密歇根天然氣 (DTE) 2008 Q3 法說會逐字稿

Good day, and welcome to the DTE Energy third quarter conference call. Today's conference is being recorded.

At this time, I would like to turn the conference over to David Meador, please go ahead sir.

Thank you Michelle. Good morning everybody, and welcome to our third quarter call. I apologize for the music that was on the queue there, I would love to orchestrate our music a little bit better here. Before we get started, I encourage you to read the Safe Harbor statement on page 2, including the reference to forward-looking statements.

In a little over a week we will be at EEI, and our Chairman, Tony Earley, will be joining us at this event, and we will be making a presentation on Tuesday morning. Given our full schedule in Arizona, today we would like to keep the call focused on the third quarter and 2008 earnings, but of course, we would be happy to take all of your questions at the end of the call. 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 members of the management team on hand to help in Q&A if needed, and I might call on them.

So let me start here on page 5. We believe when taking into account the recent market and economic events that DTE Energy is a very attractive investment. We have a very strong regulated growth plan, that is based on predominantly, compliance driven capital spending. Our long-term growth rate is projected to be in the 5 to 6% range.

Michigan has recently passed energy legislation that provides a very constructive regulatory environment, and eventually will enable billions of dollars to be invested in renewable energy in the state of Michigan, which will create jobs, it will help the local economy, and it allow us to provide reliable low cost energy to our customers. Over the next six months, we will work through the renewable energy process with the MPSC. We expect to make our renewable energy and energy optimization filings with the Commission in the first quarter of 2009, and we will go into more detail on the RPS and energy optimization timelines and details when are at EEI.

To enable this growth and maximize the value of this recent energy legislation, we are going to continue to focus on constructive regulatory relationships, strong customer satisfaction, and a continued focus on cost reductions and capital efficiency. For our non-utility businesses, we will continue our track record of delivering value for our shareholders, by making select investments, where we see a clear path to returns, that are premium to the utility return. And then last, our dividend is currently $2.12 per share, which is about a 6% yield, given recent stock prices. We believe the growth plan we have laid out is achievable, and when combined with this dividend, provides a very attractive total shareholder return.

Now let me turn to slide 6. As I mentioned a few moments, after months of hard work the energy legislation was passed in Michigan, and signed by the Governor this fall. This legislation significantly strengthens our regulatory framework, especially at a time of weak economic conditions and higher capital spending, compared to historical capital levels. Tony Earley will go into more detail on this significant achievement at EEI.

We continue to commit to grow the bottom line, but at the same time we are going to maintain a strong balance sheet and solid liquidity. This has always been a north star in our growth plan. And recent events have made this even more important. Nick will take you through the details, but we believe we are on solid footing, and our current credit metrics, our liquidity, and our needs to access the debt capital markets next year.

As you know, we initiated a cost reduction program in 2005, and between 2006 and this year we have driven over 300 million in both O&M and capital savings. So given the way events have played out, it was very timely that we initiated that program in 2005. This year when you think about the economy and load, we started the year out assuming conservatively a flat load at Detroit Edison, starting in the spring we started to see electric margins decline slightly, and we intensified our cost reduction efforts around that.

But in regard to cost reduction efforts, we are not done. We have re-energized a company-wide continuous improvement process, that we are looking at operational and customer satisfaction improvements, now with the national economy behaving more like the Michigan economy, the case for change is even greater. We need to relook at everything we do as a way to help reduce rate impacts on our customers, and to create as much headroom as possible in the rate making process.

In regard to the quarter, I would describe it as a very solid quarter, Peter will take you through the results. We have increased operating earnings, both for the quarter and year-to-date compared to last year, while proactively managing some of the challenges that we faced during the year. Even with the economic environment, and the need for a rate increase at Detroit Edison, which we are hopeful will be completed by the end of the year, we are maintaining our guidance for the year of $2.80 to $3.20 a share. Through the nine months this year, we have earned over $2.00 of that goal. We have been thrown some challenges this year, but the employees of DTE Energy have stepped up, and helped offset some of these unforeseen events, through continued and one-time cost reductions.

While we are maintaining our guidance, we don't see us either at the high end of guidance or the low end, and we are aiming to be solidly in the middle of the range that we provided. We know you are interested in 2009, and the impacts of the credit and economic environment on the Company, and we plan on providing guidance early next year, since we are waiting on several critical data points. One of those is the Detroit Edison rate case that I mentioned. We expect that wrap up by the end of the year. And another data point is the second base gas sale proceeding for Michigan Con that is currently underway.

In addition, we are watching the economy and the electric load. We have some information in the Appendix for you on the electric load by customer class, and we will know more about the trends that we are seeing by year end. For both utilities it is important to remind you that we have now the new file and implement rate proceedings that was provided for in the legislation.

It also in the legislation includes the ability to use a forward-looking test year, when we make our filings. We anticipate filing a Detroit Edison rate case early next year, and we could self-implement some portion of those rates in mid-year. MichCon's first base gas settlement agreement last year keeps us out of a rate case filing until January 2009, and we expect rates to go into effect for MichCon in early 2010, and then similar to the electric company, you would see us most likely file another rate case in 2010, with the ability to self-implement portions of that rate increase in mid-year 2010.

When you think about load exposure on a temperature normal basis, we are down 1% year-to-date. 2% for the quarter, when you are looking at year over year load. Peter will talk more about this, but I just want to size this, when people are thinking about the potential for further decreases in load going forward.

For example, if we lost another 1% of load next year, given the file and implement structure that is now in place, this would result in about six months of exposure. So if you think about 1%, equating to 500 gigawatt hours and $30 million pretax, with a file and implement structure in place we would really think about six months exposure, which would be about half of that, which would be 250 gigawatts and 15 million pretax, if we had another 1% load decline.

For our nonutility businesses, the diversity in those businesses has worked well in the past, and the businesses are having a great year this year. These businesses don't face many of the challenges of the utilities, and they have contracts in place in many cases for storage, gas transportation, services that we provide, and also output or off takes.

We are assessing the broader economic impacts on these businesses, but we still believe we can deliver at the low end of our earnings for 2009, and our previous outlook that we provided. As with the utilities, we will know more about the nonutility group by year end, and will provide detailed guidance after the first of the year. We believe this will be an ongoing positive story for DTE Energy.

In regard to capital spending, I want to make a comment here, for our capital we have to think about three distinct categories. First going forward, which will start late next year, then into 2010 and beyond, we will have spending on renewable energy. But renewable energy will have a dedicated revenue stream, as provided for in this legislation.

Our spending plan for renewable energy will be outlined in our RPS filing that we expect to make early next year. Beyond that, you have to think about the other categories of capital, we have the environmental capital, that I would describe as compliance capital, then the last category of capital is the base maintenance capital at the utilities, and then the nonutility growth capital. For environmental and base capital we are currently designing our plan for next year with a lot of flexibility, and I think that will be a theme for 2009 is flexibility.

Our current thinking is that over a long term the utility capital must be spent to save, maintain safe, reliable, and efficient utilities. In the near term if needed there is significant flexibility in both the base utility capital and nonutility growth capital. We currently are anticipating levels of capital for next year that would be very similar to capital that we are spending this year, and the details for this year are on page 25.

But again we will be designing next year's plan with significant flexibility, as we watch the local economy and the credit markets. When we provide guidance early next year, we will outline our capital spending plans in detail, including giving you some of our thoughts, and how we are going to possibly back end load capital spending, and make sure that we design our capital plan to give us maximum flexibility , given the current economy, and credit conditions in the marketplace.

So with that opening comments let me turn it over to Peter, and he will take you through the quarterly

Thanks Dave, good morning everyone. I would like to start with page 8, which is our standard slide on the quarter results. For the quarter DTE's operating earnings per share was $1.06. I would like to remind everyone tat a reconciliation to GAAP reported earnings is contained in the Appendix. Detroit Edison contributed $0.98, while Michigan Con, which typically has a loss in the third quarter, came in at a loss of $0.08. The nonutility segments combined to earn $0.34. The primary driver to the nonutility quarter results was power and industrial projects at $0.15, energy trading at $0.10, and gas mid-stream segment at $0.07 in the quarter.

Moving on to page 9, where we show a summary of each segment's performance quarter-over-quarter. I will be covering each segment in more detail later in the presentation. Overall operating earnings are up 37 million for the quarter. Detroit Edison and MichCon results are a combined 54 million from the prior year. Our nonutility segments are down collectively 7 million.

Our Power and industrial projects are up 17 million, driven by higher coke margins, while energy trading was down 28 million, due to lower accounting margins quarter-over-quarter. Our trading company has strong year-to-date earnings, and is on-track to hit our 2008 guidance. I will talk more about the trading company later in the presentation. Our corporate and other segment was down 10 million, due primarily to a power and industrial segment true-up related to synfuel proceeds.

On page 10, is a year-to-date summary of our earnings performance. Overall year-to-date September's operating earnings are up 12 million from prior year. Detroit Edison's earnings are up 23 million, driven mainly by O&M reductions. Energy trading earnings are down year-over-year, with earnings of 54 million this time last year, compared to 37 million through the third quarter of this year.

Let us continue on to slide 11, and go through some quarterly details, beginning with Detroit Edison. Operating earnings in the quarter for Detroit Edison was 159 million, up 45 million from the prior year. Margin increased earnings 11 million as the expiration of the temporary show of cause rate reduction, and lower customer choice, more than offset the reduction in sales due to the economy.

The quarter results were also helped by the elimination of computer system startup costs incurred in 2007. Cost improvements in our generation fleet, and lower benefit costs also aided the quarter results. The 12-month rolling operating ROE for Edison is 10.5%.

Page 12 outlines our year-over-year electric sales for the third quarter and year-to-date. We continue to see softening of sales in our service territory. Temperature normal sales were down over 2% for the quarter, and are down over 1% year-to-date. We are forecasting another drop in sales in the fourth quarter, and will most likely be down close to 2% for the year. We originally planned on flat sales, as Dave mentioned earlier for 2008, but early in the year we forecasted a 1 to 2% of sales drops this clear. Actions have been taken throughout most of the year to reduce our cost structure, to be in-line with the lower volume of sales.

Moving on to page 13 and a review of MichCon's performance. As I mentioned earlier, the third quarter is typically a loss for the seasonal gas utility business. Operating earnings for MichCon was a loss of 13 million, down 9 million from the prior year. Similar to Detroit Edison, MichCon also benefits from the elimination of the 2007 computer system startup costs, and lower benefit costs. The 12-month rolling operating ROE for MichCon is 10%.

Let us turn to page 14 and the nonutility business segments. Total nonutility operating earnings for the third quarter 2008 are 57 million, compared to 64 million in 2007. Gas mid-stream earnings are up slightly in 2008, driven by increased storage revenue. Power and industrial earnings are up 17 million in the quarter, due primarily to higher coke revenues, due to higher production, and higher profit margin on this production.

The segment also benefits from a holding company true-up related to synfuel proceeds, as well as some one-time expenses incurred in 2007 during the monetization effort. Unconventional gas earnings also improved, as higher gas and oil prices, more than offset the lost earnings from the sale of the core Barnett properties. Finally energy trading earnings of 17 million, are down 28 million for the quarter. As you can see trading third quarter 2007 accounting earnings was 45 million, which was a significant portion of last year's total year earnings for that segment.

Page 15 provides details of our earnings guidance for 2008. As Dave mentioned earlier, we continue to hold our 2008 guidance to 455 to 520 million of operating earnings, or EPS of $2.80 to $3.20 per share. Given the solid year-to-date results, we are on-track to deliver our earnings commitments, and as mentioned earlier, we continue to focus on cost reductions at our utilities, in response to the soft local economy.

With that, I would like to turn discussion over to Nick, who will cover cash flow and capital expenditures.

Thanks Peter, and good morning everyone. As we all know these are times of unusual stress in the credit and equity markets. But it is in times like these, that our prior commitment to improve cash flow and balance sheet strength pays real dividends. We have managed both short-term liquidity and our long-term debt and equity targets to weather the current storm.

Page 17 details our current short-term liquidity position. We have total bank credit facilities of 1.9 billion, supporting our commercial paper program. In something unusual for us we are temporarily holding over 200 million of cash on hand, to meet both daily operating requirements and unexpected needs. In late September and early October, we drew down 400 million of credit lines, to assure us the flexibility, in case the CP markets did not reopen. We also have approximately $500 million of commercial paper outstanding, with staggered maturities.

Finally against the bank credit lines, we have issued 286 million of letters of credit to support our business operations. Leaving unused available liquidity of nearly $1 billion. It is also important to note that we have no bond maturities for the remainder of this year.

Then moving to 2009, 220 million of debt is maturing at DTE Energy, but the plan calls for us to retire the debt with internal cash. Of course we expect to issue long-term debt at the utilities from time to time to improve liquidity , and fund our utility investment program, but we have no maturities at the utilities in 2009. Our approach to the current credit crunch is focused on four main components, a thorough understanding of our near term cash requirements, including scenario planning, daily monitoring of our counterparty credit risk exposure across all DTE business units, retain excess liquidity to meet changing circumstances, and access the bond market when possible.

For example in October we issued 250 million of 5-year debt at Detroit Edison, with a 6.45% yield. Earlier in September we issued 190 million of MichCon debt with 7 and 12-year maturities at around 6%.

Page 18 shows year-to-date consolidated cash flow statement for 2008 compared to the prior year. Through September adjusted cash from operations totaled approximately 700 million, down from about 1 billion in the prior year. The entire decline is the result of the phase-out of synfuel net cash which falls from $600 million last year, to approximately $100 million this year.

In other words, non-synfuel cash was up year-over-year. Asset sales are down year-over-year, since in 2007 we included the sale of DTE and [chrome] E&P properties. Consistent with prior intra-year patterns, we expect strong positive net cash from the utilities in the fourth quarter. The full year forecast for cash flow has not changed from prior guidance, and is detailed in the Appendix.

Page 19 summarizes capital spending for the first nine months of 2008. As you can see, total capital spending reached 1.071 billion, or about 11% 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. Finally we expect to end this year within our leverage target of 50 to 52% in the ratio of cash flow to debt between 20 and 22%.

With that, let me turn it back over to Dave to wrap

Thanks Nick. Let me wrap up on slide 20. As I mentioned earlier on the call, I believe that DTE Energy is a very attractive investment. Our business plan is on-track, and we have the needed flexibility to work around the current economic and credit situation. As I also commented, looking back into history here a little bit, jumping into our cost reduction initiatives starting in 2005, and building up our capacity around that, and keeping our balance sheet strong, has proved out to be very wise, as we weather the current situation.

The new legislation in Michigan provides a very constructive framework to help our utilities earn their authorized return, while at the same time providing reliable low-cost energy, and providing much-needed jobs in Michigan. Our nonutility business plan is also on-track, and here we also have a significant amount of flexibility if needed going forward. As Nick laid out, we believe our credit metrics are solid, and our liquidity is more than sufficient, with enough flexibility to work through the current environment.

We will continue to monitor and assess the economic and credit situation, to make the appropriate adjustments going forward as required. Our dividend of $2.12 per share is a healthy payout, and when put together with our projected growth rate, provides a very nice total shareholder return. With those comments, Michelle, we will now open it up for Q&A.

Thank you. Ladies and gentlemen, (OPERATOR INSTRUCTIONS).

Your first question comes from Greg Gordon, please go ahead.

Good morning.

Good morning Greg.

So while you are not at this point willing to reiterate or endorse explicit 2009 guidance, you did state in your comments, correct me if I am wrong, that as you see it now, the low end of the previous guidance range, is still at least achievable under current economic conditions?

That comment was in regard to the nonutility businesses in particular.

Okay.

And then on the two utilities, we still have our overall goal of earning our authorized return at the utilities, and as you know we have always targeted 11%. Right now we have the Detroit Edison rate case pending, and we are very optimistic that will work out well, and that will play out by the end of the year. Then for MichCon we have got this second base gas proceeding that is under way, and we are also hopeful that we can go into a settlement process with that, and have that get resolved by year end. Those two data points will be very helpful in providing guidance for the utilities then.

Thank you. When it comes to the utilities for 2009, can you talk about both the potential for cash pension funding needs as it pertains to liquidity, and expected cash needs, and also talk about whether there would be any increase in your FAS 87 expense, and how that is recovered in the rate making process?

Sure. I will ask Nick to comment on what is going on with the pensions, and how it works for both cash and earnings here.

Sure. Let me give you a couple points and see if this answers your question. Just for background, we have about 3.5 billion in our defined benefit plans for both Detroit Edison and MichCon. The one thing to keep in mind, is that we came into this year fully funded, Detroit Edison was 100% funded, and MichCon for a variety of reasons was actually 125% funded, when you talk about a risks of funding requirement. So we came in in really good shape. Certainly the returns this year have been poor, like every place else, through September our pension return is, through the end of September our pension fund is down about 15%, and obviously down more in October.

But having said that, we have been contributing nearly every year for the past three or four years into the pension fund, somewhere between 150 and $180 million. And in our plans, we have always had regular annual pension fund contributions of about the same amount. So with the current market decline, we may have some additional increased spending from the plan, but we will just have to wait and see how things shake out. Again, we are starting from a strong position, and we have always had continued funding going forward.

On the expense side, expense we will have to see how it plays out, because obviously returns are down this year. What is critically important for the expense determination is the discount rate used, and that is up. We will have to see how that plays out, but certainly the risks are slightly higher expense than what we had in '08, in '09. Remember the way this works now, as Dave said, with the new regulatory structure, we will file early for any increase in expense at Detroit Edison, and by mid-year we will at least have the potential of recovering that expense, and the rate case, and in self-implementation.

Okay. So between rate cases there is no sort of tracking or deferral mechanism, but you plan on filing in a more timely manner, so the lag should be diminished if the expense is above and beyond what is currently in rates?

That is correct.

That is correct. The pension assumptions get measured at year end, that then determines your expense for the next year. It is hard to predict this precisely, but if you were drawing a chalk line today, we have a loss as everyone does on our assets, and that gets amortized into expense over three years. Offsetting that, if you had a chalk line pulled today could be the discount rate. So the way this might play out for the expense is you actually have minimal increase in expense, and any increase in expense, we will then immediately file a rate case, and could self -implement those portion of rates mid-year next year.

So you take the actuarial loss, you offset it with a reduction in PVO, and you amortize that over three years?

On the asset side, that is correct.

Okay, great. Final question, you talk a little bit about how you think about Detroit Edison's strategic decision to remain in the electricity and gas trading business, given the stresses in the financial markets, and investors sort of decreased appetite for ownership of companies that maintain those types of exposures?

Sure. I would like to step back, first of all, and say that, you know, after 11 years now, we have had business here that is not a big part of our growth story, or our earnings. You know, we make 40 to $50 million on average in accounting earnings from our trading company. We manage it very tightly. So you see a business here that has very low current VARs, $3 million, and as we go through these storms, I think we also see situations here as an example, that the business continues to do well this year.

Their economic profit is very high. Their accounting net income is going to be, as Peter laid out, within our previous guidance. And we are comfortable with this business as we have managed it. We don't see it as being a big part of our growth story going forward, but it has provided very steady net income numbers for us, and positive cash flows for us.

As we went through this whole process here, what you saw is for example no counterparty defaults, no financial institution counterparty defaults, and it is a business that we manage very tightly. We believe it has a much lower risk profile than what others might have in regards to their energy trading companies. So right now we do not have any plans to change our strategy, our approach, even with the tightening credit market. We believe that our liquidity can support maintaining the trading company as it is designed and operating today.

Thank you.

Thank you. Your next question comes from the Timothy Yee, please go ahead.

Good morning. I am just trying to get a better sense of the one-time cost cuts, and the sustainability of them, and what is the fourth quarter outlook for costs?

Well, let me back up first of all, and describe the nature of what is happening here. We have got two efforts that are going on in regards to costs. We have our continuous improvement initiatives, that is basically as I would describe always trying to look at ways to drive out waste, and get more efficient. So in continuous improvement, for example in field operations, it is all about getting people out of the station as quick as possible, minimizing drive time, and optimizing that with new GPS technology.

When people get to the job, trying to drive productivity, and making sure they have the right tools and equipment and material to get their job done, as quickly as possible. At the end of the day getting more jobs done per employee, in everything that they do, whether it be in the power plants, or field operations, or in my accounting group. We are doing that across the Company.

In addition to that, because of some of the pressures this year, we have done one-time cost reductions. Examples of that would be stopping hiring, slowing down hiring, minimizing overtime, general belt tightening, that you would expect in this type of environment. We have stopped using consultants, we have let a lot of contract labor go, and we basically have asked everybody to be very prudent in this environment, and also sensitive to what is going on in our customer base. So I know when people are looking at O&M, we had a spike last year because of the computer system, that is gone this year.

We have got continuous improvement, and we also have one-time reductions, and people are trying to get a sense on what is going on with O&M. I think the best place to look would be in our Detroit Edison filing that was made, that would give you a sense of where we see O&M going for 2009. Obviously we will give you much more guidance after the first of the year. But if you are trying to get a sense on what is a normalized run rate for O&M, look at the Detroit Edison filing would be the best place to look.

Okay. And then have you given the discount, the assumed discount rate in the pension expense? The assumed pension discount rate, or the assumed discount rate in the pension benefit applications?

We do it in the K's each year. It would be the end of last year, we used 6.5%.

Thank you.

As Dave mentioned, it is actually a calculation that is done on a single day, December 31st. So we don't know what this year's is. But if it was today, it would be higher than 6.5.

Okay, thanks.

Okay.

Thank you. Ladies and gentlemen, (OPERATOR INSTRUCTIONS).

Seeing that there aren't any more questions at this time. I thank you for calling in today. If you have follow-up questions, I encourage you to call the Investor Relations department. If you have questions on the quarter or the year, and then we look forward to seeing everybody out at Arizona.

We have a full schedule, and as I mentioned Tony and I will be presenting on Tuesday morning, and we look forward to seeing you then. Thanks.

Ladies and gentlemen, this concludes the conference call for today. You may now disconnect your line, and have a great day.