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DTE Energy Co (NYSE:DTE)

Q4 2013 Earnings Conference Call

February 14, 2014 09:00 am ET

Executives

Anastasia Minor - Investor Relations

Gerry Anderson - Chairman and Chief Executive Officer - DTE Energy

Peter Oleksiak - Chief Financial Officer, Senior Vice President

Analysts

Jonathan Arnold - Deutsche Bank

Andrew Weisel - Macquarie Capital

Steven Fleishman - Wolfe Research

Matt Tucker - KeyBanc Capital Markets

Michael Weinstein - UBS

Andy Levi - Avon Capital

Paul Patterson - Glenrock Associates

Operator

Good day and welcome to the DTE Energy Hosted Year End 2013 Earnings Release Conference Call. Today's conference is being recorded. (Operator Instructions) At this time, I would like to turn the conference over to Anastasia Minor. Please go ahead.

Anastasia Minor

Thank you, Nova, and good morning everyone. Happy Valentine's Day. Welcome to our 2013 year-end earnings call. Before we get started, I would like to remind you to read the Safe Harbor statement on Page 2, including the referenced forward-looking statements.

Our presentation also includes reference to operating earnings, which is the non-GAAP financial measure. Please refer to the reconciliation of GAAP net income to operating earnings provided in the appendix of today's presentation.

With us this morning, are Gerry Anderson, our Chairman and CEO and Peter Oleksiak, our Senior Vice President of Finance and CFO. We also have members of our management team with us to call on during the Q&A Session.

With that, I would like to turn it over Gerry to start our call this morning.

Gerry Anderson

Thanks, Anastasia, and good morning, everybody. Thanks for being with us, particularly those of you in the East, who may have had to fight your way through weather, to find your way to home.

We are going to take you through an agenda today that's shown on Slide 4. I am going to start with a look back on our accomplishments this past year. Then I will turn and look forward to some of our growth and investment opportunities and I think we have some interesting updates for you there today.

Now, I will turn it over to Peter Oleksiak, who will give you a financial update.

Peter Oleksiak

Let me start with the look back and I am going to frame my look back on 2013 in the context of our company's system of six priorities, which is shown on Slide 5. I have discussed this system of priorities with all of you before. This is how we run the company.

The concept is pretty simple. We are very focused at the company on employee engagement. We measure it and the notion is that if we can get people to bring a high degree of energy and focus to what we do and we can frame that energy and focus on producing great outcomes for our customers, frame it using our continuous improvement, skills to control our costs and then growing the company.

If we do those three things really well, we have a much better chance of having a constructive political and regulatory context, because our politicians and regulators care about how we treat our customers, how we manage our costs and whether we are able to tie our growth into the economic development activities of the state, and if we can combine a strong political and regulatory context with healthy growth, we produce good sustainable outcomes for you.

I certainly have learned over the past five years that if we are going to deliver you sustainable, strong financial results and do that consistently, then we need to bring intense focus to the priorities that are upstream or to the left of the financial performance shown on this page, so how we do against these priorities in 2013?

Moving onto Slide 6, I said we start with engagement, use gallop to measure their pores. They do it all over the globe and we have the highest engagement measurement in the company's history. We moved from the 78th to the 85th percentile in Gallup's global database, so we are now 5 percentile points from our goal of being a top decile engagement company.

As a result of that work, we received Gallup's Great Workplace Award. They give that out to a handful of companies that are progressing especially well in this area. Parallel with that, we achieved the best safety record in the company's history. Our OSHA recordable rate was at an all time low. We are clearly strongly into the first quartile, moving towards top decile there, which is clearly our goal as well.

On the continuous improvement front, we continue to build and train the skill set in the company that's enabled us to keep our O&M expense at 2003 levels, so we are at the same cost level we were a decade ago. Our continuous improvement program was recognized by the London Process Excellence Network. That's a worldwide continuous improvement on process excellence organization, recognized as the best process improvement for example, over the past two years.

One of the places we trained those skills on was reducing the cost of renewable resources. The construction costs are down, purchasing costs are down. Locations are producing higher capacity connectors. As a result, we are able to recently reduce the renewable energy surcharge, which was good for our customers.

Speaking of customers, both of our utilities are in the top quartile of J.D. Power's customer satisfaction rankings, which is a good outcome, but frankly we are firmly focused on being in the top position of both of those rankings and that's what we have our people focused on.

One of the things that we need to do is not drop the ball. When we drop the ball heavily, people complained to the Public Service Commission. You can see that our levels are down fundamentally in recent years. We are also investing significantly in electric system reliability an additional 50 million this past year. Those investments are really working. I can tell you we are going to accelerate those to bring our system reliability up to really excellent levels.

Moving onto Slide 7, in the political regulatory arena, I am really pleased with our ongoing interactions with both, the Schneider administration and the Michigan Public Service Commission. We continue to play an active role in the policy discussions about Michigan's energy future. I believe those discussions will yield good results. In parallel with that, we continue to work on our strategy to minimize rates and rate increase in the state. You may have seen that we actually decreased electric rates materially on the first of the year on the order of 6% on average for customers and there's more of that coming as I will discuss later.

We also were a big participant in what's known as pure Michigan business connect. It's a program to buy more from Michigan companies, spent over $800 million with Michigan companies. See that the goal we set with the governor by 30%. This was a big deal for economic development on the states something we are really happy to be peered with the state in pursuing.

On the growth front, we invested over $1.5 billion in our two utilities, double the rate of depreciation. I'll talk about the areas in a bit. Significant progress on the non-utility front too, I'll talk about some future investments, but just the highlight from the past year, big year for investment in our gathering assets around our Bluestone Pipeline. It's has become a significant new growth area for us.

We placed our seventh REF unit, reached an agreement on the eighth and we are working on the ninth, and we also constructed a large new renewable project that will be going operational here over the next week or two.

Then finally on the financial front, our operating EPS came in at $4.09. Our guidance mid-point, most recently was $4.05, we came into last year with a mid-point guidance of $4.00, so that was a good outcome.

We earned our allowed ROE at both utilities, increased the dividends 5.6%, were upgraded at all three agencies, so from a financial perspective, I felt good about the outcomes for the year.

Moving on to Slide 8, the next agenda item, I just said 2013 was a strong year. I entered 2014 with a great deal of confidence as well. I think this can and will be another very good year for the company.

I feel we are extremely well positioned as we work our way into 2014, so I want to turn to a look at our future prospects, beginning with our earnings guidance for the year on Slide 9.

We provided 2014 guidance last fall with a mid-point of $4.27. We've revised that guidance upward. The mid-point of the new guidance is $4.30. Assuming we achieve that, 2014 would be our sixth consecutive year of healthy earnings per share growth.

We've also been growing our dividend in parallel with the earnings. You can see that dividends have been growing at about a 5.5% clip and we intend to continue to grow dividends in parallel with our earnings with the earnings grow.

Finally, as you see there in the bottom of the slide, we are targeting $1 billion in operating earnings by 2018. That's the plan we are working and we are confident we will get there.

Now the environment in Michigan, our home or headquarter state is, I think, supportive of the sort of growth we are talking about.

If you look at Slide 10, the Michigan economy continues to show good strength. For example, temperature normal, electric sales overall last year were up 2%. If you look at the industrial component of that, industrial sales were up 4%, temperature normal, gas sales were up about 1% and we are seeing rising customer counts at both utilities.

For some years, we didn't see that, but we are seeing customer accounts rise again. These are all signs of the continued recovery and continuing growth of Michigan's economy.

As I said earlier I feel good about the regulatory environment in Michigan. I think it's fair and constructive and I like the way we are working with the administration and the commission to think through good future energy policy for the state.

Finally, we have a full slate of good investment opportunities in our utilities and in our non-utility businesses, and I'm going to turn to those now. Starting on Slide 11, with our electric utility. We are going to invest $6.7 billion. That's a five-year plan and we are going to do that in three areas.

First is base infrastructure, it covers the fundamentals of plant reliability, distribution reliability, AMI and so forth. We will spend $1.1 billion on that in 2014. The couple of areas I would point out is, I mentioned earlier that we are going to go after distribution reliability at an increased pace.

We are seeing very good results from our program of investments and we are going to up that, advance metering, we have accelerated as well as part of our cost reduction efforts. We are seeing good efficiencies come out of this, so we are accelerating it.

The second major area of spend in the electric utility is generation compliance. We used to call this environmental or emission reductions, but we are seeing some new things in this category, so we do still have expenditures on environmental requirements; $280 million this year, but as you look out over the five-year period, we are beginning to see as well some post-Fukushima investments in our nuclear plant that are material over the period, so $700 million in this category over the five-year period.

Then finally new generation, so we are working our way through the 10% renewable energy standard. By 2015, we will spend $240 million this year on two wind parks. As we look out a bit longer term on the five-year plan, we are clearly working our way into the renewal of the generation asset base in the state.

That renewal is coming via our discussions of state policy. That's one of the big topics in state policy, where do our generation assets go. It's also beginning to be a topic of discussion in MISO, because MISO is clearly beginning to see the need for new capacity in roughly the 2016 timeframe and that includes new capacity in Michigan.

The combination of the states discussion of the future and MISO's discussion of future needs, I think, has us looking squarely at the future generation in the state in a serious way.

Moving onto Slide 12, the next five years is also going to see some significant investment in our gas utility. We will invest $1.2 billion over the next five years. $700 million of that will go into base infrastructure, so expanding our distributions system and other long-term investments of that nature

A $150 million in that category this year, but I think you also know that we have a significant program in main renewal and meter move-out. We will spend $500 million in that category over the next five years. That capital, you will recall is being recovered through an infrastructure recovery [mechanism].

It's a big program, we've got thousands of miles of distribution main and a lot of cast iron distribution main that needs to be renewed, $90 million expenditure this year with about $100 million per year average over the next five years. Now the good news is, that we going to be able to invest this capital in our utilities with our customers seeing minimal rate impacts. Slide 13 discusses that.

The investments that I've just described in our utilities, along with the normal cost pressures that a company like us has to deal with, clearly put upward pressure on rates but we have a significant set of offsets to these pressures, including lower surcharges, our work on structural cost projections and our ongoing work on continuous improvement.

Let me give you a little color on that. As the electric company, we have, over the course of this year and next year, $615 million of surcharge reductions that will come into play. Roughly $300 million of those came into play at the beginning of this year and those were the reasons for the roughly 6% rate reduction that customers saw.

We will also see an additional $350 million surcharge reduction on the 1st of January next year. That's related to the securitization of our Fermi Power plant that ends 1st of next year those are very material downward revisions to our rates.

As a result, our mantra here at the company is to stay rate-neutral or as close to rate-neutral as we can over the next five years while we work our way through this big slate of investments in our electric utility.

On the gas front, we foresee a three-year stay out of rate cases. A part of that is our continuous improvement, efforts in the gas company, part of it is the infrastructure recovery mechanism. When you look at the overall rate of change in rates, we see them at below inflation levels, so very modest increases in rates in the gas utility over the next five years.

Turning now from our utilities to our non-utility businesses and I am going to be moving to Slide 14. Some of our very best growth opportunities are emerging in our gas storage and pipelines business.

Just a quick reminder on Slide 14. This business consists of I am roughly working my way from West to East here. This business for us consists of our position in the Vector Pipeline between Chicago and Dawn, Ontario our large base of storage assets in Michigan.

The Millennium Pipeline in New York, which runs across the top of the Marcellus Shale, down into the New York City market. Our Bluestone Pipeline, built down into the heart of Susquehanna County. Our base of Bluestone Gathering assets that we really worked hard on building this past year.

Then finally looping back around the west end of Lake Erie is our proposed Nexus Pipeline, which I will give you an update on in a minute. Now, we expect to invest roughly $1 billion to $1.5 billion in this set of assets over the next five years. If you move on to Slide 15, I will talk off of this slide to give you an update on how our various investment opportunities are progressing.

I will start with the Bluestone Pipeline. We put the Bluestone Pipeline into service in late 2012, the Bluestone pipeline is now absolutely full in both directions, both north and south, moving 0.3 Bcf, which is the design capacity, north and south.

Given the pace of new production development in and around the pipeline, we are currently working to double the northbound capacity from 0.3 Bcf to 0.6 Bcf and I will tell you given the production in the area and the interest of counterparties, we fully expect to need another expansion on top of that one in the near future.

The Millennium Pipeline, which as 0.5 a Bcf design capacity, is also fully sold out in both directions, so like Bluestone it has become a bi-directional pipe. We are moving a half of Bcf east and 0.5 a Bcf west and we are pursuing two expansions of the pipe this year that will expand the capacity 60% or 0.3 Bcf.

Further, we have significant new interest from both LDCs and producers to expand the pipe again. This LDC interest become intense after the recent events in the Northeast and we got a lot of people reaching out to us about the ability to get product delivered to them through the Millennium Pipeline.

Our producers also need to get to markets in the east, so some very serious discussions about yet another expansion of the Millennium Pipeline underway currently, so given this, we expect that Millennium will be further expanded after the expansions this year by another quarter to 0.5 a Bcf to the east bringing service date of 2016 to 2017.

With respect to our gathering investments for Southwestern Energy, around the Bluestone Pipeline in Susquehanna County, Pennsylvania, we began construction work on these assets just a little over year ago. In that timeframe, the flow has grown from 0 to now 340 million cubic feet a day from Southwestern's core properties there in Susquehanna County, and we expect significant growth and output from those core properties in 2014. In addition to that work, we are also in serious discussions with Southwestern about the development of their properties, both northwest and northeast of their core positions there.

With respect to the Nexus Pipeline, which we are developing with Spectra and Enbridge, we are very encouraged by recent discussions on this pipe, so let me just frame it this way. Existing pipeline capacity out of the Utica play is contracted up and the results of the play continue to be very bullish. As a result, it's clear that there's a need for a major new pipe out of the play and likely more than one. In our most recent round of discussions with producers, there was a noticeable shift in tone and urgency, and the degree of interest has intensified significantly.

I believe that's a result of the pipeline constraints that have been revealed over the past few months. I think it's a result of the strength of the results that producers continue to see. There is a view that the Michigan, Ontario, Chicago markets which could be served by the Nexus Pipeline are premium markets.

There's a sense that, that marketplace is large and liquid, so one of the things producers want is a market that's large and liquid enough that when a new supply enters in, you don't collapse the price.

I believe producers have concluded that given what they have seen in the marketplace we serve that large liquid markets exist. There's also the largest base of market area storage in the United States at the end of the Nexus Pipeline, both in Michigan and in Ontario. Finally, the pipe has LDC sponsors who are also committing volume to the pipe.

Given all of that, give the discussions that we've had. We really feel very good about the prospects for Nexus and I think stronger than we have at any point in its development.

Given all of this, we expect earnings from this business to continue to grow at a healthy cliff. That's shown on Slide 16. Last year, earnings grew from $61 million to $70 million, or 15%. We are targeting a move at mid-point, another $12 million up or 17% up this year.

As you can see, we think we have got a lot of growth wired in for the future and continue to feel that the $130 million number is our target and it's achievable. We are also seeing really good growth opportunities in our Power and Industrial business and I'll begin that discussion on Slide 17.

You would recall this business consist of three business lines, our industrial energy services business where we serve industrial sites at 37 projects in 11 states. We also have a renewable energy business line in which we have wood-fired plants and landfill gas-fired facilities across 11 states.

By the way, all those are utility contracted. Then finally, our reduced emission fuel business line. This business line produces a fuel that reduces emissions in coal-fired power plants. We have nine units in five states. Again, we contract with utilities in that business.

A few highlights for the coming year in this business include a 25 megawatt cogeneration plant. That's going on line at an industrial site in Ohio, so that will add to our industrial services portfolio.

We are also in startup mode right now on a roughly 50 megawatt waste wood-fired plant in California. We constructed that over the past year-and-a-half. That will be a nice addition to our renewable business line, and then finally in the reduced emission fuel business, we have our eighth REF unit under construction right now and expect it to be running by mid-year and we are in serious discussions with potential host sites for our ninth and final REF unit.

While investments like these are producing healthy earnings growth in the prior industrial business as well you can see on Slide 18 that earnings this past year grew from $52 million to $70 million that's 35% increase.

We have got about 15% increased targeted for this year moving from $70 million to a mid-point guidance of $80 million and longer term, you can see that we expect this business to essentially double that $155 million remains our target. We've been communicating that number for some time and still feel good about it.

Well, with that as background, I am going to turn things over to Peter Oleksiak to take you through our financial update. Peter, over to you.

Peter Oleksiak

Thanks Gerry. Good morning, everyone. Before I get into the financial results, I'd like to give a shot of the date meter. I didn't do the exact count but this is the first call without Dave for over 15 years. Dave's not gone too far and many of you will see him on the road since we haven't been slated for several our investor conferences and business through 2014.

Moving to the financial update, I would like to start with Slide 20 and the year-end earnings result. For 2013, DTE Energy's operating earnings are $4.09 per share. DTE Electric earned $2.76 per share and DTE Gas earned $0.80 per share.

For the non-utility businesses, the Gas Storage and Pipelines and Power and Industrial Projects segments each earned $0.40 per share and Energy Trading finished the year with $0.02 per share loss. Finally, corporate and other incurred a loss of $0.25 per share.

Let's move to Slide 21 and the summary of the year-over-year performance by segment. DTE Electrics earnings were $1 million higher in 2013 than 2012. For this segment, we saw an increase in earnings due to lower benefit expense, resulting from the planned design changes we implemented in the fourth quarter of 2012, and the first quarter of 2013.

We also saw growth in our underlying electric service territory contributing to earnings in 2013. Temperature normalized, sales are 2% higher than last year, driven by growth in each of our customer classes. These improvements in earnings over last year were offset by return to normal weather and higher storm expense.

If you recall, in 2012, DTE Electric saw $45 million of earnings capability due to weather. The higher year-over-year storm expenses were driven by two incremental catastrophic storms occurring in the fourth quarter.

Our strong financial performance was able to offset these late storms, which combined impacted over 500,000 customers and drove nearly $40 million of the increased O&M. Similar to last year, we also took some of the financial strengths of our electric utility and reinvested over $20 million after-tax into the core assets and operations. In 2013, a comparable level to what we did in 2012.

For DTE Gas, 2013 operating earnings were $28 million above 2012, with the primary driver being colder than normal weather and 2013 combined with the unusually warm weather in the winter of 2012.

Similar to electric utility, we took some of the financial streak and invested close to $10 million after-tax directly into the business. Detailed year-over-year operating earnings for loss of the utilities are provided in the appendix.

For the non-utilities, gas storage and pipeline operating earnings are up $9 million a strong growth in our pipeline assets, particularly offset by lower storage earnings. In particular, we are experiencing increased volumes and revenue at Bluestone and related gathering investments that Gerry touched on earlier.

Our industrial earnings are also higher for the year by $18 million, driven by increased earnings from our reduced emission fuel projects and our significant on-site energy project portfolio acquisition that occurred in the fourth quarter of 2012.

Finally, our trading company is now $15 million year-over-year due to the mix of transactions and associated accounting recognition timing. I will talk more about the operating earnings results for trading company in a moment when I discuss 2014 guidance.

First, I want to talk about the new trading related operating earnings adjustment related to mark-to-market accounting and economic hedges related to pipeline transactions in the Northeast. As many of you know, the Northeast region of the country experienced significant weather related gas price increases at the end of last year.

Turning to Slide 22, as it covers the new operating earnings adjustment that takes out the noise related to mark-to-market accounting on the economic hedges related to the gas, buy-sale and transport transactions in the Northeast and provide detail on the associated roll on to timing.

These transport deals have three components. The buying of gas at a fixed price, the contracted cost of transporting the gas and the sale of gas at a fixed price, the economics of the transaction are locked in.

According to U.S. GAAP, the buy and sale ends of the transaction are on mark-to-market accounting, whereas the middle component of the transport is not, but the well-known year end spike in gas prices in the Northeast to gas side, sales side of these transactions had a significant mark-to-market unrealized loss.

Majority of this will turn around in the first quarter with the delivery of the underlying gas. The accounting of the transaction completely converges to the economics of the transaction once all the gas is delivered. This type of operating earnings adjustment is not uncommon and is used with other energy companies where hedges have received mark-to-market accounting treatment, are used to secure the economics of the transaction.

Without this operating earnings adjustment, there would be a large unrealized operating loss in 2013 for our trading segments followed by corresponding large offsetting operating gain in 2014. This adjustment take out that noise about a reflect the performance of the business.

Slide 23, now we are looking forward to 2014. This slide provides our operating earnings guidance for the year. As Gerry mentioned, we are raising our guidance mid-point from $4.27 per share to $4.30 per share while also narrowing our EPS guidance range from $0.24 to $0.20.

Number of factors are driving this improvement. First, we are targeting zero equity issuance in 2014, which means we are deploying over $2 billion in capital this year with no need for additional equity issuance.

We are also raising 2014 earnings expectations for DTE Electric and Gas Storage and Pipelines. For electric utility, we see more benefit favorability driven by changes in the discount rates for post-retirement expenses.

Moving on to our cash flows, we are also raising our 2014. - I'd like to take a moment to discuss our guidance for the trading company. For the year, the trading company has been a great source of cash for DTE Energy, while also providing valuable market insights to our other businesses.

In 2013, Energy Trading produced $21 million of economic net income with a coming up operating results of $3 million loss. We provided in the appendix a standard reconciliation of economic net income to operating earnings.

As I indicated on prior calls, our trading company has gone through a transitional period, where we are moving a portion of this transaction mix from short-term financial transactions that accrue earnings immediately to transactions that are more physical in nature and will occur in earnings over several years.

The goal is to create a product mix that has longer streams of earnings and cash. As we move to this new mix, accounting earnings will lag economic contribution of the business, similar to what occurred in 2013.

Given the strong performance of our utilities and growth-oriented non-utility businesses, we have the opportunity to have 2014 guidance not depend on operating income contribution from our trading business.

Accordingly, we have set the Energy Trading earnings guidance for 2014 at zero. A new way to think about our 5% to 6% earnings goal is to focus on our growth business or operating earnings before energy trading contribution. We do expect future year earnings contribution from our trading segment but it'll be additive to our 5% to 6% goal.

Now, I am moving onto cash flows on Slide 24. In 2013, our cash from operations was $2.2 billion, the same level as 2012, $300 million higher than our original guidance. Free cash flows improved $200 million over last year from reduced capital spending at our non-utilities, primarily due to the acquisition of the on-site energy portfolio in 2012. The strength in cash in 2013 was a major enabler in our ability to target zero equity issuance in 2014.

Slide 25 provides our cash guidance for 2014. We see lower cash from operations, due to the lower utility surcharge collections than in 2013 and higher planning contributions to our employee benefit plans in 2014.

Capital expenditures increased year-over-year with higher environmental and renewable energy spending at DTE Electric and spending on our growth projects for the non-utilities.

On the next slide, you can see that our balance sheet remains strong with leverage and FFO metrics in line with our targets. As I mentioned before, we are targeting zero equity issuances in 2014.

We anticipate annual equity issuances of $200 million to $300 million in 2015 and 2016. As Gerry mentioned, in our 2013 accomplishments, our financial success and solid risk profile were recognized with credit upgrades at all three rating agencies. Additionally, in January of 2014, Moody's upgraded DTE Energy and its two utilities, maintaining our strong credit rating's fundamental for our business strategy.

Finally, let me wrap up on Slide 27, and then we will take your questions. Our investment thesis and shareholder value creation approaches has been consistent year-after-year, deliver EPS growth of 5% to 6%, while providing an attractive dividend and maintaining a strong balance sheet.

This approach has delivered 7% growth since 2008. When coupled with our dividend, which has grown 5.4% over the last three years, it provides total return in excess of our targeted 9% to 10% total shareholder return.

Our utility growth that Gerry laid out for you is occurring in a growing Michigan economy and a very constructive regulatory environment. We know we have to earn this constructive regulatory environment every day.

Our work on operational excellence, cost management and customer satisfaction will do both, good things for customers and help make sure we keep that constructive regulation.

As Gerry outlined, upfront on the call we got some very solid earning opportunities at our non-utility businesses, and those give us a nice lift to the growth opportunities that we have at our utilities and provide more certainty to our 5% to 6% longer term earnings growth target.

With that, I will wrap it up and thank you for joining us. Nova, we hope you now open up for the questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) We'll take our first question from Jonathan Arnold with Deutsche Bank.

Jonathan Arnold - Deutsche Bank

Good morning, guys. I apologize if you just went over this. I thought you pulled off for a second when you were on the topic. On the way you are going to present the trading business going forward is this exclusion of mark-to-market on these particular contracts going to be a feature of how you present your numbers in the future or is that some kind of a sort of materiality threshold that will govern that?

Peter Oleksiak

Jonathan, yes. This is how we will be presenting it in the future. As we move more to these physical type of deals, derivative accounting treatments will be occurring on these type of deals, so you will see this going forward.

Gerry Anderson

It may not be as material, Jonathan, we don’t expect to get this sort of weather every year.

Jonathan Arnold - Deutsche Bank

Absolutely this is how you will do it going forward and the difference in the annual guidance is basically because some of the reversal occurs in 2015?

Gerry Anderson

Well, a couple of things. This is how we will do it, because it's frankly kind of silly to have a fully hedged transaction produce a big down and a big up or you could have a flip through a big up and big down and none of it means anything, so from an accounting perspective which is a lot clear to do it this way.

In terms of the earnings level, I think what Peter was saying is, I think we had a modest loss in trading last year. We look at our earnings goals for this year. We can fully achieve that with our asset based businesses, our guidance is based on that. The growth of our asset based businesses.

Frankly in the future, we would like to keep the guidance for our trading modest. What we expect to earn profits from the business over time, but I think you all could just look at those as additive cash flow to what we are doing in the other business.

Jonathan Arnold - Deutsche Bank

Thanks Gerry. Then just on the Gas Pipeline and Storage business, you talked a lot about incremental opportunities. Are you still in the sort of mode of you like the things in front of you and you want to see those on a standalone basis or is the dynamic in that business sort of increasingly - does it make it more interesting to try and look for other partnership with somebody we could step up scale of what you're doing there?

Gerry Anderson

We always have been open to partnerships that were a good strategic fit, so I won't say that we are not open to or interested in that. We would be, but the current pace and level of activity around Millennium, Bluestone and our gathering in Pennsylvania and the degree of interest, the intensified interest in Nexus adds plenty in front of our team right now to execute put in place, so they are feeling a need for it to grow the business the way we talked about.

Jonathan Arnold - Deutsche Bank

Thank you.

Operator

We'll take our next question from Andrew Weisel with Macquarie Capital.

Andrew Weisel - Macquarie Capital

Thanks. Good morning, everyone. First is an easy one. Am I reading it correctly that the guidance for '14 Gas does not reflect any of the weather that we have seen year-to-date?

Gerry Anderson

We have not reflected any of the early year weather in our guidance. Weather can change as you move through the year across both, the electric and the gas utilities. Obviously, it's been a positive for both our gas and electric business to start the year, but we'll just watch that as the year goes on. It gives us a strong starting point and will help us offset any bumps we run into if we do.

Andrew Weisel - Macquarie Capital

Okay. Great. Next question on the Storage and Pipelines business. You sound more enthusiastic, it sounds like you have got this new third expansion to Millennium and the enthusiasm from Southwestern and the LDC seem higher than what you have talked about in the past.

My question is, when you showed the five-year outlook to 2018, there's no change, so at the very least, why haven't you moved some of the white box down into the more specific project contributions and what would it take to make you increases those targets?

Gerry Anderson

Well, that's a good question and I think really, we evaluate that. We haven't evaluated the mix in the past month, I'd say. As some of these things become firm, so we pull an expansion in that wasn't part of the mix previously and it becomes firm or Nexus just becomes that much clear.

I think you will see us shifting the mix of to-be-determined and what we think we have locked down, but you're right, we haven't changed that since we showed it to you a few months ago.

You are also right that the tenure and the feel of things have changed over the past few months. I've always said that the Gas Storage and Pipeline business, the nature of the conversations can flip on you in a hurry and people can go from, well, that's interesting, and let's talk about it too. Why can't you give me that tomorrow, and it can happen in the course of month or two, and the reason that it happens is that those companies are evaluating their capital investment plans, their strategic interests and they are evaluating the marketplace.

The combination of people thinking about their strategies at year end and the incredible strain on the gas pipeline system that emerged late last year and early this year has made an awful lot of people in the industry sit up and realize that we are going to need a lot of new assets to get all this gas to market.

That combined with the strength of the Utica Shale, when we are talking about Nexus, and just incredible price blow out in the Northeast when we are talking about Millennium, has got people anxious to move.

Andrew Weisel - Macquarie Capital

Okay. Great, and did I hear you say that in addition to the obvious demand side interest, the producers seem happier with what they are seeing in terms of results than what they had said in the past? Is that – did I hear you right?

Gerry Anderson

Utica in particular, I think the results in the Susquehanna County and Pennsylvania are well-known as continuing to be very strong. Southwestern is the best spokesperson for that and it's really them and other producers who are drilling the wells, but they continue to have very good results.

In the Utica, yes, I think we do continue to see strong, bullish, whatever you want to call it, results and here producers are talking about the scale of what is going to happen there and the scale is large and it will be constrained by infrastructure to get the gas to market, so they are now transitioning from evaluating the resource to believing that and now they got to get it to market.

The other thing you hear them thinking about is, what market and they are clearly places that take it that are better than others. A lot of it's been taken south to this point, but the basis to Michigan and Ontario if you watched in the recent year was strong, and those are growing markets. Demand for gas in Ontario is growing same is true in Michigan, particularly as we transition our generation fleet. Then our Vector Pipeline reaches into Chicago, Wisconsin and so forth, I think there is a lot of interest in reaching those markets with Utica gas.

Andrew Weisel - Macquarie Capital

Very good. Then one last one if I can. When I compare the 2013 actual CapEx of the utilities versus the guidance that you had put out most recently it was a little bit light by about $140 million.

Just wondering is that a timing issue? Is there anything in terms of cost savings that you've identified from the capital side and how does that tie in? Is that the reason that you were able to offset the equity mid-this year?

Peter Oleksiak

This is Peter. The reduction actually is a combination of continuous improvement in our environmental capital spend as well as timing related to that. And I'd say that plus our strength in the operating cash flow actually is really a key enabler and us be able to take the equity issuance down to zero.

Gerry Anderson

We had cash flow strength in a lot of fronts this past year when you looked at it and that became clear as last year played out that the need for equity this year was going to go away, so the $300 million or so that we had planned we just took off the table and we will be able to keep our credit metrics right where we want them without issuing.

Operator

Andrew Weisel - Macquarie Capital

Perfect. Thank you.

Operator

We'll take our next question from Steven Fleishman with Wolfe Research.

Steven Fleishman - Wolfe Research

Hi, Gerry. Good morning. Just to kind of clarify Slides 15 and 16 together on Gas Storage and Pipelines. The Bluestone lateral expansion and Millennium 2 expansion, those are in the core growth and Nexus and then the kind of other gathering pipeline expansions Millennium 3, those would all be in that new project box or upside to that?

Gerry Anderson

Yes. I would say that Nexus, we have talked about as being in the new project box or in that timeframe. In some of the things that we considered possible, but not yet locked in like some of these expansions that we are beginning to see come into our window, we also get some of those in the new project development.

One of the things we will do for you guys is give you an update on what we think is in the locked abound portion of these and what we've received to be in new project development. Next time around, we will give you a good, clearer delineation of those things.

Steven Fleishman - Wolfe Research

Okay. Then just any update on the kind of what to expect on Michigan Legislation, this year and alike on the kind of electric reforms. How do you think that process is going?

Gerry Anderson

I would say a couple of things. One is that this is going to be a year, primarily for discussion of future policy. It's clear that there is a lot of thinking going on about future generation policy. I mentioned that earlier, but people also want to understand the future renewables that program is playing out in the state as of 2015 and there is diverse thinking about what the future should be.

The same is true for energy efficiency, so I foresee this year principally being focused on the administration, the commission and a number of other parties trying to reach some common ground on those topics.

You mentioned the choice issue. I don't think the administration or the Public Service Commission see expanded choice as a stable base to build the future of Michigan's energy infrastructure around. The Governor is pretty clear. He sees it as a free option, kind of like having the access to your fixed rate mortgage and your variable rate mortgage both, whenever you want it. It's just not reality.

When you try to build an important industry around a structure that's unstable, you get bad results. I will tell you watching deregulated markets trying to deal with the stresses that emerged this year and the stresses that are coming as markets get tighter, we better watch it.

Those markets are in trouble and I think an increasing number of observers believe that. I don't think Michigan has an appetite for stepping into that. For example, there's a bill that's being introduced in the House on deregulation, we see those pop up every now and then. I don't think there is serious interest in that and I don't think it'll clear.

Steven Fleishman - Wolfe Research

Great. Thank you very much.

Operator

We will take our next question match Matt Tucker with KeyBanc Capital Markets.

Matt Tucker - KeyBanc Capital Markets

Hi. Good morning and congrats on a nice year. First question. Could you comment on the extent to which the decision to bring the Energy Trading guidance to zero is driven by a change in market conditions versus a change in strategy that you described versus just want to be conservative by kind of pointed out of the equation?

Gerry Anderson

Just go through the last year. Last year, our economic earnings at trading were $21 million, economic earnings in cash in this business – this business over the past decade has produced about $0.5 billion in cash over the past five years, about $300 million? Yes. What we find over time is the economic earnings converge with gas one-to-one.

The economic earnings this past year were $21 million. The accounting earnings were minus $3 million. We have seen the environment produce fewer opportunities. If you look back over time, our economic earnings used to be larger.

It's an opportunity for us when we look at the balance of the company and see it, those utilities and non-utility business is able to support very healthy EPS growth. It's an opportunity for us to take trading down to a zero level, not premise our earnings growth on it and essentially say to you, hey, if it produces some upside in the coming year, it's great. We don't intend for it to be a big piece of the picture. As I said a couple of percent, and that's kind of the way we would like to posture it heading forward.

Matt Tucker - KeyBanc Capital Markets

I guess long-term then, is there a kind of a new normal earnings run rate you'd expect post-2014?

Gerry Anderson

It will be over time in line with the economic earnings with the recent years have been in that $20 million range.

Peter Oleksiak

$20 million to $25 million.

Gerry Anderson

$20 million to $25 million, but how that comes into and out of accounting varies because of the accounting rules, so, I think what we are really looking to do is take the up and down noise out of that, give you, I guess, it's right to say conservative guidance there, because we don't want your perception of our earnings hinging on that.

We would like it to be focused on the utilities and our non-utility businesses if we get some earnings contribution from trading grade.

Matt Tucker - KeyBanc Capital Markets

Got it. Thanks. Then just on O&M, with the utilities. In '13, you had a weather benefit at both and you kind of used that opportunity to utilize your lean and best strategy and ramp up O&M, can you just talk directionally about O&M in '14 and if you continue to see a weather benefit? Will more of that start to flow to the bottom line?

Peter Oleksiak

Yes. We targeted in our operating groups in our planning cycle for flat O&M, so we take the reinvestment as incremental. We take that off when we do our planning for the following year.

Right now, we are planning on flat O&M. Now, having said that, for instance, we have a strong start here and the weather and we know there's a lot of the year left, but that continues on. We will take some of that and reinvest that back into our utilities.

We really are focused on keeping our utilities strong for the long-term, so both utilities are in a stay-out, so I don't from a rate proceeding and we would like to take that opportunity where we can to take extra revenue and put it back into our core assets from those utilities.

Matt Tucker - KeyBanc Capital Markets

Just a follow-up to that, can you quantify how much of the '13 O&M you viewed as kind of being above the base level?

Peter Oleksiak

Between the two utilities combined, it's now $50 million pre-tax, so it's roughly, call it around, $20 million at our Gas Utility, $30 million at the Electric Utility.

Matt Tucker - KeyBanc Capital Markets

Thanks a lot guys

Operator

We will take our next question from Michael Weinstein with UBS.

Michael Weinstein - UBS

Hi, guys. Could you talk about your impact of interest rates on pension expense, benefit expense? I think you had mentioned earlier that that was expected to decline in the fourth quarter and how it will affect 2014 as well?

Peter Oleksiak

Yes. For 2014, the pension accounts capability was roughly $15 million. We have baked that into guidance. That is; one, if you look at the DTE Electric guidance versus pre-outlook we have increased guidance and its related to the discount rate change.

Michael Weinstein - UBS

Great. Just curious, the news on - the Utica play sounds very good, very positive. I think there is a lot of growth there and I am wondering if I'm wondering if at some point you might consider alternative financing structures, or if the need for equity might get - if the growth rate is so fast, so high - interest is intense will you have to consider alternative methods of financing fast growth.

Gerry Anderson

We have got it modeled in our five-year plan now and it's not pressuring our equity. In fact, these businesses tend to be strong contributors to your FFO to debt. They throw off a lot of cash, so they have a – they improve your credit metrics as you build them out, as long as you do it well, but our projects in this area have been credit strengtheners in recent years.

In terms of MLP, we have said pretty consistently that we don't think we have the scale right now. We haves got a lot of growth out in front of us. We don't want to be pursuing growth or get into the pursuit of growth or acquisitions to feed an MLP. They may come when we have accumulated the scale that alternative structure would make sense.

I think what we see in the near-term is pursuit of what we think is a good slate of organic growth opportunities that should have that business growing at a 15% plus clip. Then, over time as we watch the scale, we'll ask the question again.

Michael Weinstein - UBS

Thank you.

Operator

We will take our next question from Andy Levi with Avon Capital.

Andy Levi - Avon Capital

…guys. Thank you very much.

Operator

We will take our next question from Paul Patterson, Glenrock Associates.

Paul Patterson - Glenrock Associates

All my questions have answered. Just the Power and Industrials, it seems that there was a little bit of a scale down on the renewal projects and the industrial ones in terms of the numbers.

I know that the profitability didn't change or anything. I'm just wondering has anything changed or is that's just sort of optimization and why did they not, I guess, impact earnings or the earnings guidance?

Gerry Anderson

Maybe you could clarify your question when you say there's been a scale down.

Paul Patterson - Glenrock Associates

Well, it looks like the number of projects, from at least where I remember in the EEI, were a little bit higher. I think renewable was 27 now they are 25 and industrial, was 42 now I have 33?

Peter Oleksiak

Yeah. Slide 18, kind of lays it out, reduced emissions fuel, what we've been seeing for the last several years, it's been $60 million now we are saying $70 million and the renewable energy is at a $35 million and the renewable energy is at a $35 million target for 2018.

Paul Patterson - Glenrock Associates

I know that the earnings, there's no changing in the earnings, but I just thought the projects themselves - the number of [projects] - I was suggesting there was a change in them. I just was wondering if there was anything like that.

Gerry Anderson

No. There's nothing fundamental in the project accounts. If they changed it, it may be just the way they were categorized or aggregated. Anastasia is nodding her head.

Peter Oleksiak

That is more grouping of contracts and projects.

Gerry Anderson

Nothing material there.

Paul Patterson - Glenrock Associates

Okay. Then going back to the slide where we talked about the Millennium Project, the map, so to speak, is Millennium 3 in there? I mean, I'm just sort of wondering, is Millennium part of that or where would that show up?

Gerry Anderson

It's in the solid.

Peter Oleksiak

It's in the solid, - would be $40 million.

Paul Patterson - Glenrock Associates

Okay. When you talk about what's happened with respect to the increased interest because of the volatility and everything we have seen, how should we think about the potential expansion beyond that solid blue line or is there any?

Gerry Anderson

When you say the solid blue, you mean the solid gold there on 16?

Paul Patterson - Glenrock Associates

I guess, I'm looking at Slide 14. I'm just wondering what kind of opportunities you guys see in terms of the bottlenecks and everything that apparently are causing some concern obviously on the part of customers. You have been mentioning that why people are now more interested. I'm just wondering if that might show up.

Gerry Anderson

Okay. On Millennium, I think we always thought there would be expansions, multiple expansions and those are included in the solid colors on the following slide, but I think both the pace and the potential scale of those expansions may play out to be larger than we thought and there maybe follow-on expansions that could come after that.

The other thing I would say is that, the gathering around Bluestone, it's grown quickly this past year. We have made major investments there, we will again this year, but it's clear that the scale and pace of what Southwestern is pursuing there is ramping up. It's a great resource for them and we are partner for them there, so we are very focused on doing well for them and continuing to grow there.

Then, Nexus, we have always said Nexus is kind of the next platform that would play out at the end of the five-year period. As I have tried to make clear, we have always felt good about it, because the fundamental seemed right to us but it has been a real strong uptick in perception from counterparties over the past couple of months.

Paul Patterson - Glenrock Associates

Okay. Great. Thanks a lot.

Gerry Anderson

Yes.

Operator

This concludes the question-and-answer session. I would now like to turn the call back over to Gerry Anderson for any closing remarks.

Gerry Anderson

Well, I would just like to reiterate that we feel we had a really good year this past year and I come into 2014 with a high degree of confidence that we can deliver you another good year. We look forward to keeping you abreast of developments as things emerge this year.

Thanks for joining us this morning. We look forward to seeing you all out on the road. Take care.

Operator

This does conclude today's conference. Thank you for your participation.

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