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DTE Energy Company (NYSE:DTE)

Q4 2009 Earnings Call

February 23, 2010 09:00 am ET

Executives

Gerry Anderson - President & COO

Dave Meador - CFO

Nick Khouri - VP & Treasurer

Analysts

Greg Gordon - Morgan Stanley

Paul Ridzon - Keybanc

Leon Dubov - Catapult Capital

Paul Patterson - Glenrock Associates

Mark Siegel - Canaccord Adams

Yiktat Fung - Zimmer Lucas Partners

Daniele Seitz - Dudak Research

Operator

Good day and welcome to the DTE Energy, fourth quarter and year end 2009 earnings conference call. Today’s conference is being recorded. At this time I would like to turn the conference over to Mr. Gerry Anderson. Please go ahead, sir.

Gerry Anderson

Well good morning and welcome to everybody and before I get started I want to remind you we have got a Safe Harbor statement that is on slide 2 of our materials.

With me here this morning are Dave Meador, our Chief Financial Officer, Peter Oleksiak, our Vice President and controller, Nick Khouri, our treasurer and Lisa Muschong is our Director of Investor Relations.

Moving onto slide 4 I am going to start the discussion this morning by recapping 2009 and in particular I want to look back on three priorities that we set out early last year that were key to our success and I think also are significant for this year.

On slide 5, the first of those priorities had to do with regulatory strategy and I think you are all aware that 2009 was our first year active under the legislation that was passed in Michigan in 2008 and we had a number of key regulatory proceedings that we needed to work with Michigan Public Service Commission and specifically we put in place our renewable energy and energy optimization plans mid-year last year and as you will see later in the discussion both of those are now turning into significant investments areas for the company.

We also worked on the Detroit Edison rate case across the year and early this year in January 2010 we finalized the rate case and have characterized that as a constructive outcome. We are also working our way through the MichCon rate case, we began work on that in the middle of the last year. We implemented rates January 1st and currently are working toward resolution of the case around mid-year and all signs are that that’s on track for a constructive outcome.

Second priority that we set out last year had to do with continuous improvement in cost reductions and that proved to be really key last year. The goal we set out for the company was to sharply step up the pace of work on this to help deal with the economic crisis and the load loss that came with it. I think we've talked before about the fact that we targeted $130 million in cost savings in 2009 and looking back we achieved that and we were able to do that while actually driving our operating and reliability and safety metrics in the right direction, so that was a key last year and as you will see one of our goals this year is to build the momentum that we came out of 2009 with on the CI front.

Finally, in terms of financial performance, the goal coming into last year was to preserve our financial strength and doing that to emerge from 2009 with the ability to focus again on growth. And I think you've seen from our earnings release that we brought 2009 in at $3.30 which was actually a 14% year-over-year growth versus 2008. And importantly, we exited the year with a strong balance sheet in place, actually stronger than we entered. I think that met our primary goal of preserving the company's strength and positioning it for success in 2010 and beyond.

Slide six focuses on the regulatory structure that we have in Michigan and the left hand side of the slide really talks about how we entered last year. We had 11% of ROEs in place at both utilities and still do. Filing use rates had been passed in late 2008. Those were targeted at minimizing regulatory lag. They also had key tracking mechanisms in place for some of our more volatile costs, fuel and purchase power, electric choice, storm, line clearance and then as I just mentioned we had new provisions in place that targeted renewables and spending on energy optimization.

We had evolution of the regulatory structure during 2010 and the middle column of this slide really addresses that. I think the most important new evolution is revenue decoupling. The whole goal here was to put in place a structure that removed any disincentive to fully work on energy efficiency and energy optimization and that was a joint goal between our company and the public service commission. That we have a decoupling structure now for Detroit Edison that was approved in the case that was finalized in January.

Decoupling is included in the MichCon rate case filing and we expect decoupling to come through at MichCon as well. So that’s been an important evolution in the structure for the company this year. We also have an uncollectible tracker now at Detroit Edison that’s analogous to the one that we have at MichCon. There’s on 80-20 split which means that 80% of the uncollectible expense is covered by the tracker with 20% borne by us. We’ve been working on the whole area of uncollectibles with our regulators to address this in a creative way, in the right way and we think this tracker gives us the right incentives to do just that.

So the net result of the evolution is described on this slide. I think its really laid out on slide 7 and that is that the perception of Michigan Regulation and its quality and in this case the ranking of where Michigan falls in terms of state utility regulatory environments has moved materially over the last couple of years from one of the lower tiers to one of the upper tiers or more constructive tiers. And that’s been positive for us but we know that maintaining a constructive regulatory relationship requires that we do our part. And one key way to do that is to focus on cost controls and making sure that rate increases are workable for customers.

And that really moves us on to slide 8. I said earlier that cost reductions driven by continuous improvement were a key for us last year and you see the absolute O&M numbers 2008 and 2009 on the left hand side of the slide. In absolute terms we were down $65 million, that $65 million is a net of the $130 million reduction plan I mentioned earlier offset by increases in healthcare, pension those were the two largest offsets. But despite increases, a lot of companies saw in those costs we are able to log an absolute reduction in costs and that helped to mitigate both the unfavorable economic conditions and to help reduce future rate increases.

Our focus on this is going to continue in 2010 as I’ll talk about in just few minutes.

So I think we're exiting 2009 with a solid financial foundation in place and I think we're positioned to have another solid year in 2010. As you can see on the next slide, slide 9, our last year finished at $3.30 and our guidance, the right bar for 2010 is $3.35 to $3.75 and we are comfortable presently with the mid point of that range and assuming we hit the mid point, it would provide 7.5% growth year over year from 2009 to 2010 and if you look back a year further, it provides 11% compound annual growth from 2008 to the 2010 mid point. That growth is consistent with what we have been saying for years that we think we have the ability in the company to provide 5% to 6% long-term earnings per share growth at DTE.

Our balance sheet also exited the year in solid condition. You can see on slide 10 that both of our key balance sheet metrics improved in 2009. On the top left, you can see that our leverage declined from 53% at year end ’08 to 51% at year end ’09 and you can see that our FFO to debt ratio improved from 23% in 2008 to 24% last year. Those moves in leverage and FFO were possible because we had strong pre cash flow generation of the company and that was really the result of having the whole company focused in 2009 on cash flow and the fact that we were pretty careful with our capital expenditures given the environment.

Given the movement in our balance sheet, S&P recently revised our outlook from negative to stable. The negative came on really when the economic crisis emerged and they have seen fit to pull that off given the performance last year.

In 2010, looking at the right bars of each of those bar charts, we expect to move our leverage down a bit further from 51% to 50% and maintain our FFO to debt at 24% which is really at the strong end of our range for FFO to debt given our debt ratings and our debt rating targets.

As the bottom two bullets discuss, we do intend to fund cash flow and capital expenditures of the company with both debt and equity overtime. However, we don’t expect any public equity issuance in 2010. We are going to have some new shares, as we'll talk about it a bit later but we expect to do that within our pension plan, our direct plan and our employee benefit plans. We will discuss the details of that in a little bit.

So I am going to move and now a recap of 2009 to a review of our priorities and performance in 2010. Slide 12 lays out the six priorities that we have described to the company for 2010 and I want to take just a minute on those to give you a sense for how we are thinking about the year.

Top left is the first priority I want to discuss and that’s employee engagement and we're really focused on managing this is a top priority in every part of the company and well that may sound like a soft priority for the company, it really is not. The focus and the discipline of our employee base proved to be critical to our performance last year and our goal in 2010 is to maintain that focus and momentum and to build a product. So we really see that as a very important goal.

Top right, customer satisfaction I have described is the top priority in the company in 2010. Our goal is to take a sharp step up in customer satisfaction and close half the gap between our current ranking in first quartile this year. We're not yet first quartile. We've told our leadership and our people we need to get there.

We see driving customer satisfaction to first quartile and eventually first decile as one of the keys to keeping support for DTE Energy strong in Michigan again. So we are going to be after moving customer satisfaction north materially this year as the top priority in the company.

I would say a close second to that is middle left which is continuous improvement and I’ve already said that this was very important last year. Our goal this year is to broaden and deepen our work on this effort and over time make this a distinctive capability at DTE within our industry. I think also that our work on this is key to keeping our rate increases manageable and along with our working customer services important to keeping support for DTE in Michigan strong.

Middle right on the political and regulatory front, I've already said that I think we have constructive policies in place now in Michigan that were part of the 2008 legislative package. Our job this year is to do the work that's needed to maintain those constructive policies and the main ways to do that I've already discussed which is to focus on costs and customer service. We also need to keep our eye on policies in Washington DC although frankly a lot of the energy related work has slowed down significantly from what we might have expected six months ago.

Bottom left, our fifth priority focuses on financial growth and value creation. We've described this to our people as resuming a sharp focus again on our ability to grow. We took a more conservative approach to this in 2009. As I've said earlier, the goal last year was to hold our own and exit the year in a position where we were ready to grow again this year.

We are in a position to do that, both in our utilities and in our other business lines. I also think it is recognized that this is an important role that we can play in the state, both from an economic development perspective and from the perspective that this state right now needs Michigan headquartered companies that are growing, both within the state and across the region and across the country. So we believe we're in a position to do this and this is an important role we can play in the state.

Final priority, the sixth is financial performance and that as stated is to resume a focus on steady earnings growth while keeping our balance sheet strong which leads me directly to slide 13. I'm going to focus on the right hand side of this chart, which really lays out the source of the financial growth and earnings growth. As you can see there is going to be a significant step up in capital investment at DTE, in the coming three years from 2010 to 2012 versus the prior three years 2007 to 2009. That growth in investment is driven primarily by the increase you see at Detroit Edison which is depicted in dark blue, where average investment or I guess the three year investment rises from $2.6 billion to roughly $3 billion to $3.5 billion which is a 15% to 30% increase for the period.

So the point here is that the scale and nature of the investments that we're taking out of the company does support the annual 5% to 6% earnings per share growth rate that we've been talking about and what I want to do in the next few slides is give you a feel for the nature of the investments that we're making, that are summarized on the right hand side of slide 13.

So moving on to slide 14, which discusses the investment agenda at Detroit Edison. Top left, 2010 is our first year of significant investments under the renewable portfolio standard here in Michigan. I mentioned that we put that in place in the middle of last year, we spent much of the second half of last year planning and beginning the contract, and this is the first year of significant investment for us. We plan to invest $300 million to $400 million in renewables over the next three years with a $100 million of that happening in 2010.

Top right, we continue to make significant investments to meet clean air environmental requirements in our generation fleet. Much of that's happening at the Monroe Power Plant, our 3,000 megawatt coal plant that's pictured here. Over the next three years, we will spend $500 million to $600 million on this clean air compliance, $75 million of that in 2010. 2010 is really a in between year as we transition from two new scrubbers that we've completed at the plant to our next round of investments in scrubbers at the Monroe Power Plant.

Bottom left on this page, we're also making sizable investments in energy optimization. These are now mandated by the legislation passed in 2008. So, it's also something that we're anxious to work on because we think these are great investments to manage particularly residential affordability. Here in the State, we invest in commercial and industrial as well, but I think that we know that there are a lot of residential customers under pressure here. We're going to invest $100 million of capital over the next three years, $25 million in capital this year. The total investments will actually be above the $100 million but not all of it is capitalized.

Finally bottom right, all of the investments I just discussed in renewable and environmental and energy optimization are over and above our ongoing investments in base infrastructure, which will total $2.1 billion to $2.3 billion over the next three years. It's about $750 million a year.

We also believe we exited 2009 with some good investment opportunities in our other business lines and I'll use the next few slides to discuss that.

On slide 15, we discussed our gas, storage and pipelines business. Top left of slide 15; you can see that this is a business in which we've had a history of strong net income growth. We finished last year at $49 million in earnings, and as you can see from the first bullet under the bar chart there, we expect 2010 to be another year of earnings growth and we have guidance in this segment of $50 million to $55 million.

If you look longer term in this business line, we do expect to continue to see this growth pattern and that growth is really coming from three sources and they are all tied to the assets that we currently have in place. The first service of growth relates to the Vector Pipeline which runs from Chicago into our storage fields in Michigan. We continue to see opportunities to expand the Vector Pipeline. Those expansion opportunities are driven principally by changes in gas flow into Chicago and the Mid West from the Rockies and the mid-continent area, significant changes in gas flow which are benefiting the vector pipeline and our storage fields.

Second driver of growth is the millennium pipeline. I think you know we recently put that pipeline into operation and as luck would have it, that pipeline happens to overlay the Marcellus Shale, which has emerged as one of the truly large gas finds in North America and the world. I'd like to say we planned it that way. We really didn’t, but we are now seeing the Marcellus Shale as a significant driver of demand for the millennium pipeline and expansion of it because that Marcellus Shale gas needs to move on to markets in New York, Boston and the Northeast more generally and Millennium is in a position to play that role.

And than finally, we do see continued development of Michigan storage. Development in that storage is tied to markets that are served by both the Vector and the Millennium Pipeline. So we see end users in the Chicago and Wisconsin areas and in the northeast reaching back to Michigan for their storage needs, that’s really driven by the fact that Michigan has geology which makes storage expansion here either the most economic or among the most economic in the nation at this point.

Slide 16 provides an update on our power and industrial business. There are two primary areas of activity in this business. In the industrial business, this area is providing a strong uptick in earnings in 2010 and that’s coming because this business is benefiting from the broader recovery in the industrial sector that we're seeing across the country especially in the steel sector. You can see from the middle bullet on the industrial discussion that we’ve upped our operating earnings guidance in this segment to $60 million to $75 million. That’s up sharply from the overall P&I earnings last year of $35 million and the outlook that we provided in the fall of last year of $40 million to $50 million. And the increase is driven as I said by the broad industrial recovery, particularly the demand for coal and coke that we supply to steel facilities across the country.

The most significant area of investment near-term in the power and industrial business is in renewables on the bottom half of the page and the most significant investments here are coming from conversions that we're undertaking of smaller coal fire plants to waste wood generation. So just to give you a feel for this we have a plant in Wisconsin that we're currently completing a retrofit on that will take operational in 2010 to meet the Wisconsin RPS requirements. We reached an agreement to start retrofit of a similar facility in California this year. We expect to have that operational in a few years, we already operate similar plants in California and Louisiana and have two similar facilities currently under development. So, this conversion of coal plants to wood fired plants to meet state RPS requirements is a niche that we like and think we can both add value to and produce premium returns and it will be the principal area of new investment in this business line.

Last business that I want to comment on is our unconventional gas business. As we’ve described previously, this is a business where we have in the past developed and sold assets at healthy premiums. You may recall then in 2007, we monetized our Antrim shale assets for $1.2 billion and then in 2008 we followed that with a monetization of our core Barnett properties for $260 million and a very healthy IRR and monetizing assets in this segment is still our plan. We develop them and then monetize the assets when we feel the market provides a good condition to do that.

Given that we focus more on asset values than we do on net income and I think the real news in this segment is on the left hand side of the slide, in particular on the top left bar chart there. You can see that our proven reserves have moved up 40% from 167 Bcf to 234 Bcf. Our overall reserves had moved up over 10% when you combine proved and probable.

On the bottom left here, we know that you can and will do your own valuation. So we are simply trying to give some indication of what this increased improved reserves means from a financial perspective and you can see that when we combined our proved reserves valued at roughly a $1 to $2 in Mcf and our probables at $0.50 to $1, you end up with a valuation of 400 to 700. the point is only that we think we have significant value in these reserves that we will target monetizing when the market is right.

So just in terms of near-term plans, on the bottom right of the slide, we are going to continue to invest roughly $25 million a year and we will then monetize when the time is right with the goal being to fund other investments at DTE and offset the need to issue equity.

So, in conclusion before I turn things over to Dave Meador, on slide 18 I think we were successful in meeting our goals in 2009 and posted a really solid year in a tough environment. We have got plans in place to achieve strong financial results in 2010. The regulatory structure in the state is constructive and we are focused on continuous improvement operational excellence and customer satisfaction to maintain that constructive environment.

We do continue to see good investment opportunities in our non-utility segments and when you put that whole description together we think we have a plan that makes us confident, we can achieve the 5% to 6% earnings growth that we have been talking about for sometime.

And with that I will turn things over to Dave Meador.

Dave Meador

Thanks Gerry and good morning everybody. I will start on slide 20 where I will provide our 2010 operating earnings guidance. As you can see on the slide the total is $563 million to $633 million which is almost $600 million at midpoint which is 10% higher than our 2009 operating earnings of $543 million.

Let me walk down this page starting with Detroit Edison’s guidance of $405 million to $435 million, as you know the rate case for Detroit Edison was completed in January and as Gerry outlined it included decoupling and a new bad debt tracker for Detroit Edison. Ongoing cost control will be an enabler for Detroit Edison reaching its goals as it will be for throughout the company. MichCon on the next line will step up its earnings from $80 million last year to $95 million to $105 million in earnings in 2010 and this is going to be driven by self-implemented rates in January.

As Gerry talked through, the final case will be resolved in June and we expect this will also include decoupling for this utility. Additionally ongoing cost control will be a key enabler at MichCon. Gas storage and pipelines after a very strong year in 2009 is projected at $50 million to $55 million and this is driven by existing projects. Power and Industrial will see a significant increase in earnings as we just talked through to $60 million to $75 million in earnings driven by new projects coming on line as well as higher contribution from coal and coke sales to the steel industry.

As you can see in 2009 column here, trading had a great year in 2009 earning $75 million and as we discussed that the October analyst meeting we expect trading in 2010 to return to a normal earnings level of $45 million to $55 million and the holding company after experiencing one time savings last year returns to normal expense levels of $85 million.

So the total is almost $600 million at net point or $3.55 per share which is a 7.5% share increase over 2009. And this is with a projected 168.6 million shares outstanding and I will talk about equity issuances a little bit later. As we said last year, we positioned the company to return to growth at the end of the recession that’s exactly what we are doing.

On slide 21 is a summary of Detroit Edison’s load for 2009 compared to 2008 and we also give you a projected variance to 2010. We believe the economy has troughed and we are seeing positive signs such as unemployment which has peaked and now is slightly improving. We know there will be a long tail on improvement here, but we are seeing improvement. While we are not directly exposed to the economy due to decoupling and trackers, we still keep our eye on the positive events and indicators and we are seeing them such as improvements in steel and vehicle production and new investments in Michigan like General Electrics announced $100 million investment in a new technology center that will eventually employ 1000 people with very well paying professional jobs.

2009’s load came in as expected and included some positive non-industrial recovery at the end of the year. For 2010 we are projecting a rebound in industrial load of 9% year-over-year and this is lead by the steel and auto sectors as we see them leading our way out of this recession. We are still planning conservatively and even though we are not dependant on the economic recovery, we are predicting a 1% sales increase in load year-over-year and that’s net of energy optimization and when we talk about energy optimization, that’s in Michigan what we call our energy efficiency program. If sales rebound at a higher level it will provide a direct benefit to our customers under decoupling.

On slide 22, let me take you through some of the details for 2010 starting with Detroit Edison. For both utilities we're focused on achieving our authorized return on equity which is 11%. For Edison the guidance of a $405 million to $435 million includes the full year benefit of rate increases and normal weather after a cold summer last year.

Going forward with decoupling, we will not be exposed to weather Detroit Edison as we have been in the past. Partially offsetting that will be higher benefit expense, incremental O&M related environmental projects and higher depreciation and then finally the other category here includes one time cost savings in 2009 which are not repeated in 2010 inflation and that’s partially offset by ongoing cost reductions.

On slide 23, we'll shift MichCon and you'll see that MichCon is expected to return to full earnings power this year with earnings of $95 million to $105 million and that’s driven by the self-implementation of rates and ongoing cost control. We expect this rate case to be completed in June as we've mentioned.

We also expect lower margins here due to conservation and customer comps and storage revenues. Ongoing continuous improvement work will partially offset higher benefit cost and other inflation and one time savings that we experienced in 2009.

On slide 24 is our cash flow guidance. As Gerry laid out, the cash flows in 2009 were very strong. In 2010 cash will be down slightly due to one time tax savings in 2009 that won't be repeated and higher working capital requirements in energy trading. Capital spending will increase $300 million as we fund our growth plan here and I'll go over capital on the next slide. And then last, we will issue about $100 million of debt and $200 million in equity to support our growth plans.

On slide 25, is the capital expanding summary, which shows we will spend $1.1 billion in the utilities and $300 million in our non-utilities in 2010. The total is 30% higher than 2009. At Detroit Edison, operational capital is up due to our automated meter reading project which we also anticipate receiving $80 million in a DOE grant for that program and also nuclear fuel cost is another driver in the operational capital.

Environmental capital is down slightly as Jerry explained. We're shifting here as we continue our environment scrubbing at the remaining two units at Monroe. So the environmental capital is $75 million and then renewables and energy optimization ramps up significantly in 2010 with $125 million which leads to a total of $950 million for Detroit Edison. MichCon's operational capital will increase to $130 million, driven by pipeline integrity work and that will be offset by a reduction in expansion capital as a major lateral project was completed in 2009 at MichCon.

For the non-utility businesses we're planning $200 million to $300 million in expenditures in the sister Gas Storage and Pipelines, the Power and Industrial Group and the unconventional gas group and this does include our Millennium Pipeline Equity infusion that we will make this year of $60 million.

On slide 26, I just want to briefly cover our expected 2010 equity issuances. As we outlined, we successfully maintained our balance sheet strength in 2009 and we intend to keep our balance sheet strong as we move through the period of high utility capital investment.

Our growth investments continue to outpace our depreciation and we expect to fund that growth with a mix of internally generated cash, debt and equity. For this year we'll continue our practice of issuing about $100 million in new shares to fund drift and our benefit plan.

So we expect to issue another $100 million in equity into our pension plans which will improving our funding in our pension plans. The level of equity issuances that you see on the slide are in line with what we communicated at our last analysts meeting in October.

So let me wrap up on slide 27 and then we'll be happy to take your questions. As you would expect, we are very pleased with both our results in 2009 and the guidance we're providing you for 2010. We've shown over the last 15 to 18 months that we can correctively manage in a difficult economy and we can deliver strong results. We said we wanted our balance sheet strong at the back end of the recession to resume growth and we are well positioned to the 5% to 6% annual growth which Gerry outlined.

Both utilities have constructive regulatory structures and ongoing continuous improvement opportunities which will continue to enable us to deliver our authorized returns. The utility plans that we've laid out for you are driven by mandated investments that we have to make. They're not driven by the economy or load growth as it is in other territories and our non utilities have meaningful low risk growth opportunities which we will continue to invest in that provide diversity in earnings and geography.

As we've talked about all last year, we've build our muscle around continuous improvement and we're going to continue to do that which will drive improvements in O&M, capital efficiency and customer satisfaction with a real focus on customer rates. And finally our dividend of $2.12 per share is attractive and when added to our earnings growth provides a very attractive total shareholder return.

With that summary we'd be happy Elizabeth to take questions now.

Question-and-Answer Session

Operator

Thank you. The question-and-answer session will be conducted electronically. (Operators Instructions). We'll take our first question from Greg Gordon with Morgan Stanley.

Greg Gordon - Morgan Stanley

Can you give us a little bit more detail around the assumptions with regard to the power industrial projects improvement? First what new projects are coming online and if you can give us some sense of what the underlying level of you think sort of ongoing earnings power is there and sort of what the potential drivers of volatility are there if we want to sort of look at milestones of the economy.

Gerry Anderson

So the real drivers to the increase this year was full utilization or near full utilization of the facilities to service steel industry. That’s the primary driver. We contracted our coke capacity and increased use of the coke capacity and that’s what took us up to the $60 million to $75 million.

I guess the broadest way to talk about ongoing earnings power is do we feel comfortable at that level for example in 2011 and our take rate now is that we do think the earnings level at $60 million to $75 million is sustainable into 2011. There'll be some change in mix. We're going to have essentially 100% of our coke on long-term contracts in 2011, but we are going to see new projects coming in, so although the pricing in the long-term contracts will be somewhat lower than what we have termed up for this year, we're going to see backfilling of that by new projects coming online and so we expect the level to be sustainable in the next year.

Greg Gordon - Morgan Stanley

When you say, you have the coke output under long-term contract, what are the durations of those contracts approximately?

Gerry Anderson

So we've got a 100% this year under take up really now and we got 90% contract to that particular pay next year and the terms on those tend to go out in to the 2015 to 2017 time frame. So they are five, seven year contracts or longer I think in some cases.

Greg Gordon - Morgan Stanley

So you have some indemnified yourself from a potential future short-term pull back in steel capacity utilization because they are take or pay and they are for multiple years?

Gerry Anderson

Yes, they are take or pay both this year and those future contracts.

Operator

We’ll take our next question from Paul Ridzon with Keybanc.

Paul Ridzon - Keybanc

What percent of your revenue requirement do you think is kind of covered by trackers or decoupling at this point?

Gerry Anderson

Well, I’m looking around the room here Paul for anybody who has a perfect number at their fingertips. I’m looking at Don Stanczak, Paul who is one of our regulatory folks here in the room, maybe he can try and if we don’t nail it right, we could get back to you later with a better answer.

Don Stanczak

So you look at uncollectables for both utilities, Edison its base is about $66 million, Michigan its current base is $37 million, I think that will go to about $70 million when we get the final order in the rate case. Edison also has the restoration tracker, that’s about a $117 million and the volume clearance tracker that’s about $47 million and then we have decoupling for Edison and the choice tracker, those are harder to say what the base is because they are on revenue. There is not really a cost associated with them, but that sort of gives you a picture of how many of the dollars are covered by trackers.

Gerry Anderson

And of course we have fuel trackers at both…

Don Stanczak

It's very large and right from Michigan, the fuel tracker is far and away the biggest part of the revenue requirement for Edison, it's about a third of the revenue requirement.

Paul Ridzon - Keybanc

What do you view as the biggest determent to earning you authorized?

Gerry Anderson

Biggest challenge to earning it?

Paul Ridzon - Keybanc

Yes.

Gerry Anderson

I would say at this point we need to manage our cost picture. When you do, we need to bring our investments in as targeted and manage our cost picture, and Paul as I think about the structure that we have in place in Michigan now, we have a structure that has fair returns embedded and has good provisions for the timeliness of getting capital and to be earned on and I think the primary thing we need to deliver is very, very good cost management and excellent customer service. And if we deliver those two and I mean, we got our people focused manically on those two, because I think it is those two that will continue to earn you constructive regulatory support and if you let those things fall away, you'll loose some of that constructive support as you should. So I think the primary things we need to deliver is really good cost control and good customer service and then we need to manage the regulatory process of filling new cases and working those through with the public service commission in a sensible way too as we bring new capital on line and new investments online.

Paul Ridzon - Keybanc

As you look out over the next couple of years at the equity needs, I mean between your DRIP programs and potential asset sales, do you envision coming to market with a secondary and then just as a follow-up on that, besides Barnett, where do you see the monetization opportunities?

Gerry Anderson

So I think another way to ask your question is, if we were successful with the significant monetization, could we get through the next few years like we do this year using pension plans and DRIP programs. I think the answer is if we're successful with monetization, the answer is yes, we could. And if we don’t strike monetization we'll probably be doing something in addition to those. So our goal obviously is to find the right time to monetize and use that to offset equity requirements. We haven’t talked about any other monetization opportunities. There are some things we're thinking about here in the company, but I don’t think we're willing to be public with them at this point.

Paul Ridzon - Keybanc

And just one last question on the biomass, is there a pipeline there?

Gerry Anderson

Of projects?

Paul Ridzon - Keybanc

Yes, opportunities or…

Gerry Anderson

Yes, we've got two in operation and two in the works to bring into operation and I would say there are two more that we're working on that are very analogues that I do see a pipeline. These investments tend to be in the $50 million to $100 million of total capital from us, so they are meaningful but not overly large and we like the feel of the mix of our skills, these are conversions to coal plants which we know well, they involve both material handling, which we know well and relationships with utilities, we are trying to meet their RPS requirements, we also know that process well, so they seem to be a nice niche for us and yes we do see the ability to keep adding one or two of these a year.

Operator

Our next question comes from Leon Dubov with Catapult Capital.

Leon Dubov - Catapult Capital

Could you break up for us the non-utility CapEx, the $300 million guidance for 2010 between the various businesses?

Dave Meador

Historically, it would be about a $100 million a piece, but because of gas prices we pulled back on Barnett the $25 million to $30 million range, so if you want to reverse this, just say $25 million to $30 million for Barnett and half and half for the other two.

Leon Dubov - Catapult Capital

Also just on P&I, given that it was kind of the biggest driver of the guidance coming up, could you give us a little bit of a sensitivity as to how to look at, I know you said you are close to 100% contracted this year, but is there anything that could change there to kind of swing guidance even further up or maybe down somewhat from that business?

Gerry Anderson

We don’t feel like there is a lot of downward exposure to the range we have discussed and I suppose if we were more successful than we thought in bringing some new things online, it might add to the range but we are comfortable with the guidance we provided right now.

Leon Dubov - Catapult Capital

So are there still coke batteries that are not online?

Gerry Anderson

No, our capacity this year is sold out. We've some capacity available to be sold next year, but 10% of it, but this year we’ve contracted up.

Leon Dubov - Catapult Capital

Do you think we could see a material change in pricing for that uncontracted 10% versus what you're getting on the rest of the fleet for next year?

Gerry Anderson

Right now, we see that uncontracted 10% as an opportunity because the short-term prices, our spot prices are significantly stronger than the long-term prices, so that may be an opportunity for us to place that with some upside.

Operator

Next we will go to Paul Patterson with Glenrock Associates.

Paul Patterson - Glenrock Associates

I wanted to ask you about your FFO to debt goals now. As I recall it was around 20% to 22% for 2010, 2012 and now it looks like for 2010 you are going to be above that. Has there been a change in your goal here? Is it just that that you're doing better than expected or how should we think about that?

Nick Khouri

As you said we're focusing on cash flow metrics of FFO to debt. We're targeting now as we show here, as we define it here about 24%. That as Jerry said in his comments above the top of our range, so we're looking at somewhere between 22% and 24% moving forward and past 2010.

Paul Patterson - Glenrock Associates

So it's at the high end of the range, does that suggest perhaps that you guys have more deck capacity that you're now looking at in terms of going forward?

Nick Khouri

Well, as Jerry said, after 2010, you will see a step up in some of the capital at Detroit Edison for both environmental and renewable, so as we leave 2010 we want too make sure the balance sheet is in a good shape to support that.

Paul Patterson - Glenrock Associates

In terms of the continuous improvement, how much is there? You guys have done very impressively in that area. How should we think about that and what opportunities you might have in the future? Is this sort of a gift that keeps on giving or is there some limit to it?

Gerry Anderson

What is see there, Paul, is that people will think about cost reductions as asymptotic meaning you know you do it for a while and then it just gets harder and you know the opportunities are gone. That’s the wrong way to think about it, I don’t think that’s true. I will tell you what we are asking through our budgeting process, where people are in the first quartile in terms of the cost structure when we benchmark them versus the industry, we are asking them to absorb inflation.

That’s in most cases, people are stepping up and doing that. In other cases, where we are not in first quartile, we are asking them to absorb inflation and move towards the benchmarks and that’s just a way for us to drive ongoing productivity. And then with that we see other cost elements that you really can’t work this on in quite the same way, so pension costs for example are volatile and depend on market returns. We are seeing some new costs like the operation of scrubbers and SCRs come into our cost structure and so forth, but that’s the general philosophy. We are working with this to keep the right level of tension and pressure in the organization. And in the end, it’s really targeted at trying to manage rate increases.

Paul Patterson - Glenrock Associates

Right. So I mean are you looking at let’s say CapEx that’s allowing you to lower the operational costs or is this just I mean keep on finding more and more efficiencies in the existing business that just I guess keep on showing up, how should we think of those two?

Gerry Anderson

I think there are three categories that we're working, one would be pure operational efficiencies that have either no or modest capital investment. Second, we are looking for investments that drive cost reductions to customers, so for example, not unique to us, but people found ways to expand capacity of their nuclear plants materially reduces our purchase power cost to customers, if we find those opportunities we're going to jump on them. And then the third is the work on continuous improvement in our capital expenditure itself because we all know what drives -- our principal driver of rates over the next 5 years in the industry is capital investments. We have plenty of capital investments, but we’re really trying to make it more efficient and minimize the capital investments as much as possible to keep the rate increases as low as possible and we are finding opportunities inside those projects to drive efficiencies and deliver the same results, but at lower capital investments.

Paul Patterson - Glenrock Associates

Okay. Then finally the monetization of the gas properties, you mentioned a favorable commodity environment, I guess from hearing your comments to Paul Ridzon, you guys feel the commodity market right now is still favorable when you look out on the forward curve and what have you?

Gerry Anderson

I guess my comment on this would be that we have seen some sales of assets at favorable valuations in recent months, but if you were to follow on the question and say, well, are you guys working on something right now related to the Barnett asset monetization, the answer is no, we aren’t. We're going to continue to evaluate the environment. We do think it will provide opportunities for good monetizations down there, but there's nothing eminent.

Paul Patterson - Glenrock Associates

Okay, and then the corporate and others seem to be a little bit higher than what guys expected in 2009 and it looks like it's a little bit higher than what you guys had expected for 2010. Any long-term plan we should be thinking about there?

Peter Oleksiak

Yeah, for the guidance, this is Peter Oleksiak, we did make a contribution to our DTE Energy foundation, that’s really the change between the last guidance and the actual results, and actually from on going, we do see a step-up, there was a realignment change. It was related to when we made the purchase in MCN and MichCon. There were some legacy costs related to some of the expense around that, we hold that to the holding company, really wasn't part of our rate structure in MichCon. It's really kind of get a pure utility, we realign those costs, so, we are not expecting to see any change from that, it's mainly debt at that holding company as well as those purchase accounting related expense.

Operator

We'll next go to Mark Siegel with Canaccord Adams.

Mark Siegel - Canaccord Adams

I was just wondering if you could provide a status update on your AMI deployment and perhaps how you see that project progressing in 2010 and then lastly, when you might expect to get clarity on the DOE grant award.

Gerry Anderson

Couple of comments, last year was really a year for us to pilot the technology that we shows in two phases and we’ve been working our way through those pilots to troubleshoot the technology and find any trips and implementation that we want to know about before we do this at larger scale. The other development last year was the one you pointed to which was the DOE grant which we will match 50-50, we had I think an $89 million grant from the DOE that will be a significant source of funding for AMI work over the next few years. I think you know that in the industry, the DOE has been working its way through a couple of large initial grant recipients and our discussion with some of those folks says that that process is moving its way towards completion or is near completion now. We expect to be in the next tranche of people that they will work with on trying to bring the grant resolutions. So we’d expect to be working with the DOE late this winter and into the spring trying to finalize that and hope to come out of that process late in the spring or middle of the year where it began implementation.

Operator

Your next question will come from the Yiktat Fung with Zimmer Lucas Partners.

Yiktat Fung - Zimmer Lucas Partners

I just would like to clarify the renewals projects of the power industrial segment. These quoted with conversions; can you just give us a sense of their magnitude?

Gerry Anderson

You mean in megawatts or dollars?

Yiktat Fung - Zimmer Lucas Partners

Can you give me both and basically also the capital expenditures related to them and the earnings pick up from them?

Gerry Anderson

Sure. So, I’ll just give you rough figures. The play out in the 25 to 100 megawatt range, so there tends to be smaller coup lands that were built by municipalities or utilities that either are no longer efficient for coal use or people are beginning to look at for carbon reductions down the road, and repair those off with states that have RPS requirements, we usually can deliver these at a favorable price compared to other renewable plus they are 24/7 power as opposed to intermittent, and in terms of capital investments, they’ve also been in the $25 to $100 million range. Typically we’re using a fair amount of the infrastructure at the facility but have to modify the boiler and the fuel feed mechanisms to do the conversion. Does that answer the question?

Yiktat Fung - Zimmer Lucas Partners

Yes, do you get tax incentives for investing in these projects?

Gerry Anderson

Yes, we get incentives just like you do for other renewables, so there is a closer biomass instead of that’s out there, that’s analogous to what you would get for landfill gas.

Yiktat Fung - Zimmer Lucas Partners

And is it an upfront cash return from the government or is it kind of like the PGC that you get over time?

Gerry Anderson

So that you can with the provisions over past you can choose it either way and from an MPV perspective or value perspective it’s a toss up.

Yiktat Fung - Zimmer Lucas Partners

And what kind of returns you target on these projects?

Gerry Anderson

So, I’ll be in two specific of the projects since we discuss and negotiate with people on the other side. Our goal in this segment is been to have depending on the rich profile of projects to have after-tax returns on total capital in the 10% to 15% range.

Yiktat Fung - Zimmer Lucas Partners

And just going back to financing needs, I think during your analyst day, one of your slides highlighted that from 2010 to 2012 you expect to have somewhere around $600 to $800 million of cash coming in from equity and other items? Is that guidance still true given you strong FFO to the metrics in 2009 and your expected metrics 2010?

Gerry Anderson

I’ll put this back to Nick Khouri, our treasurer.

Nick Khouri

We did say at the analyst meeting that somewhere between $600 and $800 million of either equity assurance or monetization, that guidance still holds true as Jerry said will, we’ll have to see how both internal cash and monetization play out over the next few years and certainly as Dave said, the $200 million we’re targeting next year is consistent with that.

Yiktat Fung - Zimmer Lucas Partners

And what credit rating does the company target?

Nick Khouri

Solid BBB at the unsecure debt level for all three agencies and as you know we’re there for Moody’s and Fitch and we are looking for an upgraded S&P.

Operator

Our last question will come from Daniele Seitz with Dudak Research.

Daniele Seitz - Dudak Research

Just this one I think, are you recovering dramatically all of the expenditures, environmental and renewable expenditures at Detroit. As you’re saying or do you have to file for ratings we see?

Gerry Anderson

So when you say renewable and environmental …

Daniele Seitz - Dudak Research

On the Detroit Edison side yes.

Gerry Anderson

So the investments that we make on our forward generation fleet discover [ph] SCR, mercury controls, those are recovered through the normal reprocess. The renewables are covered differently; they have their own funding source. So you may recall that there was a surcharge that was actually implemented last year for renewables just to give you a feel for it, at the residential level its $3 a month per customer and that is going to be a flat surcharge for the duration of the program. So the rate increases associated with renewables are done. So the customers have seen it and what we do then is we use the funds that come in to finance the investments and the renewables over time.

Danielle Seitz - Dudad Research

And are you also getting revenues from the -- I mean the lower demand or 1% that your hope to achieve?

Gerry Anderson

Yes, so similar to the renewables there's a separate surcharge for the, we call it energy optimization here. Other states call it (inaudible) management or energy efficiency but there's a separate energy optimization surcharge that would also have its own revenue stream which we use to fund both the capital that goes into this program and there is a significant push in its expenses that are expensed annually and the surcharge covers those.

Danielle Seitz - Dudad Research

So if you have to put these three together, is this almost a flat sort of surcharge, there is no increases going on or do you anticipate that these revenues will grow with time?

Gerry Anderson

So the renewables is flat. That’s the larger of the two. The energy optimization, we have the majority of the fees being collected now but we will some increases in the future although its modest, I think on residential bills which might be $0.50 a bill sort of increase. So the majority if you were to look at the renewals and energy optimization combined, the vast majority are in place. We will see a little bit of increase or energy optimization in future.

Dave Meador

And then environmental. You would ask do we have a tracker or mechanism in place. We don’t but we have a long history of getting a 100% recovery in rates and we have our file and implement structure now in Michigan and if you look at Detroit Edison, their environmental expenditures will be the reason for us to be in regular rate cases and will be the fundamental driver of rates going forward.

Danielle Seitz - Dudad Research

I was wondering how long you could stay without going back especially if you're expanding your CapEx. It seems that you can stay away for at least two years as long as you get all the 0:00:38.9. Is that about what you're looking at?

Gerry Anderson

So in terms of the timing and the rate case, this is Detroit Edison, Michigan still playing very currently.

Danielle Seitz - Dudad Research

Right.

Gerry Anderson

We have not determined a date where we will go back for the next rate case. We're still evaluating the current rate case, which is fairly recent and other factors that impact us and I think when we determine that, we'll be out and communicate that. I would say the primary driver now is new capital being brought in where as we laid out, we've got significant expenditures, particularly when you set aside the energy optimization renewables which have their own stream. They tend to be in the clean air emission and the base capital, and it's really a combination of those two that would drive timing.

Operator

And with no questions remaining, I would like to turn the call back over to your presenters for any additional or any closing remarks.

Dave Meador

I wanted to thank everybody for joining us again today. As we've said in our comments, we are very pleased with our results last year and also what we have outlined for you in 2010 and we look forward to providing periodic updates during the year. Thanks again.

Operator

Once again that does concludes today's conference call and we thank you for your participation.

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Source: DTE Energy Company Q4 2009 Earnings Call Transcript
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