密歇根天然氣 (DTE) 2008 Q1 法說會逐字稿

Good day and welcome to the DTE Energy first quarter 2008 earnings call. Today's conference is being recorded.

At this time I would like to turn the conference over to Mr. Dave Meador. Go ahead, sir.

Thank you, good morning and welcome this morning to our 2008 first quarter conference call. Before I get started, I encourage you to read the Safe Harbor Statement on Page 2 of our power point document including the reference to forward-looking statements. With me today 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 other members of the management team with me this morning and I might call on them during our Q&A session. Next Monday, Gerry Anderson will be presenting at the AGA conference. At that time, Gerry will provide an update on our utility and non-utility growth strategy. Pending Michigan legislation and rate procedures and other strategic updates, I know many of you have also signed up for one on one meetings with Gerry. Given that, our focus this morning is on the first quarter results. I encourage you to join Gerry on Monday morning at 9:00 A.M. for his presentation. So, let's switch over to the first quarter and let me start with a few comments.

First on slide 5., I believe that DTE energy is a very effective investment. As we have laid out for you, we expect 5% to 6% average annual growth from our two utilities over the long term. In the near term, there are slightly higher growth projections and I want to go through a couple of statistics. For Detroit Edison, 2008 compared to 2007, at midpoint guidance we have laid out almost 6% growth for Detroit Edison. But at the high end of guidance is 9% growth. And then if you look at the 2009 early outlook that we provided, compared to 2008, that is over 11% growth year-over-year projected.

At MichCon, 2008, compared to 2007, at midpoint there is a 6.7% growth. And at the high end of guidance for this year, is 9.8% growth over the prior year. And then, similarly, if you look out to 2009, or our early outlook is almost 6% growth, 2008 over 2007. And the numbers that I just went through, we have not factored in the near term growth opportunity for renewables and certainly we have not included the longer term growth possibilities from a new nuclear plant. We have also been careful as we invest and as we're growing earnings to be sensitive around customer rate impacts and we're very focused on customer satisfaction and very specifically, reducing any complaints that might make their way to the MPSE. Speaking of the MPSE, we feel good about our relationship with the commission. Some examples of our collaborative environment that we're working in the MichCon settlement that we reached last year.

Then the Detroit Edison rate case where we amended the case to basically bring in some of the economics from 2009, which increased our requests by $85 million. And we did that by maintaining our overall timing on that case. So, it was a very significant economic shift without having a delay. And I think it is just another example of how good the relationships are with the commission. The legislative developments have been very positive with the April 17 passing of the Michigan comprehensive energy legislation by the Michigan House. The core legislation passed with well over a 2 to 1 margin. And the renewable legislation was passed with a 4 to 1 margin. As the legislation now moves to the Michigan Senate and this topic is part of Gerry Anderson's update that he will provide on Monday.

In the non-utility businesses, we completed over $1 billion of after tax bond (inaudible) and that's from (inaudible) and we bought back $725 million of stock and we paid down parent company debt. So, we have made progress on that front. We're still working on the P&I transaction and I know there is a lot of interest in that. The P&I transaction as we have laid out is completely held up by the credit markets. It has nothing to do with the underlying transaction, which is a very attractive transaction, not only to us, but also to our potential equity partner here at General Electric. We're committed to completing this transaction, however, the exact timing of this is really out of our control. And it is hard to predict how the debt markets are really going to work, and when we will get that window that we could actually close this transaction. We're actively working it, and our guidance has been adjusted to forecast this as close to the second quarter.

We have also provided additional information that Peter will discuss, that lays out more details to show you that this is earnings neutral this year a positive, no matter when it closes. So whether this closes second, third, fourth quarter, from an earnings standpoint, this is really a non-event. Peter will take through that detail. And then my last point on the investment thesis is that, and it is very important, is our dividend is $2.12 per share. It's over a 5% yield and when added to the growth that we have laid out for you, it provides a very attractive total shareholder return.

Turning to slide 6, I have a couple of observations for the quarter. This is a very solid quarter for all of our businesses. The utilities are both on track during their 11% authorized returns this year. We had strong results at Detroit Edison, including overall electric low probe which is up year-over-year, 2% on a temperature normal basis, it is up 1.8%. So, we're experiencing low growth there in spite of some of the economic data that you might see coming out of Michigan. We had a strong quarter in energy trading and also in the power and industrial business that led us to raise both the bottom and top end of guidance which is now $2.80 to $3.20 per share. So with that introduction, let me turn it over to Peter.

Thanks Dave. Good morning to everyone.

I would like to start with slide 8, the first quarter earnings results. For the quarter, DTE's operating earnings per share were $0.78. We have 14 million less shares this quarter vs. last year which increased EPS $0.06 for the quarter. I would like to remind everyone that a reconciliation to GAAP recorded earnings is contained in the appendix. Both utilities were basic contributors to this quarter's results. Edison had $0.25 and Michigan had $0.37. The non-utility segments combined to contribute $0.30. The primary driver to the non-utility quarter results was energy trading at $0.18, aided by realized mark to market margin increases in the quarter. Our power and industrial and coal and gas and midstream segments both had solid quarters at $0.06 and $0.05, respectively. Finally, corporate and other was a loss of $0.14 in the quarter.

Let's turn to page 9 where we can see a summary of each segment performance quarter-over-quarter. I will be covering each segment in more detail later in the presentation. Overall, operating earnings are up $16 million for the quarter. Our utility businesses are both down from prior year, mainly driven by expense timing, which I will cover in more detail in the next few pages. Our non-utility segments combined contribution was up $31 million, with energy trading at $29 million of the year-over-year increase. Corporate and other was down $5 million due to a tax benefit that we realized in 2007. As you can see in this chart, there are mixed results quarter-over-quarter with the key driver for improved earnings coming from strong performance at energy trading. We still expect all segments to meet or exceed original guidance and I will cover that in more detail later in the package.

Let us continue to slide 10 and go through some details, beginning with Detroit Edison. Operating earnings for Detroit Edison was $41 million, down $7 million from the prior year. Total sales volumes are up for 2008, earned by additional new industrial customers and some overall territory growth. This increase is 1.8% on a temperature normal basis. On collectible reserves, increased during the quarter, driven by increase in the aging of customer receivables. We did plan an overall year-over-year increase on the uncollectible expense. Growing rate base resulted in higher depreciation and amortization expense in 2008. For the 12 month rolling period, operating maturing equity for Edison is 10%.

Moving on to page 11 and a review of MichCon's performance. Operating earnings for MichCon was $59 million, down $3 million from prior year. Weather cooperated for us, it was colder than normal in the quarter. In addition to the colder weather, lower loss in the Conifer gas resulted in increased market contribution for the quarter. Uncollectible expense reduced earnings by $7 million in the current year. As you recall, MichCon was granted an uncollectible tracking mechanism in its last rate case which allows for revenue offset of 90% of all uncollectible expense over the $37 million authorized and base rate. There is timing of the track or recognition that is impacting this quarter's results. We are expecting no material year-over-year impact for net collectible expense in 2008. The 12 month rolling operating return equity for MichCon is 10%, almost 11%, weather normalize.

Let us turn to page 12 in the non-utility business segment. Total non-utilities operating earnings for the first quarter of 2008 are $50 million compared to $19 million in the first quarter of 2007. Coal and gas midstream earnings are down $4 million due primarily to the elimination of margins related to central transportation offset by $2 million of growth in our gas pipeline and storage business. Unconventional gas and earnings are unchanged from 2007, as increased western Barnett production, higher gas prices offset the earnings from the sale of interim and core Barnett properties. Power and industrial earnings are up $6 million in the quarter due primarily to the county rules which require the stopping of depreciation expense on (inaudible) that are classified as (inaudible) for sale. The accounting rules also require the recognition of this cumulative depreciation as the projects move from the health to sales status. As I discuss in our next page, (inaudible) will not be negatively impacted by this potential scenario.

Finally, as highlighted earlier, energy trading earnings are up $29 million driven by favorable margins with gas and power trading. Within the quarter, two-thirds of this income was realized and one-third unrealized. Page 13 provides details on our revised stats Dave mentioned earlier. We have raised our 2008 guidance to $448 million, to $510 million of earnings or EPS of $2.80 to $3.20 per share up $0.10 from prior guidance.

Let me highlight the changes from prior guidance. Detroit Edison earnings are now $350 million to $370 million, up $10 million on the low end of guidance. The tightening of the lower end of the range is driven by the first quarter margin growth along with further (inaudible) related cost reductions. For the power and industrial segment, we are increasing guidance of $10 million to $20 million up from the $5 million to $10 million in the original guidance. The new guidance assumes June monetization. The increased earnings is driven by the delay in the monetization projects within the segment which results in more earnings for the calendar year. We are holding total average shares for the year at 159 million. The table on the right highlights the impact if power and industrial modernization is not completed in October. And also, if the sale is not completed at all in 2008. And both scenarios, there is not a negative impact in guidance. Finally, with a strong start to 2008, increasing energy tradings, range to $40 million, $55 million, we will continue to monitor performance and accounting flow through for the year. With that, I would like to turn discussion over to Nick Khouri who will cover cash flow and capital expenditures.

Thanks Peter. Good morning.

As always, improved cash flow and balance sheet strength remain the key priority for management and board of directors. It was a strong quarter for cash in the balance sheet. However, most of the year-over-year improvement was intra-year timing. For example, net cash from syn fuels, which we still expect to hit approximately $200 million this year, swings from a large positive in the first quarter to a negative in the summer. So, although the first quarter came in strong, we are reconfirming our prior cash and capital forecast for the full year. Page 15 shows sources and uses of cash in the first quarter of 2008, compared to the prior year. Adjusted cash from operations, totaled $1 billion dollars in the first three months of the year compared to $700 million last year. Also, in the first quarter, we successfully sold our holdings in the core Barnett region for approximately $250 million.

Capital and dividends totaled $400 million in the quarter, meaning we were able to pay down a significant amount of debt. But as I said, the cash picture will normalize in the remaining three quarters of the year. Page 16 summarizes capital spending in the first quarter. As you can see, total capital spending was $329 million, slightly below the $376 million of a year ago. Most of the year-over-year difference is timing. For the full year, we expect capital spending to be about 14% above 2007 levels, including a 20% increase at Detroit Edison.

Page 17 reconfirms cash and capital spending guidance for 2008. Cash from operations is projected to be $900 million, about the same as in 2007. And as I mentioned, syn fuel cash is phasing out, but still generates an estimated $200 million this year an additional $100 million in 2009. Asset sales are expected at $1.1 billion comprised of the January sale of core properties in Barnett and the P&I modernization transaction. Once again this year, the combination of internal cash and asset sales supports further reductions in holding company debt and share repurchases.

Finally, the right side of page 17 summarizes capital spending for year. Total capital is expected to grow to $1.5 billion this year. About 80% of the projected capital would be spent by the two utilities. Non-utility capital spending is roughly at $100 million for each of our three business segments. And finally, we expect to end this year well within our leverage target of 50% to 52% and the ratio of cash flow to debt between 22% and 24%. With that, let me turn it back over to Dave for a wrap up.

Thanks Nick. Let me wrap up on slide 18.

We believe we have made a strong case for why DTE energy is a very good investment. We have laid out our growth plans and believe we have the right focus on high customer satisfaction. We also have a constructive regulatory and legislative environment and we are hopeful we will see legislation pass by mid-year this year. Gerry Anderson, as I mentioned, will provide an update on Monday on our growth, regulatory, legislative and strategic plans. And Jerry Norcia will be with him also and Jerry will provide an update on MichCon as well as our midstream gas storage and pipeline business. Additionally, Gerry and Tony will provide comments at our annual shareholder meeting on May 15 at 10:00 A.M. And that will be webcast and I encourage you to listen on the that also. With that, we will now open it up for questions.

(OPERATOR INSTRUCTIONS) We will take a few moments for any questions to queue. We will take our first question from Samantha Dennison of Credit Suisse. Go ahead, please.

Good morning.

Good morning.

Can you guys talk about some of the cost cutting measures that you have achieved at Detroit Edison and MichCon and the ability for potentially more of that going forward?

Well, if you went back to 2005, we were looking at the capital investments we were making. And we initiated at that time our performance excellence plan which was a company-wide initiative that had multiple years, this is the last year of the benefits of that and we are on track to deliver $330 million of reductions and O&M and capital and fuel cost savings. In the process, we also reduced our MichCon and corporate support head count by 12%. Which went down from a little over 10,000 to 9,000 employees. And, I would just offer that we are realizing that this is going to be a way of life for us as we go into a very large capital spend period over many years, that we have to make sure that, not only are we satisfying our customers, but that our cost profile is right. So, every group in the company has been asked to go through benchmarking and target getting through first quartile in terms of cost and performance and are -- we have initiatives all around the company right now that are looking at opportunities, everything from strategic procurement to productivity improvements in our field operations to fleet operations. So, we have done a lot and we think there is more opportunity there, and just -- again, view that as something we're going to have to do on a regular basis as we -- what I describe, earn our right to rate increases. We have to make sure we have done everything we could do to help our customers.

Great. Thanks. Then with respect to coal inventories, where do you guys currently stand and what is your head positions for the next few years?

Well, in terms of coal we are -- we contract this in advance and we're 100% procured for 2008. Usually the way we run this, we're two-thirds procured for 2009 and one-third for 2010. So, we buy in advance. Plus, we have long term rail contracts that are in place until 2011. We believe we have done a good job in smoothing some of the market volatility that would eventually flow through to our customers.

Great, thanks very much.

Thank you, and we will take our next question from Paul Ridzon of Keybanc. Go ahead, please.

Peter, I don't know if you mentioned the trailing 12 Detroit Edison weather norm ROE. Was that the same as the 10 that you cited?

The 10% was -- yes, the 10% was an actual. The weather normalize is a 9%.

Okay, thank you.

And we will take our next question from Jonathan Arnold of Merrill Lynch. Please go ahead.

Good morning. I would like to ask a little more granularity around what drove the trading results and then also, I see you're not looking at an annual number materially above the quarter. There is -- are some of these mark-to-market gains going to reverse during the year? How should we think around that assumption?

Well, the -- I will start and then I will get some help here. Trading is a business because of the mark-to-market. On an accounting basis, it has been difficult to project the actual amount, even though over the years, as we have watched their ability to perform, we have taken up annually our guidance and this year our guidance was taken up a little bit more. For the quarter, two-thirds of the earnings in the quarter are realized earnings. And that said, we -- they could be on track for a good year, but you never know in this business because of potential mark-to-market movement that could come up later in the year. So, what you saw us do, even though there is very strong quarter, and even this month another strong month, we only took up the high end of guidance modestly. We think that is the right thing to do. And as the year plays out, we will see how second and third quarter come in. But they are doing great and we think it is the right thing to do to be conservative in terms of guidance until we see more of the year play out.

Okay. So, Dave, you say two-thirds was from realized. The one-third that was from unrealized, is that likely to reverse? And if so, in what timeframe? Are those the kind of mark-to-market gains that stay or rollover to next year or within this year?

Jeff, why don't you -- [Jeff Jules] with us, he is our director of risk management. He would have perspective on that.

The forward mark-to-market is, again, is going to be market dependent. So it is not necessarily tied to timing around the asset, hedging that you may have seen in previous years. There is some of that in there but, there is also a mix of just pure market open positions that are going to fluctuate with the market.

Okay. Thanks a lot.

And we will take our next question from [Bill Apacheli] of Citi. Go ahead, please.

Yes, hi, good morning.

Good morning.

Just had a quick question on the tracker for the uncollectibles. Could you just walk through that again? I guess you're saying that it is more of a timing issue for both the gas and electric utilities. Is that right?

The gas utilities -- this is Peter. The gas utility is on the head of the tracker. The electric utility does not have a tracker. As I mentioned in my talking points, we have a certain amount in base rates, $37 million. Anything over that, we essentially get to put a revenue offset on and so, the way the accounting works, driven by sales and uncollectible expense right now, we're seeing timing issues that will reverse out. Essentially, year-over-year we're expecting essentially flat flow through in uncollectible expense for our gas utility.

Okay. And then on the electric side I guess, the system needs a monitor going forward in terms of whether or not that continues to rise or --

Well, you know, Michigan has been under economic pressure for several years, and hopefully we're all coming towards the end of this, but for a long time it was referred to as one-state recession. If you went back several years ago, we saw pressure on both businesses. And as Peter said, MichCon has the tracker, Edison doesn't. We worked this issue hard and we anticipated a slightly higher bad debt expense or reserve adjustment when we gave our guidance for Edison. And it -- we don't have a concern for the year but it is certainly something that we have to be very vigilant on and stay on every single day, every single month. And so, I don't see it as a risk to the guidance or forecast at this time.

Okay. Thank you.

Sure.

Thank you, our next question is from Steve Fleishman of Catapult Management.

Hi, a couple of questions. First on the P&I, the guidance you're giving, does that include -- I think you mentioned that you're not depreciating the entity any more?

Right, when you categorize an asset as held for sale, the accounting rules have you for -- once you do that, and it meets the requirements for a one year period, you basically suspend depreciation and amort.

Okay, so if you looked at, for example, your guidance, for half a year I guess, I mean, what would that be if you were depreciating it in a normal way.

Depreciation would be about $6 million a quarter.

Pretax, $6 million, about $4 million after tax.

$4 million per quarter?

Right, we stopped essentially the fourth quarter of last year.

Okay. Okay. And just --

The way this works, then, Steve, just to be clear with people. We wanted to show this this way so there just wasn't a misunderstanding that the favorability here to day -- the business is doing well, and part of that favorability is the result of this business held -- asset held for sale. And then, if you ever are doing this and you run into that one-year window and the asset still held for sale, but you would have to actually reverse that out. So, if that ever happened in this calendar year, you would reverse out -- it is neutral to the year, but then there was this, also happened in the last quarter of last year, so would he would have to reverse out the $6 million from fourth quarter 2007, but even with that, the business is doing well enough that, even doing that claw back on depreciation and amort, we would still be earnings neutral.

Steve, the scenario I laid out was called no 2008 sale. We assumed that cumulative depreciation all comes back in. You can see that is essentially neutral for the guidance we're putting out.

Okay, I think I understand that. And just to clarify your comments on timing of completing the sale, you're assuming in this guidance end of Q2, but you're really -- you're not, you don't know when. That is not forecast of timing at this point.

Right. I think we have learned that, none of us can determine exactly how the credit markets are going to behave and when that --

Right.

-- window opens up. And I didn't want to be disingenuous and say -- like, and come out with a statement that says, hey, this will close in the second quarter when it is all dependent on, really, the markets.

Right. And, okay.

And at the same time, we just wanted to make sure that everyone understood the math, so, by providing the math for multiple quarters, I am also not saying that this is going to slip to the third or fourth quarter. We just wanted to make it really clear that no matter when this closes, or even if it didn't close this year, from an earnings standpoint, this is a non-event.

Okay. And what -- how long is the current agreement go through?

With --

With GE?

There is actually not an agreement right now. We --

Alright. You already passed the period of walk away. So it is kind of both --

Right.

Right. Okay.

My color commentary on that was, you wouldn't know that the agreement expired, because the teams are working as closely and as intensely as they were --

Got you.

-- last October.

Okay. Two other quick questions. First in trading, could you be a little more specific on kind of, just generally, how you're making the money in the business? I mean, are you playing spreads of gas? Are you -- what are the things you're doing to make money?

Well, I -- I think the first point just being in a -- in an extremely competitive business, I think we're reluctant to get into too much details, they -- they have various books of business so they have -- they are power book, we have a transmission book, we have natural gas positions and -- which are also positions around pipes and storage. And they are doing very well in the natural gas markets right now. From year to year this -- if you ask which book of business is driving profits, it has shifted from year-to-year, but right now it tends to be more in the natural gas side of the business.

Okay. And then finally on Detroit Edison, the utility, could you give a little more color on what you're seeing in the local economy?

Well, there is a slide in the back of the pack on load growth. So, I think one of the things that we're trying to point out to people is that we have conservatively planned for -- it's slide 21. We have conservatively planned for a flat load growth, even though the Michigan 21st Century plan have projected longer term that you would see load growth in the 1% to 2%. But we wanted to show that, even with Michigan in a deeper recession than what has been experienced in the rest of the country, we're actually still experiencing load growth. And we know that the auto industry is going through a restructuring that will play out over several years here and we're hopeful that this will pick up. But we did -- if you look quarter-over-quarter, you see on a weather normal basis for Edison, you see a 1.8% load growth. So, we're still seeing very modest load growth, which we think is positive. The other place that the economy shows up, as we talked about, was in bad debt expense. We have a tracker at MichCon. And we have worked both of those, doesn't matter if we have a tracker or not, we're working both of those pretty vigilantly to make sure that we keep that expense contained.

Okay. Thank you very much.

Okay, thanks Steve.

Thank you, (OPERATOR INSTRUCTIONS). We will take our next question from Mark Siegal. Go ahead please.

Good morning thank you for taking my call. Just a couple of quick questions here. Can you give us an update on potential status and timing of an AMI pilot later on in this year?

Sure, Mark. The AMI pilot is getting underway right now. We have approved a pilot, first phase is 10,000 homes. And we're looking at this just like other companies to make sure that we understand technology and the interface with the billing systems, that we understand things like security, but then also that we understand the economics. Because our view is that with all of the capital that we have to do, that we don't have a choice on, this is something that, from a customer standpoint, has to pay for itself. So part of our pilot is the economic analysis to say, do you really get the offset that you believed you were going to get in terms of not having to read the meter all the way to automatic connects and disconnects, and there is a variety of ways that this offsets current costs and our cost structures, so we are just getting underway in that pilot right now and we're really treating it like that, that we will not make a decision to deploy until after we get the results from that pilot and there is actually a second phase pilot.

Could you give us a sense of how long the evaluation process will go on the technology and potential sizing on secondary phases of the pilot?

It is a one-year pilot. And I think what we're thinking right now, it is 10,000 homes, first phase, 25,000, second phase, and we want to make sure that the pilot is designed in a way that we stress tested technology and then we stress tested the economics of this, too, before we would go into a full deployment.

Okay, great, thanks very much.

Thank you.

And we will take a follow-up question from Paul Ridzon of Keybanc, go ahead please.

I don't know if you discussed this. I had to step away, but can you kind of give your expectations of timing on something out of the Michigan Senate?

Gerry Anderson will talk more on Monday, but right now, we are hopeful we will get this mid-year. Senator Patterson, who chairs the senate energy and technology committee, has said that his goal was to have something on the Governor's desk by the Fourth of July. That's I think kind of an earmark target here. We know there is a summer recess and I think there is a lot of energy being put into this issue right now to say, what's the process? What is the timetable? Milestones to get us to a mid-year passage of the legislation.

Thank you.

Thanks.

And it appears as though we have no further questions. I will turn it back over to management for any closing comments.

Thank you. And again, thanks for joining us on the call. As I pointed out, I encourage to visit Gerry Anderson and Jerry Norcia Monday morning at AGA at 9:00 A.M. Thanks and have a good day.

This concludes today's teleconference. You may disconnect at any time. Thank you and have a great day..