costs. In addition, MichCon earnings were also lower due to enterprise system start-up costs and a higher uncollectible expense. Energy trading was also down in the quarter, due to significant mark-to-market gains recognized in the third quarter of 2006. The higher loss at corporate and other is due to the taxes and higher financing costs.

Let's turn to slide eleven and go through some details beginning with Detroit Edison. Operating earnings for Detroit Edison were $114 million, down $31 million from the prior year. Lower margin contribution of the quarter was driven by the temporary rate reduction, the 2006 show cause order and slightly cooler weather, even though it was warmer than normal. Last year it was actually even warmer in the quarter compared to last year. Improvement in electric choice margins were more than offset by choice incentive mechanism. On this slide you can see the impact of the O&M cost related to the start-up of our enterprise business systems. As Dave mentioned earlier, we have experienced higher than normal storage and restoration costs this year and this actually also impacted this quarter. The 12-month rolling operating return in equity for Edison is 9.3%.

Moving on to page 12 and a review of MichCon's performance. Operating earnings for MichCon was a loss of $22 million, down $14 million from the prior year. MichCon was also impacted by system start-up costs and the timing of uncollectible expense and that of the tracking mechanism, slightly higher operating cost and a small gain in sale that we experienced in 2006. As I mentioned on an earlier slide, year-to-date MichCon is up year-to-date and is on track to achieve their authorized return. The 12-month rolling operating return on equity for MichCon is 10%, and on a weather normalized basis it's 12. Let's turn to page 13 and the non-utility business segment. Total non-utility operating earnings for the third quarter of 2007 are $109 million, compared to $130 million in the third quarter of '06. We continue to have solid performance in the coal and gas midstream segment, however storage and pipeline revenues contributed to the increased earnings. The unconventional gas segment now reflects only earnings from our Barnett properties due to the sale of the Antrim properties in the second quarter of this year.

Power industrial was up in the quarter, due primarily to the restructuring actions taken last year related to our peaking plants, waste coal project and biomass business. As previously mentioned, energy trading was impacted by significant mark-to-market gains in '06. Finally, syn fuel earnings are down slightly and a higher paid-up percentage is partially offset by higher production. With that, I'd like to turn the discussion over to Nick Khouri.

Thanks, Peter. As always, improved cash flow and balance sheet strength remains a key priority for Management and the Board of Directors. The combination of syn fuel proceeds and the sale of DTE's Antrim gas property has led to a net cash position after dividends of over $1 billion dollars for the first nine months of this year. Page15 compares 2007 net cash year-to-date with the same period in 2006. DTE's adjusted cash from operations, including syn fuel payments, totaled over $1 billion dollars in the first nine months of 2007, down from 2006. However, a large portion of the year-to-year decline can be attributed to the $235 million tax payment tied to the sale of Antrim. In other words, the higher tax payment embedded in cash from operations was more than offset by the $1.3 billion of asset sales. This page also summarizes capital spending. As you can see, total capital reached $967 million so far this year, compared to $1.08 billion last year. MichCon capital is up, while Detroit Edison and non-utility capital is down from the prior year. The decline at Detroit Edison is due to the EBS start-up costs mentioned by Dave and the intra-year timing of planned plant outages.

Excess cash has been used to buy back stock, retire parent company debt, and infuse equity into the utilities to support their future growth. Page16 shows DTE's improving balance sheet methods. The non-utility monetization program is on track with expected after tax proceeds of over $1.5 billion. The sale of Barnett's core and southern acreage is proceeding on schedule. We are moving to close the power and industrial transaction, as mentioned at EEI, we are currently in the marketing process for the debt. As we have all seen, the debt markets have been very choppy lately. We remain committed to the overall transaction with the goal to close by year-end. We expect to end the year with leverage within our target of 50 to 52% debt and the ratio of cash flow to debt between 24 and 26%. With that, let me turn it back over to Dave to wrap up.

Thanks, Nick. I'm going to wrap up on a final page here. We expect to continue to create significant value for our shareholders. First, with the utility growth of both utilities, and if you would like to have more details on that growth plan, I really encourage you to see the EEI presentation on our website. Between now and 2012, the net utility plant is projected to increase by over $2 billion, and in addition to that, beyond that, there's a potential upside for growth as we would implement a potential renewable program as those standards come out from the state and federal government. Our non-utility businesses will provide an additional 1% growth to complement that utility growth. Going forward, the two utilities and our FERC related assets will make up about 85 to 90% of our net income. And as Nick laid out, our balance sheet is in good shape and our credit metrics are in place as we continue into this growth cycle. When you add our dividend of $2.12 per share to our growth, we believe it provides an attractive total shareholder return. A final comment, we plan on providing more detailed guidance in December after our December board meeting, and that's the next time, I think, we will be in communication with the investment community. And with that, Matt, we will open it up for questions on the quarter.

Thank you. (OPERATOR INSTRUCTIONS) Our first question today will come from Greg Orrill with Lehman Brothers.

Thanks very much, good morning.

Hi, Greg.

Just looking at Slide 24, the asset sales and other line looks like it goes up to $2 billion to $2.1 billion from about $1.3 billion for the nine months. Could you go through the difference there?

Do you want to try that?

Greg, let me see if this answers your question and walk from the $2 billion to what we've been saying, which is at least $1.5 billion of after tax proceeds. It's a little complicated the way we've laid it out, but it's really $2.1 billion, $2 billion to $2.1 billion, and then there's about a $550 million tax payment that takes it down to the $1.5 billion. You'll see the monetization tax payment is 235, but that's after the syn fuel credits. So to walk it down, it's the $2.1 billion with about $550 million of tax payments that get you the after-tax proceeds of $1.5 billion. And then the monetization impact is excluding the syn fuel price. Does that help?

It does. Now, there's -- I assume there's not a place holder in there for Barnett monetizations.

This excludes Barnett monetizations and would be upside to the forecast.

And would include the PNI transaction?

Yes.

Got it. Thank you.

Our next question will come from David Grumhaus with Copia Capital.

Good morning, guys. Dave, a couple of questions for you on the MichCon and Detroit Edison. When you talk about 11% ROE, what rate base? Is that sort of year-end '07 rate base that you're talking about or will it be sort of an average rate base? Can you give us any more --

Typically the way we look at it as an average rate base, so beginning balance, ending balance and we average it for the year. We target 11th% return for that average equity.

So sort of an average '08 balance.

Yes.

Okay. That's helpful. And then when you talk about the 5 to 6% growth, is that really off and adjusted this year or is it off where you end up this year? Because you had some other one-timers this year.

The 5 to 6% growth that we've laid out is a long-term growth rate and I would suggest that for next year we're actually would be before the one-time items, what we're targeting, a few one-off reported numbers, it actually will be higher than that, '08 over '07 because of the one-time items.

Okay. That's helpful. Thanks guys.

(OPERATOR INSTRUCTIONS) Our next question is from Ashar Khan SAC Capital.

Good morning.

Morning.

David, if I have it correct, Detroit Edison, according to your rate filing, the 2008 rate base is $8.8 billion with an equity rate base of $3.5 billion. So if one assumes that you can earn 11% in '08, just doing the math would imply earnings at Detroit Edison of around $385 million, $390 million. Is there anything I'm doing wrong in my calculation?

Go ahead, Peter.

Not, I think for us that would be kind of an exit. We are kind of working towards the capital structure we have in that rate filing. So for 2008, when you look at the -- I would describe it as a simple average, it would be slightly lower than that, but that's pretty close ballpark way to look at it. So it probably be like an exit earnings for 2008. That's probably the best way to look at it.

What do you mean by exit earnings, I don't understand that concept.

When we build up the equity, the year-end of 2008, we get -- and we get the full rate release, that's going to be your exit. So we're going to enter 2007 at a lower than the $3.5 billion of equity, we'll be building up towards that by the end of the year, so your average would be actually lower than the 3.5.

Okay. Where do you end up at the end of '07?

It would be approximately 3 point -- I think it's like 3.2.

3.2.

Right.

Okay. Thank you.

Thank you.

That's all the questions that we had in the queue at this time. I'll turn the conference back over to you and the other presenters for any additional or closing remarks.

Thanks, Matt. I suspected this would be a short call given the fact that we visited so many people on Monday and Tuesday, and thank you for joining us this morning. Take care.

And that does conclude today's teleconference. We would like to thank everyone for their participation and wish everyone a great day.