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Executives

Dave Meador – Chief Financial Officer

Peter Oleksiak - Vice President and Controller

Nick Khouri - Vice President and Treasurer

Lisa Muschong - Director of Investor Relations

Analysts

Dan Eggers – Credit Suisse

Paul Ridzon – KeyBanc

Neil Stein – Levin Capital

Mark Siegel – Canaccord Adams

Danielle Seitz - Dudack Research Group

DTE Energy Company (DTE) Q2 2009 Earnings Call July 31, 2009 8:30 AM ET

Operator

(Operator Instructions) Welcome to the DTE Energy Second Quarter 2009 Earnings Conference Call. At this time it is my pleasure to introduce Mr. David Meador.

Dave Meador

Good morning and welcome to our second quarter conference call. As we get start out this morning I encourage you to read the Safe Harbor statement on slide two of our Power Point deck, including the reference to forward looking statements.

With me this morning are Peter Oleksiak our Vice President and Controller; Nick Khouri our Vice President and Treasurer and Lisa Muschong our Director of Investor Relations. I also have members of the management team on hand and might call on them during the question and answer period. This morning I’m going to provide a brief overview and then Peter will cover the quarterly results and Nick will cover cash flow, the balance sheet and capital.

With that background let me start on slide five. When we provided guidance for the year back in February we laid out our 2009 financial goals. They were based on what we believe to be realistic assumptions regarding the economy and electric demand and that we had built in flexibility to address economic uncertainties. We also said that we would make significant company wide cost reductions using our continuous improvement approach, we would implement a mid year rate increase at Detroit Edison and deliver solid non-utility performance.

Our over arching goal was to preserve solid earnings and provide strong cash flows and balance sheet metrics in 2009. Building on the first quarter results I’m pleased to report that we are executing on our plan and overall our 2009 earnings and cash flows are strongly on track to reach our goals.

Continuing with many years of cost reductions at DTE we’re doing a great job here in driving continuous improvement across the company. We’re involving all of our employees at all levels and we’re ensuring that we don’t compromise on reliability, customer satisfaction, or safety. As a matter of fact, if you looked at utility operation O&M for the first six months of the year and compared it to the first six months of 2008 we’re down year over year by $111 million in costs, although some of this is timing and will reverse out during the year.

As we said earlier in the year, we believe our plans were conservative but we also needed to build in flexibility. We have taken steps to build that flexibility through one time actions to help offset sales impacts where we see declines beyond the 6% low drop we had originally forecasted. We are now forecasting about an 8% low decline for 2009 and we have offset that incremental decline with proactive one time cost reductions. Our targeted O&M reduction is now $130 million pre-tax and savings and there are some additional non-O&M savings that Peter will cover in more detail in a moment.

Detroit Edison’s self implemented rates this week were $280 million. Three of the main components which is just part of the original filing that we had made of this increase represent reduction in electric load, higher benefit expenses and bad debt expense, which by themselves equal about 100% of the implementation that we did, that is just by coincidence and I’m just trying to emphasize some of the main components of the filing that we made.

As we work through the case we remain optimistic that we will have a good outcome. Its important to note that this rate increase will be more than offset by a PSCR reduction of about $300 million that will go in place tomorrow, August 1st. On a positive note, the automotive bankruptcies were quick and had minimal direct impact on DTE. On our first quarter call we had estimated that the rage of receivable exposure to be in the $26 to $42 million range after tax. Today it looks like that’s about $11 to $14 million with $9 million recognized in this quarter in reported earnings.

Another positive result is the performance of our energy trading group where earnings are $67 million year to date and offsetting some of that good news is ongoing pressure at our Power & Industrial group due to the downturn of the steel industry where this has impacted our coke battery volumes directly. While we’re starting to see signs of increased coke demand this group will deliver less than its full earnings power until the steel industry recovers. While small, our unconventional gas group’s earnings is off slightly due to the price of natural gas.

As I said earlier, cash and balance sheet goals are key to us during the recession and we had another strong quarter in cash flows and took actions to increase and firm up our liquidity. While we’re delivering solid earnings and maintaining strong cash flows we’re investing in the business. We will invest about $950 million in our two utilities this year and $200 million in our non-utilities.

On slide six is a quick run down on guidance for the year. It’s still very early and while we’re seeing some positive like the performance in Energy Trading, we have some offsets like reduced electric load and mild weather to keep our eye on. That said, we’re holding our guidance at $2.75 to $3.05 per share and our average shares outstanding are 164 million shares. Let me walk down this page quickly.

While we’re experiencing higher load loss then originally forecast at Edison, that is being offset with continuous improvement in one time cost reductions. The projected earning for Detroit Edison are solidly within the guidance range and I’ll cover Edison in more detail on the next page.

MichCon is in the last year of its rate freeze from a prior settlement agreement and is under pressure due to the economy. We filed for a case for MichCon in June for $193 million and we will self-implement a rate increase for this business in January 2010. Given the economic pressures, MichCon is trending towards the low end of guidance.

Gas Midstream is having another good year and is on track to deliver a very solid performance this year. As I mentioned, Power & Industrial is under pressure primarily due to the steel industry. Year to date performance has been low, however, we have several new projects that will provide earnings in the second half of the year and we are comfortable that the group will get to its lower end of the guidance. I’ll talk more about energy trading in a moment. The total guidance is $445 to $505 million and we’re on track with a very solid six months now behind us.

On slide seven is an overview of Detroit Edison on a year over year basis. The year is playing out as we described it would in February. Looking left to right the economy has impacted Edison with sales reduction of about $125 million and that’s higher then what we originally gave you when we forecast the 6% low drop. Additional pressure comes from higher pension and healthcare costs, interest expense and other expenses. Partially offsetting those pressures is the full year benefit of the 2008 rate orders and our ongoing O&M reduction which are about $50 million at Detroit Edison.

Mild weather is adding to that pressure and that’s continuing in July here. Also driving positive earnings is our one time cost reduction efforts like property tax reductions, employee benefits plan changes, and other non-sustainable cost reductions. Then last on this chart is the 2009 benefit of the electric rate that were self-implemented this week.

On slide eight is an overview of Energy Trading. Our expectation for this business is to earn about $50 million a year and to generate about the same amount of cash flows which they have done consistently year in, year out. We managed the business based on economic profits, knowing that the recognition of accounting earnings can be timed differently.

Last year the trading company team had a strong economic year and we said some of those profits would roll on this year and over the next couple years. This year’s year to date economic profit is also strong and is in line with 2008 and the team there is doing a great job. Accounting earnings year to date are $67 million which includes some of the roll on from last year’s economic profit and a one time tax benefit of $7 million.

In accomplishing these earnings, our business model and our risk model has not changed from prior years. We’re projecting that Trading earnings will exceed guidance by at least $20 million and that will offset some of the performance pressures at MichCon and the Power & Industrial segment that I just described.

With that background let me turn it over to Peter and he’ll take you through the quarter.

Peter Oleksiak

I’m going to start with slide 10 and the second quarters earnings results. For the quarter, DTE’s operating earnings per share was $0.56. As a reminder there is a reconciliation to GAAP reported earnings contained in the appendix of the presentation. Detroit Edison contributed $0.50 and MichCon, which typically incurs an operating loss in the quarter, came in at a $0.09 loss.

The non-Utility segments combined to earning $0.20. The primary drivers in the non-Utility second quarter results were Energy Trading at $0.16, Gas Midstream at $0.06, and the Power & Industrial Projects and Unconventional Gas Production at a $0.01 loss. Finally, Corporate and Other had a loss of $0.05 in the quarter.

Let’s move on to slide 11 and a summary of the quarter over quarter performance by segment. Overall, operating earnings are up $66 million in the second quarter of 2009. Detroit Edison Earnings were up sizably in the quarter while MichCon results were down from the prior year. I’ll take you through additional detail on the two utilities in a few moments.

Non-utility segments were up $39 million in total with Gas Midstream up $2 million due to higher pipeline income. Power & Industrial projects are up $5 million; this is due primarily to a depreciation true up on held for sale projects in 2008, partially offset by lower coke sales as of the result of slowdown in the steel sector.

Energy Trading had a quarter over quarter earnings increase as the result of unfavorable mark to market accounting timing in 2008 and favorable taxes in 2009. As Dave mentioned earlier, year to date economic net income is comparable with last year. Lower gas prices drove a $5 million decrease in earnings in Unconventional Gas production segment, as volumes were pretty comparable quarter over quarter. Finally, our Corporate & Other segment was slightly unfavorable.

Now I’d like to go through some quarterly details of the utility company beginning with Detroit Edison on slide 12. Operating earnings for Detroit Edison was $83 million up $32 million from the prior year. Total margin for the quarter was down $22 million due to the drop in load and weather offset partially by the implementation of the December 2008 rate order.

Additionally, O&M expense was lower as the result of a series of continuous improvement initiatives, one time cost reduction actions and the timing of power plant maintenance and restoration expenses. I’ll be discussing total utility O&M year over year in more detail in an upcoming slide. In addition to O&M reduction, Edison also benefited in the quarter from a favorable property tax settlement.

Let’s turn to page 13 for quarter over quarter and year to date details on our temperature normal electric sales. In the second quarter we experienced a year over year sales drop of 9% which is larger than anticipated. This was driven mainly by the reductions in industrial load which we anticipate will continue through the remaining two quarters. Therefore we are now projecting a total sales drop of 8% this year versus our original projection of 6%.

The year over year drop in our industrial load is now projected at 23% versus the 15% embedded in the 6% original guidance. Load reductions in the commercial and residential segments are now forecast at negative 3% and negative 4% versus the negative 5% and negative 1% in prior guidance.

Moving on to page 14 and a review of MichCon’s performance. As I mentioned earlier, the second quarter is typically a loss in a seasonal gas utility business. MichCon had an operating loss of $15 million down $4 million from the prior year primarily due to the economy’s impact on residential demand, industrial transportation and gas. Similar to Detroit Edison, O&M expense was reduced as the result of continuous improvement initiatives and other one time cost reduction actions.

On page 15 is a view of total utility O&M expense year over year. This slide represents the total Edison and MichCon O&M expense excluding bad debt and spending in our energy optimization. We thought it would be helpful to provide the absolute O&M spending levels for 2008 actual and the 2009 projection. In the past we’ve given you the target of continuous improvement reductions for the year only. This chart puts the pieces together for the entire year.

On a pre-tax basis we are now forecasting a $65 million reduction across the two utilities with $100 million of reduction related to the continuous improvement and $30 million tied to one time cost reductions, partially offset by $65 million of increased expense related to healthcare and pensions. As a note, our June year to date utility O&M favorability is larger than this, approximately $110 million which includes approximately $55 million of timing of distribution and plant maintenance expenses that will reverse in the second half of the year.

As I mentioned on the first quarter call, the year over year savings will be front end loaded given the fact that we started these cost reduction efforts in the second half of last year.

Earlier, Dave covered Detroit Edison’s total earnings year over year. To help connect the two slides we have provided a table which gives you both the pre-tax and after-tax numbers tied to Detroit Edison and MichCon’s continuous improvement savings, one time savings, as well as the pension and healthcare offset. Not included on the slide are other non-O&M one time cost reductions that impact other income state line items such as property tax.

This concludes my comments on the second quarter earnings results. With that I’d like to turn the discussion over to Nick Khouri who will cover cash flow and capital expenditures.

Nick Khouri

As always, improved cash flow and balance sheet strength remains a key priority for management and the board of directors. While the economy and financial markets remain unpredictable, DTE’s cash and capital targets remain on track. Underlying cash has been strong so far this year and we have secured sufficient liquidity to manage under a variety of scenarios.

Page 17 details capital and cash flow for the first six months of 2009. Cash from operations reached $1.3 billion through June, while free cash flow before dividends was a positive $700 million. That’s slightly behind last year but remember last year we saw a large intra-year swings from the phase out of synfuels, with a large cash buildup in the first half of the year, offset by negative cash in the second half.

For the full year, we expect free cash flow to flip from a negative $200 million in 2008 to a positive $200 million in 2009. Balance sheet metrics are expected to remain within our targets of 50% to 52% leverage and approximately 20% FFO to debt.

Capital expenditure detail is shown on page 18. DTE capital spending totaled $631 million in the first half of 2009 down about 10% from last year. Detroit Edison’s operational capital is up about $130 million year over year but nearly all of the increase is timing within the year driven by outage schedules. For the full year, Edison’s capital is expected to decline from $944 million to $800 million in 2009. Total DTE capital this year is still on track to reach about $1.1 billion about a 20% decline from 2008. Even in the fact of the soft local economy, DTE’s cash and balance sheet targets remain on track.

Now let me turn in back to Dave to wrap up.

Dave Meador

Let me wrap up on slide 20. With a little more then six months behind us we’re feeling pretty good about where we are given the environment that we’re operating under. We believe we have a very constructive regulatory environment in place and as I mentioned, the Detroit Edison rate case will wrap up by year end and the MichCon case is now underway with self-implementation of rates in January.

We built a realistic plan for the year and in total the proactive position the company took is working well as we execute that plan. The auto bankruptcies moved with lightening speed and the plants are back and running. With the auto company’s having significantly reduced their cost structure and much lower dealer inventories as they come out of this. As I indicated we’re starting to see signs of life showing up in the steel sector again which is important not only to the Power & Industrial group but also important to Detroit Edison.

As we’ve laid out both ongoing continuous improvement and one-time cost reductions we’ve managed this year and we’ve gotten through the economic environment very well. We’ve delivered on our cash flows, our balance sheet metrics and earnings. This is being done without compromising on safety, reliability or customer satisfaction. As a matter of fact, we raised the chinning bar on all of those areas during this crisis as we strive to get better at everything we do.

We continued to make investments during the recession as Nick laid out in our capital schedule, although at slightly reduced level and this supports our long term earnings growth. Our dividend at $2.12 per share is well supported in our plans.

We’re asking that you save date for a DTE Energy Analyst meeting on October 19th and we’re going to have that here in Detroit. The analyst meeting will be on a Monday afternoon and that evening is the kick off of a conference that we are co-sponsoring called The Business of Plugging In, and it’s a conference on plug in hybrids and batteries and how that all works with the electric utility industry.

The Plug In conference features a kick off dinner on that Monday night with our CEO Tony Earley and Governor Granholm is going to be speaking and you’re welcome to stay for the dinner or some or all of the plug in hybrid conference. If you’re interested in that conference the website for that conference is at www.PEV2009.com and if you have any questions about the analyst meeting or that plug in conference please email or call Lisa.

With that we’d be happy to take your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Dan Eggers – Credit Suisse

Dan Eggers – Credit Suisse

Can you just share a little more thought on the O&M expenses, maybe a little more color around why the timing was a little front end loaded as far as maintenance from the first half to the second half if there’s any true up obligation associated with the rate case based

Dave Meador

I put this in the context of what we saw playing out last fall. We got our groups into the rooms and said listen, we’ve got to get prepared for what’s going on in the auto industry and the local economy and we can’t have a cost reduction program that is back end loaded, we’ve got to do everything we can to do to front end load this and engage our employees. Then also the goal was to make sure that this was as sustainable as possible so we told the groups we know we’re moving fast here but we want 80% of this sustainable and as front end loaded as possible. Some of this was by design.

Then we also have some timing issues that are playing out when you look at this year over year whether you look at plant maintenance outages and things like that. I would describe this as we wanted to make sure with this economy that we were not in a situation where we were trying to dig out of a hole in the second half of the year and the marching order this had to be a January 1st cost reduction and I think that sets the context and background of how we set this whole thing up.

Peter Oleksiak

The main part of the timing, a little more than half of it is tied to restoration. A lot of that, the restoration expense is pretty comparable that we’re forecasting this year versus last year. At the front end of the year the first half has been about $25 or $30 million lower. Right now we’re projecting that to be back on budget and on top of that we do have a restoration tracker so we’re essentially whatever over and under we incur will be offset in terms of revenues.

Dan Eggers – Credit Suisse

With O&M coming down so much in the midst of the rate case proceeding is there any sort of adjustments we need to be aware of to your rate case? I guess that comes down to getting the final order done.

Dave Meador

No, I don’t think so. We will have to lay out as we work through this is really the nature of the one time items which I think is an important component of what we’re doing here.

Dan Eggers – Credit Suisse

The one timers you mean kind of layoffs and benefit reductions or can you help me out on one timers?

Dave Meador

An example would be we had a property tax settlement that is flowing through the income statement and that won’t be repeated. We also had some benefit reductions that were one time in nature that won’t be repeated. We’ve done a couple other things that I think would be not repeatable as we go through this and this gets back to this we wanted 20% of this non-sustainable, 80% sustainable as we went into that.

As the load got worse we dug in and as we dig in on cost reductions I think we ended up with higher one time items to offset some of the load loss this year.

Dan Eggers – Credit Suisse

If we look to next year and off of this year’s base line with your new projections for O&M, should we go back to a normal inflation rate or is there more process improvement that you grow at a slower rate?

Dave Meador

I think the first thing you’d have to do is add back the one time items that we’ve described. We’re all waiting to see what happens with inflation but I know, I’ll return to wage inflation as an example, we didn’t provide any salary increase to our non-rep employees this year as an example. We know we’ll get back to wage inflation.

I would also offer that we feel that we are not done on cost reductions. The more we work on continuous improvement and trying to excel at everything that we do I think that we continue to get a sense that there is more there and that we should have the ability to offset any inflation that shows up.

Dan Eggers – Credit Suisse

Some updated color on where bad debts are, how that’s tracking given the high unemployment rate in the Detroit area. Along those lines, with the $9 million hit from auto bankruptcies in the second quarter will some of that reverse if GM at all actually paid their bills before year end?

Dave Meador

On the first question, when we gave guidance we forecast that our bad debt expense would be flat year over year. Its working out that way, it’s primarily flat. I think we had slight charged earnings in the second quarter. Everything that we see when we look arrears and bad debt expense right now is that even with unemployment rising we’re holding the line.

Our team is doing a good job helping people get assistance if they qualify and if they don’t qualify we’re dealing with credit as prudently as possible in terms of being firm with customers on payment. I would just say we’re doing a good job on bad debt expense in the light of unemployment rising.

In terms of the receivable question that you asked, we did not reserve for General Motors so I think our anticipation is that we are going to be paid for that pre-bankruptcy receivable. The net amount that I described was predominantly Chrysler plus a handful of other suppliers and non-automotive related suppliers.

Dan Eggers – Credit Suisse

That money is likely not coming back.

Dave Meador

No.

Operator

Your next question comes from Paul Ridzon - KeyBanc

Paul Ridzon - KeyBanc

You outlined at Trading what the quarterly and year to date mark to market activity’s been within that segment.

Dave Meador

If you go to slide 23 it details the year to date and the quarter year over year, realized, unrealized and on O&M.

Peter Oleksiak

It also gives the economic net income accounting.

Paul Ridzon - KeyBanc

Can you run through the O&M items that you consider one timers?

Peter Oleksiak

I can give you an example, for the benefits we had a change in our vacation policy and actually we were able to take a one time accounting benefit due to that that was a big piece.

Dave Meador

I would say that we also have the whole slew of other things that you would do in an environment like this from reduced travel to we had a higher increase, too we didn’t give raises, we are limiting training to critical training and things that you would normally do and that everyone has done in a deep economic environment like this but things that you can’t do on a sustainable basis if you’re going to be growing a healthy and vibrant company. We just had to take basically what I described as a spending pause and that would be in addition to the benefit change and the property tax.

Operator

Your next question comes from Neil Stein – Levin Capital

Neil Stein – Levin Capital

I don’t know if you gave out this number but the trailing 12 months ROE at Detroit Edison.

Peter Oleksiak

It’s actually slightly over 11%.

Neil Stein – Levin Capital

Any concern with respect to the rate case as far as how that will impact the outcome?

Peter Oleksiak

The trailing ROE?

Neil Stein – Levin Capital

To the extent it’s above what the staff recommended and what you’re actually asking for.

Dave Meador

No, I don’t have a concern. When we provided guidance the guidance that we provided for the share, for example, we were under earning it was a 10.4% ROE and MichCon was 9.2%. As its playing out Edison is trailing towards its guidance ROE which is we are not going to earn our authorized return this year and certainly MichCon is not. I don’t have that concern.

Peter Oleksiak

Some of that is impacted by the one time items.

Operator

Your next question comes from Mark Siegel – Canaccord Adams

Mark Siegel – Canaccord Adams

I was wondering if you could provide an update on the progress being made in your smart meter deployment, whether or not you plan on applying for any stimulus funding and what your plans for broader deployment might look like going forward.

Dave Meador

We are piloting our AMI program right now. We initiated a 10,000 meter pilot that is our first phase and that’s wrapping up so we’re moving into our second phase of our pilot program. As we look at our forward year capital we’re going to have to decide how aggressively we implement AMI or not AMI and one variable is the one that you mentioned which is the economic stimulus package.

We will file for an application for the economic stimulus. We are hoping that we will get some of this funding through the stimulus package which might accelerate some of what we’re doing.

Mark Siegel – Canaccord Adams

Any plans for broader deployment would likely be 2010 or beyond scenario?

Dave Meador

Yes, and directly tied to the stimulus money.

Operator

Your next question comes from Danielle Seitz - Dudack Research Group

Danielle Seitz - Dudack Research Group

I don’t know if I understood well but you said that Trading might be better then what you originally anticipated by about $20 million or did I not understand it correctly?

Peter Oleksiak

You understood it correctly.

Danielle Seitz - Dudack Research Group

I’m assuming that because you didn’t change your assumptions that the $20 million will be coming from MichCon and Power & Industrial projects?

Peter Oleksiak

Right.

Danielle Seitz - Dudack Research Group

That’s how you visualize it now.

Peter Oleksiak

Yes.

Danielle Seitz - Dudack Research Group

You anticipate that actually when that O&M might be about $50 million for the rest of the year, something like that?

Peter Oleksiak

$20 million for Energy Trading.

Danielle Seitz - Dudack Research Group

I was thinking for O&M, Operating and Management expenses you anticipated to be up by at least $50 million in the second half?

Peter Oleksiak

Yes, the timing is between $50 million that we’ll reverse out.

Operator

At this time there are no further questions. I’ll turn things back over to you Mr. Meador for any additional or closing remarks.

Dave Meador

I thank everybody again for joining us this morning. Again we’re really pleased with the way the quarters worked out. On the analyst meeting that I talked about in the Plug In conference I’d encourage you, we will be putting out a save the day card. I encourage you to consider coming to Detroit. We think we’re going to put on a good meeting and if you could stay for the dinner that evening or the Plug In Conference after that that would be great also. We look forward to seeing you. Thank you.

Operator

That does conclude today’s teleconference. Thank you all for joining.

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