Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message| ()  

Executives

David Meador – EVP and CFO

Peter Oleksiak – VP, Controller

Nick Khouri – Treasurer

Analysts

Kevin Cole – Credit Suisse

Ashar Khan – Visium Asset Management

DTE Energy Company (DTE) Q3 2010 Earnings Conference Call October 29, 2010 10:00 AM ET

Operator

Welcome to the DTE Energy third quarter 2010 earnings conference call. Today’s conference is being recorded. At this time, I like to turn the conference over to Mr. David Meador, please go ahead, sir.

David Meador

Thank you, and good morning, and welcome to our third quarter conference call. Before we get started, I encourage you to read the Safe Harbor statement on page two, including the reference to forward-looking statements.

With me this morning are Peter Oleksiak, our Controller; Nick Khouri, our Treasurer; and Mark Rolling, our Director of Investor Relations. I also have with me members of the management team that I might call on during the Q&A session.

If you can turn to Slide 5, let me start with an overview. We’ve talked about our investment thesis on a number of occasions. This lays out our financial aspirations, and highlights what we, as a management team, are focused on. Our financial plan support our target of 5% to 6% long-term earnings per share growth, and attractive dividend, which we increased by nearly 6% last quarter, and a strong balance sheet.

We understand the needs and challenges of our customers and we continue to work closely with the MPSC. This gives us the confidence that we can grow the utilities in a manner that provides an attractive return to our shareholders, while at the same time being aware of the financial pressures of our customers. To do this, we need to manage significant capital on investment at Detroit Edison and MichCon. Much of the growth of the utilities is being driven by environmental mandates and renewable energy standards which are required by Federal and State Regulations.

At the same time, we face the significant capital investment requirements, we need to focus on the needs of our customers by ensuring the lowest possible rates and providing the highest level of customer service. To do this, we’re leveraging our continuous improvement capabilities to reduce both our O&M cost as well as our capital expenditures to ensure we minimize the overall rate impact on customers, and at the same time, improving our operational performance and customer service. When you combine the cost reduction efforts with constructive regulatory environment, we are confident that the two utilities will be able to earn their authorized return of 11% and grow 5% to 6% over time.

At the beginning of the third quarter, we filed for a $51 million rate increase in MichCon and later today, we will file a rate case for Detroit Edison. We’re not able to talk about the Detroit Edison rate case on this call before its filed but we will be preparing our standard investor summary document which will 8-K later on today. And of course, we’ll discuss this in more detail at EEI next week.

Our non-utility businesses continue to provide growth opportunities, as well as diversify our earnings. We’re prepared to go on a more detail on these businesses next week, also including both near and long term outlooks.

Now turning to page 6, our earnings for the third quarter came in at $0.96 per share, $0.05 above last year. The increase in earnings is primarily the result of solid results of the utilities in another robust quarter at the Power and Industrial group. Partially offsetting this is the third quarter loss of Energy Trading and higher cost at corporate and other.

Given the results through the third quarter and our forecast for the remainder of the year, we are tightening our 2010 guidance to $3.50 to $3.70 per share, which results in a year-over-year increase per share growth of 9% at midpoint. This is an improvement over the 7.6% growth we originally expected in our original guidance of $3.55 per share.

The local economy continues to improve. Year-to-date load is up to 2.3% on a temperature normal bases and industrial load is up almost 15% year-to-date. Then, we see other indicators of the economy recovering. Finally, our balance sheet metrics are strong and where we like them to be. Year-to-date, we have generated $1.5 billion in cash from operations and we’re increasing our full-year guidance for cash flow and Nick will take you through that in a few minutes.

On page 7 is an update of our 2010 guidance. As you know, the original guidance was $3.55 per share at midpoint and that’s the left hand column. After a strong first quarter at Detroit Edison, Power and Industrial and Energy Trading, we raised our guidance in April to a midpoint of $3.63 and that’s the middle column on this page. As we come into the final quarter where refine our guidance to reflect the continued strong performance of the utilities, Power and Industrial and the holding company, which is helping to offset the performance at Energy Trading. While there’s earnings mix change, holding the bottom line is something we take very seriously and we’re driving to deliver earnings pretty close to the revised guidance that we provided in the spring.

Let me walk down this page by going down the right hand column. With solid performance at our utilities, we’re raising the lower end of Detroit Edison’s guidance range by $10 million and we’re narrowing and raising the guidance range for MichCon to $105 million to $110 million. In an effort to stay out of rate case of Detroit Edison as long as possible, we captured a number of one-time cost savings opportunity which flowed through the bulk utilities.

We continue to see long-term growth at our gas Storage and Pipelines business and we’ll cover that at EEI but we expect the current year to come in near the lower end of current guidance of $50 million.

On the second quarter call, we talked about potential upside earnings to the Power and Industrial business if we were able to realize the full value of the steel industry fuels tax credit. We are now comfortable with that and we are increasing a narrowing, the P&I guidance to $85 million to $90 million. And earnings at Energy Trading continued to be pressured by a market that has made it difficult for a business like ours to make money. While there has been some volatility in the commodity stock markets, our trading business typically makes money on relational value trading or put more simply, they look for seasonal and geographic spreads in gas and power prices. Recently, those spreads have collapsed. This has made it difficult for the trading team to realize trading gross margin similar to historical averages and in fact, the third quarter gross margins were insufficient to cover fixed cost of the business.

As a result of these marketplace dynamics, we’re lowering the guidance for Energy Trading to $5 million to $15 million. While we’re disappointed in Energy Trading results, the team there has done a very good job for us over many years and we have full confidence in them. We aren’t changing our risk profile and I believe this team will find a way to work through the current market environment and again, we’ll go into more detail about trading next week.

Due to some favorable tax items, we expect corporate and other expenses will come in near $68 million for the year. So overall, we expect DTE Energy to deliver a 9% increase in operating earnings per share at midpoint, a net increase higher than the 7.6% growth that we expected in our original guidance and both of them are well above or 5% to 6% long-term target.

Now, let me turn it over to Peter who will take you through the third quarter results for more detail.

Peter Oleksiak

Thanks Dave and good morning to everyone. I’m going to start with slide 9 which is our standard slide for the quarter and the third quarter earnings results. For the quarter, DTE’s operating earnings per share were $0.96. As a reminder, there’s a reconciliation to GAAP reported earnings contained in the appendix of the presentation. Detroit Edison grew $0.97 and MichCon, which typically incurs an operating loss in the quarter, came in at a loss of $0.04.

The non-utility segment combined to earn $0.13. Breaking this down into the components, earning results for the third quarter were Power and Industrial at $0.15; Gas, Storage and Pipelines at $0.07; and Unconventional Gas Production at $0.02 loss and Energy Trading at $0.07 loss. Corporate and other had a loss of $0.10 in the quarter.

Let’s move on to slide 10 and a summary of the quarter to quarter performance by segment. Overall, operating earnings were up $13 million in the third quarter of 2010. Both of our utilities, earnings were up in the quarter and I’ll be taking you through additional details at our two utilities in a few moments.

The non-utility segments in total were down slightly quarter over quarter. The primary movers in the quarter were Power and Industrial projects with $17 million improvement driven by higher co-sales and the steel industry fuels tax credit offset by reduced earnings at Energy Trading of $18 million. I’ll take you through some details of Energy Trading segment after I cover the utilities.

Finally, our corporate and segment was unfavorable driven by 2009 onetime tax benefits.

Now, I’d like to go through some details beginning with our utilities in Detroit Edison on slide 11. Operating earnings for Detroit Edison were $165 million, up $16 million from the prior year. Total margin for the quarter was up $24 million due to a colder than normal 2009 and weather normalized revenue treatment in 2010.

The revenue decoupler Edison received in its rate order this year captures any weather related uses changes. We didn’t see a small pickup in weather margin related to summer rates higher than average rates into the decoupler. But this pickup was offset by incremental margin loss for the customer choice that was not captured by our choice tracker.

Additionally, O&M expense was lower as a result of onetime cost actions, continuous improvement initiatives and lower uncollectible expense. Edison experienced some quarter-over-quarter unfavorability driven by the 2009 third quarter property tax settlement, which benefits 2009 results.

Moving on to page 12, I’ll review MichCon’s performance. As I mentioned earlier, the third quarter is typically a loss in our seasonal gas utility business. MichCon had an operating loss of $6 million, up $17 million from prior year primarily due to margin improvement and lower depreciation. The improvement were driven by the June 2010 rate order, lower gas expense – lost gas expense and reduced depreciation rates partially offset by lower mid-stream revenues.

Let’s move to page 13 to review the Energy Trading segment. This is a standard slide we do provide that does look at the accounting earnings versus the economic earnings and I wanted to take you a little bit through the detail here. On a year-to-date basis for 2010, our operating earnings for Energy Trading were zero and the economic net income was $23 million. At 2009, year-to-date comparable time period was $73 million of operating earnings and $64 million of economic net income. Energy Trading had a strong year in 2009 with operating earnings that were higher than the $55 million average operating earnings for the three preceding years.

Now, with the decreased level of year-to-date earnings in 2010, which driven heavily by the year-over-year decline in Trading related opportunities, which Dave mentioned earlier. This is due in large part to an oversupplied gas market’s significantly lower volatility and liquidity and regulatory changes along with uncertainty associated with the new financial reform legislation. Another factor impacting this year’s results has been account in recognition timing. Of the $23 million of timing effects in our year-to-date 2010 operating earnings, we anticipate approximately $10 million will roll into the income statement in the fourth quarter. Given the challenges in the marketplace, Dave and I have described, we are lowering our expected performance on the segments to a range of $5 million to $15 million.

That concludes an update on the earnings for the quarter. We’ll now turn the discussion over to Nick Khouri, who will cover cash flow and capital expenditures.

Nick Khouri

Thanks Peter and good morning. As always, improved cash flow and balance sheet strength remains a key priority for management and Board of Directors. Through the first three quarters of this year, DTE Energy’s cash and balance sheet metrics are on track. In fact, nearly equal to the historically strong year we saw in 2009.

Page 15 summarizes our balance sheet metrics. We expect to end this year within our targeted leverage in cash flow ranges. In addition, we are nearly finished with our 2010 funding requirements. We have contributed $200 million to our pension plan through a combination of cash and DTE equity, refinanced outstanding utility debt at all-time record low interest rates and renew a nearly $2 billion credit facility at cost approaching free crisis lows. Both Fitch and S&P have improved DTE’s credit outlook so far this year with Fitch moving from negative to stable and S&P improving from stable to positive in the first half of the year.

Page 16 provides an overview of DTE’s year-to-date cash flow this year versus the same period last year. Free cash flow reached a solid $600 million through September. Even with higher capital spending, net cash flow after dividends was a strong $300 million, enough to shore up DTE’s balance sheet liquidity.

Page 17 shows our revised guidance for 2010 cash and capital. Cash from operations is expected to be up about $100 million from our original guidance driven mainly by weather at Detroit Edison while capital is expected to end the year slightly below prior guidance. What’s important is that net cash after dividends is expected to move from a negative in our original guidance to a positive in our current estimate.

Capital spending for the full year is shown on the right side of page 17. DTE capital spending will total $1.25 billion, down from the original projection of $1.4 billion, but over a 15% increase from 2009 actuals. Detroit Edison’s operational capital has been revised up slightly, while the timing of renewable spending has shifted from 2010 to 2011 and 2012. The retiming of renewable capital does not change the total projected multiyear spending outlook.

Finally, the forecast for capital in our non-utility businesses is being reduced from $300 million to $200 million. Capital spending in these businesses is dependent on the timing of projects and varies from year to year.

In summary, DTE’s cash and balance sheet targets are on track with year-to-date actuals nearing the historically strong year we saw in 2009, allowing us to increase our cash guidance for all of 2010.

Now let me turn it back to Dave for a wrap up.

David Meador

Thanks Nick. Let me wrap up on slide 19. The third quarter was another solid quarter at the Utilities and the Power and Industrial group, and when you combine that with the challenges we’re seeing at energy trading, we’re confident in tightening our 2010 guidance. Nick just took you through the cash flows which are very strong, and we’re able to maintain a solid balance sheet and increase our cash flow guidance for the year.

In summary, we remain committed to our financial goals and believe our plans will deliver the results necessary to provide an attractive total shareholder return through a combination of 5% to 6% long-term earnings growth and an attractive dividend. Next week we’ll be able to provide an early outlook for 2011 by business segment.

And with that we’d be happy to take your questions now.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) And our first question today will come from Dan Eggers with Credit Suisse.

Kevin Cole – Credit Suisse

Hi, good morning, guys. This is actually Kevin.

David Meador

Hey Kevin.

Kevin Cole – Credit Suisse

With Trading, you guys did a good job actually at last quarter with the slide 14 segments and trading between timing and economic performance. Can you help me think about year-to-date performance between this timing versus actual losses and then how you get to the $10 million gain in 4Q?

David Meador

The quarters, as you know, have been different. We had a very strong quarter in the first quarter where the team almost made our entire year of profit goal in the first quarter. Second quarter was different where we had some positions that the market shifted against us and we had to step out of the market at that point in time. The third quarter and fourth quarter were seeing different dynamics where the market’s just not providing the opportunity to generate margin sufficient enough to offset fixed cost.

Now, we still have roll-on coming back in. So we have transactions as you know where we booked day one reserves and those reserves get amortized over the life of the transaction. So, when we look at the fourth quarter, the way I think about it is you’ve got roll-on of about $10 million. We also know that they have quarterly O&M that the team has to cover, and then we look at what they see in the market place in terms of their ability to generate margin that would, with that roll-on, cover the fixed cost and basically get you to a profit in the fourth quarter.

Peter, do you have anything to add?

Peter Oleksiak

Regarding the nature of these timing transactions, a lot of them are originations, these four [ph] requirement service contracts. From accounting perspectives, we need to take day one reserves and actually then we (inaudible) in those reserves over when the transaction actually commences, and a lot of this will become – starting in the fourth quarter. So, this is really kind of a set program to get the day one reserves back in. So we’re feeling pretty comfortable with the $10 million roll-on in the fourth quarter.

Kevin Cole – Credit Suisse

Okay, and not to pin you into any sort of like ‘11 guidance, but are you still seeing the business as a $45 million to $55 million a year project or segment?

David Meador

We’ll talk about that at EEI. I think over time, that’s our objective. As you know, this has never been part of our growth objectives and we like that as – at the size it was was $40 million to $50 million, and the open question really would be a combination of the team working hard and the environment that they’re working in, and how soon does the environment change that will provide more opportunities for them to generate gross margins.

So, part of the answer to that question is it’s slightly out of our control. The question is what does the market provide them, but that doesn’t mean that the team isn’t working hard in the meantime. We trade and there’s three areas basically that we’ve described asset optimization market, marketing and origination and then proprietary trading, and they are seeing opportunities in that second group, the marketing and origination business. So, like I said, they’re working out hard and our long-term goal is still in the $40 million to $50 million range.

Kevin Cole – Credit Suisse

Okay, that’s helpful. And then on the steel tax credit, what’s it looking like for 2011? Do you see the bill getting past Congress, get the tax extended?

David Meador

We believe so, but it’s difficult to call some of these items. There’re two extender bills, the way to think about it is the large Bush tax reduction extender bill, and then there’s a smaller extender bill that is Senate Bill 3793 and it was introduced by Senator Baucus. That bill’s a smaller bill, it also includes the R&D tax credit. We believe there’s broad support and we’re pretty optimistic that this gets passed in lame duck legislation, but it’s something that we’ll all have to watch.

Kevin Cole – Credit Suisse

Okay. And you’re expecting that to fall out around $0.18 for 2010 of benefit?

David Meador

It’s $30 million of net income, and if it gets extended it will be slightly less for next year.

Kevin Cole – Credit Suisse

When you file the Detroit Edison rate case later today, do you have to refile for choice or is that any different proceeding?

David Meador

No, it’s part of the filing that we’ll make today.

Operator

(Operator Instructions) We do have a question from Ashar Khan from Visium Asset Management.

Ashar Khan – Visium Asset Management

So you still are expecting a 5% growth rate? And just wanted to hear, when should we expect ‘11 guidance for 2011?

David Meador

Next week. We’ll be at EEI with Gerry Anderson and its part of our presentation that we’ll make next week.

Ashar Khan – Visium Asset Management

Okay, but the long-term growth rate is still intact as you see it?

David Meador

Yes. Over time, the utilities as an example, we have substantial capital investments that we’re going to have to make, and with the utilities being two thirds of the business, we have more than enough capital investment to make that will actually drive that growth. Our challenge is actually a little bit of the opposite, we’re trying to turn back some of that capital to be really cognizant of the impact on our customers. And then we also see a lot of interesting opportunities in the non-regulated businesses and Gerry Anderson will also give a multiple year review of that next week.

Ashar Khan – Visium Asset Management

Okay. And then, could you just remind us, there was a change as part of this legislation last year in terms of – what are the new laws if there’s any M&A activity in the state? You have to get approval from the Commission? I believe there was a change in laws part of the legislation. Could you just remind us, what is the procedure if there is any M&A activity? Do you have to get approval from the Commission or what happens?

David Meador

Yes, the law that was passed in 2008 that provided the new regulatory environment that we’re working in in renewable energy and other factors also provided for the Commission to be able to review and approve an acquisition of a Michigan company.

Ashar Khan – Visium Asset Management

Okay. And is there a timeframe for that or were any standards set up, or any time frames set up or no?

David Meador

I’ll let Don [ph] talk to that, but the reason I don’t know the answer is I view this as a pretty remote activity. So, Don, do you want to comment on that?

Unidentified Company Representative

Yes. As I recall the main time constraint as the Commission has 90 days to rule on it. I believe it’s 90 days. It could be a 180 days but there’s a relatively short time frame, that once you file an application, the Commission has change to rule on it.

Ashar Khan – Visium Asset Management

So it’s 90 days. And is there any standards that was set up in the law or no?

Unidentified Company Representative

There’s some criteria that the commission has worked on in terms of how to process with work but since nobody’s done it, it’s kind of unclear how it would work. We’ll see how it works if somebody files one of these applications.

Operator

At this time, there are no further questions. I’ll turn the conference over to Mr. Meador for any additional or closing comments.

David Meador

Well, thank you for joining us this morning, and I appreciate you joining us for the call, and we look forward to meeting many of you next week at EEI. As I mention, we’ll provide additional insights on 2011 including more details on the upcoming Detroit Edison filing that we’ll make later today, and then some longer term outlooks on both our utility, non-utility businesses. And as a reminder, Gerry Anderson and I will be presenting Tuesday morning at 8:15 Pacific Daylight Time. So thanks again for joining us and have a good day.

Operator

That does conclude today’s conference call. Thank you for your participation and have a nice day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY’S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY’S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY’S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: DTE Energy Management Discusses Q3 2010 Results – Earnings Call Transcript
This Transcript
All Transcripts