DTE Energy Company - Analyst/Investor Day

May. 2.13 | About: DTE Energy (DTE)

DTE Energy Company (NYSE:DTE)

May 01, 2013 8:30 am ET


Gerard M. Anderson - Chairman, Chief Executive Officer, President, Chairman of Internal Risk Management Committee and Group President of Energy Resources

Steven E. Kurmas - Group President, President of Dte Electric and Chief Operating Officer of Dte Electric

Gerardo Norcia - Group President, Chief Operating Officer of Michigan Consolidated Gas Company, President of Michigan Consolidated Gas Company and Member of Internal Risk Management Committee

David E. Meador - Chief Financial Officer, Executive Vice President and Member of Internal Risk Management Committee

David Ruud - President

David Ruud - Executive Vice President of Dte Energy Resources and President of Dte Energy Services


Mark Barnett - Morningstar Inc., Research Division

Kevin Cole - Crédit Suisse AG, Research Division

Gerard M. Anderson

Well, I think we've got a few people still filtering in, but I think we'll kick off here. We are really pleased to be here in New York, spending some time with you. Thanks for choosing to spend a few hours with us this morning. Like a lot of companies, we hold our annual meeting each year in early May. And as for most companies, our annual meeting from a shareholder perspective, has become a pure formality. And given that we put a fair amount of time and effort into it, we decided to try something new this year. So over the course of the next couple of days here in New York, we are going to spend this half day with a lot of our major shareholders and then we also have our board committee meetings, our board meeting and our annual meeting here in New York. As a result of that, by the way, we have a number of members of our Board of Directors seated here, if you could raise your hands. So you may want to seek them out on the break and introduce yourself just to get to know our board a bit.

Before I start into the materials, I do want to start with a safety note. If for any reason there's an emergency and we need to exit this room, the exit we would use is back in that corner, and I think we'll have people there who can point you in the right direction under that unlikely event.

All right. I will start by saying that DTE Energy is off to a very good start in 2013. A number of you may have listened to our First Quarter Earnings Call last Friday. And if you did listen to that call, you saw that our first quarter earnings came in at $1.34, that compares to $0.91 in the first quarter a year ago. So our earnings were up essentially 50%.

All of our business lines are producing well through the first quarter, but that was especially true in our utilities and particularly true in our gas LDC. Our gas LDC had strong results. A year ago, we had a winter that just refused to show up. And this year, we had a winter that refused to leave, and that produced really different results for our gas LDC. But the good results weren't confined only to that. Dave will take you through the results a little bit later, but good start across the board.

So a year ago, we were well behind plan at the end of the first quarter, our internal plan. This year, that's not at all the case. And as a result, we are in a position this morning to be raising our earnings guidance for the year or moving our guidance range from $3.85 to $4.15 up to $3.90 to $4.20, so midpoint is up $0.05 versus where we came into the year.

We're also in a position having done a lot of work looking forward at next year to introduce some early guidance for 2014. And you see that here, our early guidance is $4.27 at midpoint with a range of $4.12 to $4.42. If you do the math, it's just about 5.5% growth, which is right on the 5% to 6% year in and year out growth that we've communicated to you for years and have as a target for the company.

Now our confidence in this year and the work we've done for next year also put us in a position to raise the dividend as well. And you see that laid out here. We're announcing this morning that we had an 8-K come out a little while ago and announced our dividend would be going up from $2.48 to $2.62. That's a 5.6% dividend increase. Again, that's right in line with the 5% to 6% earnings growth that we try to produce consistently for you, and it's in line with the growth we're seeing this year and projecting for next year. At that midpoint of $4.05 for this year, the new dividend level is a payout of 65%. That's right in the middle of the 60% to 70% payout target that we have as a company. So it feels like the right place to be for us, and we're happy to be able to do that.

And as we continue to grow our earnings as we expect to, we would expect the dividend to continue to grow in parallel with those earnings. Obviously, you can never guarantee your dividend, but continuing to grow the dividend in parallel with our earnings is certainly our plan.

Now the latest earnings projections in this dividend increase are part of a longer-term period over the last half dozen years or so where our EPS has actually grown in excess of our 5% to 6% target. You see there in the right, we've grown more like 7% a year. And we have been growing our dividend at 5% to 6% a year, and it's tempting to look at that half-dozen-year period and say we are on a good roll. But that's not really the way I think about it. Being on a good roll implies you've got gravity in your favor, and the terrain is good for as long as it lasts. But I see the results that are shown here rather as the outcome of a significant change in our approach to managing and leading the DTE, and a significant change in the way we run the company. And we first began to work with this approach back in about 2006 and 2007. And we want to spend the first portion of today discussing that, talking about how our approach to running our company has changed in the last half dozen years or so and what that means to you as investors. Now one question you could ask is why are you spending time talking about how you run the business? Why don't you talk about your numbers, what you can produce, what opportunities you have in front of you? Well, we're going to do that, too. But I believe that our ability to be distinctive in how we go about our work has everything to do with whether our strong performance over the last 5 to 6 years will be an aberration or whether it can persist long term, whether you'll see strong performance over the next 5 to 6 years or whether inevitably we regress to more average performance. I think that companies that outperform over long periods of time have usually developed practices and competencies that drive strong performance through a wide range of circumstances that they're served up, and they've developed the skills and abilities to deal with those circumstances. And I hope that we can convince you today that not that we're all the way there, but that we're on the path of developing those practices and competencies. And I refer to those as an operating system that we're using at the company, and that operating system will drive outcomes at DTE Energy that are good for you and good for our customers for many years to come.

So I said that our management practices start to shift back in the 2006 and 2007 timeframe, but the most intensive period of change for us, not surprisingly, was during the economic crisis in 2008 and 2009. I think it goes without saying that, that was an unsettling time for Michigan companies. Michigan was at the epicenter of all of that. Our employees knew it. They were afraid, but interestingly, they also wanted to help out in some way. I had a lot of employees come to me in the midst of their own fear and ask, "What can I do to help Michigan get back on its feet? What can I help do to get my community into a better position?" They were tired of seeing their home state portrayed as uncompetitive, as mediocre. And our answer to them was, if you want to help make Michigan better, start by making DTE Energy better. If you want Michigan to be viewed as competitive, the most important step you can take is to have our company be viewed as competitive, so that when people look outside in to Michigan, they see an energy company, it's among the best and among the best operators in North America. That's the first thing you can do to help. And if you want to help economic development in our state, you have no better vehicle than DTE Energy. We have a huge footprint in the state of Michigan. You want to help push and drive growth and prosperity? Our company is the place you can do that. Well, it was during that time period, as this conversation with our employees was underway and we were living through the economic crisis, that what we call our aspiration at DTE Energy emerged. And that aspiration is shown here and it's to be the best operator and energy company in North America and a force for growth and prosperity in the communities where we live and serve. Now, look, I am keenly aware that statements like this can be vacuous poster board material, kind of taped up around companies that don't mean much. But I can tell you that, that is not true for this one. This aspiration has significance for our people because of where it came from, when it emerged and what they were experiencing at the time. It emerged for them in the midst of battle, so to speak, and they remember what their roots are. And the phrases "best operated" and "force for growth" are now routinely used by our people to connect their work to the broader strategy of the company and the things that they think matter. I also believe that if an energy company really is among the best operated and is a driver of economic development and is perceived that way by its regulators and its legislators, that we'll be in the position to do very well for all of you as well. That isn't where we started. We started by trying to connect our people to keeping our company from going under. But the aspiration has really evolved into something that I think is important to our people in helping drive what's happening at the company.

Now to pursue this aspiration, we developed what we call the DTE system of priorities, the operating system. And this system consists of 6 interconnected priorities, really key areas of focus that, taken together, describe how we're running the company today. This is the way we run DTE Energy, and we think this system will produce strong results long term. And the starting point of this system is highly engaged employees. Many people talk about it. Not everybody is serious about it, but the simple premise here is that no human endeavor is excellent, at least not for long, if the people involved are giving mediocre energy. You want excellent results? You've got to have great energy and great focus. But if you can get that, you can then harness that energy and focus to produce really good outcomes for customers, and our goal is top decile customer satisfaction. We'll talk about that later. You can harness that energy to be distinctive in your continuous improvement abilities, productivity, efficiency, cost control, again, for your customers. You can use that energy to grow the company and have a growth strategy that produces good results for you. But also if you're able to do those 3 things, focus well on the customer, manage your cost well, have a growth that plays in the economic development for your state, I think you have a strong chance of producing a regulatory and political context that's productive and keeping it that way long term. And if we can have a strong political and regulatory context and growth, we can produce good results for you. And that really is our model. Everything starts with our employees, feeds those first 3 priorities there in the middle, which create a political regulatory context, combine that with growth, good results for you all.

So our goal today is two-fold. First, we want to spend some more time explaining and discussing how we think we're creating the conditions for long-term success using this operating system that I just sketched, that we're going to take the pieces of the system and discuss those in a bit more detail. We also want to give you some further insight into our growth opportunities and growth prospects. And our hope is that if you understand the system we're using and you understand discreetly the opportunities we have, that you'll leave convinced that the next 5 years will be every good -- every bit as good for the company as the last 5 years have been. And that's the agenda for today. And many of the members up front here are going to be part of that discussion. I'm going to kick it off with a look at the first of the priorities within that operating system, highly engaged employees.

Now I said a few minutes ago that the operating system begins with our work with employees. And I have come to not just say that, I really believe it. And I want to describe this morning why that is. And I said a few minutes ago as well that it's hard to be really good at anything if your people's energy is mediocre. We see that all over in life, right? I mean, typical place to see it is in athletics. That's easy to see, and we've all seen teams with great talent but mediocre chemistry and energy. And a few of those here in New York, I think. And that great talent produces pretty average results if the chemistry and energy is poor. And we've all seen as well teams that have not such spectacular talent, but really good focus, really good energy, really good chemistry and leadership, and they surprise you at what they're able to accomplish. That's equally true in business. People think it's all about great opportunities or weak opportunities, I don't think that's the whole story. I think an awful lot of it comes down to what we're discussing here.

Well, that said, we haven't always been particularly good at this. In fact, as recently as 5 years ago, I would say our employee engagement was downright mediocre, maybe worse. And to be honest, we weren't particularly focused on improving it. And that is no longer true. We are intensely focused on this as a company and much better at it as a result. I'll show you that in a few minutes. But I want to tell you the story of how that came to be. How did we go from a company that was mediocre and not particularly paying attention to one that's better, and I want to tell you the story of how I, in the process, personally came to realize that being really good at tapping our people's energy really is the starting point for everything else, including good long-term results for all of you.

So this story also has its roots in the economic crisis. I remembered the time period back in late 2008, we were wrapping up our financial plans for 2009 like we usually do late in the fall. And then the stilts under the national and global economy started to wobble badly, and things got worse in a hurry. And we realized sometime in November that everything we've done that year to develop a plan was scrapped and we had to start over. This was about Thanksgiving. First thing we asked our people to do was size up how big the problem was, and we need to do that quickly. They came back and said we've got $150 million to $200 million problem coming at us in lost revenue and other issues. And we quickly concluded if we don't deal with that, we are going to end up kicked to the curb, so to speak, with a lot of other companies struggling in this crisis and we needed to figure out a way to respond quickly. So I asked the team to develop a plan in 10 days that we could be ready to implement by January 1. A couple of days into thinking about the plan, there was some advice that came back and said this is such a big number, it seems impossible to do without a big layoff. Now the issue with that was that we have been talking to our people about continuous improvement, I'll discuss that later, for some time. And one of the key premises of continuous improvement is that you don't ask your people to play hard to improve your company and then usher them out the door, either when the chips are down or after they've improved your productivity. If you want your people to commit to you, you commit to your people. So we decided to do the opposite. And this was a bit of a leap of faith, but we went out to our people and said, "Look, we've got $150 million to $200 million problem. We don't know if we can get through this without some serious damage. But our commitment to you is the last lever we will pull is to lay anyone at the company off here. But if that plan is going to work, you all need to bring energy and focus to this business in a way that you've never done before, and we need to come pretty close to have all 10,000 of us pulling hard in the same direction at the same time." Well, we lined up initiatives and plans. But as you might expect, we've never pulled $150 million or $200 million out of the company in a year, so we really did go into the year holding our breath. I can remember the first time Peter Oleksiak, our Controller, came in to talk to me, January results, ahead of plan. February results, ahead of plan. First quarter results, ahead of plan. I can remember at that point stopping Peter and saying, "I think you have a break in your financial systems." I'm not making this up. I said you got to check the financial system, because this isn't adding up. We still had the GM bankruptcy and the Chrysler bankruptcy in front of us. But April, May, second quarter, ahead of plan. I stopped Peter at that point and said something is not adding up here. You got to check the numbers. "Gerry, I'm checking the numbers, they're right." July, ahead of plan. I can remember being at my vacation home in August, I was in a sweatshirt. I was thinking, okay, this is it. This is the month we get creamed. It supposed to be 90, it's 70. This is not going to be good. Get together with Peter in early September, lays down the numbers. August, ahead of plan. I slammed my fist on the table and said "Peter, your system is broken. Find out what's wrong." "Gerry, there's nothing wrong". And I remember looking at him and saying, "What is going on?" And it was at that point that I realized what was going on is that our people were behaving completely differently than they ever had before and that we were getting a level of focus and discretionary energy from our people that was completely uncommon in our company's history. And the reason I couldn't figure out what was going on and why our results kept coming in, in an unexpected way is that what our employees was doing was so atypical. I don't know if you remember the results in 2009, but we had an analyst -- last time we had one of these meetings was in the fall of 2009. We raised our earnings guidance. By the end of the year, our earnings in 2009 were up 18% over the prior year and we had a record cash flow, the highest cash flow in the company's history. We all looked back at that and said coming into this year, wondering if we'd be kicked to the curb, exiting the year with those results, made a believer of me, that getting your people lined up really can make a huge difference to your ability to produce outcomes.

Now we use the Gallup organization to measure employee engagement. Their survey is used at hundreds of companies around the globe. You'll see here that our Gallup results in 2009 took a big jump. Look, you can see in 2007 and 2008, we were downright mediocre. 28th to 29th percentile, bottom third of the industry. But we took a 21% jump in a single year. Gallup will tell you that's almost unheard of to take a jump that big in a single year. Our worry, of course, was that this was a product of the intense crisis environment could we continue to improve or would we kind of regress to mediocrity. Well, our conclusion was that if we weren't in crisis, our improvement was going to have to be based on something else. So we started to focus on this. We started to train for it. And rather than regressing to the mean, as you can see, we've continued not only to hold our gains but to keep improving. And by 2012, we traveled over a 4-year period from the 29th percentile, bottom third, to the 78th percentile, top quartile. And as a result of that trip, we, in 2013, received what Gallup calls their Great Workplace Award, which is given to a handful of companies out of the hundreds that they do this for worldwide. And we are the first, by the way, first energy company of any sort to receive this award and we're a lot more gritty sort of business than usually gets these, too. They're often advertising companies and the like who receive these. So we were surprised. We were flattered to receive the award. But for me, this trophy is emblematic of what we've learned over the past 5 years and how we've gone from being a company that was pretty mediocre at our engagement of our people to a company that's much better at it today. And I believe, I tell our people this and I'll tell you this, I think that journey that I just described is the most important thing that's happened to this company over the past 5 years. It has driven our performance over that period. It is what got us through 2009. It's driven us since then. It's driving our continuous improvement agenda. It's driving our customer service improvement agenda, and I think it's the key to us being able to produce strong long-term results for all of you. And we now take a very systematic approach to improving engagement. We set clear expectations and accountability for our leaders. They have engagement goals, just like they have financial and budget goals. We provided them extensive training. This is a trainable skill. You don't -- you're not born either good or weak at this. You can be trained. We've learned that one of the keys is to have our front-line employees very much involved in problem solving and using their skills and knowledge. If people are able to use their skills, knowledge and training to do things that they think are important for the company, they love it. This is, of course, at the heart of our continuous improvement effort that we'll describe in a minute. Bottom line, if you want to be a leader at DTE Energy, you have to be good and you must show the ability to engage people. And if you can't do that, you may have another role at DTE Energy, but you're not a leader.

Where we're headed next, we hope, is to take our current position up to the top decile, and that's what we've got our people focused on. We can keep our workforce this focused, this much on top of things, I think we then have a much of better shot at replicating the last 5 years for you and producing good long-term results. Now one of the keys to this whole puzzle and especially that part of having front-line employees really be able to use their skills and knowledge is our continuous improvement effort. Continuous improvement and engagement are tightly linked, and so we're going to turn things over right now to Steve Kurmas who's going to come up and describe the approach we're taking on that front. Steve, over to you.

Steven E. Kurmas

Thanks, Gerry. It's no mistake if you look at the chart of priorities that CI capability is sandwiched between customer satisfaction and engaged employees, because it really is the glue that connects those 2 elements. And what we found out is those 3 priorities move in lockstep. If you want to excel at any one, you have to advance all 3, and I think Gerry mentioned it himself. We begin our real focus on continuous improvement over a decade ago. But as Gerry mentioned, we really hit stride about 5, 6 years ago during the beginning of the economic downturn. And we actually emerged from an economic downturn in large part due to our distinctive CI capabilities, a stronger company than we were when we went into it. And we're completely focused on being the best energy company in North America, and we believe the pathway to that success is continuous improvement.

Before we talk about what our continuous improvement process entails, I think it's important to see what we've been able to accomplish. We're very, very proud of this slide. As you can see, since 2007, we've actually reduced O&M expenses by $160 million. If you were to inflation just our O&M expenses, you actually would triple that savings. And that's even with a substantial reinvestment in infrastructure maintenance that we began last year and will continue through this year. This is truly unique in our industry. If you look at the electric utility in itself, this is a comparison chart of the O&M increases for peers in our industry, you can see we are the only company in this peer group that actually reduced expenses over this period. In fact, the average increase in O&M over this 7-year period is about 23% compared to our 1% reduction in O&M expenses.

At the Gas business, our savings are equally impressive, beating our peers on average by 23% and netting a net reduction of 3% down in O&M cost over the period. So how do we do this? How do we achieve this? We use these slides a lot. And I mentioned we're very, very proud of them. We've implemented a business improvement approach, and we began that approach a few years ago when we took an assessment of where we were realistically relative to our peers and relative to the industry overall. For many years, we would rationalize our position relative to our peers by 1 of 2 things. We either just stated that we were the best when, clearly in some areas, we weren't or in those areas where we knew we weren't the best, we would rationalize and say we had some insurmountable unique circumstance in our business that didn't exist anywhere else. And we would pat ourselves on the back and move on to the next effort. Well, we began -- I challenged our leadership to do a series of benchmarking virtually every process we had in the organization to seek out the best of the best across the industry, across the nation, literally across the globe in virtually everything we did. Whether we were calibrating and repairing technical instrumentation or we are preparing and mailing bills or any single activity we did, we went to the industry we believe was best of that, benchmarked ourselves against them and took a realistic approach where we were. And what we found out, we weren't very proud of where we were at that time. We then asked each of our leadership teams to take those individual metrics, compare them against where they were at that period, identify that gap, make no excuses for that gap, but to develop a plan to close the gap, to do whatever was necessary, whatever was within their power, whatever was within anyone's power to close that gap and move us towards advancement of that improvement. We developed the best operating scorecard. We took all of our key metrics. We found the best company in the country or in the world of that key metric, and we'd utilize that on a quarterly basis to compare ourselves whether to determine are we the best operated energy company in North America. What we found out was there was no company who excelled at every single metric. Nonetheless, that's the aspiration we set for ourselves, that's the plan of action we asked all of our leadership to implement and that's where we're monitoring ourselves against on a daily basis.

As we develop these gaps and ask the teams to build plans to close them, we cascaded those plans through the organization, we cascaded those metrics through the organization. The goal was to obviously make sure that every important shortcoming, every important gap that we had, was covered by a business unit and there was a business unit focused on closing that gap. That's not unique to us. Every successful company in the country develops and cascades a set of metrics to their front-line teams and business units. We did that, too. What we did, we believe, was a bit unique is we took a reverse look at that gap. It's easy for leadership to look down through the organization to see if their gaps are covered. It's much more difficult to ask a front-line employee to look back upwards from the activity they do each day and really and truly understand how it impacts business success, how it helps to close that gap. We have a unique circumstance at the utility company that many industries don't have. We have a unique connection to the community. Our friends, our families, our churchmates, our in-laws are all customers. And when they have a question or a concern about their energy delivery system, it's generally our employees that they go to first. Oftentimes, our employees were not able to answer those questions. So if you are an equipment operator at a power plant, and your mother-in-law said, "What are you guys doing to lower my energy bill?" The answer that you would probably expect is, "Mom, I drive a bulldozer. I don't know what we're doing." That's not the answer we wanted our employees to give. That's not the connection we wanted our employees to bridge with the connection to the success of the company. What we want them to do and what they do today is they say, "Mom, every day I make sure that I'm delivering the optimal coal blend to that generator that assures the lowest power supply cost that we can deliver. And that in turn is helping everybody lower their bill." And I know that every teammate across DTE is equally focused on the task they're doing. Building that connection from what an employee does on a daily basis to the success of the company and to that connection to the vision and connection to community that Gerry outlined is the primary motivation in succeeding in continuous improvement. That personal connection is far more valuable than any business result you can put in a piece of paper or in a scorecard. Being able to speak to your neighbors with authority, confidence and pride is what the continuous improvement program is really based on.

The next thing we ask every employees, the fourth element of our business improvement approach is to improve every day. We started our continuous improvement program like most businesses do, rolling out a bunch of tools and looking for low-hanging fruit. And we found a lot of it, we found a lot of it. Those initial years, our success was driven by big banks of productivity increases and waste removal. What we do now is much different. What we do now is ask for every employee, every team on a daily basis to look for a stairstep improvement, is to get continually better in small increments every day at what you do and to -- and the summation of those incremental improvements is what's driving the improvements through today. And we ask them to practice that on a daily basis. And we'll talk more about that practice through the formation of daily huddles going forward. But every team, every morning, led by the front-line supervisor, meets and says what went well yesterday, what didn't go well yesterday, what can we do differently today and how much better can we be today than we were yesterday? It's a 10-minute conversation that occurs every morning, and is a powerful motivational tool and a powerful reminder that continuous improvement is built into and engrained into the DNA of everyone's job.

In order to build this continual stairstep into our DNA, it has to become the way we do work, not something that we do in addition to work. So for every equipment operator, every lineman, every secretary, every accountant in the company is well aware of these 4 elemental steps of our continuous improvement program and practices them every day. The 4 elements are straightforward. They're based largely on operating system. They start with effective process design. Does every team understand their output metrics? Are they clearly visible and real-time to the team? Do we understand our pathways? Who is supposed to do what, and when they're supposed to do it? Are our connections and hand-offs clear? We're not dropping any balls. We're not fondling any papers. And are the activities clearly spelled out in details and procedures that are repeatable and followed every day? By doing that process design, we immediately expose errors. And by immediately exposing an error, you can prevent that error from compounding through the organization. So once that error is exposed, we have to go to Step 2 and empower our team with the skills and tools necessary to solve that problem. We do that through providing training, providing formats, providing coaches that help employees help teams resolve their problems in a timely fashion to identify what's the cause of the problem to postulate solutions, to test those solutions and to implement them in real-time.

The third step is knowledge sharing. What we found out is as we look from -- and this is probably true in many industries. As you look from department to department, from plant to plant, from location to location, there were brilliant ideas in one location and huge shortcomings in another location. So sharing that information, systemically sharing that information in an organized fashion across the entire corporation in and of itself helped us to substantially improve operations.

The last element is probably the most important, and Gerry touched on this early, is expecting our leaders to be coaches. And that's every leader from Gerry down to a front-line supervisor on a line crew and distribution -- or gas distribution business. You can't be a leader at DTE unless you understand these 4 elements, employ these 4 elements and talk about these 4 elements with your team. It's absolutely critical across the organization that the leaders emulate this behavior. We teach this. We have our leadership teach this. I've conducted classes. Gerry has been part of the classes. The entire organization can see from top to bottom that continuous improvement is more than what we want you to do on top of your job. It's the way we want you to do your work on a daily basis.

So we rolled out this process and we had immediate success. And we began to evaluate how we were doing and we simply believed in trust but verify. So we started calling in, on a quarterly basis, specifically, we'd call in our leadership team and we would ask them to describe to us how they were doing on their journey to continuous improvement.

And they would each outline the steps they've taken that quarter, the successes they've had that quarter and they'd leave the room and the next leader would come in we'd go through this process, leader after leader, quarter-after-quarter. And after a short while, we began to look at ourselves and realized that we weren't really sure if we were succeeding at this or not. We saw the metrics moving, but where we building this DNA? Where we building this, engraining this into the organization? We didn't have a uniform way to measure our success in implementing continuous improvement.

So we began to discuss how can we possibly do that? And we looked internally to the Institute of Nuclear Power Operations process for self-evaluation of a nuclear performance. And they have a process you may be familiar with, in which they are bringing in external audit teams. That external audit team is continually benchmarking the industry, identifying best practices, developing a framework in a model of best practices and then coming in and measuring your station performance and activities against that best practice, then leaving you with a very self-critical analysis of how you did. We thought, we could do that ourselves. So we developed a framework, we call it a continuous improvement maturity model, where we've identified behaviors based on our external scan of continuous improvement, our efforts across the world from what we considered initial application to world-class, in a scale of 0 to 5.

We then developed a matrix that show us what behaviors, what skill sets, what results that we expect in each of those blocks. We've got an internal audit team, external to the department they were evaluating, but internal to DTE, that on a semiannual basis, goes around and evaluates the quality of our continuous improvement business unit by business unit. We divide the company into 90 accessible entities. And every 2 years, all 90 entities are assessed on this scale.

What that does is it not only gives us an objective viewpoint for how effective we're being in implementing our continuous improvement process, it also gives a roadmap for each organization to look, here's where I am, here's the next step I need to be and a clear ability to chart their pathway to that next step. Progress is not easy. We don't have anybody at the far right end of that scale. I'll illustrate that in a moment, but we make movement each year. I mean, off years, we ask the groups to self-assess against that same matrix and report their results. And then we look for 2 things on these quarterly meetings that we have now. We look for how the formal assessment has moved the ball over that 2-year period and we set expectations for every leadership and every team member to advance continually on that scale, and we also look for the delta between the self-assessment and the external assessment, because that gives us a key indication of how realistic we're being in our own self appraisal.

So those 2 factors we look at each year and give us a clear indication of where we are. So where are we? One of the things we always get asked for at presentations like this is when are you going to run out of opportunities? How much more low hanging fruit do you have? Because the assumption is always we're eliminating waste and at some point, we'll run out of waste. The fact of the matter is, we're not sure we're ever going to run of opportunities. about. We know that we'll never run out of opportunities. There may be leaner years and more bountiful years, but we expect it continually to harvest continuous improvement benefits indefinitely.

We've gone beyond waste reduction. We look at integration of new technologies, new processes, new procedures. We look at evaluating our own benefit programs, our own practices and procedures and continually taking that stair-step movement. So when we looked at where we were, we saw we're still what we believe to be below the midpoint of this 0 to 5 scale. Our goal this year is to advance us towards the midpoint across the organization, giving us plenty of upside to improve from where we are today to as we scan the world of continuous improvement leaders and look for opportunities.

So while we think we've only began to tap the riches associated with continuous improvement, and our goal is to continue to hold our cost as flat as possible for as long as we possibly can and we're not sure where that processes ends.

So I have a brief video here I want to show you of some team input and some team actions. We have a process we call PRT, practice, repetition and training, which is every day we ask all of our teams to continually demonstrate these behaviors. Because it's just like a professional athlete, a professional golfer goes to the driving range and hits 1,000 balls to make sure his swing's good, we want our teams to have 1,000 swings at continuous improvement.

So here's a little video of talking about that.


Steven E. Kurmas

So our desire was to distinguish ourselves with our continuous improvement initiatives. This year, we participated in an award process by a London-based process excellence network, comprised of several thousand companies, several thousand companies, all which pride themselves on their continuous improvement ability, and we are recognized as the global award winner for 2013 for Process Excellence. So in a very short time, we're very proud of the success that we've had.

We also find ourselves with a line of companies at our door from across the industry wishing to benchmark us. Companies like Harley-Davidson, state of Michigan is in here, a variety of companies that wish to emulate our success and we're very proud to share our methods and procedures with them as well. So that's our continuous improvement process. Again, we're very, very proud of it and very proud to share with all of you.

I'd now like to welcome my peer, Jerry Norcia, the President of DTE Gas, to talk about our customer improvement initiatives.

Gerardo Norcia

Well, thank you, Steve, and good morning. The purpose of this discussion is really to talk about our aspiration to achieve top-decile customer satisfaction. I'll describe to you our journey so far, our progress so far, our aspirations going forward and also some of the methodology that we deployed to achieve or to move us towards top-decile customer satisfaction. As Gerry mentioned, this is one of our key priorities that will enable us to become the best operated energy company in North America.

So let's take a look first at progress to date. You can see that in 2006, when we started this journey, Gerry started to describe this when we really started with his management system in place, we were second to bottom both on the electric utility and gas utility on the J.D. Power scale. While since then, in 2012, we moved to sixth place in the electric company and third place with the gas company. And our current status, mid-cycle, is we moved another spot up on electric the company, 5th place on the J.D. Power scale and second place on the J.D. Power scale for gas companies. We're pretty excited about moving towards -- our true aspiration is to be #1 on the J.D. Power scale. And we think that we can achieve that by 2017.

So we're aiming high and one of the key ingredients, as Gerry mentioned, was employee engagement, in terms of moving our customer satisfaction scores. Here we've plotted on the bottom, employee engagement and on the vertical access, customer satisfaction. Now you can see that for one of our organizations, which is our customer service organization, which is really the front line in dealing with our customers, our Gallup scores in 2006 were fourth quartile. And today, we are top quartile for our customer service organization. And with that, we've seen the J.D. Power scores move north as well.

What are the key ingredients to employee engagement? Well, one was leadership. We needed to put the best possible leaders in front of our employees. So we made fundamental change to our leadership team in our customer service organization. And then we also needed to start driving a culture of accountability, which is something that I'll talk about here over the next few minutes.

So as we looked at creating a culture of accountability, we really started to develop what we call a performance architecture, where we had 3 major pillars. And the 3 major pillars' really designed to attack our largest gaps: One, was our call center excellence; two, was our system reliability on the electric front; and three, developing new and enhanced channels to connect with our customers.

So if we look at the details, I'll talk a little bit about this system, what we did is we constructed a pretty rigorous measurement process where we looked at what are the major interactions that we have with our customers? And what we determined is that 5 of our transactions really comprise approximately 80% of our contact with customers. They can see some billing, payment, outage, restoration, call center operations, collections, turn ons and disconnects. Those transactions formed 80% of our interaction with our customers. So what we started to do -- first thing we did is we introduced the voice of the customer into these scorecards.

So we implemented a callback program and a post-call survey process, whereby in the call back, every service operation that we conduct with the customer, we call the customer and ask them a very simple question. Are you satisfied -- fully satisfied with DTE Energy? If the answer was no, it was logged as a defect. And then within 24 hours, a supervisor was responsible for calling that customer and understanding the nature of the defect and resolving that defect.

Well, what that started to do was started creating a very large database for us of opportunities to resolve defects with our customers. We were able to sign the defects through the frontline supervisor the created that -- their organization created that defect, would start to analyze with some of our CI techniques as to how we would remove those defects. And not only remove -- engineer the removal of those defects, but also engineer opportunities to exceed customer expectations, which later we'll talk as plus one moment. And so we created accountability from the top of the organization, right to the frontline of the organization. I can tell you that Steve Kurmas and I, on a weekly basis, review the scorecards for each of these transactions and review progress or removing defects and creating plus 1 moments or exceeding customer's expectations.

The results of this work, you can see that our defect -- one of our most egregious defects, which is complaints through our regulator, since 2006, has reduced by over 60%. So we're pretty excited about that.

But as we continued on our journey to remove defects and improve our operations on a transactional basis, we also started to see that reducing debt defects was not going to be enough. And not making mistakes doesn't make you great and human sexology tells us that reducing negative experiences does not matter as much as increasing positive experiences for our customers.

And so we started to train our employees to understand that customers will only positively remember their experience is if we created a memorable experience or exceeded their expectations. So what I'm going to share with you know is a very short video that describes how we've tried to train our employees to create what we call these plus one moments. What we call plus one moments, is opportunities where we have exceeded customer's expectations. So let's roll the video.


Gerardo Norcia

So basically, we've started to move from defect reductions. So let me give you an example of a defect. We install a new gas service line to a customer's home from the street through the front lawn. One of the largest defects we used to have, believe it or not, 3 or 4 years ago, was that the customer wasn't happy with the restoration of their front lawn. And the process used to be that the customer will call the call center and the call center was sort of struggling to find out who was supposed to repair this front lawn that we had damaged and would sometimes get the runaround in the call center, if we weren't able to resolve the problem.

So what we did is, when we started this -- when these defects started to emerge through our callback process, when we're calling customers and trying to find out where we were dropping the ball, this emerged as one of our largest items on the gas side. So what we did is something very simple. Our supervisor that was handling the work did not know that they were actually had an unhappy customer in their hands because the connection between the call center and the customer and our field employee wasn't happening. So what we did is we asked the supervisor, put a door hanger on the door and say, "Hey look, here's my cell number. If you're not happy with what we've done here, please give me a call." Well that defect vanished within 90 days. I mean, a very simple solution to a problem.

So we're finding is that there's a lot of simple solutions to the customer defects. And also plus ones, when we found out about the nature of plus ones is that if we tell someone that we're going to be there at a certain time to perform a certain operation with our customers and we show up on time and we're courteous and we get the work done in the first time, we've exceeded their expectations.

I mean, this stuff is not -- it's difficult in the sense of getting all the processes to work together, but creating a plus one moment with our customer is really meeting their expectations and doing the work right the first time or first contact resolution. When we look at our data, we also -- this started bearing out the fact that we needed to not only reduce the defects, but also drive increased plus one opportunities.

And you can see here that since 2008, our defects were on the bottom, which are our minus ones. We've reduced them from 11% of our customers feel that were -- are highly dissatisfied or dissatisfied to 8% and in order to achieve our top aspiration in the company that delivers the #1 spot on the J.D. Power scale, 6% of their customers are dissatisfied. But what's really unique is that 26% of their customers are highly satisfied. And those are the plus one moments. So we need to move from our 18% to 26%. But we're trying to engineer plus 1 moments and tracking what delivers plus 1 moments very carefully and assigning that responsibility to the frontline and monitoring on a weekly basis.

So when we talk about what -- as we look forward and say, "Well how do we achieve this aspiration?" There's really 3 fundamental pillars. And the first one I'll talk about is the call center. So when we say, "How do we determine what are the 3 things we need to work on?" when we look at our largest gaps on the J.D. Power scale, really there is a reputation, which is tied closely to our call center operations, system reliability, which is tied to the time that it takes you to restore customers when they experience an electric outage. And third, offering new and enhanced products and contact channels for our customers.

So let's talk about the call center first. We've made a lot of progress in the call center. We've been working on it for 2 or 3 years. Our goal with the call center is really to drive first contact resolution. Right now, our first contact resolution is approaching 80%, best in class is 90%. So that's going to be one of our key drivers. Secondly, we're specializing our call center by transaction. So I mentioned the 5 transactions. So we have a transactional leader for each transaction -- major transaction in our call center. And they have a very detailed scorecard that Steve and I review on a weekly basis that looks at first contact resolution, plus one moments and negative one moments and try to engineer less minus ones and more plus ones into our operations.

We also use the voice of the customer quite extensively to provide feedback through our customer service representatives. So each customer representatives receives at least 10 feedback sessions a month with a taped conversation with the customer to find out how they either exceeded the customer' expectations or did not meet the customer's expectations.

System reliability. Again, when we benchmark and we benchmark this extensively, we found that our duration to restore our customer after they experience an electric outage is deep in the fourth quartile. So we're making significant investments in infrastructure over $350 million over the next 5 years to upgrade our distribution system. And the purpose of these investments is really to reduce restoration time. Our frequency is actually benchmarked first quartile. So it's really restoration time that we need to work on.

So to give you an example how this has started to have an impact. In the past, we also need to change the culture with our employees and how is this having an impact? In the past, when we experienced an electric outage on a circuit, we would survey the entire circuit to determine where the damage was and then repair the circuit and bring the whole circuit back up at once. Well now, as the crew is patrolling the circuit and they find that a portion of the circuit is okay, they bring that portion up and isolate it from the rest and continue down that process. So that 3/4 or 80% of the circuit can be restored much more quickly than before and we think that, that restoration process and culture can really drive down our restoration time quite significantly.

Our third area of opportunity is to introduce new channels for our customers, and these are primarily electronic channels. So we'll give you a -- these are mostly under development. So the first one that we're introducing is energy efficiency tips on realtime usage data. This is something that we'll see coming out later this summer, so these are under development as we speak. The other opportunity is to create a mobile app around bill payment. So we're going to introduce that later this fall. We're targeting this fall. The third app is our outage app, where we have actually introduced that already and continue to modify it and make it better where we can report an outage with the mobile app. You can manage looking at what opportunities you have to find sources of power and also give you estimate updates.

So those are some of the key new channels we're introducing. You'll see that we actually received recently a J.D. Power award around our mobile device customer applications that we have in place right now, as well as access to our online systems.

So on closing, what I'll tell you is that we've made significant progress with our customer satisfaction initiatives. We've moved up significantly on the J.D. Power scale. We won't rest until we're #1 in the energy industry. And when we're #1 in the energy industry, we'll start to look to be #1 in the service industry. And right now, our largest gaps are in our call center, which we're working quite aggressively and rigorously. And restoration time for our electric customers is also significant in closing that gap.

So with that, I will close. I know that we're moving towards the Q&A period here?

Gerard M. Anderson

Yes, yes. Thank you, Jerry. We're going to be on break here in a few minutes. But this is a natural kind of break in the discussion this morning from, I think, things that are upstream to us beginning to move downstream to talk about politics, regulation, investment opportunities, growth opportunities and so forth.

So a good time to stop and ask if you have any questions related to what's come so far. I think we do have some mics out there so you can either use one of those or shout out the question if you haven't.

Question-and-Answer Session

Gerard M. Anderson

Any questions? Looks like we've got one in the back corner there. Yes. You.

Unknown Attendee

So we all know the stock market behaves like a manic-depressive individual. And to what extent would a depressive phase, let's say in a stock market, have an impact on morale with the employees? I mean, every day they can look and see the -- an external factor pointing to that you've done a great job.

Gerard M. Anderson

Yes. Well, that's -- I had one of the senior leaders in our company kind of say that he wasn't buying this whole employee thing. He said, "Look, I fundamentally believe that engagement comes from good results. Just get the results, your people will be happy." And the person is no longer at the company, retired, no, he retired. He's a good guy. I didn't mean to say it that way, but he's been a college football player, at a serious school. And I said, "Oh, is that the way was in football, where it really didn't matter whether the coach could focus people, pull their energy together, put you at your peak to play the games? You just had to wait to see if you won, and then if you won, everybody felt good and the energy built?" But I don't think so. The key job of a leader is to put people in the position to be successful, focus them to get their energy. And I said to him, "Yes, I agree when you succeed, it feeds your energy. That's part of the loop." But that isn't the starting point. That's the added juice. So Ron [ph], I think the answer is, it does get harder if you're in a tough phase. But I think that's when leaders earn their stripes that work with employees to be able to describe to them. It's a tough time, all the more reason we need to pull together. And one of those tough periods for us was 2008 and '09, which is it wasn't a fun period. Turned out well but a lot of people were frightened. So I take your point, but I do think the job of a leader is to be able to engage even when the chips are down. Yes, here.

Unknown Attendee

Just -- it sounded a -- with the birthday example, that once you guys start performing that perhaps people are going to get sort of used to it and then -- in other words, I mean, the fact that you showed up on time, was considered really a good move. One wonders whether or not this improvement...

Gerard M. Anderson

Can continue?

Unknown Attendee


Gerard M. Anderson

Jerry, do you want to field that?

Unknown Attendee

Well, whether or not people's perception will actually decline once they get used to the new baseline, I guess, is the way to think about it.

Gerard M. Anderson

It'd be a big problem.

Gerardo Norcia

Well, I think that's true. The interesting thing is that the state of service in America is at such a point that if you show up on time and do the job right and you're courteous and you don't damage their property, that, that exceeds their expectations today. Tomorrow, you're right, I think that, that standard will go up and I'm hoping that we're the one setting that standard.

Unknown Attendee

I guess what I'm also wondering is in the context of price, is this -- I mean it's one thing to sort of take this as an isolated situation, but in the context of how people actually feel about the value of what they're getting, is that in this analysis?

Gerardo Norcia

Absolutely. If you look at the J.D. Power model, and we look at the drivers of the J.D. Power model very carefully, service reputation, which is what I focused on mostly, is a fundamental driver. It probably drives 1/3 of your customer satisfaction. Price drives at least 20% of your customer satisfaction scores. And then corporate reputation and service to the community is the balance of it. So price is a very important component of customer satisfaction. But I think to the extent that you provide stellar service, it gives you room and the ability to -- it gives you room in price.

Gerard M. Anderson

And the interesting thing on price and satisfaction is that doing better is usually cheaper because you knock out problems the first time, you don't produce waste in re-looping and follow-up. You cut the number of calls coming in to complaint to you that for the fifth time, can't you do this? As you get better, the noise in the system is attenuated and your cost in delivering is lower. And people have found that over and over again. Cost and quality move together.

Gerardo Norcia

I mean, we saw a live example of that in our call center, where we -- as we improved our operation, the number of calls coming to the call center has dropped by at least 10% already.

Steven E. Kurmas

And remember there's a huddle that meets around windows of appointments every day and they're continually ratching down and narrowing the timeframe and the expectation around that, as well as part of our communities improvement process.

Gerard M. Anderson


Unknown Attendee

Gerry, you've been a senior guy in the -- you've been a senior executive in the industry for a long time and you've been involved with EI and you've talked to the other CEOs. How unique is your continuous improvement philosophy relative to other companies? And if it is unique and so differentiated and the results are so clear, why isn't it being more widely adopted? Or is it in fact being more widely adopted? I often hear from companies that they're frustrated with their unionized workforce, the work rules preclude them from doing the types of things that you've talked about. What are you hearing, sort of like, "Well, we can't to what you're doing." I mean, if in fact, it's not being widely adopted, what are the excuses that you're hearing?

Gerard M. Anderson

Just one comment on unionized workforce and engagement. If you tear apart our 78 percentile, our nonunion employees are currently in the 90s. And our union employees are at about in the 50s. We have a full-scale joint effort between union and leadership of the company to pull that union workforce right up to where the rest of our workforce is. And they are working with us on that. I mean we essentially went to them and said, "You want your people happy? This is an indication of whether your people are happy. We need to work this together." I believe we will move to where there really isn't much difference between the 2 over time. You're in a as good, maybe better position, because you talk to so many companies to judge whether what we do is unique or not. I do know that there are many companies in our country who get started on this process but for whatever reason, it really isn't owned at the top levels of the company and is sporadic. So it tends to happen in surges when needed and then it goes fallow and people focus on other things. If you want this to be real and you call it continuous improvement, it actually has to be continuous. And you need to be asking yourself every day, what do we do differently now to keep this system tightly tuned? And so this -- Steve talked about this audit process. The real reason for that audit process is because people kept coming back to us and saying, "Hey, we're getting -- we're getting pretty darn good at this." We looked at them and asked ourselves, "Are they?" I mean, really? How good are we? And we put in place this audit process and found out when you put us on a scale of 1 to 5, most people came in at 1. Actually, a scale of 0 to 5, so they were 20% of the way in. So now we've got a process, we're just continuing to ask ourselves, what do we do next, what do we do next, what do we do next, in order to get better. And I think companies that are unique at this, if for whatever reason gotten that mindset at the top of the company and if the leadership at the top level is casting a shadow that says this is important, it will happen in the rest of the company.

Well, with that, I think we are going to wrap up this segment. It's 9:45. We're going to come back here in 10 minutes. We'll take a 10-minute break and will start up at 5 to 10. We'll see you back then.


Gerard M. Anderson

All right. Well, welcome back. We are going to move on now to the next element in our management operating system, which is maintaining a healthy political and regulatory context. I don't have to tell all of you how vital this is. You know that losing your political support or healthy regulatory context can make or break company like ours.

And we do have a constructive regulatory and political context in Michigan right now. Our relationship with our regulators and legislators is healthy and we are very focused on keeping it that way. When we talk to our employees on this topic, we make it very clear that to maintain high-quality regulation, you have to deserve high-quality regulation. We have to earn that, not demand it.

And our approach to doing that to maintaining that high-quality regulation is really embedded in part of our operating system. It's really these 3 elements that feed the regulatory and political context. If you can do a great job for your customers so the average regulator or politician hears, DTE does good work for me, they're an outstanding company. If you can manage their rates or their cost well through continuous improvement and keep that piece of the picture competitive and not moving in ways that surprise people and if you can play your growth strategy into the state's economic development agenda in an important way. If you can do those 3 things well, the likelihood that you have a strong political regulatory context is much higher.

So Steve and Jerry have taken you through descriptions of how we're doing our CI work and our customer work. I want to focus now on that piece on economic development as a feed to this political and regulatory process. And we have a number of ways that we're interacting and are working very hard to put the full weight of the company behind the state's economic development agenda and align ourselves with key initiatives in the state of Michigan. We are well positioned to do that by virtue of the fact that year in and year out, we are the largest investor of capital in the state of Michigan.

Now there are bigger companies, but they tend to be global. And when it comes to activity in Michigan, we are as big as it gets. We are also one of the major employers in the state. So the state does know that our economic impact is large and our economic health matters. And given that scale up on the top left there, I guess it's bottom left, Michigan procurement, one of the things that the governor came to us a few years back to work on is something called the pure Michigan procurement initiative and it was a simple idea that's turned out to be a great idea. The request was you're a big company, you buy a lot of things, buy more of them from companies here in Michigan as part of the process of putting the state in healthy footing again. At that time, we were spending $475 million a year with suppliers in Michigan and various things that we bought. We told the governor, after thinking about it, we'd go to work on it.

A year in, that $475 million had gone to $600 million. A year after that, last year, the $475 million had gone to $825 million spent with suppliers in Michigan. And this year it will be higher. Now we're approaching doubling our purchases from Michigan-based suppliers. I could tell you, we're not compromising cost and quality to do this. It is more work. You have to align yourself with suppliers who may not have been in your sector previously. You sometimes have to do work to find those, but it can be done. And the interesting thing is, when you put the economic multipliers on those hundreds of millions of dollars of additional expenditures, somewhere between 5,000 and 7,000 jobs. That's a large fraction of the jobs that we have in our company, period, that have been created just through working harder to buy from companies in our state.

Let me give you a couple of other examples. Detroit Public Lighting is there. I think you all know, we are working through a process of putting Detroit back on better footing, like we have the state and the state's economy. They run a lighting and electrical operation. It is badly in need of investment and better operating skills. The governor, the Mayor of the city, the emergency manager of the city have all come to us and asked for our help in this process. We are helping. We've been critical in putting together a process to get the lighting system functional again and activity on that is going to kick up in a big way this summer. And I think we will be involved, as well, in putting the electrical supply system back together in a way that works.

Neighborhood and campus are listed there. We have, I wouldn't say taken responsibilities too strong, but we've certainly become a strong sponsor for a swap of the city of Detroit in the economic development and revitalization of it. We're working with other partners in the city who have a big footprint like we do. If you get inside what's happening in Detroit, we've kind of carved the city up by domain. We've got one of those domains and we're working it.

We've also put significant money into our own campus, kind of as an example, if we want the city to be a certain way, we ought to be that way ourselves. So we have invested in our own campus and the properties around us.

Our foundation is one of the largest foundations in the state. We give to a wide range of causes and those are -- our support out of that foundation is really important. But rather than talk more about kind of my view of our role in economic development, we asked some of the state's leaders to talk about both what they see happening in the state of Michigan and the role of DTE Energy in that process.

So I've got a little video here that includes Rich Studley, who's the President of the Michigan Chamber of Commerce; Sandy Baruah, who's the President of the Detroit Regional Chamber; Mike Nofs, who's the Chair of the Senate Energy and Technology Committee; Cindy Pasky, who leads a -- chairs a group called the Detroit -- Downtown Detroit Partnership; and then Bert Marks, who is a minister and community leader in the City of Detroit.

So why don't we queue up that video and run it?


Gerard M. Anderson

As I said, I think if you want a constructive environment, you earn it and hopefully, you've got a sense from some of those folks with the way we're trying to play into the picture of the state. But frankly, the person who's really in the lead of transforming our state is our Governor, Governor Snyder. He is doing a great job, for those of you who aren't watching him closely, he has led dramatic change in our state in his first few years as governor. He's dramatically improved our business tax competitiveness. Now look at that, 49th most competitive to 7th. He has eliminated a $1.5 billion structural deficit, did it in a single year, that required addressing a whole host of issues that had festered for decades, but he did it. He's driving economic development, our state has rebounded much better than most. He's reshaping our government bureaucracy to be more efficient, more responsive. I can tell you now, he has jumped into the efforts in the city of Detroit to put that city back on its footing. Governor Snyder also agreed to share some of his thoughts with us on what's underway in Michigan, on energy policy and on our company. So why don't we roll the video of the Governor, please.


Gerard M. Anderson

As I think many of you know, last fall, Governor Snyder delivered a policy address on energy and the environment, and he takes topics one by one and kind of lays out his thoughts and policies developed and that leads to him defending his agenda. He pointed out in the policy addressed that certain elements of the energy legislation that was passed in 2008, are sunsetting. So for example, the renewable energy provisions sunset in 2015, we will have achieved our 10% goal. He also pointed out that we've been investing in energy efficiency for 5 years, and he wanted to study whether we have energy efficiency goals right in the state moving forward. Finally, the governor is very familiar with the deregulation cap or choice cap in the state. He knows there are some parties who have suggested expanding it, and he would like to bring clarity to that issue as well. So the Governor asked MPSC Chairman John Quackenbush, as well as the member of the Michigan Economic Development Corporation, to lead the effort to gather facts to inform good policy for the next 5 years or longer. And John, many of you know John, is holding public forums, he's taking written input from a wide range of parties, including us, and he will have a draft report to governor this fall, and that will position the government -- governor then to be ready for any recommendations in 2014.

Now I don't want to speak for the governor, or the commission chair, but I can say the following, I think. In his fall address, the governor stated that he felt adding more renewables in Michigan just made common sense. Now we've had good experience with that, and he thinks more makes common sense but he also said that we have to be careful about the pace and the amount to ensure that we balance it properly with impacts on rates as part of the adaptability that he mentioned. He also expressed an interest in diversifying Michigan's sources of power generation and in particular, believes expanded use of gas has a role to play, or likely does. And the issue of the deregulation cap or choice cap, the governor understands this issue very well. I am comfortable with his views on it, and I'm confident that his recommendations will be sound. I'm also confident that Chairman Quackenbush's advice to the governor on these issues will be sound, but many of you know him and you have opportunities to talk to him and see him yourself. So I suggest that you avail yourself of that.

I also have full confidence in the Senate's posture on energy policy. Senator Mike Nofs, who is on the film, chair the Energy and Technology Committee, was the principal author of the 2008 legislation. He knows these issues inside out. Senate Majority Leader Randy Richardville, has both our Monroe and Fermi plants in his home district. He understands firsthand in a big way, the impact of our company on economic development in the economy. The players in the house are newer, many of them given that we have term limits, came in the last election. Aric Nesbitt was appointed chair of the House Energy and Technology Committee. Aric will be a good chair of that committee. I have also met with each member of the energy and tech committee in recent weeks, and I came away from those discussions feeling that we'll have solid support for sound policy as well.

Finally, the coalition that worked together in 2008 to establish energy policy, which includes the Michigan Chamber we have the chair of the chamber, on the -- or the president of the chamber on that film. The Detroit Regional Chamber, also on the film, and many other groups, including community groups. That group, along with the utilities, continues to work closely together on energy policy, the way that we did back in 2008 to shape the current context.

So I'd say bottom line, the political and regulatory front is we understand how critical constructive regulation is, we know that to keep it, you have to deserve it. So we focus on earning it, not demanding it. And at present, that posture has yielded us good support from an array of players who are important in shaping that context. We're going to turn then from the political regulatory context on to our next topic. I think I've gotten -- Dave Meador is going to introduce that, and we're going to begin to head now into earnings, investments and so forth. So Dave, over to you.

David E. Meador

Good morning, and thank you all for coming out this morning, and for those of you on the webcast, thanks for joining us. Gerry showed you a slide earlier that showed since 2008, our earnings per share has grown 7%, and our dividend has grown over 5%, in line with our earnings growth. What I will lay out for you today is how we will continue that journey, providing solid 5% to 6% earnings growth in a dividend payout within our 60% to 70% payout ratio. So I'm going to kick off this section with a few slides, and then Steve Kurmas is going to come up and talk about DTE Electric, and then Gerry, our CEO will go to DTE Gas, and then the Gas Storage & Pipelines, and then we'll wrap it up with Dave Ruud talking about the Power & Industrial Project group.

Our business mix continues to be weighted towards our -- to stable and growing utilities. If you look on the left-hand side here, our projected operating earnings, which has shown here for the 5-year period, 2013 to 2017, is about $4 billion, and about 80% of that over that timeframe is coming from the 2 utilities, actually well start to trail down towards the end of that period as the non-utility group grows. The lower risk non-utility businesses compliment the utilities and by 2017, they'll represent about 25% of the company. On the right-hand side are the capital levels, which you can see are very healthy over this period. They average almost $2 billion per year, and the split here is about 80% utility, 20% non-utility in terms of mix.

On this slide, F-3, it shows where the earnings growth will come from over this period. And it also demonstrates our confidence in our 5% to 6% growth target. Given the levels of operational and mandated capital, that has to be invested at the 2 utilities, they will continue to grow at a very healthy pace as you can see here. Over this period, the earnings growth at the utilities will be in the 6% to 7% range. Complementing that growth, in the nonutility businesses, they will grow 15% to 20% and overall, when you put it together, the corporation we're projecting will grow at that 10% level.

And now what you see here in the next 2 bars, and I'll talk a little bit about equity later, there will be some dilution for this equity issuance that will be modest that we'll be doing over this period. And then also, we have a column in there for contingency. So we plan and not only our annual planning, but also our long-term planning, we always plan for contingencies for unforeseen events, because we want to be confident that no matter what we can deliver on our commitment in terms of earnings growth.

We've shown this slide a couple of times to you before and it will be covered more by Steve Kurmas and Jerry Norcia. But as you know, we're keenly focused on affordability with our customers and as part of that, we have been very explicit that our strategy is to stay out of rate cases as long as possible. Both utilities are going to be able to continue to hit their growth targets over the next several years without going through rate cases, and that's really positive because it's going to provide a period of stability and predictability here over the next several years, that we have not had in some time.

At DTE Electric, our goal is to use the $350 million in securitization rollout in 2015, along with continued cost control and the revenue decoupling liability to stay out of rate case. So our current thinking is to file for rates in '14, for new rates in 2015. However, we're exploring ways to even push that out further, and Steve Kurmas will talk more about that. At DTE Gas, with the recently approved infrastructure mechanism and the ongoing cost control, we believe we can stay out of rate cases for up to 3 years, and Jerry Norcia will talk more about that. So overall, we're entering a period of regulatory stability, as I mentioned.

The one thing I want to set up because both Jerry and Dave Ruud will be talking about non-utility growth is that, even though our growth is weighted towards the 2 utilities, our 17-year track record in our non-utility businesses has been fundamental to our success. This slide shows that over a 10-year period ending in 2012, our non-utility generated $2.6 billion in net cash flow. Gas Storage & Pipelines and Power & Industrial have not only funded their own capital, but they had net cash flow of $1.4 billion, and the shale and other asset sales provided another $1.2 billion. And this cash was generated by hitting our historical ROIC targets, which for the Gas Storage & Pipelines business was 12%, and the Power & Industrial business was 14%. And with that setup, I'm going to turn over to Steve now who will take you through the DTE Electric growth.

Steven E. Kurmas

Thanks, Dave. DTE's electric strategy is focused on 4 key areas. First, is a continued robust capital investment over the next decade, and we do continue to see ample opportunities for investment, coupled with the regulatory strategy, which focuses on the rate affordability in light of that increased investment. We also plan on continuing to build on Michigan's strengthening economy as the governor described, and we'll begin to talk about the long-term transition of our generation portfolio towards the end of this planning period. Our first tranche of investments through 2017 is in base infrastructure. We expect to spend about $5 billion during this planning period, with a little over $1 billion slated to be expanded here in 2013. These base infrastructure investments focus on reliability and operational efficiencies, and provide the key underpinning of our customer improvement strategy that Gerry had talked about earlier.

The second tranche of investments of $900 million is in the area of environmental compliance. These projects will continue to be a significant portion of our investment portfolio over the planning period, and include scrubbers, SCRs, our dry sorbent injection system, all technologies earmarked at improving the cost and longevity and environmental emissions of our generation fleet. These will bring our total environmental investments over this period, plus prior expenses to $2.8 billion, with 85% of that investment spent at our Monroe plant, our largest coal-fired plant, one of the largest coal-fired plants in the United States.

The final area of investment for us of about $500 million is in our renewable energy and energy efficiency, which Gerry talked about earlier. $200 million of that investment is expected to be spent this year and when completed, will bring us to about 8.5% of our total generation requirement in renewables. We're very proud of that track record and we started in 2008 with less than 1% of our generation in renewables. We are well on our way to hitting our reliability portfolios, I mean, our renewable portfolio standard of 2015 at 10%. We currently have projects in the early planning stages, which will bring us to that point, to conclude the majority of this investment. And then we're going to the next phase that Gerry described, whatever the state determines the direction we should take and whatever we think is prudent at the time. But we do spend -- expect to see continued expenses in renewable generation and energy efficiency arenas.

This $6.4 billion of investment between now and 2017 is approximately twice our depreciation rate. And as such, will resort in about a 6% to 7% compounded growth rate and rate base through the planning period. It's important as we increase rate base that we focus sharply on customer affordability, especially as our customers continue to revamp in the economic downturn. I think we had a great question earlier about the importance of rate affordability and the rates in customer satisfaction that not only affects customer satisfaction directly, but has a secondary and equally important effect in our regulatory relationships. It's very important that we continue to focus on controlling our rates at the same time we're growing rate base. In fact, those are equal priorities in our viewpoint.

We have some unique circumstances, which Dave described earlier, that we believe will allow us to hold our rates flat through 2015, and possibly even farther into the future than that. This is a twofold effort. First of all, we have about $350 million of securitization surcharges that drop off in February of 2015. That provides a significant amount of headroom for us to fold in some of the capital and the rates associated with debt to capital, coupled with our continuous improvement process, we believe we'll be able to only partially offset that securitization charge and actually see a rate reduction between now and 2015 until the customer bills, the recent base rate bills, hopefully, we have an equal focus on our power supply costs, and we'll see total customer bills come down during that period.

We're looking for ways to extend them into the future, we have the $127 million in charges associated with our revenue decoupling mechanism refund, it was awarded last year and we applied in 2014. It's difficult for us to retime that refund. However, what we can do is look at ways to pull future expenses, such as power plant scheduled outages, into earlier years and create headroom towards the tail end of the planning period, and that's really our focus right now as a way to extend our base rate reductions or base rate controls beyond the year 2015.

Load growth outlook is favorable and we expect a 2% growth this year and a consistent growth of at least 1% and possibly more, as we continue to build on the strong economic fundamentals, led by a bounce back of our automotive and steel industrial sectors. As you can see on the chart in the right, there's been a close to a 30% increase since 2009 in those segments, and we expect to see an additional 10% in the near-term, bringing those sectors on very, very strongly, and we expect that also to see an increase in our residential and commercial load. In fact, we've seen -- already begin to see a turnaround in residential load as we see the new housing permits in the area substantially ramp up after several years of virtually no construction, and I think that's pretty typical across the country. Our investments will continue beyond 2017. In fact, we believe it will actually increase beyond 2017. Our base infrastructure investments will remain at a pretty consistent level, as we continue our reliability investments, we complete our AMI program, and we continue to perform our routine generation maintenance.

Generation compliance is an area of a significant investment opportunities for us up to $1 billion, associated with both continuing and completing the existing environmental regulation, as well as we know there will always be more environmental regulations. We'll see post-Fukushima nuclear investments associated with our nuclear plant, and we're beginning the Fermi relicensing process to extend their operating license. Those investments will likely take place during this timeframe as well.

Finally, new generation. We expect to see our generation begin to retire during the second timeframe. We expect to see that generation in place -- replaced with incremental renewables and potentially, some gas generation investments as well. In fact, if you look at our generation portfolio, here is our current outlook of retirement. We have about 4,400 megawatts of generation, which we believe will be in for the long-term. And by the long-term, we mean at least 20 years. It's our newest portions of our fleet, it's those portions of our fleet which will either have retrofitted with full SCRs and to offer scrubbers, or plan to retrofit in the future, and their competitive generation, which will continue to be dispatched throughout MISO. There are some short-term units, typically our oldest and smaller units, which are at end-of-life and not economically retrofit with environmental controls. We expect to see in the very near future, probably between now and 2015, a little over 200 megawatts of those retired, with an additional 650 megawatts on the bubble, depending on how current environmental regulations mature over the next few years. And that leaves us with a tranche of about 2,400 megawatts of generation, which we would expect to retire a significant piece of post-2020 but during the second planning period that we've spoken about. That, obviously, will be monitored carefully, we'll look at the cost and availability renewables, the current market prices, low demand, and we'll dictate the timing of our next tranche of generation build, which will in all likelihood be combined cycle natural gas, given the current pricing scenarios.

So our average annual investments over the next 5 years are anticipated to be about $1.3 billion and rising as high as $1.7 billion during the next 5 years. And there's -- that upside and even further upside is really determined by where the state goes with its renewable mandates and what environmental regulations are imposed upon us at the federal level going forward. So with that, I'll hand it over to Jerry Norcia.

Gerardo Norcia

Thanks, Steve. So over the next few minutes, I'll focus on 2 areas of our business: One is our gas utility, and secondly is our non-utility pipeline and storage business. Let me start with the gas utility. The key investments strategies here that we'll deploy, one is significant investments in infrastructure renewal, that's related to our pipelines that are in the ground, as well as our meter move out program. Secondly, we'll manage these cost investments to minimize the impacts on affordability with our customers, and that's happening in a unique environment where we have low commodity prices. Third, we'll continue to take advantage of market opportunities that the state presents to us, such as propane displacement, as well as new customer attachments with the resurging housing market. This strategy, we expect to deliver 5% to 6% growth annually in income and rate base.

So let me start with our base infrastructure. So over the next 5 years, we expect to invest approximately $1 billion in our gas utility, $600 million of that will go into our base infrastructure, which is connected to providing reliable, safe and efficient service to our customers, so that's investing in our distribution pipeline, our storage fields, as well as our transmission lines. We have quite an extensive network of pipelines and storage assets. We will also use our base infrastructure investments to connect approximately 7,000 to 15,000 customers a year on a net basis.

Second half of our investment profile at utility is approximately $400 million over the next 5 years, and this is -- directed this investment is directed at main replacement and renewal. We still have approximately, 4,000 miles of cast iron and bare steel under ground, so we're attacking the replacement of those pipelines, as well as, we have approximately 400,000 meters still inside people's homes, and we're going after the investment to start moving those meters outside, that provides both efficiency, as well as safety -- increase safety to our customers.

We'll also say that these rate base investments will drive approximately 5% to 6% growth in rate base, which also drives approximately 5% to 6% growth in income. The infrastructure renewal program that I described recently received an order from the commission that allows us to recover that through our capital track that gives us timely and efficient recovery of those investments. So that investment has been segregated, approximately $80 million a year into the capital tracker. Finally, I'll say with respect to our utility investments that we seek to manage the price to our customers, and we'll do that through our continued efforts around CI, as well as we will continue to take advantage of low-commodity price environment, and that is where I think the commission and ourselves came together on this investment opportunity that we saw this as an opportune time to really accelerate our infrastructural renewal program.

Let me now move to our Gas Storage & Pipelines business. Our investment strategy here is really, one, to focus on multiple asset platforms, which I'll describe, and the opportunities associated with those platforms, as well as manage our risk through long-term contracts, that's been the hallmark of our investment profile in this business. We also, with this type of approach, expect to increase our earnings by 10% to 15% per year. Let's talk a bit about the platforms.

We have in the Michigan, Indiana and Illinois area, we have the storage platform, which is approximately 90 billion cubic feet, 9 utility storage; working capacity, 90 billion cubic feet of working capacity. We also own a 40% interest in our Vector platform and really, this is our, was our first platform that we developed, and moves gas from a Chicago supply hub and the market hub into our storage assets and then from there we distributed the gas to markets in Eastern Canada, as well as the Eastern United States and then to Ohio and Wisconsin. Subsequent to that, we developed our Marcellus platform, which is really the Millennium Pipeline, our interest in the Millennium Pipeline, our Bluestone lateral, which has gone into service, and we will complete the New York section here this week, and we'll go into service later this week, so we're excited about that, and we're also -- and also the associated gathering investments. Those are the -- and of course, the Utica platform, which is an emerging platform for us, that we're working with Spectra and Enbridge to bring to market, and I'll talk about that in a few minutes.

Let's start talking about our Marcellus platform. This is probably our most significant area of growth over the next 5 years. As I mentioned, consisted of Bluestone Pipeline and related gathering, assets all of which have expansion opportunities. We're still -- and our next platform is our NEXUS platform, where we expect to make approximately $500 million investment, and we've seen very healthy interest in our open season, as it relates to that, strong LDC interest. Of course, the 3 companies involved in this pipeline own 3 LDCs, so we're seeing a lot of interest from our LDCs to anchor this project and move it forward.

Our third platform, our storage and Vector platform, even though we've seen some reduction in storage values, we're certainly excited about connecting our NEXUS platform to Vector, which we think will help drive incremental expansion opportunities with our Vector platform. So these investments, you can see that we expect over the next 5 years, significantly increase our earnings. In 2012, we earned approximately $60 million, expect to take this to approximately $100 million to $120 million. Again, as I mentioned, this is primarily driven early on in a time horizon by investments in our Marcellus platform, by expanding Bluestone and expanding our gathering opportunities, as well as expansion of the Millennium Pipeline. Later in the time horizon, we're also looking at more significant investments in gathering, as well as bringing on our NEXUS platform.

I'll talk a little more about how we reach our 2017 operating goals. I can tell you we have a very clear line of sight to $85 million in earnings, that is basically either contracted or imminently to be contracted. We also feel extremely confident about taking this business to $100 million, based on expansions, and both on the Millennium Pipeline, as well as our gathering facility that we think discussions are underway with a series of parties and starting to advance. And I think moving our aspiration, of course, we'll take this business, so we feel really good about getting $85 million. I would say that's pretty well locked in.

Moving to $100 million, we're well underway with a good inventory of projects to get us there. $120 million is our aspiration, and we think we have a good series of projects attached to that aspiration as well, even though that's probably not as far along as our plans to get to $100 million at this point in time.

So let's take a deeper look at Marcellus. First of all, our Millennium Pipeline is undergoing a significant expansion. We expect to expand that from 500 million cubic feet a day to 800 million cubic feet a day, those expansions will be in service both this spring, with one compressor station, as well as this fall, that will take us to 800 million a day. We expect that we can expand this pipeline economically up to 1.5 billion cubic feet a day, and are having a series of discussions with various parties to do so. We're seeing lots of interest to move gas East into New York City, from producing regions that are connected to Millennium, as well as into New England.

Also, our Bluestone asset, which as I mentioned to you, went into service last fall, we'll complete the connection in New York this week, and that will go into service, I hope, late this week or early next week. We see a significant opportunity to expand this asset. We know that of 180,000 acres that are within 5 miles of the Bluestone Pipeline, we've only connected 1/6 of that, only have 1/6 of that committed to us today. We are working to increase those commitment levels, both from a gathering perspective, as well as a transport perspective with various parties. I'll tell you that those conversations are going well, and we're pretty excited about the opportunities that, that may bring.

Let's talk about NEXUS for 1 minute. The exciting part about this project is that the Ontario LDCs that we're working with are seeing tremendous growth in the need for gas to show up at Dawn, which is a major storage hub and complex in Ontario, which we are directly connected with, with our Vector pipeline. That market opportunity exceeds -- incremental market opportunity exceeds well over 1 billion cubic feet a day, that we think will present itself between 2015 to 2018. That's being driven by several factors. One is Ontario's continued growth in attaching customers, it's still continuing to attach 50,000 to 70,000 customers a year. They also are making a major conversion at their coal plants to gas. That process continues. It's been underway for some time. And lastly, their traditional sources of supply from Western Canada are either flat or declining. So what we're seeing is a lot of the demand in Ontario, as well as Québec, starting to move its way towards Dawn, well that presents us with a unique opportunity to attach an incremental supply to that market, which is -- we believe, as the 3 LDCs got together and talk about this, 3 companies got together and talk about this is to use NEXUS as that platform. So there's an emerging supply in Ohio, and we think that one of the efficient ways to connect that supply to the market is the NEXUS pipeline. As I mentioned, we got significant interest in the project, and we're working towards creating some definitive pricing agreement that we can use to advance their project.

What I'll close with, is to say that really, the platforms that I described, our storage and Vector platform, our Marcellus platform and our Utica platform, really hinges on the fact that we have tremendous increases in shale production that we are forecasting, and that shale production is going to need to find its way to a market, and we believe that our platforms, the Marcellus platform, Utica platform, and our storage and Vector platform are well positioned to capture investment opportunities associated with moving those increase in supplies to their destined markets. So with that, I'll close on this portion and David Ruud will talk about our opportunities in the power and industrial business.

David Ruud

I'm Dave Ruud, President of DTE's Power & Industrial business, and I'm excited about this opportunity to talk to you today about P&I business, but in particular, about the great growth prospects that we have for this business over the next 5 years. We plan to accomplish growth in this sector through executing on 4 main initiatives. We're going to capitalize on our industry leading position in industrial energy services to continue the success in that business. We're going to complete some construction projects that are right there in front of us to drive growth in our renewable energy business and then we'll continue the success of our Reduced Emissions Fuel business through relocating some of our remaining facilities, and we're going to continue to find new opportunities for growth and our existing businesses or related areas.

Now before I get into more detail about each of these initiatives, I thought I'd take some time and discuss what Power & Industrial does and how we think about our investments. Power & Industrial, we're in 3 main businesses: Industrial Energy Services, Renewable Energy and Reduced Emissions Fuel. In our Industrial Energy business, we provide utility services for large commercial and industrial energy-intensive customers. So we operate the central utility plant, where we provide services like cogeneration of electricity and steam, compressed air, hot and shield water, wastewater treatment, currently have about 36 of these projects around the country. And in our Industrial Energy Services business, we also have a solid fuels focus, so we produce metallurgical coke and pulverized coal for steel customers that have integrated steel mills. We have ownership in 2 coke batteries and partial ownership in 2 others, then we have 2 pulverized coal facilities as well.

We also have a Renewable Energy business, and this is different than a normal renewable energy of wind or solar. Here we produce Renewable Energy through wood-fired power plant, plants that burn primarily waste wood from the surrounding areas around them to produce power. We have -- we will have 5 of those operating, and we also have a landfill gas energy business where we capture the gas to produce within landfills, use that to generate electricity, steam or pipeline, from a pipeline quality gas, and we have 22 of those projects around the country.

And the last business is our Reduced Emissions Fuels business, this is our newest business line, it started in 2009. And here we have plans that mix an additive with coal, when it burned in the coal-fired power plant, it reduces the emissions to the plant, and also qualifies for tax credit. And this business, as I said, we started in 2009 and is progressing well.

Now we've been successfully operating this business for over 17 years, and what we've seen is over this time, many utilities have gotten into unregulated businesses like these, and most of them have exited. And we've been successful because we've been able to focus on our core competencies and follow strict investment criteria that leads us to ensure that we did the type of projects that we want, and will work for investors for the long-term. We stay true to the skills that we started with from our utility heritage, having an industrial focus, a good solid fuels experience and strong operations and safety. And we're constantly looking for growth. That's what drives our business is finding new growth ideas. But we follow strict investment criteria. We want higher returns with managed risk, and I know that sounds very obvious to get high returns with managed risk. But what it leads us to do, it follows some strict criteria in structural investments to make sure we meet those goals.

First, we need to go into areas that have limited or managed competition, and we've seen in some areas, especially some renewable areas, you can get pretty crowded with investments, and drive returns down below what we would want in that area. We look for areas that are more of a niche potential, where we can use our strong capabilities and operational skills to drive into higher returns. And then when we find these areas, we try to manage the risk, and we do that through having long-term contracts with creditworthy counterparties, ensuring that we're at strong sites that will last through those contracts and then reducing any commodity exposure that we can through fuel passthrough contracts. We've been successful at this approach, as Dave mentioned, we've had returns of invested capital of 12% to 14% over the last 10 years, and although the markets where we invest evolve to meet our criteria and we will continue to be nimble and enter or exit markets as we need to meet this.

So by continuing to apply this focus, there's going to be a lot of new growth coming. We expect to get to a $140 million of net income by 2017 from our current base of $60 million to $70 million this year. And we see this growth coming in each of our businesses, and a lot of it is right there in front of us to accomplish. And most importantly, we need to operate our existing assets efficiently and safely and we will apply continuous improvement in order to make sure that we do that, and we think this will be a strength for us. And then to continue to grow, we'll focus on our building our strong position in energy, industrial energy services, completing these

construction projects and renewable energy, which could drive up to $20 million of earnings contribution in the near term; and then finalizing our last few relocations, reduced emissions fuels project will also drive some good near-term earnings.

And then you could see there's a new project development kind of whitespace up there. We're confident that we're going to be able to continue to fill that area as well based on what we've been able to do through our history.

So let's talk a little bit more about each of these areas to give you a better understanding of the potential. One of the areas that we're particularly excited about our growth prospects is industrial energy services line. Again, that's where we provide utility-like services for large commercial and industrial customers. We've had some good success here. We added 15 projects last year, either through acquisition or development, and it brings our total up to 36 projects.

And along with this scale, we get some advantages that allow us to continue to grow even further. So we're now an industry leader. This allows us to lower our overall cost per project, but more importantly, gives us the reputation as an industry leader with our customers. And this is very important as we develop these because customers are trusting us with their energy assets as we go forward.

For example, last year, when we completed the acquisition of 14 projects from Duke and SUEZ North America, we think that one of the key things that allowed us to not only complete the project but get a valuable project -- get a valuable portfolio out of it was that the customers wanted DTE as their energy supplier. So this led us to get what we think are better returns than some of the alternative bidders. And then after we purchased the portfolio, we've been able to use our energy management skills and operational skills to drive further savings and look for more opportunities for growth within this portfolio. And we think there's more opportunity in this sector as well. The market dynamics for industrial cogeneration in some areas is really good right now, with low natural gas prices and high electric tariff rates, so we're looking into that market. In fact, we're constructing a project right now at a chemical plant in Ohio that will be a co-generation plant there as well.

And then there's the opportunity for acquisitions. There's a lot of -- there's companies out there that have smaller portfolios of similar projects that we think may have the opportunity to valuably add some projects that way.

Our renewable energy business is also going to grow. Remember, in Renewable Energy, we're in 2 areas: waste wood-fired power plants and landfill gas to energy projects. And we have some new projects coming online this year that's going to add considerable growth. In the wood-fired generation, we had a plant come online last year in Bakersfield, California, a 44-megawatt plant. Right now, we're optimizing that asset and it'll deliver full -- its full potential within the next year. And we have another plant coming online this year in Stockton, California, and that will come online this summer and should deliver full earnings in 2014.

We also have 2 landfill gas projects that will come online, one outside of Los Angeles, a 20-megawatt project, which is huge for the landfill gas world, and then a 10-megawatt project in North Carolina. Just completing these 4 projects will add over $20 million of new operating earnings, earnings contribution for our business, so we're very excited to get that done.

And this also demonstrates how we follow our core competencies and our investment criteria in niche markets. So California had a period where there was high renewable power prices, and we were able to use our unique skills and ability to find an area, converting these coal plants to wood plants, take advantage of that. Now these high renewable prices may no longer be available, so we have to find new ways then that we can add value in these areas, perhaps through acquisitions of plants where we can increase the operating ability and add more value that way. So this is the business we like for the near term net income from our construction projects and then opportunities as well.

Then our reduced emissions fuels business is also going well. And this business, again, we produce the fuel by blending additives with coal. And when it's burned in coal-fired power plants, it reduces the NOx and mercury emissions. Additionally, this business qualifies for tax credit, which is a pretty healthy tax rate of about over $6 per ton, that was put in to generate advancements in areas like this. However, you had to be -- you have to have your plants in service for IRS deadline prior to 2011 for this. And so we've had 9 plants that we placed in service. But now -- the goal now is to get these placed at host sites where they can maximize the value. And it's good for host sites as well because they lower their emissions, as well as reducing their costs at the same time.

Like I said, we had 9 facilities that we placed in service, 6 of these are currently operating and produced $40 million of net income in 2012. And we have 3 plants that are either underutilized or redundant in their current location, but with the opportunity to relocate these to maximize the value of this program.

Now of these 3, we expect one of them to come on in the third quarter. We've completed all the contracting, and right now, we're in the permitting stage. And after final permitting, it's about 3 months of construction period, and this should come online then.

And the other 2 facilities, progress is also going well. We have -- we're nearing the end of our contract negotiations on one of them, and we'll go into permitting and construction stage and hope to have that online at the end of the year. And for the ninth facility, our third one that's available, we are -- we have some good host sites that we're discussing with now and still hope to get that to progress quickly through the end of the year as well.

And as we get these 3 facilities online, it'll drive some additional growth this year and next year from our $40 million in 2012, as we get to our $60 million to $65 million goal, 2014 to 2017. But this is another example of a business that we've been able to initiate, make it into a successful and valuable business for DTE. And this is what we're going to continue to do within Power & Industrial. As we discussed, this has been a very successful business. Dave showed that it's returned over $1 billion in net cash over the last 10 years, with strong returns of 12% to 14%. And by executing on these initiatives that we discussed here, we're going to continue this success. We're going to generate the growth of 20% per year and mainly through projects that are right there, ready for us to get completed.

I think now, Dave will take and put it all together for us.

David E. Meador

Thanks, Dave. Let me wrap up quickly here, and then we will take your questions. So I'm going to wrap up with our last priority and start talking, first of all, about the guidance for this year. Gerry covered the increasing guidance at the beginning of the meeting, and here's the detailed page for 2013 that supports the increase to $4.05 per share at midpoint. We increased the guidance at the 2 utilities based on underlying performance, regulatory certainty, including the rate proceeding that was just closed out at DTE Gas that provided the infrastructure recovery mechanism and ongoing cost performance. So given our goals of consistently hitting our authorized returns, we've also continued to, and you'll hear about this from quarter-to-quarter, we'll continue to use our Lean and invest strategies that we demonstrated last year as we worked our way through some volatile weather.

We are also increasing the Gas Storage & Pipeline guidance based on higher transportation earnings, and then for a total of new range of $3.90 to $4.20 per share for $4.05 at midpoint.

Now normally, we wouldn't provide 2014 early outlook until the fall EEI Financial Conference. However, given our regulatory stability, we are providing a detailed early outlook, and Gerry mentioned this earlier, with a midpoint of $4.27 per share. And that represents a 5.4% increase year-over-year, and that's over the $4.05 guidance on the prior page.

The drivers for DTE Electric, where the midpoint is growing year-over-year at 7%, are the RDM liability, which is being amortized back into income in 2014 renewable energy growth and cost control. At DTE Gas, which will grow about 5% year-over-year, we'll have a full year of the Infrastructure Recovery Mechanism and also ongoing cost control.

At Gas Storage & Pipeline, the Bluestone pipe and gathering system that Gerry just talked about, will fuel about 11% year-over-year growth. And all the great work that Dave Ruud just talked about is going to drive 23% year-over-year growth, and that's coming from the REF business line and also the renewable projects that Dave outlined.

We'll continue to hold Energy Trading at our conservative level. And as you know, that's not part of our growth plan, so the range here is $4.12 to $4.42 for 2014.

On this slide, we're providing a 3-year outlook on our sources and uses of cash, and let me start on the right-hand side. We talked a lot about the healthy capital spending that we'll have over the next 5 years, this is a 3-year look that shows on average $2 billion per year in capital. And when you add the dividend to that, the uses of cash are about $7.4 billion. On the left-hand side, the sources are continued strong cash from operations and also about $900 million of equity, which is consistent with what we've been doing. So the -- on average, $300 million will be our equity. Our plan is to continue to do what we have been doing and issue that equity through our DRIP and pension plans. And then finally, you can see the $1.5 billion of new debt.

As you know, maintaining a strong balance sheet is a priority for this company. We've done it in the past and we'll continue to do it as we go through this healthy growth period. This is our projected leverage in FFO. And as you can see, we're targeted to remain right within our goals. We also continue to take advantage of current market conditions. So far this year, we've issued $100 million of the $300 million in equity that we will do. We issued close to $400 million in debt, and we also extended our credit facility out to 2018 and currently have about $2 billion of liquidity on that facility.

Given a lot of what we laid out for you today, including the recovering state economy, the very stable regulatory environment and the company's performance, we've also seen a series of credit upgrades from all 3 rating agencies, and we appreciate the fact that the positive changes that are playing out in Michigan and also with the company have been recognized.

This brings us to the end of our formal presentation, and I will take questions. But I just wanted to bring this together, and hopefully, we've brought to you the insights about how we're operating the company as we pursue our aspiration of being the best operated energy company in North America. Hopefully we've conveyed this to you. We and our employees have a lot of passion in this whole operating system in how we do our work everyday. We know it's driving great results, but it's also the company that we want to be. And you could see a lot of the elements of what we stand for as we continue to build this operating system.

The operating system also, the financial priorities are on the right-hand side, and I believe we've done a good job in driving consistent financial performance, both in earnings and dividend growth. And as we continue to work this, we're confident with the amount of capital that we have in front of us that we'll be able to provide superior financial results for many years to come.

So with that, I'll turn it back to Gerry, and we'd be happy to take your questions.

Gerard M. Anderson

On the second half of the morning, we've had a chance to review our political and regulatory environment, get some comments from outsiders, including the governor, as well as review with you the primary investment opportunities we have, and I look forward to the next couple of years on earnings. So we are open for questions on any of that or really on anything that you've heard this morning. So who would like to kick us off here? Yes?

Unknown Analyst

You guys gave us today the 3-year look at CapEx. Not to pin you down, but I was just wondering if maybe you could speak through -- speak to some of the things, the gives and takes, that might give us some timing at which are the big years, which are the lean years, that sort of thing?

Gerard M. Anderson

In terms of CapEx?

Unknown Analyst

In terms of CapEx, yes. I mean it's not -- I presume it's not perfectly ratable for the period?

David E. Meador

It is pretty close. When we modeled this out, we were averaging pretty near, on average, close to $2 billion a year.

Gerard M. Anderson

We have another over that way. We have one here, and then one back in the corner after that.

Unknown Analyst

Just a couple of questions on the 5% to 6% CAGR. First, how long does that go? Second, how consistent will that be or will there be some lumpiness between now and whenever the end of the target is? And three, how big is that contingency and what are the -- some of the swing factors that might take you over 6% or under 5%?

Gerard M. Anderson

So how long does it go? One of the things we tried to address this morning was -- and I know it's a question that's arising in the industry. Once you get outside the 5-year window roughly and some of the near term, at least EPA investments play their way through, what happens after that? And is -- 10 years is a long way to look out. But as we look out past 5 years, we see a lot of factors that continue to suggest we're going to have levels of investment that are at or above what we're dealing with now. In the Electric side, Steve described that we are going to see a turnover in our electric generation fleet, and that's a capital-intensive area. But our state needs to get on with investing in the next generation of assets. Gas, Gerry described, we've got a long-term infrastructure replacement underway there. We don't see that ending. EPA isn't stopping with some of their things. So as we look out and try to be realistic about what's coming, we don't see the utility side pulling back. Similarly, on the non-utility side, we would expect to continue to see good opportunities. When we modeled it, it isn't lumpy, so we don't see bursts and stops. In terms of the contingency, I don't know that we can be overly specific other than to say, if you do the math on our overall growth rates in the utilities and the non-utilities, the fact that we've got higher growth in the non-utilities does give us a measure of contingency to that 5% to 6%. But we're pretty clear on an annual basis and on a long-term basis. If we plan to -- for 5% to 6%, our chances of hitting it are very low. We have got to have something in there for unexpected that we're certainly going to hit along the way. So we're trying to build a plan to go beyond that, with the hope that we can deliver predictably on that number. And 10 years is a long time. We'll certainty get things we don't expect. What we're trying to get good at it in this company is dealing with the unexpected, and that's scrambling when it arrives but actually have things in our portfolio that allow us to respond effectively, whether that's costs that we've invested forward against to be able to respond to unexpected changes or whether it's growth where we're pursuing things that if one thing falls out, we've got another that we had on our portfolio we can backfill with. Does that answer it? Okay, thank you. Back in the corner there.

Mark Barnett - Morningstar Inc., Research Division

It's Mark Barnett. I did have 2 quick questions on both of the -- those lines where you give customer rates. You said something, I just wanted to be clear, were these -- the current rate versus potential, were these net of your supply and fuel costs?

Gerard M. Anderson

Well, in the Electric, I think what Steve said is that we hope we can pull our PSCR cost down as well. We've actually entered some rail contracts recently that were a significant cost reduction for us. We're working with fuel blends that are very material in terms of their ability to affect us. Our hope would be to be able to keep those flat, down. Steve, is -- anything you would add to that?

Steven E. Kurmas

No. The chart specifically dealt with base rates. But as Gerry pointed out, we've got a lot of initiatives around power supply costs. And our goal was to hold both flat to declining over the period.

Gerard M. Anderson

Then on the gas front, I think what we were dealing with specifically was base rates. The forward curve on gas is up a little bit, but the experience has been it's moved up and we expect it to be reasonably flat over the period. So we'd like to operate in a reasonable cost gas environment and hold our base rates very flat.

Mark Barnett - Morningstar Inc., Research Division

Okay. And I did actually just want to ask a little bit about that on the gas side, in terms of supply for the utility. Is there any -- I know this is something that's probably been asked a lot over the years and hasn't really gone anywhere, but any chance that you've been able to maybe talk a little bit more about longer-term contracts with some of the producers that are looking at a lot of volumes that don't really know what to do with coming out of Marcellus?

Gerard M. Anderson

Yes. Jerry, why don't you take a shot on...?

Gerardo Norcia

Sure. Basically, the way we contract for gas now is that, in the forward year, usually we're locked 75% when we approach the injection cycle in April. And then if you look at the out years, that will decline to 50%, 25%. So we do have term contracts for supply, but it's usually no longer than 3 years on average. As we look forward, I think we've been discussing with the commission to continue that practice.

Gerard M. Anderson

So we haven't had an explicit discussion with the commissioners about taking a 10-year deal or something like that. We've had this on a 3-year build of supply in place, and it looks pretty well to keep the volatility out of price movements. The environment evolved in a way where there were some things that looked like a longer-term supply agreement might make sense. We could talk to them, but we'd have to get their agreement to move on that. Other questions, yes?

Unknown Analyst

Two questions on your continuous improvement policy. Does that also apply to the non-utility businesses? And secondly, it hasn't gone unnoticed given all the awards you gained. Has that meant that it is easier for you to attract talent that because talents goes with the successor? But also, how does that make you think of retaining managers? Because somebody out there must be interested with people that has experience and gotten over that initial enthusiasm for this. You said yourself, it's been 20 years now, and it's working on a day-to-day and not everybody has been that successful.

Gerard M. Anderson

Yes. Well, on the first question on the non-utility continuous improvement, why don't I let Dave Ruud answer that one. I'll take the second question.

David Ruud

It truly is a corporate initiative throughout our company to drive continuous improvement everywhere. And so we're also involved in it throughout all of our plants and facilities and in our corporate offices to drive improvement there. You want me to talk about retention for you too, Gerry?

Gerard M. Anderson

I -- geez, if you want to take a cut at it, go ahead. Well, maybe I better take that one. Senior people are no different than people down in the company. I think ultimately, they're trying to have a balance between opportunity. So we have to keep our compensation and opportunities set for people strong. Given our performance, it has been strong, so that's been a good thing. But they balance with that, whether they're enjoying their life. And whether people ask them the question, "Hey, do you like your job?" they don't have to make up an answer and kind of mask over the fact that they really don't. And so when you get things moving where we're plowing new ground and doing things to make the company better and it's working, and you're doing things that you think are important for your state and your communities, people have a lot of fun in trying to satisfy. So our experience is if you pursue that now, you actually have a better retention factor, even if things are working well and people may look and say, well, that would be a good place to try to take somebody. And the fact that people enjoy their work and are having fun is pretty strong retention.

Unknown Analyst

And maybe a follow-up, if I may. Do you believe that Michigan has created a sort of sustainable climate in constructive regulatory environment and this friendliness overall, so that maybe your company could be southern company of the north, and maybe Michigan could attract other industries rather than just auto and steel? So kind of that positive feedback look and -- outlook and maybe good economic growth in many years ahead because governors, they come and go, so that plan should hopefully be sort of more sustainable.

Gerard M. Anderson

Yes. A couple of comments. I think Michigan over the past 5 years, on many fronts, has remade itself. Our largest industries dealt with a series of issues that had plagued them for decades. They flushed those through and are fundamentally different today than they were 5 years ago. Our state government is functioning well and within its means for the first time in a long time, like a lot of state governments, that have ways of hiding the pee. We're not doing that now. State government is functioning better. We are in the midst of going after our largest city. Interestingly, Detroit is seeing a big influx of people wanting to live there. You can hardly find places in midtown and downtown to rent, so people are running with their feet, but we've got to get government in the city right. So there are many fundamentals in Michigan that are much better. On the regulatory front, I think that we do have a construct in Michigan that is split from adversarial to one where people realize that to attract investors like you into the state, you need to be able to project an image of this being a place that capital invested earns a fair and good return. And I think that's the posture that the state has moved to in trying to present a new image of itself. Now we can screw that up. If we don't do our part, if we don't manage our costs well, if we don't serve our customers well and so forth, you all know that, that leads to rightly, leads to increased scrutiny and tough regulation. So our job is to keep our CI moving well, to keep driving customer satisfaction north to keep ourselves aligned with the state's economic development agenda and do that really well. And we think if we do those things well, the prospect of doing what you're talking about, which was continuing a constructive environment, is high. Any other questions? Yes, we have one here.

Kevin Cole - Crédit Suisse AG, Research Division

Kevin Cole from Credit Suisse. So I guess to continue the conversation, so it seems like Michigan regulation continues to prove -- improve every year. And so when you think about your mid-2014 next electoral cycle, what initiatives would you be working towards to be able to implement in that timeframe? Like CapEx trackers, electric side or decoupling, is that also on that -- with the 2015 energy policy, is that a rewrite of the 2008 legislation or simply a statement of targets or aspirations?

Gerard M. Anderson

So why don't I take the last part first, and then maybe Steve and Dave can -- and Jerry could answer on whether they think there's any trackers or anything like that, that we think are important. So on this look, no, I don't think it's a rewrite of the 2008 legislation. I do think, as in many states, as the renewable portfolio standard comes to an end, the question arises, do we stop there or do we do more? I mean, was this 5 years and there is no more, or what's next? I told you what the governor said. He said, "I think adding more renewables makes common sense." He sees diversifying our portfolio in Michigan is common sense, but he's very keenly aware that there's -- renewables aren't cheaper. So you need to do that in a measured way and keep your eye on costs, particularly cost to industry from a competitive standpoint but also for homeowners. So when he talks about adaptability, I don't know if you picked it up in that video, but he said a hallmark here is adaptability, he's unlikely to say this is the way it's going to be for the next 15 years and we're going to go through the roof on this. He's going to want to see a policy that can adapt to changing environment, economic environment, but still move on some things? I think renewables is one that he thinks we can find ways to do more. Energy efficiency, same thing. They want to look at the goals. I think a lot of states have moved on that. We have. What he wants is input, how much is left, are there still good investments out there that makes sense for the state? If there are, we should set policy to keep pursuing those. If they're narrower, we just need to be aware of that and respond. And on the regulatory construct, I mean, you're aware that there are certain players in our industry who wish that accounts for around 10%, 15% or something like that. That noise pops up in our legislature now and then. He's aware of that. He'd like to address it. But I don't necessarily see that we have to end up with, for example, even a rewrite of legislation around renewables. It could be that the governor comes out and says, "This is what I want to accomplish." And he may do that. I don't know what he'll do, but he could do that through, for example, the commission itself, just pursue the next round of investment. So time will tell. The way he works is he gathers the facts, gathers the information, then he actually tries to adhere to a good, sensible sound policy. And that's what he's doing. He's gathering the facts and he's going to come out, he knows energy is a big sector in the state. He'll come out with recommendations on what he thinks should be next. Does that answer it, Kevin?

Kevin Cole - Crédit Suisse AG, Research Division

It does then with -- I believe he's up for reelection in '14? And if he doesn't get selected for '15, how does that change the energy policy? Your -- is it an impossible question?

Gerard M. Anderson

Yes. I mean, if we have a Democratic governor? Is that the question?

Kevin Cole - Crédit Suisse AG, Research Division

Correct, yes.

Gerard M. Anderson

Yes. So it's a little hard to project forward to the election right now. It's early, one. Second, we don't have any clear Democratic contenders that have stepped forward. They may, but haven't yet. If that were to happen, we'd just have to take stock as to who it was. It's real speculative when you don't even know who the candidate is, you have to think of how it might change things. There was a -- you had a follow-on question that I forgot, and I was going to point at these guys.

Kevin Cole - Crédit Suisse AG, Research Division

Yes. It's -- I guess what are you thinking about the mid-2014, I guess...?

Gerard M. Anderson

Oh, the other regulatory things? Thoughts, Jerry?

Gerardo Norcia

You asked the question specifically about trackers. We've had a history of the commission implementing trackers when they were prudent and when they were required. A good example of that would be during 2008, '09 and '10, when we had a downturn in the economy, they gave us some uncollectible tracker, which was very important to us at that timeframe. When the economy bounced back, they went through the tracker when we didn't no longer need it. So I would expect we will continue to analyze trackers with the commission and implement if necessary. Consumers has filed in their current rate case a new revenue decoupling tracker, and we'll follow that with interest. And if successful, we may propose an energy optimization revenue decoupling tracker-only. For the purpose of it is to keep us whole as we support energy optimization and to keep our interest levels high on that. But at that point, that's the only thing I think, where we're actually concerned.

Gerard M. Anderson

Anything else, Dave? Jerry?

David E. Meador

We're interestingly, right now, not only in a stable period as we go into the next rate case, we don't have a long list of regulatory mechanisms we're pursuing. It will just be getting the increase in rate base into the next set of rates.

Gerard M. Anderson

I think Steve said it, well, we look for things that both we and the commission, CI, is a good policy. So the gas infrastructure recovery mechanism was an example, where the commission had a specific desire to see that infrastructure replaced more quickly. They also didn't want to see it driving a series of rate cases on a single line of investment. So we agreed that it made sense. We came together, and through this last rate case, have the Infrastructure Recovery Mechanism. And we'll be working over the next 5 years to invest against that. And that was one we, we didn't go asking for on bended arms. This was kind of a mutually agreed policy.

Kevin Cole - Crédit Suisse AG, Research Division

If I can ask one more question, actually, on the Michigan business. I guess as you look to grow the business, is the risk profile changing?

Gerard M. Anderson

Which business?

Kevin Cole - Crédit Suisse AG, Research Division

The midstream.

Gerard M. Anderson

The Midstream?

Kevin Cole - Crédit Suisse AG, Research Division

Right. As the business changed, is the risk profile changing in the business as you grow it? And are you looking at entering into new types of businesses like production, like anything outside the traditional pipes, like processing or so on?

Gerard M. Anderson

Yes. Jerry, why don't you take the first cut?

Gerardo Norcia

Our approach to the midstream business remains consistent. We're looking for long-term contracts to secure the return of our investment and also the margin on that investment. So I think that hasn't changed, that approach. So we don't -- I don't really see us taking more risk. In terms of change, there has been a bit of a change in terms of our initial investment profile was primarily market delivery pipes and storage. We've now moved into some significant investments into gathering. Some of that gathering could come with processing, depending on the nature of the gases coming out of the ground. You've asked if we would move into the 'production business. I believe the answer is no. We've completed our divestiture of that business, and we'll probably remain out of it for the foreseeable future.

Gerard M. Anderson

He's right on that, yes. Now the change in profile, I think Jerry's right that as an investor group, we don't believe folks here have a lot of appetite for commodity price exposure. So we are working more with producers, but we're not looking -- there are companies who work with producers who like the -- kind of like the volatility of the commodity price cycle. That's not us, so we strike contracts that we don't take that. We are, as Jerry said, looking for long-term contracts. And our -- we got a lot of good opportunities in front of us that fit that model. Got one more here.

Unknown Analyst

As long as we have time. Just one more follow-up, you -- someone mentioned the potential for moving pipes more into New York City as part of the plan already, then maybe further into New England. Obviously, a pretty tight gas shortage there and it seems like a lot of other midstream competitors are kind of scrambling to be the first ones out there. Can you maybe talk a bit about how big your ambitions are? How soon that might be coming? And what competitive landscape specifically to get gas into New England looks like from your prospective?

Gerard M. Anderson

Jerry, why don't you take that?

Gerardo Norcia

Sure. So as you mentioned, we see significant need for incremental gas suppliers into New England as northern supplies dry up and also demand grows, as well as we see significant growth in the New York City markets with a very significant drive to displace fuel oil, as well as incremental power generation needs. So our platform will be Millennium to access those markets. We will work with partner pipelines to access those markets.

Gerard M. Anderson

Well, I don't see any more hands. So we will wrap things up here. I want to thank you again for agreeing to spend your morning with us. Hopefully you've gained some insight into how we think about operating DTE Energy, what our system for doing that is, as well as the specific investment opportunities we have in front of us and the growth profile that we think that will produce over the next 5 years and beyond. And I really would just wrap up by saying that my confidence that we can continue to produce in the coming 5 years, what we have in the past 5 years, is high. And we look forward to doing that for all of you. Thanks again for being here. And I look forward to having lunch and so forth with some of you afterwards and look forward to seeing all of you at meetings like this in the future. Take care and be safe on the trip home.

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