密歇根天然氣 (DTE) 2008 Q2 法說會逐字稿

Good days and welcome to the DTE Energy second quarter earnings conference call. This conference is being recorded. At this time, I would like to turn the conference over to Mr. David Meador. Please go ahead, sir.

Thank you, Holly. Good morning, and welcome to our second quarter earnings conference call. Before we get started, I encourage you to read the Safe Harbor statement on page two of the Power Point document, 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 some of the leadership team with me in the room, and on the phone. And I might call upon them during the Q & A session.

So let me start on slide five. We believe we have a compelling investment thesis that we've presented to you that's built on several key strategies. First is our strong utility growth plan, and our utilities comprise about 80% of DTE Energy today after our restructuring. Long term, we see about 5% to 6% growth in the utilities, and that's driven primarily by mandated environmental expenditures. Near term, that growth in earnings is projected to be 7% to 9%.

Based on passage of Michigan's energy legislation, there could be upside to those growth projections. Given this growth strategy, it's imperative that we continue to maintain a collaborative relationship with the MPSC. It's also very important that we continue to service our customers well, and that we use cost reductions as we have in the last several years as a method to minimize customer rate increases. Energy legislation is also very important to the strategy and I'll provide a brief update to that this morning. For our non-utility businesses, we will continue to build on our history of being value-focused, and while this is a smaller part of the business going forward, we will be looking for premium returns to the utilities as we continue to make investments to drive shareholder value.

In our dividends as a $2.12 per share is attractive at a current yield of over 5%. To put that dividend together with this growth plan, we believe it provides a very nice total shareholder return story. Now, let me turn to page six, and I'll provide a brief business overview before I turn it over to Peter. First I'd like to provide an update on legislation. As you know, the Michigan House passed legislation on April 17th and the state Senate on June 27th. Both sets of legislation have bipartisan support with consensus on many elements of the proposed new energy policy for Michigan. There are differences that exist, that are primarily in the areas of renewable energy and energy efficiency. But the next step in the process is to reconcile these bills between the two chambers. And last week, and it's evidence of another step forward in this whole process, the House and Senate appointed their conference committees and their currently actively working on compromised language.

If they reach an agreement, this legislation could be voted on as early as August 13th when the full House and Senate return to Lancing. As we've indicated in the past, this legislation is backed by a broad coalition in Michigan, including the Michigan Chamber of Commerce, the Michigan Manufacturers Association, labor organizations and business leaders. Also, the governor has expressed strong support for the appropriate energy reform and renewables package. We've been really, really pleased with the progress that's been made, and we encourage the conference committees to act quickly here to reconcile the few remaining issues and push for passage of this legislation as soon as possible. Regarding the Detroit Edison rate case, as you know, staff and intervenors filed testimony on July 15th. This is another step in a multi-step process. We will file rebuttal testimony on August 8th. And we do respect the views of all the parties in this process, including the MPSC staff, and at the same time, we also believe that we can support our position in our original filing, and we will do that again when we file our rebuttal in August.

We continue to work collaboratively with all the parties in this case, and we are optimistic that we will have a reasonable outcome and that will happen by year end. Peter will take you through the second quarter earnings in a moment, but I just want to offer a few comments. Our quarterly earnings were impacted by significant storm costs. We've had storms, if you went back to the first quarter, we've just had one of those years, and in June, we had the fifth largest storm in the history of Detroit Edison. We also have in the quarter some timing-related mark-to-market adjustments at energy trading. And what we are seeing a little bit is what we've seen in the past where the accounting treatment and some of our books of business and trading, they end up in a timing mismatch where the underlying asset is accounted for historical costs and the forward sales mark-to-market, and those are timing issues that we've had in the past, and they will turn around and Peter will talk about that. Now, also, I wanted to mention as we went into this year, we understood the challenges of earning our authorized return.

We were prepared to engage in one-time cost reductions, turn our 11% return on equity, especially at Detroit Edison. With some of the external pressures we've seen, like storm costs, this makes it hard to offset those one-time events and regulatory lag, but we continue work that issue pretty hard, and at the same time, the other businesses are all doing very well, and Peter will take you through that, and also our guidance. But we did want to signal that there are challenges at Detroit Edison caused by the these external drivers. And we need a rate increase, which we expect to get by the end of the year. And in the meantime, we are going to continue to press hard on costs including one-time items to move that business as far as we can towards its authorized return. So with that background, let me turn it over to Peter, and he will take you through the quarter.

Thanks, Dave. Good morning to everyone. Let's just start with slide eight and the second quarter earning results. First off, I'd like to point out for the second quarter, we moved our coal services business into the power industrial segment in our SEC reports. And our Gas Midstream business will be shown as a stand-alone segment. For the quarter, DTE operating earnings were $0.16. I'd like to remind everyone that our reconciliation to GAAP reported earnings is contained in the appendix. Detroit Edison contributed $0.31, while MichCon, which typically has a loss in the second quarter, came in at a loss of $0.07. The non-utility segments combined to a loss of $0.03. The primary driver to the non-utility quarter results was energy trading at a loss of $0.07, and continued solid performance by our Gas Midstream at $0.06 in the quarter. Finally, corporate and other was a loss of $0.05 in the quarter.

Moving on to page nine, where we can see summary of each segment's performance quarter-over-quarter. I'll be covering each segment in more detail later in the presentation. Overall, as you can see on the slide, operating earnings are down $38 million for the quarter. Most of these quarterly bearings are attributable to either timing-related items or one-time events that impacted the quarters. Detroit Edison and MichCon results are down a combined $21 million for the prior year. Within the $21 million negative variance, there's a $24 million pick up that occurred last year with a PSCR reconciliation true up. Our non-utility segments are down $35 million, power and industrials are down $15 million, primarily due to a true up of depreciation and amortization expense on the held-for-sale projects. Energy trading was down $18 million for timing-related mark-to-market losses. Corporate and other was up $18 million due to favorable interest and timing of taxes within the year. Let us continue to slide 10 and go through some details, beginning with Detroit Edison. Operating earnings for Detroit Edison was $51 million, down $13 million from the prior year.

Margin for the quarter increased earnigs $6 million as expiration of the temporary show-cause rate reduction and lower customer choice more than offset the reduction in sales due to milder weather and the impact of the economy. We will continue to see the benefit of the show-cause rate increase and the lower choice in the third and fourth quarter as well. I'll talk more about the impact in the economy on sales in the next slide. As I mentioned, on the quarterly summary page in 2007, the second quarter was aided by 2004 and 2005 PSCR reconciliation order that increased earnings by $24 million. Also on pace in the quarter was a series of catastrophic storms in June of this year that knocked out power to more than 400,000 customers, and as Dave mentioned, this was the fifth largest in Edison's history. In the quarter, we also increased our bad debt reserves for electric utility as we saw an increase in total arrears in the aging of those receivables. Positively impacting the quarter was cost improvement in our generation fleet, lower benefit costs as well as implementation of EPS start-up costs, which occurred in 2007.

The 12-month rolling operating ROE for Edison is 9.5%. Page 11, outlines year-over-year electric sales for the quarter as well as the YTD. Up into the second quarter of this year, we experienced relatively flat to slightly positive attempt to normal growth year-over-year. With the American axel strike and other industrial sector-related events, we witnessed a reduction of territory sales in the second quarter. Not only was the quarter down 270 [gateway hour] reduction due to weather, it also was impacted 2.4% in weather normal sales. But even with the decline in the second quarter, YTD sales was down only 3/10 of a percent on a weather-normal basis. Given a second quarter volume performance, we going to continue to monitor the impact of the economy on territory sales, and overall 2008 expected results. Moving on to page 12 in the review of MichCon's performance.

As I mentioned earlier, second quarter is a typical loss in the seasonal gas utility business. Operating earnings for MichCon was a loss of $11 million, down $8 million from the prior year. Margins were down slightly in 2008 due to milder weather and lower storage margins. Uncollectible expense reduced earnings $3 million in the current year. With higher gas prices combined with local economic conditions, MichCon has seen an increase in the amount of aging customer receivables with the required increase in bad debt reserves. However, 90% of the impact of the increase of uncollectible expense is offset by the uncollectible tracking mechanism granted in MichCon's last rate case. The 12-month rolling operating ROA for MichCon is 8.6% and 9.6% on a weather-normalized basis. Lets us turn to page 13 in the non-utility business segments. Total non-utility operating earnings for the second quarter 2008 are a loss of $5 million, compared to with $30 million income in the 2007.

Gas Midstream earnings are flat as increases in storage revenue was offset by tax reserve related to the prior year. Unconventional gas earnings are only down slightly from 2007, as increased Western Barnett production and higher gas prices almost offset the lost earnings from the sale of the Antrim and Core Barnett properties. Power industrial earnings are down $15 million in the quarter, due primarily to the true up depreciation and amortization expense and held for sale monetization project. Depreciation and amortization expense is suspended in the fourth quarter of 2007 when these projects were classified as held-for-sale at part of our non-utility monetization effort. With our recent announcement earlier this month on our decision to retain full ownership of these projects, we must now recognize the depreciation expense deferred in the previous two quarters. Our coal services business is also impacted by the elimination of Simm Fuel Transportation Services proved in 2007. Finally, energy trading earnings are down $18 million driven by unrealized margin losses and gas trading and storage. YTD trading company income is $20 million, which is up $12 million from last year.

In the appendix, you will find a slide that shows economic net income for the trading business is $57 million to the first six months of the year, so a real strong performance YTD. This difference in economic and accounting will flow back in future quarters. Page 14 provides details on our earnings guidance Dave mentioned earlier. Even with the earnings pressures we are experiences at both utilities, we continue to hold our 2008 earnings guidance to $455 million to $520 million of operating earnings for an EPS of $2.80 to $3.20 per share. As I mentioned earlier, Edison will benefit for the remainder of the year with a show-cause rate reduction credit expiring, lower choice, and lower cost related to our information system implementation from last year. And that is why we are holding guidance for that segment. Another point, our segment guidance has been revised to reflect the movement of coal services into our Power and Industrial Project segment. With that, I would like to turn the discussion to Nick Khouri to will cover cash flow and capital expenditures.

Thanks, Peter and good morning. As always, improved cash flow and balance sheet strength remains a key priority for both Management and the Board of Directors. Page 16 shows the YTD consolidated cash flow statement for 2008, compared to the prior year. Through June, internal operating cash was significantly above last year, and above capital and dividend requirements. Adjusted cash from operations reached $1.5 billion, about 25% above last year's level. Asset sales are down year-over-year since 2007 included the sale of DTE Antrim ENP properties. As for cash uses, capital and dividends totaled approximately $900 million, leaving positive free cash flow after dividends of $600 million for the first half of the year. However, most of year-over-year improvement was intra-year timing. For example, net cash from synfuels swings from a large positive in the first half to a negative in the third quarter.

Also, MichCon will see it's usual working caoital requirements as they move from a positive net cash in the first half of the year to a negative in the second half. So although the first half came in strong, we are reconfirming our prior forecast for the full year's base, cash and capital. Page 17 summarizes capital spending for the first six months of 2008. As you can see, total capital spending reached $726 million, about 15% above last year. The year-over-year increase was spread across all business units. For the full year, we expect capital spending to be up about 14% from 2007, including a 20% increase at Detroit Edison. Page 18 slightly revises full year 2008 cash and capital spending guidance to reflect last months's decision to suspend monetization of the power industrial portfolio projects. Pretax asset sales declined from previous guidance of $1.1 billion to approximately $300 million. These projections exclude any further Barnett monetizations.

Though not included in guidance, we are continuing to target a reduction in parent company debt this year. The right side of page 18 summarizes capital spending for the full year. Total capital is expected to grow to $1.5 billion this year. About 80% of the projected capital will be for the two utilities. Non-utility capital spending is roughly equal to $100 million for three of our business segments, but will, of course, depend on opportunities if and when they arise. And finally, we expect to end this year well within our leverage target of 50% to 52% in the ratio of cash flow to debt between 22% and 24%. Now, let me turn it back over to Dave to wrap up.

Thanks, Nick. Slide 19 is a repeat slide that I talked you through earlier. Again, we believe that we have a very reasonable growth plan near term, that growth is going to be higher than long term growth, and there are some catalysts that are coming up here in the near term that will be signals towards that growth. Put that growth together with the dividend, it's a nice total shareholder return story. In terms of catalysts, we look forward to updating you as we make progress on the rate case. There's a timetable on slide 26 in the appendix on the rate case. And we'll be filing our rebuttal testimony here in early August. And then another possible key date is August 13th for legislation. So we'll open up for questions now, Holly.

(OPERATOR INSTRUCTIONS) First question comes from [Carolina Bottom] with Merrill Lynch.

Hi, good morning. I just have a question on your energy trading business results in Q2. On your midyear update conference call in early July, you said that energy trading was doing well in '08, and we would see that in Q2 as we did in Q1, but energy trading actually recorded a loss. I'm curious if you could go into that a little bit. I'm wondering what happened.

We managed the business on an economic margin, an economic net income basis. And if you look at the economic margin YTD right now, they are at about $135 million, which is significantly ahead of where they were on a 6 month basis last year. What happens is the way the accounting works on this. So if you went back to the first quarter as an example, we reported net income of $30 million for the $30 million per trading, and all of that was realized. Now when you get to the second quarter, what happens is the accounting the way it works is, only slices of what trading does, but for example, in storage, we put gas in the ground. That storage is accounted for at an average cost for inventory, but the forward sale is mark- to-market. So we have a transaction that is economically hedged and the way the accounting works, you can have mark-to-market gains or mark-to-market losses during the year based on gas prices. So in the second quarter, we still had a net realized gain but there was a mark-to-market loss on some of the gas storage positions and gas transportation positions, that because they are economically hedged, that will turn around over the next several years. So if you look at it on a 6 month basis, trading net income is $20 million, and when you net all the realized and unrealized, the net income is all realized because of what happened in the first quarter. So from time to time, you'll see these mark-to-market losses or gains, but the business is still doing well, it's on track, and the six months earning on a net income basis is reflective of our guidance for the full year.

Okay, thank you.

Next we'll hear from [Leon Debelt] with Catapult Capital

Hi, good morning. I just wanted to double-check-- You guys show industrial sales down about 3% in 2Q '08 versus 2Q '07. Does that include the Rouge plan that moved over from, I guess, CMS service territory? And bigger picture if you could comment on the economy and what we're seeing with industrial sales overall, and whether you're seeing residential also following some of reduction in the industrial load or is that purely from the weather?

This is Peter Oleksiak. Sale does include the Rouge plan, that is territory sales for us, so it is in the numbers.

Okay.

Industrial sales were impacted by the American Axle strike, so about a third of the reduction is related to one event. Auto sales are down as well, a lot of those are event-drive. Potentially could be temporary in nature with some plans to shut down, temporary stoppages at work. We are seeing the auto sector down, but we are seeing increases in the steel-related business as well, but overall, industrial is down year-over-year and quarter-over-quarter. Residential actually is holding relatively flat on a YTD basis. We are seeing some slight reductions in the overall commercial sector as well.

So relative to the economy as we indicated, Michigan has been economically struggling here for a while, and because of that, we have been forecasting flat load and that's embedded in our guidance. YTD we are almost flat. Second quarter was slightly off, and, as Peter indicated, we believe some of that was event-driven, but we'll have to watch this going forward.

Okay. Thank you very much.

Next, we will hear from [Ben Sung from Luminous] Management.

I had a question about the uncollectible expenses at MichCon. The $3 million that you have listed there, is that net of the offset so if you were to gross it up in reality, $30 million or is $30 million the total and there's an offset of 90% against that?

I think either way you phrase it, it is correct. It is roughly $30 million gross. When you net off the track, it would be $30 million.

Okay. Thank you.

It appears there are no further questions at this time. Mr. Meador, I would like to turn the conference back over to you for any additional or closing remarks

Thanks, Holly, and thanks for joining us today. We know that there were other calls going on this morning, and for those of you who are listening to the archive, if you have follow up questions, you will call our investor relations department. As I indicated, the next catalyst and things to look for in the August time frame, both the rebuttal filing on Detroit Edison, and then the August 13th date on legislation and hopefully, we'll have good news on that side, and look forward to seeing you at future conferences in the September time frame and also at the fall As I indicated, the next catalyst and things to look for in the August time frame, both the rebuttal filing on Detroit Edison, and then the August 13th date on legislation and hopefully, we'll have good news on that side, and look forward to seeing you at future conferences in the September time frame and also at the fall EEI. .

This does conclude today's conference, we thank you for your participation, and have a wonderful day.