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DTE Energy Company (NYSE:DTE)

Q4 2008 Earnings Call

April 30, 2009; 8:30 am ET

Executives

David Meador - Chief Financial Officer & Executive Vice President

Peter Oleksiak - Vice President & Controller

Nick Khouri - Vice President & Treasurer

Dan Brudzynski - Vice President and Controller

Lisa Muschong - Director of Investor Relations

Analysts

Greg Gordon - Citi Investment Research

Dan Eggers - Credit Suisse

Paul Ridzon - Keybanc

Brett Mcclenning - Fidelity

Paul Patterson - Glen Rock Associates

Yiktat Fung - Zimmer Lucas Partners

Daniele Seitz - Dudak Research Group

Operator

Good day and welcome to the DTE Energy, first quarter 2009 conference call. Today’s conference is being recorded. At this time I would like to turn the conference over to Mr. David Meador. Please go ahead, sir.

David Meador

Thank you, Loren. Good morning everybody and welcome to our first quarter 2009 conference call. As we get started I will encourage everybody to read the Safe Harbor statement on page two, 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 members of the management team with me this morning that I might call on to answer questions during the Q-and-A session.

With that background, let me start on slide five with an overview. As we have laid out for you, we believe that we are well positioned during these unprecedented times. Our goal is to achieve strong results in this challenging environment.

Our objective is to use this crisis as an opportunity to get better at everything that we do, and that’s everything that we do to serve our customers and all of our internal processes, and also getting better in terms of financial performance in our balance sheet. We plan conservatively for 2009 and with a quarter of the year behind us, our plan is working and I think it was evidenced in the results we released last night.

The 2008 Michigan legislation provides key new tools to enable us to file and implement rates on a forward-looking basis, and we will be doing that at Detroit Edison in July of this year. The renewable energy and energy optimization programs will start this year with dedicated funding mechanisms.

Our plans for 2009 are based on realistic assumptions and our goal for this year is to preserve solid earnings and keep our cash flow and balance sheet metrics strong. This will position DTE Energy to continue its growth as the recession ends. Our dividend is $2.12 a share, and that’s well supported. It provides an attractive return in today’s market.

With that, let me turn to slide six, provide an overview of 2009 first quarter and then Peter will provide you more details in a moment. I am pleased in this environment to report these results and we achieved operating earnings of $1.10 per share versus $0.70 per share last year. This was driven by proactive cost reductions at our utilities, where our operating O&M was down almost $50 million quarter-over-quarter. This is further evidenced that our continuous improvement process that we’ve been talking a lot about is working.

We had solid results in our non-utility businesses and this was driven by Gas Midstream and our trading operations. We also generated $500 million in free cash flow and achieved a key milestone for us in successfully renewing and upsizing the expiring portion of our credit facility for $1 billion. Also during the quarter, all three rating agencies confirmed our ratings.

Now let me turn to slide seven. Our 2009 plan remains on track with guidance of $2.75 to $3.05 per share. We’ve laid out the economic pressures for you, which are shown at the top of the slide here. Our assumptions include a 6% load decline at Detroit Edison, ongoing automotive and steel industry uncertainty, higher benefit cost and the rate freeze at MichCon, which will end at the end of this year. We’ll be filing a case at MichCon this summer and then we’ll be self-implementing rates early next year.

Offsetting those factors is our $100 million cost reduction plan which is on track and again, that’s evidenced by our O&M expense in our financial statements quarter-over-quarter, also the December 2008 electric rate increase and then the mid year self-implementation at Detroit Edison that we’ll do in July.

Now, turn slide eight. We know there are a lot of questions about what you read about daily in the newspapers, including today about the auto companies and the potential impact on DTE. We believe our 2009 planning assumptions encompass much of what you see playing out in the news every day, but it’s also true that projecting secondary and tertiary impacts on DTE are difficult.

Our tools, to deal with those impacts are ongoing cost reductions and regular rate cases with six months self-implementation. It’s hard for anyone to predict exactly how things are going to play out for Chrysler today and within the next 60 days for General Motors, but we’re hopeful that these restructurings are going to result in leaner, more competitive automobile companies, with sustainable business models.

What we thought would be helpful for you is to size some of the potential, immediate exposure for you. So on slide eight, what we wanted to provide is just some more data points. On the top right-hand side is our direct sales to GM and Chrysler which is 5% of sales and 3% of margin. This is in context of our industrial load declining over the years, which was 40% in the 70s and is about 25% of our load today.

On the top left, we showed the average after-tax accounts receivable for GM and Chrysler and the key automotive suppliers that support those two companies, which you can see the total there is $26 million to $42 million. This is being provided as background data, because if there is a bankruptcy filing or a multiple bankruptcy filings, the pre-bankruptcy receivable could be at risk. However, we are currently considering if something like this does happen and depending on the magnitude, we might pursue regulatory recovery of that pre-bankruptcy receivable.

The General Motors and Chrysler amount that we have on this page is an average accounts receivable outstanding over a 60 day period. So, it’s actually slightly higher than, what might be outstanding at any point in time.

The key supplier amount is a probability weighted after-tax exposure. So, that’s not the average outstanding. We look that the key suppliers, that we believe might be under distress here that support those two companies and we did a probability analysis for those numbers. So, the total there is $26 million to $42 million.

On the bottom of page eight, we frame the potential asset related exposure for our power and industrial business, where we have energy assets at several GM facilities and eight Chrysler facilities. For General Motors, the after-tax asset book value is $46 million. However, after taking into account non-recourse financing, the potential net exposure is just $11 million.

In Chrysler’s case, our equity investment is on the books for $40 million and that creates a potential after-tax exposure of $24 million, which is backed by Daimler North America Guarantee. So, we believe we have no net asset write-down exposure there.

In both cases here for power and industrial, if they file and the plants where we have assets close, we might have impairments that play out in one quarter and then the non-recourse debt or guarantees play out in the subsequent quarters. So there could be some lumpiness in how this is all recognized, but when you look at the net exposure it’s not significant to the company.

So, with that background let me turn it over to Peter who will take you through the first quarter results.

Peter Oleksiak

Thanks Dave and good morning to everyone. I’d like to start with slide 10, the first quarter earnings results. For the quarter, DTE’s operating earnings per share was a $1.0. I’d like to remind everyone that a reconciliation to GAAP reported earnings is contained in the appendix.

Detroit Edison contributed $0.48 in MichCon, which typically had the strong first quarter that came in at $0.37. The non-utility segments combined to earn $0.34. The primary drivers to the non-utility quarter results were Energy Trading at $0.24, Gas Midstream at $0.09, Power and Industrial Projects at $0.02 and unconventional at a penny loss. Finally, corporate and other was at loss of $0.09 in the quarter.

Let’s move onto slide 11, a summary of the quarter-over-quarter performance by segment. Overall, operating earnings are up $51 million for the quarter. The earnings level on the first quarter of this year was in line with our internal financial plan and external guidance. Both Detroit Edison and MichCon results are up from the prior year. I’ll be providing additional detail on the two utilities in a moment.

Our non-utility segments were up $6 million. Gas Midstream was up $6 million due to favorable storage contracts and higher pipeline performance. Power and Industrial was down $6 million, due primarily to a higher depreciation expense in 2009 and assets that were held for sale during the first quarter of 2008. Also, lower coke sale as a result of the slowdown in the steel sector, partially offset by some new business at our coal services business.

Energy Trading had a strong quarter, as a result of higher unrealized margins and our gas related strategies. Lower gas prices drove a decrease in earnings at our unconventional gas production segment. Finally, our corporate and other segment was favorable $6 million, due primarily to favorable taxes.

Now, I’d like to go through some quarterly details at the utility companies beginning with Detroit Edison on slide 12. Operating earning for Detroit Edison was $78 million, up $37 million from the prior year. Total margin was up for the quarter, with an implementation of the December 2008 rate order and the expiration of the temporary show caused rate reduction in April of 2008 helped lower electric choice sales.

These positive margin changes more than offset the reduction in sales due to the economy. Additionally, O&M expense was lower as a result of a series of continues improvement initiatives and other cost reduction actions. The 12 month rolling operating ROE for Detroit Edison is 10.1%.

On page 13, detailed our year-over-year temperature normal electric sales for the quarter and also provided the quarterly comparison of sales volumes used in our 2009 plan to prior year actuals. You can see that the 9% reduction in sales, compared to the first quarter of 2008, as outlined in the left side of the slide was inline with our 2009 plan, which is on the right side of the slide.

We saw a significant drop off in sales in the second half of 2008; the profile reduction in 2009 is front end loaded. The main takeaway from the slide is that while we continue to see softening of territory sales in the struggling local economy, the sales drops we experienced in the first quarter are inline with our expectations in guidance. Of course, we will continue to monitor closely the outcome of the Chrysler and GM situation and the impact on our service territory.

Moving on to page 14 and a review of MichCon’s performance; as I mentioned earlier, the first quarter is typically the strongest in the seasonal gas utility business. Operating earnings for MichCon was $61 million, up $2 million from the prior year, primarily due to lower O&M expense. Similar to our Detroit Edison, O&M expense was reduced as a result of continues improvement related cost reductions. The 12 month rolling operating ROE for MichCon is 10.6%.

That includes an update on the earnings for the quarter and for your reference, we have included in the appendix our previously announced earnings guidance for 2009. With that, I’d like to turn the discussion over to Nick Khouri, who will cover cash flow and capital expenditures.

Nick Khouri

Thanks Peter. As always, improved cash flow and balance sheet strength remains a key priority for management and Board of Directors and while the economy and financial markets remain unpredictable, DTE has taken steps to weather the current storm. Underlying cash has been strong so far this year and as Dave mentioned, we have secured liquidity to manage under a variety of scenarios.

Page 16, details capital and cash flow for the first quarter of 2009. Free cash flow in the first three months of 2009 was approximately $500 million, comprised of $800 million of internal cash, against $300 million of capital. 2009 net cash was down from last year, due to almost $300 million of synfuel cash in 2008 that was partially reversed later in the year. Even after dividends, DTE had excess cash in the first quarter of approximately $400 million, but as in past years, the first quarter is always a big cash quarter, especially for our gas utility.

Capital expenditure detail is shown on page 17. DTE capital spending totaled $333 million in the first three months of 2009, about equal to last year. Most of the year-over-year change can be explained by higher capital at Detroit Edison, offset by lower capital of MichCon and the non-utility businesses.

Detroit Edison’s capital increase was for planned maintenance outages, at both our coal and Nuclear Fleet. For the full year, DTE’s expected capital spending haven’t changed from prior estimates and will be approximately 20% below 2008.

Page 18 shows, liquidity at the end of the first quarter. We had total bank credit facilities of $1.9 billion, supporting our commercial paper program. As Dave mentioned, yesterday we closed on a $1 billion committed credit facility with a group of 19 banks; the first large multiyear renewal in our industry.

Late last year, we drew down $400 million of credit lines to assure us flexibility in case the CP markets did not reopen. By the end of the present quarter, we’d have paid back the total 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.

Against, this capacity of nearly $2 billion at the end of the quarter, we had a $185 million of CP outstanding and $302 million of letters of credit, leaving unused capacity of almost $1.5 billion. Finally, we ended the first quarter within our leveraged target of 50% to 52%, and the ratio of cash flow to debt between 20% and 22%. We believe we have a plan and sufficient contingency to manage through the current uncertainties.

Now let me turn it back over to Dave to wrap up.

David Meador

Thanks Nick. Let me turn to slide 20. To summarize, we are very focused on executing our 2009 plan and with one quarter behind us, we are on track. We have a very constructive regulatory environment and we’re proactively managing our economic risk. We believe our plan is realistic and as I said encompasses most of what is playing out as you read in the papers today about Chrysler and GM and generally the Michigan economy.

In the meantime, we are very focused on our ongoing cost reductions, our regulatory filings, disciplined capital investments and customer satisfaction. We want to ensure that we position DTE Energy to emerge from 2009 with strong future growth vehicles in place, recognizing that distress always presents opportunities and as I said earlier, our dividend is at $2.12 is attractive and well supported.

Next week Gerry Anderson and Gerry Norcia, who runs our Midstream and MichCon gas LDC and Nick Khouri and the IR team will be at a AGA. Gerry Anderson and Gerry Norcia will be presenting at 9:50 Pacific Time, that’s 12:50 Eastern Daylight Time and for those of you that aren’t at AGA that will be webcast if you want to dial into that. That concludes our presentation Laura, we’d be happy to take questions now.

Question-and-Answer Session

Operator

(Operator Instructions) We will take our first question from Greg Gordon with Citi Investment Research.

Greg Gordon - Citi Investment Research

Thanks, good morning.

David Meador

Good morning, Greg.

Greg Gordon - Citi Investment Research

You guys are amazing, great quarter. I just for a moment am speechless and that never happens to me, anyway…

David Meador

Thank you.

Greg Gordon - Citi Investment Research

When it comes to the O&M cuts, I know a lot of this is laid out in the slides, but can you just go through for us what the total O&M reduction was quarter-over-quarter and in which businesses the cuts came from and in particular focusing on the regulated operations and how that might play into your discussions with the regulators and the current rate cases?

David Meador

Well, I can start and set the context and then Dan Brudzynski is here and he can give you the regulatory commentary and Peter can break this out, but we’ve been working as you know on cost reductions for a long time and I would just say that this automotive influence here it’s a double edged sword.

On one hand we’re dealing with what we’re dealing with in the economy, on the other hand, we have learned a lot from the automotive industry about how they go about doing continuous improvement and as you know in 2005, we took out a significant amount of cost.

In last fall when we started to see, the margins start to shift for us, we sat back and we said, we benchmark and we know that we have opportunities in all of our operations to move our operations closer to where they need to be and we want to engage our employees around this cost reduction in the middle of this crisis and basically position the company to get better. So, it was interesting last fall.

People said “Is there really more and can you get it?” and we said, “Yes.” We feel that our cost reduction muscle is stronger than doing this through blind cost cutting. So as we went into this, there were some clear directions to say you can’t do this by cutting line clearance or pole top maintenance, you can’t defer planned outages.

We have to go about this by getting into our processes and driving out waste and doing this across the company; everywhere from my accounting department to my investor relations department, to our service centers to the power plants, to the executive suites. We are doing this from top to bottom and from one side of the company to the other.

So, you can see the results that we front end loaded this and we’re driving this and then people keep asking, “Is there more?” and I think we are not done when this all plays out, because we continue to aspire to excellence and our employees are getting very, very good in helping us identify and takeout this waste. Peter, do you want to provide some commentary on that?

Peter Oleksiak

Yes. I think, when you look at the breakout, we really went after A&G in these reductions. So, about half of it is coming from A&G related costs. The other half is coming from operating groups. As Dave mentioned, those are really just doing things smarter and more timely, taking out costs while remaining high quality.

Greg Gordon - Citi Investment Research

Okay, but the O&M cut, particularly at DTE was on our pretax basis on the order of…?

Nick Khouri

When you look at the utility related, $50 million.

Greg Gordon - Citi Investment Research

$50 million and the majority is that DTE and then a bit of it is at MichCon, right?

Nick Khouri

Yes, the majority of it is at Detroit Edison, which is a combination of the A&G as allocated down as well as the core operating groups.

Greg Gordon - Citi Investment Research

It looks like you’ve hit your O&M cut target that you laid out for us at the end of last year, all here in the first quarter. So, does that mean we’ll see some normal costs creep throughout the rest of the year, off of the lower base?

Nick Khouri

Just see some additional, maybe two-thirds of it in the first quarter. As Dave mentioned, our O&M reductions are really following our load loss. So, when we saw load reductions happening last year, actually internally starting in the second quarter, we started taking reductions and actually we took another round of reductions first quarter of this year. So on a pure year-over-year, you’re really going to see about two-thirds of it happening in the first quarter.

Greg Gordon - Citi Investment Research

Okay and are these levels of cost reductions sort of presumed in your current rate filings?

David Meador

Dan, why don’t you comment on it?

Dan Brudzynski

Sure. Yes, what you’re seeing play out in the first quarter is already assumed in our rate case filing. Our test year runs from mid ‘09 to mid “10 and they were approximately $93 million of assumed cost reductions as part of the filing.

Greg Gordon - Citi Investment Research

Okay, so the regulators are not going to look at this and see this as being indicative of sort of a cost level lower than what you had already presumed when you filed for your rate increase?

Dan Brudzynski

No.

Greg Gordon - Citi Investment Research

Okay. Thank you.

Dan Brudzynski

Thank you.

Operator

We will take our next question from Dan Eggers with Credit Suisse.

Dan Eggers - Credit Suisse

Hey, good morning. Separate from the O&M savings in the quarter, its rating is also quite a bit ahead of plan and I guess you guys kind of setup your full year in the first quarter. Any thoughts on revision there or are you guys just monetizing wildly in the money contracts in the quarter?

David Meador

We’re still comfortable with the $45 million. Really at this point in time, the majority of that is unrealized margin gains. So, we’ll continue to monitor the performance of that business. They are off to a good strong economic start, but at this point we are comfortable with the guidance.

Nick Khouri

So, if you look at the breakdown of the earnings for the quarter, I would say that close to 20 was realized and 35 was unrealized and that’s offset with the O&M for the business. So, they had a significant unrealized gain on the quarter and it’s early in the year for everything. It’s certainly early in the year for trading.

Dan Eggers - Credit Suisse

So, this had a lot to do with the fact of just where you had positions and the fact commodity prices fell that you had unrealized gains; so probably over the rest of the year, it’s going to be more execution on realizing those gains at a diminium as profit. Is that the right way to think of it?

David Meador

Yes. I think that’s right.

Dan Eggers - Credit Suisse

Okay. Residential usage was also down quite a bit in the quarter in addition to industrial, can you just give some color on kind of what you’re seeing customer behavior wise. Is that customer class of people conserving more? Are you seeing population migration or was this just more of a weather event?

David Meador

For residential, we are closely monitoring the usage. The high usage for them actually is in the summer months with the air conditioning load. So, we’re definitely going to be taking a look at it. There’s a kind of a profile change around usage. So, we didn’t anticipate actually some usage declines, we baked that into the plan and as you indicated right now, they are coming in at lower than expected.

So, that’s probably a potential risk, but there is upside, more favorability we’re seeing on the commercial sector. So when you mix it together, we’re comfortable with the load projections we have.

Dan Eggers - Credit Suisse

Are you seeing residential usage actually down or is there a change in customer dynamics or empty houses or anything?

David Meador

Not really. Unfortunately we had been in a recession earlier than the rest of the country. So, I think we kind of had already started playing out with this customer migration out of the state, and I think that’s leveled off for now. That doesn’t mean that it can’t increase. What we aren’t getting is any new attachments obviously.

The place where it’s playing out it would be in the whole area of bad debt expense, but we’re doing a good job there too. The team’s done a great job out in the field and those that can’t afford to pay their bills, getting them the appropriate assistance programs and those that can afford that aren’t paying, being pretty assertive in terms of credit and collections and so you see our bad debt expense is on track for the year also and we still feel comfortable with our projections on arrearages and bad debt for the year.

Dan Eggers - Credit Suisse

I guess just one last question. Dave, can you remind us, at P&I kind of what the breakdown of customer exposure is between auto and steel and some of the other pieces where you have equipment onsite?

David Meador

Just roughly, rough figures, I’d say it’s about two-thirds steel, one-third autos, it’s kind of a rough rule of thumb there and we also have our coal services business running through that business also. So this year, the coke-related field sales came up, but coal services is offsetting some of that and the auto-related is still performing well. So, we’ll have to wait and see how this goes and if there is an extended shutdown or a plant closure, then we’ll have some impact there.

Dan Eggers - Credit Suisse

Thank you.

Operator

We will take our next question from Paul Ridzon with Keybanc.

Paul Ridzon - Keybanc

Just looking for a little more clarification on the O&M. Was the $100 million off of ‘08 or is that off of budget?

Peter Oleksiak

It was off of ’08 and actually there is going to be some offsets around pension in OPEB. So, we look at it all in, it’s probably net around $60 million to $70 million absolute down year-over-year.

Paul Ridzon - Keybanc

You’ve taken a 106 out of first quarter and your two-thirds done. So, does that mean we’re going to end up at 150?

Peter Oleksiak

The 106, you may be talking to the overall DTE income statement. That includes non-utility businesses, which a lot of that is kind of related to the volumes and costs of good sold. The utility business is around $50 million as we discussed earlier. So two-thirds of it is realized this quarter from a year-over-year profile.

Paul Ridzon - Keybanc

Was the $100 million a utility reduction or a consolidated reduction?

Peter Oleksiak

The $100 million is total utility reductions that we’re going after. Now once again there’s going to be a partial offset with increased pension and OPEB expense; that’s really related to the plant performance and returns.

Paul Ridzon - Keybanc

So MichCon and Detroit Edison should be down about $60 million year-over-year?

Peter Oleksiak

Approximately.

Paul Ridzon - Keybanc

Okay. Thank you for the clarification.

David Meador

Thanks Paul.

Operator

We will take our next question from Brett Mcclenning with Fidelity

Brett Mcclenning - Fidelity

Hey, good morning guys.

David Meador

Good morning, Brett.

Brett Mcclenning - Fidelity

Great job, again in that credit facility extend or renewed rather. I think a lot of you were looking at you guys and are really interested to see how that will play out; certainly one of the first ones to get renewed in the industry. I was wondering though, you guys had only mentioned it was a multiyear facility, so I was hoping to get more details on the terms of the facility, when is it mature, the cost, covenants, etc?

Peter Oleksiak

Well, the migration was towards shorter terms. So, if you went back several months ago, kind of the feedback was you’re not going to renew this and you’ll be lucky if you get anything other than 364 day facility.

Brett Mcclenning - Fidelity

Alright.

Peter Oleksiak

So, you come out of this afterwards and we proactively manage this and Nick and the treasury team did a great job. We ended up with a two-year facility and we upsized it. So, that we thought that was very positive.

The costs are more than you’d like to have to pay, including some upfront fees. So, the costs end up higher than we’d like them to be, but it’s all anticipated within our guidance, so even though the costs are higher than the expiring facility, we anticipated the mixture of what’s happening here and so there’s no change to our guidance.

Brett Mcclenning - Fidelity

Okay and the covenant side, is there any new covenants they requested?

David Meador

Nick, do you want to speak to that?

Nick Khouri

No. There is nothing unusual on the covenant side.

Brett Mcclenning - Fidelity

Okay. The last thing I wanted to ask about on this, I think you guys are mentioned there is 19 new banks in the new facility? How many banks were in the facilities that were maturing later this year?

David Meador

A few more, 24.

David Meador

We gained a couple. We lost a couple and net-net we are down a few, but still a pretty strong bank group, but nearly 20.

Brett Mcclenning - Fidelity

Okay and these were mostly regional players or are they the big banks? How would you define them?

Nick Khouri

We could go bank-by-bank, but let’s just say generally, some of the smaller players are the ones that are no longer part of the bank group and all the bigger banks are still in the bank group and including we’ve increased the number of leads from 3 to 6 too.

Brett Mcclenning - Fidelity

Okay, great. Thanks for the color there. I just want one more quick follow-up; it’s on the cost side. You guys had mentioned that it’s baked into your guidance, etc. and that’s good, but I was just wondering, we hear about pricing more on what the market costs would be? So I was curious, if you could give us a little bit more color of what the actual pricing was?

Nick Khouri

Well, not at this time. We’re still just closing the deal, we’ll release that later, but the pricing certainly was much higher than a few years ago and then higher than before the crisis, but I don’t know at this point if we’re giving out the specifics until the deal’s actually done, but over the next week or two we’ll talk about both the total cost in both upfront and ongoing.

Brett Mcclenning - Fidelity

Great. I expected it probably to be at the back of the 10-K or Q rather or is that going to be coming out?

David Meador

No, I don’t think. In the Q we’ll talk about it, but we won’t put the pricing in it.

Brett Mcclenning - Fidelity

Okay, great. Thanks a lot guys and good job.

David Meador

Thank you.

Nick Khouri

Thanks.

Operator

We’ll now move to Paul Patterson with Glen Rock Associates.

Paul Patterson - Glen Rock Associates

Good morning guys.

David Meador

Good morning Paul.

Paul Patterson - Glen Rock Associates

I just want to again revisit the O&M. I’m a little slower I’m afraid. When I look at the quarter-over-quarter number, it looks like it’s over a $100 million decrease and I guess if you multiply the three months by four, you come up with a substantially lower number than 2008.

So, I guess just looking at company wide and the job you’ve done with O&M, if you could just again sort of help me out with respect to, how much we should expect that to go down and how pension offsets that and sort of when that would show up?

David Meador

The $100 million you’re referring to is total DTE. So, about half of that relates to the non-utility business; it’s really which is related to cost of goods sold, credit expense. So, you really need to kind of exclude that. So, we’re really talking about $50 million reduction at the two utilities.

So, when we mentioned the $100 million goal that was kind of an absolute before increases around the pension and OPEB, so you net that in and we really are looking at about a $60 million to $70 million a year-over-year absolute reduction, with the majority of it happening year-over-year at the first quarter. Once again, we started our cost reduction efforts really in the second quarter of last year. So, those reductions, plus some additional ones we’ve taken this year are all kind of playing out this quarter.

Last quarter, really we were kind of growing flat and actually there was even a bit of a hangover from the SAP implementation occurring in that quarter. So, actually this profile was kind of anticipated with the majority of the O&M reductions happening quarter-over-quarter in the first quarter.

Peter Oleksiak

So Peter, just to reconfirm that, if you took your O&M and the two utilities for 2008 and asked a question, what it look like for 2009, it’s $60 million to $70 million lower projected year-over-year, that’s what would be embedded in our guidance and we’re executing on that.

Paul Patterson - Glen Rock Associates

Okay. You’re mentioning all this continuous improvement and you guys have taken an opportunity here with the recession it sounds like and other things, so keep on looking for costs savings and sometimes utilities can find more and what have you?

I’m just wondering; I mean, there’s been a slowdown in MichCon and what have you, what about the opportunity for more stuff or how should we think about that going forward? I mean maybe something that we could see coming up, I don’t know, how should we think about that over the next two years?

Nick Khouri

Part of it I think, part of the answer would be dependent on what happens with inflation, that I think if we stay in the deflationary environment, it feels one way depending on how the government manages itself and if we end up in inflation or hyperinflation and I’ve been working just to offset inflation, it feels differently, but let’s set that aside and say it doesn’t happen or that it’s out there for a while.

We’re going to continue to look at everything that we do to drive out waste and reduce our cost, because we owe that to our customers to be a low cost provider. We have many areas of the company we benchmark. We started this several years ago. We’re at fourth quartile that now are our median or even at first quartile on their benchmarks, but we still have some that aren’t, that are off working on those.

So, we’ve taken a unique approach. We believe at a time when companies around the country are laying off their employees is the way that hit their bottom lines; we went to our employees and said “We’re not going to do that, but we need your help. We need your help in trying to help us root out all of this waste and opportunity and to the best of our ability, if you do that, we’re are not going to lay people off. We’re going to keep you employed” and we’ve really rallied our employees around this. So, we’ve got, as I said, thousands of people engaged in helping us to identify opportunities for improvement and that’s just going to be a way of life for us.

So, if there is no inflation, I would say there’s still more cost reduction, but at some point in time, we will also have not only inflation, but with environmental expenditures, there will be scope related O&M items that get added back in, but relative to this continuous improvement culture, we’re not stopping. There’s never a there, so we’re going to continue to work on cost reductions.

Paul Patterson - Glen Rock Associates

Okay, great. Thanks a lot guys.

Operator

We will now go to a follow-up from Greg Gordon.

David Meador

Still speechless Greg.

Greg Gordon - Citi Investment Research

No, actually all of these guys have been asking the follow up O&M questions. So, my question has been answered. Thank you.

David Meador

Okay. Thank you.

Operator

We will now move to Yiktat Fung from Zimmer Lucas Partners.

Yiktat Fung - Zimmer Lucas Partners

Good morning. Congratulations on the great first quarter.

David Meador

Thank you.

Yiktat Fung - Zimmer Lucas Partners

I’m actually gone to beat the dead horse about O&M again. I’m just wondering, it sounds to me that most of these cost reductions are kind of a permanent nature. Is there some part of this O&M reduction that’s really kind of a deferral of costs to future quarters or years?

David Meador

When we set our objectives, because we did this very rapidly, last October we called people in and said “You’ve got a week to get your plans in place and then start executing” and our target then was at 80% of this needed to be sustainable. We would allow people 20% in one time actions, and those one time actions could be anything from eliminating travel to stopping leadership and employee training. So those things will come back.

What we are doing now is that we’ve got I believe most of the sustainable in place and the non-sustainable, what we’re trying to do is, to continue to look for cost reductions, which gets to a prior question, to basically backfill these non-sustainable items. So our first to do is to continue to look for cost reductions to backfill non-sustainable items.

So, I wouldn’t describe it as deferrals as much as just one time items that have been set. You can’t continue not to do that. I have to do training if we’re going to be a sustainable, vibrant business, if just we cut back really hard this year.

Yiktat Fung - Zimmer Lucas Partners

I see. So, is it fair to say that of that $100 million O&M cut that you’ve targeted for utilities this year, around 80% of that is sustainable and 20% is kind of a one-time nature. You are working to increase the 80%.

David Meador

Right, right, that’s how I’d describe it.

Yiktat Fung - Zimmer Lucas Partners

And are there any costs to achieve related to these O&M cuts?

David Meador

No.

Yiktat Fung - Zimmer Lucas Partners

No, okay.

David Meador

Much different than prior reductions here and the way we’re going about this again is I think fundamentally different that there are no costs to achieve and if there our costs, those costs have to be offset as part of the cost reduction.

Yiktat Fung - Zimmer Lucas Partners

Thank you and congratulations once again.

David Meador

Thanks.

Operator

We will now go to Daniele Seitz with Dudak Research Group.

Daniele Seitz - Dudak Research Group

Thank you. You mentioned that you had some opportunity for growth in the renewal areas and that actually to start this year, could you elaborate on that and also could you give just a hint as to what your capital spending will look like over the next few years. Will it stay around $1.1 billion?

David Meador

As we’ve talked about it, under the law that was passed last year, we have an energy optimization program. The surcharge for the energy optimization program will start we believe in June of this year and we will start spending money there. The renewable energy program, the timing is slightly different. The surcharge starts in the fall and it’s going to be predominantly wind. There will be some biomass and solar and those expenditures will ramp up starting in 2010.

Our thinking right now as we lay out our program, we’re waiting for MPSC approval, which we expect to get in June is that this fall we will be able to layout for you in much more detail what our RPS program looks like for let’s say 2010, ‘11, ‘12 as we step into that billion dollars of predominantly wind that we’re going to be doing in Michigan.

On a non-utility side, our renewable energy business; here in the power and industrial group, we had 24 landfill gas biomass sites. We are looking for growth opportunities there and then we also have several small coal burning plants. These are 100 megawatts or less plants that are being converted to wood burning.

So, we have one in Wisconsin; we’re in the process of bidding on one in California right now and these qualify for renewable energy credits and we see that as a possible area of growth for the power and industrial businesses. We look around the country at these very small coal plants that can be converted.

Daniele Seitz - Dudack Research Group

Do you visualize this as these convertible ITC situations, where actually a lot of the earnings are upfront?

David Meador

So at the Detroit Edison with the renewable energy program, if you have either production a tax credit or a treasury grant, we believe that basically is an offset to the capital and will flow through to our customers in terms of reduced cost for wind power. On the acceleration of depreciation, that will show up for us in terms of cash flow, not necessarily earnings. So, that will help enhance cash flows at Detroit Edison.

Daniele Seitz - Dudack Research Group

So, does that mean that the $1.1 billion of CapEx might be starting to rise?

David Meador

No.

Daniele Seitz - Dudack Research Group

Do you think that you can maintain on this level for a couple of years?

David Meador

Yes Nick, I don’t know if you want to speak to it, but the production tax credits or the treasury grants can actually reduce that costs and then right now there’s deflation in that whole market as that markets collapse. It’s a real opportunity to buy equipment or take positions and then, if during the program as we are executing it, we end up in a inflationary period, there is cost off ramps that have been built in legislation.

Daniele Seitz - Dudack Research Group

Great, thanks.

David Meador

Okay. Thanks Daniele.

Operator

There are no further questions at this time, sir. I’ll turn it back to you for any closing remarks.

David Meador

I just want to thank everybody again. As I said we are very pleased that we are executing our plan and the plan is working and just a reminder again that the team will be at AGA and that Gerry Anderson and Jerry Norcia and the team will be doing one on ones, but also they will be presenting at 9:50 Pacific Time and 12:50 Eastern Daylight Time on webcast if you want to dial into that. Thanks again for joining us.

Operator

This does conclude today’s conference call. Thank you all for your participation.

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Source: DTE Energy Company Q1 2009 Earnings Call Transcript
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