密歇根天然氣 (DTE) 2008 Q4 法說會逐字稿

Good day everyone, and welcome to the DTE Energy year end 2008 earnings conference call. Today's call is being recorded.

At this time, I would like to turn the conference over to Gerry Anderson. Please go ahead, sir.

Well, thank you very much everyone for being on the line this morning. With me here today are Dave Meador, our CFO, Peter Oleksiak, the Controller, Nick Khouri, the Treasurer, and Lisa Muschong, Director of Investor Relations.

By way of introduction, as I look back on 2008 and look forward to 2009, it strikes me that there are two things that we have been working on at DTE for the last three years, that are proving key to dealing with the economic downturn, both nationally and here in Michigan. And one of those things is the Michigan Energy Legislation which we passed in 2008, and the second is the cost reduction and operation improvement efforts, that we have had underway since 2005.

Both of those were really undertaken in anticipation of a period when we would be doing significant investment in the rate base of our two utilities. And that is going to come down the road. But with hindsight both the legislation and the cost initiatives are proven to be critical at a time of economic retrenchment, because they are allowing us to address both revenues and costs in our utilities real-time without lag. The legislation has a key provision from this perspective, and that is the file and use tariffs. It is designed to enable investment without regulatory lag.

That is really why we tried to put that in place in Michigan, because we do see significant investment in the future, but it is also allowing us to deal with a period of declining demand with real-time adjustments. Similarly the cost reduction effort that we have had underway since 2005, was undertaken to reduce costs in anticipation of rising rates as we make investments. We really wanted to minimize those rate increases.

We have taken several hundred million out of our costs since 2005, and by doing that have gotten good at cost reduction. So when the downturn came we were able to move quickly. And as you will see our plan calls for $100 million of additional cost take out in 2009. And one perspective I would offer on this, is that that cost reduction could feel like an undisciplined scramble and an unsustainable set of reductions. It is not.

Our people have gotten good at this over the past three years. I have been asked, isn't it harder to take out costs since you have been taking out costs here recently, and the answer I give is that it is actually easier in some sense, because your people have developed the skills, the tools and the knowledge, and that enabled us to react quickly, as the national economy moved into retrenchment late in 2008. So taken together the file and use rate-making and the cost reduction initiatives, are enabling us to put forth a 2009 plan, that will provide solid earnings in a soft economic environment.

Is going to allow to us hold our cash flows and our credit metrics in-line, and allows to us confidently support our dividend at current levels. In addition I think it is fair to say we are working well with the Michigan Public Service Commission. We worked jointly together last year on legislation. That was a process that built trust between our organization and the Public Service Commission.

I think recent proceedings for both Detroit Edison and MichCon have been fair and constructive. That is not to say that the Commission isn't going to push us appropriately. They will. But I think the state wants DTE to invest significantly in Michigan. They want us to be part of the economic solution here in the state. And they know that we need to be healthy for that to happen.

On slide 4, there are really three topics that we want to cover today. I am going to give an overview of 2008, and a quick look forward to 2009. I will then turn it over to Dave Meador, who is going to go into the 2008 results and 2009 guidance and plan in more detail, and then we will talk at the end about future investment and growth opportunities that the Company has.

So on slide 5, I think it is fair to say all-in-all we had a successful year in 2008. We achieved EPS growth year-over-year of 3%, and that was despite the emergence of a challenging economy in the second half of the year. Right into December we thought that it was going to be more like 6% growth. We did have a catastrophic storm on December 29th as it turned out, that was about $20 million in total costs. And so that was something we had to absorb at the end of the year.

Our cash flow and balance sheet metrics were right where we wanted them to be. In fact we came out a bit ahead of our cash flow goals. I would say that our most significant accomplishment last year from a strategic perspective was the passage of energy legislation, that significantly improved the regulatory structure in the state and the climate for investment. And as I have just described, also gives us some tools to deal with the current downturn, that simply weren't there prior to the legislation.

That legislation also put in place two new important growth platforms within the utilities, those being renewable energy, and energy efficiency or energy optimization. And importantly, both of those have dedicated funding streams. So we won't be asked to make the investments, and look later for the cash flows and earnings to cover them. Those cash flow streams are available up front. We have solid earnings in our Non-Utility businesses, and put in place several new investments that we think are going to play out well in the future. And we continued our strong focus on cost reductions, that have put us in a position to continue those in 2009.

On slide 6, I said I think our most important accomplishment of '08 was the legislation that strengthened the state's regulatory framework. That had four key provisions. The first being provisions that dealt with customer choice. Customer choice was capped at 10% by the legislation, just as fundamentally we dealt with skewing of rates, rates are now cost-based. And the fact that we also have a choice tracker, I think we can pretty fairly say that something that was a big issue for us three or four years ago, has been effectively dealt with.

The second key provision of the legislation was file and use rate-making. I think many of you are aware that we are on a rate case cycle that took 18 to 24 months. The legislation calls for rate cases now to be dealt with in 12 months, so there is a hard deadline in 12 months. We can self-implement after six months, and we use a forward test here in the cases.

So the sum of all that is that we really have dealt with regulatory lag, and that is true for both capital investments and for changes in load, which is more to the point this year. The renewable portfolio standard and energy efficiency provisions put in place what I think is a program that does a nice job of balancing between significant investments in renewals and energy efficiency, balanced by provisions that provide off-ramps and cost controls.

So for residential customers, for example, the impact is capped at $3 a month for the RPS provisions. Important to us as I mentioned there are separate funding provisions that put us in a good position from a cash perspective to funds these programs. Finally there is a certificate of need provision that will be important to us when we take on major investments some years down the road.

So we feel we entered 2009 with a good regulatory framework in place. And on slide seven that is laid out. We have 11% allowed ROEs at both of our utilities. Detroit Edison's 11% was confirmed in the rate case order that came out in late December of 2008. We have the file and use rate-making provisions that I have just discussed.

We have a number of important tracking mechanisms that help to manage risk. Storm Tracker was added in the Detroit Edison case in December. We have an Electric Choice tracker. And an uncollectible tracker at MichCon, which is also important in the current environment. I think you know we have both power supply cost recovering and GCR provisions in the two utilities.

In terms of regulatory priorities for the coming year, we continue to work on strengthening our relationship with our customers and our regulators, and we know those go hand in hand. And I think the key things that we can control to make that happen, are to continue to work our costs, so that the rate impacts on our customers are as small as possible, and the second is customer satisfaction. Just a quick indicator of our work there, one of the things that is tracked by our Commission is complaints from customers, and those are down 30% over the last two years. We have really been working hard on that, as part of our overall regulatory agenda.

We have two important rate filings this year, Detroit Edison filed its next rate case on January 26th. We expect to self-implement under that case in July. MichCon will file a case in mid-2009 that will then play out in mid-2010, and we will self-implement under that case in 2010.

There are a couple of additional tools that we are talking with the Commission about, one is an uncollectible tracker at Detroit Edison. There is interest in pursuing revenue decoupling at both utilities, and so we will discuss that in the current Detroit Edison rate case. And there is clearly interest at MichCon to discuss decoupling, both because of the energy efficiency work that we are going to be doing.

Finally one of our key success factors is to get the renewables and energy optimizations programs kicked off well this year. And on that front we file -- for the first time, we have an initial filing in about a week on those.

So in addition to working this regulatory agenda, we continue to work our cost agenda. Slide 8 discusses that. You can see on the left-hand side what we have played out over the last few years. Since 2005 our costs in absolute terms have gone down $60 million, but in reality the costs we have taken out has been far more than that, because clearly in that time period we have had wage increases, for much of that period commodity prices were rising sharply.

We put in place new scrubbers, new SCRs which brought operating costs, and a new SAP system. And the costs of all of those things were not only offset but more than offset, by the several hundred million dollars that we have taken out of costs since 2005. As I mentioned, the 2009 plan calls for us to take an additional $100 million out of our O&M.

Turning to an overview of the 2009 plan on the next slide, I would start by saying that I believe the plan is based on realistic assumptions about the economy and about electric demand. We started our thinking about demand levels by doing a detailed bottom-up build. We have the ability to model our service territories plant by plant, facility by facility, and we have done that. But in addition, we have then taken what that modeling provides us, and compared that by looks back at prior periods, when we had strong economic retrenchment.

And the sum of all that is that we are actually planning for the softest two-year period in the post-war era. We were down 3% last year. We are looking at another 6% in electric demand this year. We feel in doing that, that we have been realistic in what we are planning for. In addition to that we are trying to build in flexibility in our plan to deal with anything else unforeseen that may come up. So we are dealing with that economic weakness really in two ways, from the cost perspective and from the revenue perspective.

On the cost side, I just mentioned $100 million of additional cost take out. On the revenue side, we will be able to mid-year this year to offset load decline through self-implementation at Detroit Edison, through the file and use, or file and implement provision. In addition to those two things, we are looking for solid performance out of our Non-Utility businesses.

In terms of goals for this year we are looking to preserve solid earnings levels, that comfortably support our dividend. You can see that the center of our guidance is at $2.90, which is right where we finished up last year. This plan enables to us deliver strong cash flows and balance sheet metrics. To help preserve the balance sheet, we have delayed some capital expenditures.

You will see that our plan year-over-year is down over $300 million on capital. That is not unusual. Many in industry around the country are taking that step. With that said, longer term we do expect to return to 5 to 6% EPS growth, tied to investments in environmental upgrades at our power plants, the renewables and energy efficiency programs that I have mentioned, and investments in our Non-Utility businesses.

The exact timing of that is hard to pinpoint. It really will be tied to when the broader economy begins to make the turn, and we and others are comfortable beginning to invest fully in that program. So to wrap up for my piece of this on slide 10, our fundamental goals in 2009 are to successfully implement a full regulatory agenda. There is a rate case for Detroit Edison, a filing for MichCon, and the RPS and energy optimization programs.

Secondly, we are going to go hard after costs and continue to deliver cost savings. And we are going to do that in a way that is sustainable, that helps us to accelerate the improvement that we have been trying to make at the Company.

And finally we are going to execute the plan that Dave is about to layout for you. We think it is a realistic plan that will provide us stable earnings, a strong balance sheet, support our dividend comfortably, and put us in a position to emerge from 2009 ready to resume growth as economic conditions ease.

So with that as introduction, over to Dave to talk more about '08 and '09.

Thanks, Gerry, and good morning. I am going to start on slide 12 with an overview of 2008. We achieved our operating earnings of $2.90 per share, versus $2.82 per share in the prior year, despite a very challenging national recession, as Gerry mentioned. As you know we proactively started taking out costs in 2005, and in May of last year when we saw the recession start to bite down hard, we saw trends both in the electric load, and in bad debt expense that we didn't like.

We proactively went to work to offset these items which allowed the utilities to deliver respectable earnings in 2008, despite a difficult recession. Our Non-Utility businesses performed well and provided $130 million of earnings last year. And our operating metrics improved also on many fronts, actually too many to call out here, but some notable examples as we continue to focus on regulatory relationships, customer satisfaction, employee morale and operations include a couple of the following.

Gerry mentioned the MPSC complaints, which is a key area of focus for us and actually is tied to our incentive plan. We brought down those complaints 9% in 2008, bringing our two-year improvement to 28%. Our employee safety after several years of working this really hard is now at first quartile, and we are not giving up there.

Fermi just completed one of its best operating years ever, with now 387 days of continuous improvement, and a 98.8% capacity factor last year. On the balance sheet, we have always pointed out that our balance sheet strength, it is a key priority for us at DTE. Nick will cover this more in a few slides down the road here, but we weathered the financial market storm of 2008 very well. We had $1.3 billion in cash from operations, and strong liquidity of $1.1 billion and we maintained strong credit metrics.

Let me turn to slide 13 with a more detailed look at 2008 results. Detroit Edison came in at $331 million, and while O&M was down $84 million year-over-year, it was outpaced by lower load and higher bad debt expense.

Two other items that impacted Edison, Gerry mentioned was, we had losses on our assets and our nonqualified benefit plans last year. That impacted both Edison and MichCon, and then an ice storm that showed up very later in the year. Without those last two items we believed we were on-track before they showed up to actually deliver on Edison's guidance for the year.

MichCon had slight improvement in earnings year-over-year. MichCon is in a settlement period, which we right now have frozen rates until January of 2010. Results here were driven by higher based gas sales, which was part of the settlement and weather. This was partially offset by lower storage margins and conservation.

The Non-Utility businesses contributed $130 million in earnings. Gas Midstream continued its track record with improved earnings in 2008. A notable achievement for this group was the Millennium Pipeline, which went into service at the end of the year.

Power and industrial was down slightly, mostly related to coal services, which had some volume loss in 2008 due to synfuels going away. Unconventional gas was down slightly year-over-year. We sold the core Barnett in early 2008 for $260 million, which was 100% IRR on our investment. So that net income from the core properties went away, but the remaining properties in western Barnett did well in 2008, with gas and oil prices high during most of the year. The updated reserve data for unconventional gas is in the Appendix on page 37, with total reserves up 29% at 432 BCF, and producing wells up 32% at 156 wells.

And trading had another very good year. The Group's economic margin was well over $200 million, which translates into about $80 million in economic net income. There are details on this business in the Appendix on page 32. However, due to mark-to-market accounting not all of that economic profit is recognized in 2008, and will benefit future years. So the total here is $471 million, or $2.90 per share, with about 163 million shares outstanding.

On slide 14, I will shift and talk about guidance for 2009. As Gerry indicated, our goals are to deliver stable earnings during this recession, and at the same time, preserve and strengthen our financial metrics to support future growth. The plan assumes realistic, and I would also argue conservative assumptions about electric load, which I will cover in more detail in the next slide. We are targeting earnings at Detroit Edison of $355 million to $385 million, and at MichCon of $70 million to $80 million.

Gas Midstream will show continued earnings growth, with a full year of Millennium Pipeline now coming in service, and new storage projects coming online. The power and industrial business was impacted by the economy. And while coal services within that group will be up year-over-year in 2009, the Coke batteries have seen significant volume declines, as the steel industry volumes have come off. Depending on how the stimulus package, which is directed at infrastructure and the autos works out, there is potential upside to those numbers, as the steel volumes return to their historical levels.

In energy trading, we are projecting to continue at a steady state of delivering at the $40 million to $45 million rate of earnings. The business will benefit from some of the roll on from 2008 economic profit that I just mentioned. However that will be offset by reduced margins in 2009. So the total here for 2009 is $445 million to $505 million, or $2.75 to $3.05 per share, with 164 million shares outstanding.

Starting on slide 15, I am going to take a couple of slides here, to walk through our thinking on a key driver of earnings, and I know something that you are interested in, and that is electric load. But first, let me step back and give you some background. In 2008 electric load was flat year-over-year for the first two quarters, and by the fourth quarter reflecting on the weakening economy it was down 3%. We use a variety of factors to project load, including looking back to history, including prior deep recessions, and we also do an auto facility, plant by plant build up as we are doing our analysis.

So let me take you through this on each panel going clockwise on slide 15. On the top left we use an in-house economic modeling process to project a continued decline in auto production. 2009 service territory production is projected to be down at about 1.4 million units, down from 2008.

This is consistent with an annual sales forecast that you might hear about nationally of 10 million to 11 million units. And certainly down from the 16 million units that the autos were running at in early 2008. The rest of the US auto production as you can see on the bottom of those stack of bars is down as well, down from a peak in 2007, or for the rest of the country, down 22% over that timeframe. Over the years, the direct automotive exposure has become a smaller piece of the electric load at Edison, and while important to the overall Michigan economy is only about 5 to 6% of gross margin at Edison.

In terms of total load loss on the top right-hand side of the slide, we dug back into history and looked at the largest load drops in the post-war period. The 2009 guidance assumptions are in-line with the severe recessions of the '70s and early '80s. However, our mix also has also changed over time.

As you can see with industrials coming down from 40% of load in 1974, to about 25% of load today. So while we expect about a 14% drop in that segment of our load, it is certainly a much smaller piece of the pie. On the bottom right we display the rules of thumb on load that we thought would be helpful, which is $15 million pretax for residential for a 1% load loss, versus $13 million for commercial, and $5 million for industrial.

On the bottom left, just to show you some history and then our projections, after showing a 3% drop in 2008, we are using a projected 6% drop in 2009, and then flat going forward. With the mid-year file and implement that Gerry mentioned, the actual margin loss will be about half of what we show you in these charts. So slide 16 summarizes the load and planning assumptions that pulls this together. We believe the underlying auto production assumptions are conservative, and we assume unnamed plant closures that haven't been announced in our planning.

I want to reemphasize that automotive is only 5% to 6% of the margin, and within that automotive slice, Chrysler is 2.5% of load, and about 1% of margin just to size this up. The reduced automotive exposure is behind industrial load going down over the years from 40% to 25% as I mentioned. The guidance assumes what we believe to be a very realistic, and what I would support a conservative load assumption, and that offset is offset with the cost reductions that Gerry talked about, and the partial rate self-implementation that we will do in July of this year.

Given all of this, we have Edison being targeted at 10% return on equity, and then we deliver on all of our balance sheet targets for that business. Post-2009 we expect Edison to return to its authorized return on equity, which today is at 11%.

As a side note, our January actual load as we closed the books came in about 1.5% favorable to our planning assumptions. And just to keep in mind that Chrysler had an extended shutdown that started in the holidays, and then they kept their plants closed for all of January, so if you are trying to get a sense of the realistic perspective of our load assumptions, we think January is a good indicator of how this year might play out in that we came in slightly favorable to our assumptions.

On slide 17 as a year-over-year walk for Detroit Edison, I have covered margin and load already, so let me comment on a few other items. Edison's employee benefit costs will be higher due to lower asset levels in those plans. Next, the December 2008 rate increase will provide about $55 million in earnings. And a combination of the mid-year self-implementation and cost reductions will provide roughly $90 million to $120 million of earnings for the year. So that brings Edison to a total of $355 million to $385 million.

Slide 18 is an assumption page for MichCon. This business as I mentioned earlier is operating under a settlement agreement which froze rates until January 2010. During this period MichCon has faced higher costs and declining margins. To mitigate some of that pressure an agreement was reached to sell what we refer to as the first base gas sale, which happened in 2008.

We currently have pending a proposal, and we are seeking approval for a second base gas sale that will happen in 2009. The current plans are to file a new rate case under the new law for MichCon this summer, and self-implement rates in January 2010. And the same thing with Edison, MichCon is intensely focused on cost reductions, and we expect this business also to return to its authorized return on equity next year.

On slide 19 is a year-over-year walk for MichCon. Here you can see here similar to Edison, we have got higher pension expense. The remaining base gas sale in 2009 is lower than what was sold in 2008. And then we also have higher depreciation and interest. This is partially offset with additional cost reduction actions that we are taking in that business. And that brings the total guidance for MichCon to $70 million to $80 million.

Now let me turn it over to Nick, who will take you through a brief overview of capital and cash and liquidity.

Thank you, Dave, good morning. These are times of unusual stress in the credit and equity markets, and it is in times like this that our prior commitment to improve cash flow and balance sheet strength pays real dividends. We are managing both short term liquidity and our long-term debt and equity targets to weather the current storm.

Page 20 details capital and cash flow for both 2008 and 2009. Total capital for DTE reached $1.48 billion last year, up about $165 million, or 13% from 2007. Most of last year's capital increase, reflected higher spending at Detroit Edison. Moving to 2009 our plan is based on capital expenditures of approximately $1.15 billion.

As Gerry mentioned responding to the local economy, year-over-year capital has been reduced for all segments of DTE, but a little over half of the decline is due to retiming of environmental spending at Detroit Edison. And as Dave is going to mention later, we still expect to spend about $1 billion in environmental remediation during the next five years, but we have delayed spending in 2009 to create additional balance sheet flexibility.

The right-hand side of page 20 shows a standard cash flow statement for 2008 and 2009. Last year free cash flow was negative about $200 million. Asset sales and dividends roughly offset each other, leaving about a $200 million increase in total outstanding debt. This year free cash flow is expected to be positive by approximately $200 million. After dividends and asset sales, we expect to be at about net cash neutral.

Also this year as shown in the bullet on the bottom of page 20, we will return to funding our dividend reinvestment plan, and internal compensation plans with new shares, which was temporarily suspended during the monetization program. Looking beyond 2009, as we have said in the past, we expect to issue new shares from time to time to support the utilities growth plans. Finally we ended last year within our leverage target of 50% to 52%, and the ratio of cash flow to debt between 20% and 22%.

Page 21 shows here on liquidity. We have total bank credit facilities of $1.9 billion supporting our commercial paper program. In late September and early October, we drew down $400 million of credit lines, to assure us of flexibility in case the CP markets did not reopen. By year end, we had paid back $150 million of this drawn amount. For us the CP market has returned to pre-crisis pricing and liquidity. In fact CP rates are now generally below levels of last fall.

As a result, we will pay down all of last year's bank draw by the end of this month. Against this capacity of nearly $2 billion, at year end we had $349 million of commercial paper outstanding, and $300 million of letters of credit, leaving unused capacity of over $1 billion. It is also important to note that we have only one $200 million bond maturity this year. Of course we expect to opportunistically issue debt at the utilities from time to time to improve liquidity and fund our utility investment program. We believe we have a plan and sufficient contingency to manage the current credit crisis.

With that, let me turn it back over to Dave to discuss future growth opportunities.

Thanks, Nick. Let me continue on slide 23. We have outlined our thinking on 2009, and I want to shift here for a couple of pages and discuss DTE's future growth post the economic crisis. Our investment outlook supports our long-term growth rate of 5% to 6%.

First on the utility side of the business we have said most of the utility capital is compliance in nature, and while we have some flexibility, and we have shifted some of that capital out of 2009, the money eventually will be invested. The utility growth plan is heavily driven by new and existing state and federal regulations that drive environmental investments. Additionally Michigan's energy legislation as Gerry talked to, will drive significant investment, in renewable power and energy optimization.

On the Non-Utility side of the business, we will expect to return to a more historical level of investments post-recession. As you know we pursue projects with premium returns, and have a long history of creating value for our shareholders.

On slide 24 is an environmental investment outlook. Based on our current regulations on the books, we project that we will spend over $1 billion on mandated environmental expenditures. As you know, we have a long history of full recovery of environmental expenditures in Michigan. Also we will continue to play an active role in shaping the state environmental policy, as well as through EEI, and Gerry and Tony's role there, on Federal environmental policies going forward.

On slide 25 is an overview of Detroit Edison's renewable energy program. We will file our RPS filing for Detroit Edison, and the energy optimization filing for both utilities on March 4. There will be much more detail in those filings, and we will put out an Investor Relations summary after we make the filing.

I do want to point out that these two programs will result in substantial investments over the next six years. Renewable energy will be substantially made up of wind, and we will drive over $1 billion in capital spending. While energy optimization where we are filing with the premise that we will be capitalizing up to two-thirds of those expenditures, we will start with about the an annual expenditure for the two utilities of $50 million, and that will grow over time.

On slide 26, I would like to briefly touch base on the opportunities in our Non-Utility businesses. In Gas Midstream, this is where we owned about 90 BCF of storage, 40% of the Vector Pipeline, and 26% of the Millennium Pipeline, we see ongoing expansion in both storage and pipelines to capture value from the new gas supply flows from the Midwest to the Northeast.

In power and industrial this is where we have our four coke batteries and pulverized coal projects, we also have our coal services business, and our nonregulated renewable business line, where we have 20 landfill gas projects, and three wood burning power plants. Here we see growing renewal energy opportunities in both landfill gas, and the ongoing conversion of coal boilers to waste wood.

In unconventional gas, where we hold 60,000 acres in the western Barnett, our strategy is to continue to develop the remaining properties to create maximum value. We will continue to monetize properties at the right time, both in their development cycle, and during the future favorable commodity markets.

Let me wrap up on slide 27. Our results in 2008 were respectable in an extremely challenging environment. As Gerry laid out for us, the Michigan energy legislation provides key new tools to address the impacts of a weak economy. And also the two new utility platforms, renewal energy and energy optimization, have dedicated funding mechanisms. The energy optimization surcharge will start in June, and the renewable energy surcharge will start in the fall.

Our 2009 plan is realistic, and we believe if needed, we are prepared to respond to any new news that comes on the economic front. And our dividend at $2.12 per share is well supported by our plans and provides an attractive yield at current prices.

And with that, we are more than happy to take your questions at this time.

Thank you. (Operator Instructions). Our first question is from John Khani from Deutsche Bank.

Good morning. A few questions, first on the 2009 guidance, I just wanted to be clear, it sounds like there -- is there an incremental $100 million of cost cutting or O&M savings, that is assumed or embedded in that guidance?

Yes, we are pursuing an incremental Company-wide $100 million cost reduction.

That is about $0.38 a share or so, based on my calculations. Can you talk a little bit about where that is coming from, and what the drivers of that $0.38 are?

I would say John that it is heavily already in place. We saw the economy softening like everybody else did in the fourth quarter, and by year end we had moved to put our leadership and team in place around the plans we just talked about. These aren't back end weighted, or anything of that nature. They are, I would say, 90% to 95% implemented at this point. And they really are playing out around the Company, a significant piece at Detroit Edison, MichCon as well. And then the Non-Utility businesses have dug in on costs too in this environment.

John, just to build on that, just to give you a sense, $60 million to $70 million of that comes just right through procurement. We virtually brought -- went commodity spend, and PO by PO, and brought in a lot of our relationships and just said, we know commodity prices have come off, and we want a significant step-down in prices, and got that.

We also pressed hard on contract labor, and other outside spend, and working all the other levers, with the goal that 80% of what we are doing, we wanted -- out of the box we wanted to be sustainable savings, not just scope reductions, or one-time cost cutting. And then during the year we are going to work our continuous improvement hard to backfill that other 20%. There were one-time things that we did that are not sustainable, but over time we want to backfill that.

That is helpful. So when we think abut the rate case filing, the rate increases you are asking for for O&M at Detroit Edison, I guess are net of these decreases at the utility?

That is right. So we are going to be, I think we will be in discussions with the regulators about the cost reduction efforts. They know we are pursuing those, but we do see pressures on costs, in addition to pressures on revenues, and both of those are assumed in the case.

I see. And then also one other question, I guess it looked like you all had sold some base gas in the quarter. Can you talk a little bit about if you expect that to recur or not, and how much the efficiency of the storage facilities were improved?

Well, we did pursue one last year, and we will be pursuing one this year. There are limits to the number of those that you can do, so I wouldn't see that as an ongoing recurring item. But this really was the basis of the agreement that we reached with the Commission, and a number of other parties, the settlement that we reached around MichCon to essentially not be in a rate case until early next year. But in return, we were able to sell base gas from these facilities.

Is the amount you are assuming in your 2009 guidance roughly the same as 2008 or -- but I came up with about $0.07 or so.

It is down a little. I think in the walk for MichCon you can see that there is an $8 million difference between the two sales. So that is the differential. I think the volume is a little different, but the price environment is also lower.

Sure, sure. Okay. Thank you.

You bet.

Moving on our next question is from Dan Eggers from Credit Suisse.

Hey, good morning. Hey, can you just talk a little bit about maybe a little more color on the bad debt expense trends at Detroit Edison and MichCon, if they are substantial, and what are the mechanisms for trying to resolve that through the first half of '09, and then with the rate case how that gets trued up for us?

Ed, this is Dave. If you looked at MichCon, net of the tracker, the bad debt expense for 2007 was $41 million. In 2008 it was $48 million. So net of tracker it is up slightly.

If you recall, we get $0.90 on the dollar over what is in base rates, which was $38 million. And we believe that tracker mechanism is working well, and as we refile the MichCon rate case in June of this year, we are assuming that will continue.

Detroit Edison's expense is up. In 2007 it was $65 million. In 2008 it was $87 million, but the $87 million includes an accounting shift, as we wanted to be more conservative in how we recognize bad debt expense for Detroit Edison.

So we are assuming -- and then on Detroit Edison, we are pursuing a tracker in this rate case, similar to what we have at MichCon. But until then for 2009, we are assuming flat year-over-year bad debt expense. We believe this is peak that we are on top of this. And those that can't afford to pay, we are working closely with them on getting assistance, and we believe there is going to be additional assistance in the stimulus package that is coming through. And those that can afford to pay but aren't, we are being pretty aggressive on that front also.

Are you seeing any meaningful trends in kind of late pays and kind of the time of bills outstanding at this point?

We had already seen that. I think we have talked before that our recession in Michigan led the national recession. So that played out really in 2006, 2007, 2008 for us. And I think you are going to see in other service territories, they are going to be catching up to us. But we had already seen our arrears go up and our bad debt expense go up, and we believe that has plateaued.

I think one additional comment would be at MichCon we do have the tracker. We are working hard on a real basis on our collection efforts on getting Federal assistance to people. So we think that that is not a significant exposure. At Detroit Edison we did have, Dave mentioned, an accounting adjustment last year that overstated on a real basis what we had on uncollectibles.

So the flat this year does show some increase in underlying uncollectibles, offset by this accounting adjustment last year. And similarly the combination of our collection efforts, and trying to get some of the increased aid to people, we really feel we can keep it where we have shown it.

I guess since we are going to go through the first of the new rate cases with the legislative action in place, can you walk me through how you guys will adjust rates given the weak volumes in '08, and probably the lower expectations for demand growth in '09 than you would have had a few months ago, how that all rolls in, or how that gets adjusted from what you filed to the implement date?

You are specifically talking here about the volumes?

We can talk about all of it, but the volumes is probably one of the big headline numbers I would assume.

Part of the rate case is a forward projection on volumes, so we took our best shot at realistically projecting what volumes would be in this environment. When July comes, we will have an opportunity to see where things stand, versus the projections that are there in the rate case. And I think one of the things we will self-implement on will be our actual experience around volumes. So six months into this case, we are going to true up to where we see actual volumes at the time.

And then as the case plays out over the balance of the year, and we expect it to be resolved by year end and new rates in effect early next year, I think we will be able to see where volume goes, relative to the full year projections that we had in the case.

That would mean that really the minus 6% volumes would hurt the first half of this year, but by July the file and implement will true you up, so you are not going to have any more drag, that is the right way to think about it?

That is right. One way to think about it is we are going to true up the volumes in the regulatory process and the cost reductions are aimed at dealing with any period that we don't have that true-up.

And I guess either Dave or Nick on slide 21, you show the liquidity, but you also make note that $975 million of your credit facilities expire in '09. When are you guys thinking you are going to get that renewed, just to make sure there is a little cushion, in what has been a pretty volatile credit market?

This is Nick, we are going to start early. In fact we are starting now. As you say about half of the $1.9 billion of bank credit comes due this October. But we do have a strong group of 22 or 23 banks, no single bank having more than 9% of the total amount we need. So we are going to start now, have plenty of time, and we are confident we are going to get back up to that $975 million that we have right now.

You are thinking about that kind of $1 billion of liquidity is where you guys think your comfort level is? Is that the right number?

That is what we have tended to have. It cycles throughout the years as commercial paper goes up and down, because of the needs of the utilities. But essentially we have targeted $1 billion of unused capacity year in and year out.

Got it. Okay. Thank you, guys.

Thank you.

Our next question will come from Paul Ridzon from KeyBanc.

What was the benefit of the base gas sale in '08?

$22 million pretax.

$22 million pretax. Roughly 60% of that after tax.

And what was the accounting change for your bad debt at Detroit Edison, what did that hurt the year by?

Peter, do you want to answer that?

Approximately $15 million. Really what that was was taking a look at the entire reserves, doing a deep dive, and really kind of more of a reflection of what we thought the collectibility was going to be. Really it was a pull-ahead of reserves that Gerry mentioned. It was somewhat of an anomaly, when you look at the underlying year.

It really went from $65 million to $72 million. Is that fair?

$65 million to approximately $80 million. We ended up around $85 million for the year for Edison.

But that $85 million includes the $15 million of accounting changes?

Yes.

Okay. And then at MichCon bad debt went from $41 million to $48 million, but you absorb only 10% of that incremental $7 million ? Is that the right way to look at

The $7 million was the incremental that we absorbed.

Yes, if you look at the number pre-tracker, it went from $70 million to $126 million on a gross basis. After Tracker, it is $41 million to $48 million.

And then the $100 million of savings on O&M. We shouldn't think the O&M line is going down $100 million, it is going down $100 million than originally planned, is that --?

It is going down $100 million but there are obviously -- there are always pressures the other way inside businesses. So when I talked about $200 million over the last few years, you can see that the actual number is down $60 million, but that is offset wage increases and price increases, et cetera. So we have some of those pressures this year, and we are throwing the $100 million against that.

So net/net the O&M line should be up still?

It depends by business, but yes, on some of the businesses -- you can see from the Detroit Edison rate case that we have got a significant cost reduction, offset by cost pressures, so there is a net up there. And we will deal with that and how that plays out in the rate process.

On a consolidated basis what should the O&M line do?

I would expect it to net/net to go down. This is different than other years where you had 3% to 4% wage inflation, plus other items that you buy inflating. In the last five years inflating them much higher than that. So we are seeing deflation on many of the things that we are procuring.

We haven't made a final decision yet, but we might not have wage inflation this year, is another factor. We have got some decisions that we have yet to make, but generally I would expect that O&M would be going down, net of all the other offsets in this environment.

And Nick you said -- kind of mentioned a couple of times that you will need to tap equity markets for Detroit Edison initiatives. Can you kind of talk about -- is that above the DRIP, and kind of when you anticipate the timing of that, and the methodology to do that?

What we have said this morning, and what we have said consistent with the past, is that 2009 we are turning the DRIP back on, and the current plan does not foresee any additional equity in 2009. And past that, it will depend on -- our first target is our balance sheet targets obviously, and how much we issue and when and how will depend on both our capital plans, and whatever is required to meet our balance sheet target.

I think just to add to that, we have talked about the renewable and energy optimization programs as a source of growth, but they do have their own funding streams. So we don't see that as a cause of equity issuance. So it would really come down to investments in the environmental programs at our power plants and perhaps some growth at MichCon that might be the variables.

And we have some flexibility around that. As you know, the compliance date on environmental is 2015. So it probably depends on how the economy picks up as to when we feel comfortable moving back into that spending stream. And it is really that will spending that will eventually require equity to keep the balance sheet in place, in-line.

Okay. Thank you very much.

(Operator Instructions). Our next question is from Paul Patterson from Glenrock Associates.

Good morning, guys. Just on the level of self-implementation, what kind of, what are the limits to it, I guess? What would stop you from -- what are the limits in terms of what stops you from necessarily putting in the entire rate amount?

Well, I guess a couple of comments and then maybe Dave can add. One would be that any amount that we would self-implement, that was above the amount that was ultimately awarded, we would refund, and you refund that with interest. So there is a discipline in the process. And I think the second would be, that our plan is to implement for things that we think are a quite certain part of the process, so we will know what our load has done, and we will self-implement for that.

We will know what our investments in change and rate base have been, and so forth. So we will implement those items. There will probably be some other items that are going to be more matters of discussion and judgment back and forth in the case, and those are less likely to be implemented.

Okay. Do we look at the $89 million to $119 million which includes O&M reductions, and what have you -- how should we think about the breakdown between the -- I am looking at slide 17 -- how should we think about the breakdown between self-implementation and these O&M reductions, and this improvement stuff?

We actually don't think that it is in our best interests. And it is early -- I will talk about that in a minute -- to start giving a breakdown and say this is in February how much I think I am going to self-implement in July.

Part of the answer is also, I don't know. As Gerry indicated, our inclination right now is that we would self-implement items that are known and measurable, and as I would describe as hard rate adjustments. And that could include load, bad debt, and assets that go into service. And we are going to have to wait and see, and we will make an assessment in June. We will look at load, we will look at bad debt at Detroit Edison, and we will also look at our underlying rate base, and we will make a decision at that point in time, as to how much we will self-implement.

We think as we step into this for the first time as a Company, it is something that we have to not overreach on. And we also have to be mindful of what is going on in the economy and with our customers. These will be things -- that is why we described it as a partial, and try not to signal too specific, because to do that would assume more than I know at this point in time.

Fair enough. Let me ask you guys on the economic outlook. Just from a sort of big picture perspective, thanks for all of the detail, much appreciated. I guess what I am wondering is that we do hear sort of these horror stories that come out, in terms of what might happen to the national economy if one of the Big 3 goes under.

Obviously there is hyperbole in a lot of things one hears in the media, and what have you, but could you give us a flavor what would -- how these projections correspond, if in fact we did have one of the Big 3 go into receivership or something, how do we look at that? I mean you guys gave us the number for the load from the auto and stuff, but how do we think about that in terms of the economic impact on Michigan, or on your service territory and how does that correspond to something that you guys are projecting right now? You guys mentioned flexibility that you guys are prepared to deal with some contingencies and everything, and that you have clearly been assessing the situation. How should we think about if we were to see a headline cross saying that one of these guys wasn't going to be around, how should we think about that in terms of impacting you guys?

We will probably tag team this Paul, but let me just start it. I would say first of all when people talk about employment impacts in the auto sector, there are significant employment impacts nationally. The autos are a bigger employer than they are an energy user. So if you were to compare auto, to say steel or petrochemical, in terms of energy intensity, they just aren't there. They are a big employer, it is true in Michigan, but it is true in a number of states as well.

The second thing is we have actually tried to be very realistic of this, in terms of facilities that will be operational facilities that won't, and we have assumed some significant consolidation, because we think that will happen. I don't think it makes sense for us to be specific as to company or facility, but I would generally characterize things the way I have just described it.

Finally when you talk about headlines about somebody going into restructuring, we have had experience in other industries that have gone into restructuring. The real question there, is the process one where the facilities come through restructured, operational, and in a better position to be more healthy long-term. And so I think the question is, is the government going to ensure process here that is orderly, where there is restructuring done and hard decisions made, but that is done in an orderly and structured process.

Our judgment is that at this point in this economy, and in this administration a decision to say that we are going to pursue in a disorderly, unstructured process in the auto industry is highly unlikely. So our anticipation is that there will be hard decisions made, and restructuring of the sort that we have assumed. And that the autos will come out with a much more competitive cost and benefit structure, which long-term for us is going to be a healthy thing in this state.

Okay. Thanks a lot, guys.

Thank you.

Our next question will come from Yiktat Fung, Zimmer Lucas.

Good morning. Can you first comment on the pay out ratio that you target for long-term?

Good morning. We said the dividend pay out ratio we are about 70% now. We have said before we targeted about 70 to 80% pay out ratio, funded mostly from the utilities.

So basically you guys are right on target?

We are within the range, yes.

Okay. And secondly you talked about targeting on balance sheet, when you are assessing equity needs. What exactly do you target?

We target, you can measure it a million different ways, but we target leverage between 50 to 52%, and a cash flow metric FFO to debt, of somewhere between 20 and 22%.

Okay. Just one final question. I know that you guys aren't really talking about specifics of that self-implementation. I was just wondering when you do the self-implementation, do you assume the ROE that you guide in the previous rate case, or do you assume what you file in this current rate case?

We assume that previous rate case. So 11% right now for Detroit Edison, which is what we just received in December.

Okay. Got it. Thank you so much.

Our next question is from Reza Hatefi from Decade Capital.

Thank you very much. When I look at slide 17, and you have 10.0 ROE as part of your 2009 guidance, is that a GAAP ROE?

Peter?

As opposed to?

As opposed to a regulatory ROE?

It is a GAAP ROE.

Is your regulatory ROE about 100 bips or so lower, than your GAAP ROE?

Not too many differences at this point in Edison between the wrap and the GAAP ROE.

Is it the same for the MichCon ROE that is the GAAP and regulatory are fairly equal?

Pretty close.

Pretty close.

Great. Thank you very much.

Our next question is from Phyllis Gray from Dwight Asset Management.

Good morning. I have a question about slide 20.

Okay.

The adjusted cash from operations projection for 2009, does that include any synfuel production payments or refunds?

It includes about $100 million of synfuels, not production payments or refunds, but it does include some of the credits that we build up during the synfuel years we are using.

Okay. And the capital spending of 1.5 billion lifted for 2008, what is the difference between that amount, and the amount in the cash flow statement that was provided with the earnings release? It seems a bit higher?

We are looking that up now. We think it is investment in joint ventures. A different treatment of that. It is a cash flow statement. The bottom line cash flow statement should be the same.

Okay.

But we will have to look that up, we think it is investment in joint ventures, and how it is treated, and what category it is treated on the cash flow statement.

We can get back to you with the specific reconciliation.

Okay, thanks very much.

You are welcome.

And that is all of the time we have for questions today, speakers I will turn the call back to you for additional or closing remarks.

I just want to thank everybody for joining us today. And as always, if you have any follow-up questions or concerns, feel free to call the Investor Relations department.

And then as I mentioned, we will be making our filing on the renewable energy and energy optimization on March 4th, and we will get a deck out right after that. And again, if you have follow-up questions on that, feel free to call Lisa and her team. Thanks again.

That does conclude our conference call today. Thank you all for your participation.