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Executives

Gerald Anderson – President, Chief Executive Officer

David Meador – Executive Vice President, Chief Financial Officer

Peter Oleksiak - Controller

Analysts

Paul Ridzon – Keybanc Capital Markets

Steve Fleishman – Bank of America Merrill Lynch

Reza Hatefi - Decade Capital

Paul Patterson – Glenrock Associates

Mark Siegel – Canaccord Genuity

Mark Barnett – Morningstar

Danielle Seitz – Dudack Research

Leon Dubov – Catapult Capital Management

Ashar Khan – Visium Asset Management

DTE Energy Co. (DTE) Q4 2010 Earnings Call February 9, 2011 9:00 AM ET

Operator

Good day and welcome to the DTE Energy Year-End 2010 Earnings Release conference call. Today’s conference is being recorded. At this time, I’d like to turn the conference over to Mr. Dave Meador. Please go ahead, sir.

David Meador

Thank you and good morning to everybody, and welcome to our year-end conference call. Before we get started, I’d like to refer you to our Safe Harbor statement, which is on Page 2, including the reference to forward-looking statements.

With me this morning are Gerry Anderson, Peter Oleksiak, Nick Khouri, and Mark Rolling, and we also have other members of the management team that we can call on during the Q&A session if needed. And with that brief introduction, let me turn it over to Gerry.

Gerald Anderson

Thanks Dave. Good morning everyone. Thanks for being with us this morning. I’m going to cover two topics today. First I want to quickly review 2010 and some of our accomplishments last year, and then I’m going to move on to a look forward to 2011 and a few years beyond 2011. And that second topic, I think is especially important because as you’ll see later, 2011 for us is a bridge year between what’s been a period of very healthy earnings growth over the last three years and a period in 2012 and beyond that we’re confident we’ll resume that pattern of earnings growth. So more on that in a few minutes.

But moving on to Slide 5, we look back on 2010 as a really successful year for DTE Energy. On the earnings front, our EPS grew 9% year-over-year last year, and in fact grew at a 9% compound rate for the last three years. In addition, last year we had essentially 11% ROE at both of our utilities, so we earned or authorized, and also had solid earnings in our non-utility businesses where a strong year in our power and industrial business covered off for a weaker year in our energy trading business.

On a cash flow front, our metrics remain strong. We were upgraded by S&P late in the year, which was something we’ve been working hard at for several years so that was gratifying. We also increased our dividend 6%. We also kept an intense focus, as we have for the past five years, on continuous improvement; and we continue to reap dividends from this effort within the Company. So as I’ll talk in a few minutes, our absolute O&M is down over the past five years, and we continue to work hard on our costs. But increasingly we’re turning this continuous improvement toward the customer front. You can see that our complaints, for example, at the Public Service Commission are down 50% over the past five years. And as I’ll talk further in a little bit, we undertook a big step last year, essentially calling back every customer that we have an interaction with, using that to log defects where we’ve got things that we need to fix, and then we’re going after that with our CI.

We also undertook a lot of work on our growth agenda this past year. We announced our first major renewable energy project, a major wind project that I’ll talk about a little later. We began construction on a second scrubber at Monroe, and as you’ll see later, we’ve got a substantial investment program over the next three years in emission controls; and we launched several new projects in our power and industrial business, particularly the reduced emissions fuel business line, which is a significant new business line that I’ll lay out some facts on here in a few minutes, as well as our waste wood renewables business line.

Moving on to Slide 6, talking a little bit more about continuous improvement. I mentioned that this continues to be an important focus for us at the Company. You can see from the graphic on the cost front that our CI initiatives have more than offset structural cost pressures over the last five years; so absolute utility O&M is down over $100 million despite upward pressure in pension, healthcare, environmental additions at our power plants, general inflation, and so forth. And our work here is to keep driving each area of the Company to top quartile operating performance, and as we achieve that, push beyond that.

In addition to the cost savings we’re, as I said a minute ago, really focusing this CI effort more and more on the customer front – outage frequency, improved fieldwork, options for low income customers, and so forth. The reason for all of this is our belief that the companies that do the best during significant investment cycles, and we are in one of those, the companies that do best are those that aggressively manage affordability and maintain constructive regulatory relationships. And our belief is the best way to accomplish those two things is continuous improvement focused on costs and customer service.

Put differently, to get constructive regulation, you need to deserve it; you need to earn it. And that’s especially true when heavy investment is putting pressure on rates. And our job is to use this continuous improvement process to offset those rate pressures, manage affordability, and improve service quality. And if we do that, well, we believe the odds of constructive regulation and fair treatment are much higher.

Speaking of constructive regulation, on Slide 7 one of the things that’s certainly changed for the better in Michigan in recent years is our regulatory structure and our regulatory processes. You can see on Slide 6 some of the highlights and important regulatory developments for our utilities this past year, starting with the final order we received at Detroit Edison early in the year, which we characterized and continued to understand as we went through the year as a constructive order. We held off, as you can see further right on this slide – we held off on filing a new rate case at Detroit Edison as long as we could but did eventually file in October. And I think if you’ve taken a look at that filing, you’ll also see that we took some very creative steps within it to manage affordability in the amount that we’d need to increase rates for customers. That case we would expect to self-implement under in April, and the case will go final in October.

On the MichCon front we received a final order, as you can see in the middle of the slide, in June. We did file a rate case pretty quickly on the heels of that, but as the year went on and we continued to work on our costs and watched the behavior of things within the Company, we eventually determined that we could forego the case; and we did that, withdrawing the case in December, concluding that that was the right thing to do from a customer affordability perspective.

Moving on to Slide 8, another thing that’s changed for the better in Michigan over the past year is the economy; and you can see on the left-hand side of the slide what’s happening on the industrial front. The strong performance of the auto companies has been getting a lot of attention nationally, but the industrial turnaround that we’re seeing has been pretty broad. As you can see, we were up 21% this past year which led to an overall growth in territory sales of 3%. That turnaround is translating into the employment of folks here in Michigan as well. You can see that the unemployment rate, which peaked at about 14.5%, was down to 11.7% by the end of the year, so that’s a positive development.

Another indicator of health in the economy is our arrears, and you can see that we took a big step down in arrears this past year. Our uncollectable expense that’s associated with that was down sharply last year as well. So I think a range of indicators that suggests that we have worked our way through the events of the recession and we’ve got a nice recovery in the underlying economy here in Michigan.

On to Slide 9, I’m now going to turn from a look back on 2010 to a look forward to this year and the next few years. And I mentioned earlier that the past three years have been a period of very healthy earnings growth for DTE. Earnings per share have grown 9% annually between 2007 and 2010. Our EPS guidance for this year, 2011, is roughly flat to 2010 levels. It’s actually down a bit at the midpoint of our guidance, as you can see from Slide 10. And at DTE, we are talking very explicitly with our employees about 2011 being a bridge year – a bridge between that period of healthy earnings growth from 2007 to 2010, and a period in 2012 and beyond that I’m confident is going to resume that pattern of healthy earnings growth. Five to 6% a year is what we’ve been saying for a long time as our target, and that’s what we foresee.

So one question might be why are we so confident that 2011 is this bridge and we’re going to see that resumption of earnings growth next year and beyond? That’s one of the things we want to help you understand this morning, and I think to do that you need to both look back and look forward. You need to look back to understand the dynamics that are shaping our earnings this year in 2011, and look forward at the investments that we’re making this year and that we have underway that will play out over the next few years and beyond that will shape earnings in the future.

So what I want to do is take that look back and look forward, and I’ll do that with our utilities and then turn to our non-utility businesses. On Slide 11, I lay this out for Detroit Edison and MichCon. From 2007 to 2010 in those two businesses, we saw combined utility earnings growth of 9%. We also used continuous improvement to bring the ROEs in those two businesses to their allowed levels; but during that period, of course, the economic crisis hit and we pulled back investment pretty sharply, like a lot of people did, because of the capital market uncertainty and to manage customer affordability. And the result of that pullback is playing out this year.

So if you look in the middle of this slide, you’ll see that our combined utilities earnings growth is projected at about 3% in 2011. That’s less certainly than we’ve seen in recent years and less than our long-term goal of 5 to 6%, but it’s really a result of a lag impact from our reduction in investment in the heart of the crisis. But as you’ll also see in a few minutes, this is the year – 2011 – where we resume strong investments in the utilities, especially in renewable power and emission controls within Detroit Edison. And the result of that, on the right-hand portion of Slide 11, is that we do expect to see a resumption of 5 to 6% annual growth in our utilities in 2012 and beyond. And in addition in that period, the renewable investments that we’re beginning to ramp back up and the environmental investments will be actually even heavier next year and the few years beyond that.

So this is—what I just described is, I think, even clearer on Slide 12, where you can see our capital spending pattern. We had been planning for a period of quite heavy investment in 2009 and ’10 when the crisis hit. You can see how we pulled back, especially sharply in 2009, and we really only stepped up capital a bit this past year. This is what temporarily slowed the growth in our rate base and what’s playing through the lag in 2011.

If you look at this year and the next two years, though, you can see in the light blue bars and the green bars that our emission control investments and renewable investments are going to step up materially. Total capital expenditures will be a 1 billion to 1.2 billion in 2011, and as you can see, 2.4 to 2.8 billion over the two-year period of 2012 and ’13. You also see on the dotted green box on 2011 with a grey arrow—I’ll tell you a little bit more about that in a minute, but there is a renewable energy project, a wind farm that we’re pursuing with a partner, and the arrangement we have with the partner is that they’re going to construct the project and then we’re going to buy in as that construction plays out. We’re going to finish up the construction this year, so we may buy in our roughly $200 million portion of the project late this year or at the very beginning next year. So that $200 million could swing in either late 2011 or early 2012.

You can also see that, in the light blue here, the emission control expenditures ramp back up substantially as we prepare for requirements that are targeted to 2015.

So this step-up in capital spending at Detroit Edison is further laid out on Slide 13. The biggest piece of that investment is in our base infrastructure where we see 700 to $800 million per year – 2.1 to 2.3 billion over the three-year period. But the real growth in our earnings power and rate base is coming from the right two columns. Our environmental compliance expenditures – 800 to $900 million over the three-year period is really targeted at finishing two scrubbers and coming close to finishing one additional SCR at our Monroe power plant.

In addition to that, we see 500 to $600 million of renewable energy expenditures. The State for us has a requirement of 300 megawatts in place by 2013, so within the next three years; and we have the right under law to own half of that, so our projected expenditures to make that play out are 500 to 600 million over the next three years. And the details of that renewable expenditure are laid out on Slide 14.

The first thing I’d focus you on is the red star there in the middle of the state. That’s the project that I mentioned just a minute ago that we’re pursuing jointly with Invenergy. It’s a 200 megawatt wind farm. We are going to own 90 megawatts of that installation, about a $200 million capital investment. And as I said a minute ago, the way this is playing out is that Invenergy is going to front the investment and then we will buy in for our piece as the project gets close to ready to go commercial.

So you can see the impact of that, then, at the bottom left of the slide that we get a substantial step-up in our earnings from renewable energy and energy optimization as we go from 2011 to 2012. And this is certainly one of the things that is driving a return to earnings growth at a higher level at Detroit Edison in 2012.

Then if you look down the road, as I mentioned, we need to add to that project between 2012 and 2013. We’d expect to do that using the 78,000 acres of easements that we have under contract in Huron County. That’s designated there by the purple star. We’re working on those and we’d expect those investments on the heels of this Invenergy investment to take earnings in this business line to about 50 million by 2015, and as you can see, we’ll have a significant portion of that in place by the middle of this period, 2013.

MichCon, moving on to Slide 15, we’ll also be investing substantial capital over the next three years – about 500 to 600 million over that period, or about 175 to 200 million a year. MichCon’s investment agenda is laid out on Slide 15. The most significant element of MichCon’s investments are in the gas distribution network, and in particular we have been working with the Michigan Public Service Commission on a multi-year main renewal and meter move-out program that steps up the capital that we will be committing to our distribution infrastructure.

In addition to that, we continue to find opportunities within our utility storage and transportation asset base to expand storage. Generally we find our customers who want us to expand that storage, we contract with those customers and then often have pipeline investments that are needed to take that storage to market. That’s been an area of investment in recent years and we think that will continue here over the next few years.

So in summary for Detroit Edison and MichCon, we’re coming off a three-year period in 2009 and ’10 where we reduced capital expenditures in the wake of the economic crisis, but our capital expenditures on renewables, emission controls, gas main renewals and meter move-outs are going to drive our rate base investment up pretty sharply over the next three years. Our average capital spending in our utilities over the next three years will be about a third higher than it was last year, for example; and it’s this investment that will enable us to bridge from about 3% utility earnings growth this year to a higher rate of 5 to 6% next year and beyond.

Slide 16 takes a similar multi-year look back and look forward for our non-utility businesses. From 2007 to 2010, our two principle non-utility businesses – gas storage and pipelines, and power industrial – both grew at a healthy rate, 20% compound annual growth for those businesses over the three-year period. Energy trading averaged earnings of about 45 million, although as you know, our last year of that three-year period was a low year for us. The other significant event during those three years was a $1.5 billion monetization of our unconventional gas assets.

2011 for these businesses is a bridge year too. Our P&I earnings are going to be lower than last year. P&I earnings were very high last year but we had some items, as I’ll describe in a minute, that aren’t going to recur this year. But we are scaling up at power and industrial through investments in reduced emission fuels and our renewables, and we do continue to identify investment opportunities in our gas storage and pipelines business and we are making progress on those. In addition, we’re working to rebound from reduced earnings levels in energy trading the last few months, as Dave Meador will describe, have been promising on that front. And we do continue to work this year to position for the monetization of our unconventional gas assets.

So if I look forward to the next few years on the non-utility front, we see reduced emission fuels and renewable investments providing very substantial growth within our power and industrial segment. We have investments that will produce earnings growth at gas storage and pipelines, and we think our energy trading will return to more normal historical levels. That will combine with a move to monetize unconventional gas assets which we’ll use to fund growth, and this set of dynamics will also contribute to the 5 to 6% growth that we’re describing in 2012 and beyond.

Now one of the key elements of what I just described is the projected growth in our power and industrial business, and that is laid out on Slide 17. First on the left-hand side of the slide, and actually we first laid this out this past fall at EEI, we saw a big step up this past year in earnings – earnings between ‘09 and ‘10 more than doubled. But some of the items were non-recurring, so for example we saw high coke prices and we had some capacity open, and that played to our favor. That’s not going to recur next year. We also had the steel industry fuel tax credit. We actually did think that was going to recur right to the very end of the tax bill this past year, but it did get pulled, to our surprise and to the steel industry’s surprise. So those dynamics are producing a step down in earnings at P&I this year.

But as you can see from the light blue and dark blue bars here, we have two segments in this business that we expect to grow materially over the next number of years. One of those, in the light blue, is the reduced emission fuel segment; and just as a reminder, this is—these are projects where we have a technology that can be used at coal plants to reduce mercury and NOX emissions, that also benefit from a federal tax credit. We are making progress on developing this set of projects. We completed the sale of an interest in one of these projects and have it up and running. That was completed in January. And we are in negotiations with a number of other potential counterparties who run power plants a lot like Detroit Edison does and face the same emission control requirements that we do, and our goal this year is to get several facilities with those counterparties cited and up and running so that we see the substantial step-up in earnings from this segment that’s indicated here in 2012. And a little bit longer term, we’d expect to have our facilities pretty much fully pledged by 2013, and that 40 to $50 million largely in place by then.

On the renewable energy front, this past year we made significant progress in this arena. We purchased a majority ownership of a 44 megawatt plant in California late in the year. We’ll bring that online late this year. We also came to an agreement on a 45 megawatt facility in California that we now have in the conversion process that we’ll bring online early in 2013. Those two projects brought the total that we have in this segment of waste wood projects from small coal plants—brought the total to five, and so we’re going to see growth just from that base of five projects that we’ve brought online or are bringing online. But we’d expect to continue to find and invest in additional projects here. So the so-what of all this is that we expect the P&I segment to be one of our significant growth areas over the next three years and contribute to the 5 to 6% that I described earlier.

We also see opportunities in our gas storage and pipeline business, and that’s laid out on Slide 18. Our strongest opportunities in this segment center on the Millennium pipeline, which is shown there in dark blue. It runs from upstate New York into the New York City area. It also, as you can see, runs through the Marcellus Shale, and most of our development opportunities for that pipe center on gas that’s emerging from the Marcellus Shale. And those opportunities come in the form of main line pipe expansions as well as laterals off of the pipeline, and eventually connectors between Millennium and other pipelines. We are making progress on this front as well. In fact, I think the discussions went from pretty introductory and new early last year to discussions that are getting quite promising and serious early this year.

So I think the so-what here is that over the next three years, we see this as the period that this gas storage and pipeline business, which grew a lot over the past five years, we’ll make the investments that will fuel its next significant step up in growth.

In summary for the Company, then, on Slide 19 our investments on the top left are going to be up materially over the next three years. On average, if you compare the last three years to the next three years, we’re up on the order of 25% and that’s tied to our investments in Detroit Edison renewable assets, our environmental investments principally at the Monroe power plant, and the non-utility investments in P&I and our gas storage and pipeline that I’ve just mentioned. I would also say that the utility investments we’re taking with a strong eye on managing customer affordability, as I mentioned at the very outset of this discussion.

But if you look at what that implies in terms of an investment base and earnings for the next few years, our earnings this year, we’ve given guidance of 340 to 370. Within that, we do see utility earnings growth of about 3%; but as you can see, we expect earnings at both the utilities and our non-utility businesses to pick up in 2012 and ’13, and we’re projecting the 5 to 6% longer term growth there that we’ve talked about for some time.

So with that, I’m going to turn things over to Dave Meador to take a little bit closer look at 2010 and our 2011 guidance. Dave, over to you.

David Meador

Thanks Gerry, and good morning again to everybody. I’m going to start on Slide 21. For the year, our operating earnings are 607 million or $3.60 per share, which is at the midpoint of our guidance. And as a reminder, there’s a reconciliation to our GAAP reported earnings in the appendix, as well as there is other information in the appendix that I hope you’ll find helpful.

The $3.60 per share is a nickel higher than the midpoint of our original guidance for the year at $3.55, and is $0.30 or 9% higher than our 2009 operating earnings. Detroit Edison contributed $2.60 per share, and MichCon came in at $0.63. Both utilities did a great job, and as Gerry mentioned there, their authorized returns in 2010. We are seeing improvements in the local economy that we also aligned on the load chart with Detroit Edison’s temperature normal electric load up 3%, and that was driven predominantly by the industrial sector which was up 21%.

The non-utility businesses combined to earn $0.78 with power and industrial projects earning 85 million or $0.50 per share with a very strong year-over-year performance. And as we indicated, this won’t be repeated in 2011. Gas storage and pipelines came in at 4% higher than 2009 at 51 million or $0.30 per share, and energy trading had earnings of $0.04 and unconventional gas production had a $0.06 loss.

Finally, corporate and other had a loss of $0.41 for the year, and overall 2010 was a very good year for us. The performance came in very strong with the bulk of the earnings coming from the two utilities, which have returned to their full earnings power. As Gerry outlined, the power and industrial business had a very strong performance, almost offsetting the shortfall at energy trading.

Now shifting to 2011 and our outlook for the year on Slide 22, we outline our 2011 earnings guidance for each of the segments. As I just said, both of our utilities earned their authorized return on equity in 2010 and we expect to do the same this year in 2011. We have a rate case at Detroit Edison which will be finalized by the fourth quarter, and we are doing everything we believe is necessary to ensure a constructive order from the Commission, and I’ll talk a little bit more about that case in a moment.

At MichCon, we plan to return to a normal weather year after a warmer than normal year in 2010 and lower midstream revenues. Also at the utilities, we will use our continuous improvement capabilities to partially offset O&M expense.

Earnings at gas storage and pipelines will be up another 4% in 2011 as we continue to identify long-term expansion and development opportunities around the Millennium pipeline.

In 2010, we impaired some non-strategic leases at our unconventional production business, and that won’t recur in 2011. Also we’re seeing more oil and natural gas liquids production in our Barnett Shale properties, which is driving higher earnings in 2011. We’ve included in the appendix some key operating metrics for the business as well as a schedule which summarizes the valuation for the Barnett assets.

A couple points I want to point out here – given the nature of our properties, we get a 50 to 60% lift in revenue from natural gas liquids, and we are also pursuing some wells that add oil to our performance. Currently the value derived from 1mcf of gas is about $6.40, which is a nice premium over dry gas prices. Once a year, we update the reserve analysis for this business and we provide the valuation range, which is on Slide 35. Even if you use the conservative low end of the valuation, our current reserves are worth at least 400 million or $2.35 per share; and then the midpoint for that range obviously is much higher. Our plan is to still develop the properties for monetization with a focus on natural gas liquids and oil, and at the same time we’re going to eliminate the drag on earnings this year.

The power and industrial team is coming off a very strong year that we just talked about for 2010, which included some opportunities which won’t recur going forward such as the steel industry fuels tax credit and premium earnings on coke sales. As Gerry explained, the story with the P&I group is the potential earnings opportunity from the REF business line and the coal to waste wood conversions. We’ll start to see some earnings from these businesses in 2011 but we really start to scale up those lines in 2012 and forward.

2010, as you know, was a challenging year for our energy trading business. After a strong first quarter, we saw the markets flatten out in the second half of the year with lower volatility and lower commodity prices. In the third quarter, the business struggled to find the market opportunities to generate sufficient gross margin; however, that began to change noticeably in November and December. In January and so far in February this year, we have found trading opportunities returning in areas like power trading and full requirements contract with gross margins in those months similar to prior years. In fact, in January we earned about 20% of the economic gross margin that we assume in our full-year guidance. While we don’t see this business getting back to historical levels of 40 to $50 million of operating income this year, we do expect it to make a significant step in that direction and we set the midpoint of guidance at 25 million.

Finally, we’re expecting corporate and other to have improved results in 2011 primarily due to lower interest rate expense. So in total, we project DTE Energy to have operating earnings of 576 to 631 million, or $3.40 to $3.70 per share.

On Slide 23, we have an overview of the Detroit Edison rate case. We filed the case at the end of October with a total revenue requirement of 443 million. As an example of how we are focusing on customer affordability in this rate filing, we proposed some potential alternatives which could reduce the net rate request by nearly 200 million for a net rate request of $253 million. We’re looking forward to working collaboratively with the Commission on this rate case over the next coming months. Staff testimony is due at the beginning of April, and we plan to self-implement a rate increase in April while we’ll receive the final order in this case no later than the end of October.

Now turning to cash flows on Slide 24, in 2009 we had one of the strongest cash years in our history with cash from operations of $1.8 billion, and I’m pleased to report that we achieved the same level of cash from operations in 2010. We’re looking at 2011 with expected even stronger cash results of 1.9 billion in cash from operations. If you looked at total cash after capital and dividend and asset sales for 2009 and 2010 combined, we generated $850 million in total cash flow over two years.

As Gerry explained earlier, after slowing CAPEX during the recession, we plan to ramp it back up in 2011. We’ve said in the past we expect to issue between 100 and 200 million of new equity to fund our growth over the next several years. However, as a result of strong cash flows in 2010 and anticipated benefits from bonus depreciation of around 100 to $200 million between 2011 and 2012, we’re not expecting to issue any new equity this year and we’re working on reducing our equity needs for 2012.

On Slide 25, we’ve provided a breakdown for our 2011 capital plan. If you look at our capital for the utilities, going back it was 960 million in 2009. It was 1 billion in 2010, and we will be spending about 1.2 billion in 2011 which is nearly a 25% increase over 2009 levels. At Detroit Edison, as we outlined, we’re in the process of scrubbing the two remaining units at Monroe and we expect to have a sharp step-up in our environmental capital for the year. As we outlined, in 2010 we began construction on a 200 megawatt wind farm, and we’ll take ownership for 90 megawatts of that generation late this year or early next year, which will be about a $200 million investment for Detroit Edison. At MichCon, we’re planning on increasing our capital spending by over 20% in 2011, and this is driven primarily by our pipeline integrity and meter relocation work. Then at the non-utility businesses, we’re targeting capital investments of 200 to $300 million.

Slide 26 summarizes our balance sheet metrics. We ended the year with our targeted leverage range and we expect to be within that range for 2011. As a result of one-time deferred tax items in 2010, we realized FFO to debt of 28%, which is well above our targeted range. We expect that to return to targeted levels in 2011. And as a result of our strong balance sheet and cash flows we secured a credit upgrade from S&P at DTE Energy and at both of the utilities in December of last year. Also, Fitch revised Detroit Edison’s rating outlook to positive last month. In both cases, the agencies noted the economic conditions are improving in Michigan and a very positive regulatory environment that we have here.

Let me wrap up on Slide 27. As we’ve outlined for you, we have a plan that we’re confident in that will provide 5 to 6% long-term operating growth and at the same time provide an attractive dividend which combined provide a very attractive total shareholder return, and at the same time, doing all of that while maintaining a very strong balance sheet. As Gerry laid out, our utility growth plan is primarily driven by mandated investments and all of this is set in a very constructive regulatory structure that we understand that we understand we have to continue to earn every day by doing things by driving cost savings which will enable our utilities to earn their authorized return, and continuing to focus on our operational excellence, including customer satisfaction, which we believe over time will create a distinctive capability in this Company compared to others in the industry with a real focus on affordability. To compliment the utilities, we have meaningful low risk growth opportunities in our non-utility businesses that will continue to provide diversity both in earnings and in geographic reach.

With that, that wraps up our presentation and we’d be happy to take your questions.

Question and Answer Session

Operator

Thank you. The question and answer session will be conducted electronically. If you would like to ask a question, you may do so by pressing the star key followed by the digit one on your telephone keypad at this time. If you’re using a speaker phone, please make sure your mute function is turned off to allow your signal to reach our equipment. We’ll take in the order that you signal us and take as many questions as time permits. Once again, you may press star, one to ask a question.

Our first question comes from Paul Ridzon with Keybanc.

David Meador

Good morning, Paul.

Paul Ridzon – Keybanc Capital Markets

Good morning. How are you, Dave?

David Meador

Great.

Paul Ridzon – Keybanc Capital Markets

Can you give a little more timing on the monetization of the unconventional and what that could imply as far as your ongoing equity needs?

David Meador

I’ll start and then I’m sure Gerry will join me. If you remember back all the way to our analyst meeting a year and a half ago, we said to fund our growth we would need a certain amount of capital and/or—or excuse me, to support our capital growth, we’d need to issue equity and/or asset sales. And subsequently we translated that into about 100 to $200 million of equity per year. Through our strong cash flows, as we indicated, there will be no equity this year, and we’re going to drive that down next year.

One of the levers that we have here going forward is monetization of the remaining properties in the Barnett Shale, so we’re currently—as we indicated, we’re proving up the properties with a real focus on what I would describe as the wet nature of the gas, which is giving us an uplift in our prices, and we’re currently evaluating when we would start monetizing either small parcels of property or larger parcels over the next several years.

Paul Ridzon – Keybanc Capital Markets

So the 100 to 200 is kind of what you need, but that could be tapped down a little bit by selling some Barnett?

David Meador

Yes.

Paul Ridzon – Keybanc Capital Markets

And then I think you said 100 to 200 of Barnett’s depreciation benefit, how much of that is at the regulated utility, and what’s the impact on rate base? And is that baked into your 5 to 6% growth?

David Meador

First of all, it is baked into our 5 to 6% growth, and I don’t have the break-out on utility/non-utility. We have been taking some of the 50% depreciation across the Company, and some of this does apply to our non-utility businesses; so for example, you’ve heard us talk about our Mount Poso project, which is one of our renewable energy projects that qualifies for 100% bonus depreciation. So some of this is in our non-utility businesses but we see the bonus depreciation modest enough that that modest amount in combination with our increased capital spending will not impact the growth rate at the utilities.

Paul Ridzon –Keybanc Capital Markets

Could we just ballpark by saying looking at your non-utility CAPEX, your utility CAPEX, and take it in roughly the same proportion?

David Meador

Yeah, I think roughly that’s a good ballpark number.

Paul Ridzon – Keybanc Capital Markets

And then anything happening on the political front with the new governor in place?

Gerald Anderson

This is Gerry, Paul. I guess I’d just say that the new governor has got, like most new governors do, a whole slate of challenges out in front of him, principally focused on state budget and reform of the cost structure of the State. We know him very well. I know him well personally, and he’s a good guy, straightforward, ethical guy. But I think his focus is going to be squarely on that. Energy really hasn’t risen on the agenda of the new administration because they’ve got so much on their plate on other fronts, and I think that’s likely to remain that way.

Does that answer your question?

Paul Ridzon – Keybanc Capital Markets

Yes, it does. Just as a follow-up, are the choice advocates getting any traction at all?

Gerald Anderson

No. I think you could probably look at some things that have come out in state political regulatory rags here in the State over the past few days, that there’s been some commentary on that. We also know the leadership of the House and the Senate and the energy committees in both quite well. We know what their priorities are, and I think you’ll say—they’ve said themselves, and I think if you talk to them, they’d say this isn’t one of their priorities for the energy agenda.

Paul Ridzon – Keybanc Capital Markets

And on the list of things that kind of worry you, Gerry, how much is ROE deterioration, or how does that stack on the list?

Gerald Anderson

You know, I think our philosophy on the utility front is you’ve got to give to receive, and you’ve got to earn the quality of your regulation. And so the posture we’ve been striking with our regulators is that we’re going to work our tails off to manage customer affordability, and I think you see that, for example, in our Detroit Edison rate filing. We worked hundreds of millions of dollars out of what the ask might have been, all with an eye to reducing the impact on customers. The MichCon case being pulled was another case in point. So the approach we’re trying to take with the regulators is to work jointly on the big things and not spend a lot of time on things like ROE reduction. And frankly, I feel that if we do a really good job on the big things that we’ll get fair treatment on that and other fronts.

Paul Ridzon – Keybanc Capital Markets

Okay, thank you very much.

Operator

We’ll take our next question from Steve Fleishman with Bank of America Merrill Lynch.

Gerald Anderson

Hey Steve.

Steve Fleishman – Bank of America Merrill Lynch

Hey guys. How are you?

Gerald Anderson

Good.

Steve Fleishman – Bank of America Merrill Lynch

Just one follow-up question from what Paul just asked. From a sensitivity standpoint, what is the impact of 100 BPS sensitivity on ROE for the utilities? Or 10 BPS or however you have it.

David Meador

For Edison it’s about 40 million, 41%; and for MichCon, it’d be about 10 million.

Gerald Anderson

So 10 BPS would be 4 million.

David Meador

Four million, yeah.

Steve Fleishman – Bank of America Merrill Lynch

Okay.

Gerald Anderson

And MichCon about a quarter of that, so I think combined $5 million for the two.

Steve Fleishman – Bank of America Merrill Lynch

Right. And then one other question on the choice cap, which sounds like it’s not an issue; but how much request is there really for people wanting choice beyond the cap that’s there? Like, a 10% cap, is it only another few percent that want choice?

Gerald Anderson

No, I think in this market there would be more than a few percent. But I think what the policy makers realize is that if you go back just a couple years ago, there was zero request and choice was falling to zero; and now there’s request for more than 10%. The whole point of a cap is that commodity markets are volatile, and if you set policy tied to volatile commodity markets, you don’t have a policy. I think our regulators and legislators understand that, so the reason I think it isn’t high on their agenda is for that reason. I think one person in particular who understands it is our governor. It didn’t take him long. He’s an ex-businessman and in particular a high-tech businessman with a financial background. It took him about five minutes to come to the conclusion that, oh, what people are looking for here is just a free option, right? And the answer was yes, and he said well, that’s not a policy. So I think that he understands the issue, as do the leaders in the House and the Senate.

Steve Fleishman – Bank of America Merrill Lynch

Okay. And one last technical question – on Page 17 on the P&I projects out to 2015, at the bottom of that you have this corporate allocations interest in overhead. I assume that’s for 2015? The 60 to 70 million?

David Meador

Yes.

Steve Fleishman – Bank of America Merrill Lynch

What would that number be for your 2011 guidance?

Gerald Anderson

I’m looking at Peter Oleksiak here, our Controller.

Peter Oleksiak

It’s pretty similar, and we’re not anticipating a growth in those allocations throughout this time period.

Steve Fleishman – Bank of America Merrill Lynch

Okay. Does that imply that you can grow the earnings without having to grow investment, though? Like, there’s no more interest?

Peter Oleksiak

Probably the interest would be grown. That’s probably one piece. The allocations overhead would stay pretty flat.

Steve Fleishman – Bank of America Merrill Lynch

Okay.

Peter Oleksiak

We set our non-utilities at a 50/50 structure.

Steve Fleishman – Bank of America Merrill Lynch

Okay. Okay, thank you.

Operator

We’ll take our next question from Reza Hatefi with Decade Capital.

Gerald Anderson

Good morning.

Reza Hatefi – Decade Capital

Good morning. Thank you very much. I just got a little confused earlier on the Barnett discussion. Is that something – the sale of the properties – is that something that’s probably going to happen in 2011, or is it going to be multi-year, or how is that going to work?

Gerald Anderson

Let me take a crack at that. So I think what Dave was saying is that the highest prices in the marketplace right now are for oil and natural gas liquids. We do have those in our properties, and we’re making progress in continuing to improve our ability to get those and get them economically. So it’s really the timing of that that will define the timing of sale.

If you were to look at this year versus next year, we may see some modest monetizations this year; but we’d expect something larger would likely play out next year or beyond.

Reza Hatefi – Decade Capital

Okay. And then just a second question on the trading business. I guess part of your long-term five to six kegger assumes trading returns back to normal levels. What are those normal levels, and what’s kind of the driver, I guess, to get it back up there?

Gerald Anderson

So if you look over the past five years, both our cash flow and our earnings there are 40 to 50 million a year, and so we talk about normal 40 to 50 as what we mean. We’ve said pretty consistently we’re not looking to grow that business. IT provides us intelligence and cash, and that’s its role. It was 75 million two years ago, and 6 million last year. We had a long period in 2010 where the markets just went dead, not only for us but everybody – about an eight month period. But in December and January and so far in February, we have seen the markets return to much more normal behavior within our operation, so that’s a positive sign. It’s not something you can project has to continue or will continue, but it certainly is a reversion back to more normal behavior from that eight month dead period last year.

As Dave said, what we have this year is a range of 10 to 40. It’s just in line with what we saw this past year at the low end, and kind of the low end of normal at the high end, so the midpoint is 25. But we’d expect over time that we’d be able to achieve what we’ve seen over the past five years or so – that 40 to $50 million performance.

Reza Hatefi – Decade Capital

Great. Thank you.

Operator

We’ll take our next question from Paul Patterson with Glenrock Associates.

Gerald Anderson

Good morning, Paul.

Paul Patterson – Glenrock Associates

Good morning. I wanted to just sort of follow up on the rate impact, because you guys mentioned that there’s a lot of investment, but it seems that there’s a considerable amount in renewables and energy conservation, and you guys have been doing a lot in cost savings and what have you. So how should we think—I mean, you obviously mentioned affordability and what have you, so how should we think about how much rate relief you’ll actually be seeking with this rather large capital investment?

Gerald Anderson

Well, one element you pointed out, which is our renewable investments which are, as you can see on one of the slides, is a significant piece of growth at Detroit Edison. That increase in rates happened as part of the legislation and is done, so there won’t be increases for that. So that’s a good thing. I guess the second would be that as we continue to invest, and one of the questions people might ask is how can you grow at 5 to 6% in your utility if you’re not growing at 5 to 6% in your rate structure? And what we’re trying to do—first of all, the renewables help with that because of the way the legislature structured them; but secondly, we’re fighting hard on the continuous improvement front to manage our operating cost to a lower growth profile to that. The combination of the two are what we hope will allow us to moderate the rate increase profile.

Paul Patterson – Glenrock Associates

So when we’re thinking about you going in for rate cases, should we think of them as still being sort of an annual thing? I mean, you pulled the last one, like you mentioned. I’m just sort of wondering how should we think about just how much regulatory relief we’re going to be looking at—

Gerald Anderson

How regular and how much? So here’s how we talk about it internally. We very explicitly are telling our people from an affordability standpoint, hold off as long as we can; but we also don’t want to hold off so long that the cases become complex or large for us, the regulators, or our customers. So it’s striking that balance between regularity and health for us, and workload and impact on our customers. So this past year, that meant that we held off from a case in January until a filing in October.

But if you look forward, this is a heavy period of investment, particularly in emission controls were we’ve got almost a billion dollars over the next three years, and that’s going to imply that our rate base is going to be growing and we’re going to need to get returns on that to stay healthy. So I expect to see us going in each year, but we’ll use the philosophy I just described.

Paul Patterson – Glenrock Associates

Okay. There’s another utility in Michigan that sort of had their self-implementation situation—I know that’s a specific thing to them, but any flavor or change with respect to the Commission at all in terms of concerns about rates or what have you?

Gerald Anderson

Yeah, well, you’re right. The specifics on that one are—you should talk to CMS on. We make a habit not to say anything specific about them. But I have read the orders and there was information that came in late, so I think the Commission was saying we’ve got some late information, we want some time to digest it. If you take it more broadly and our feel for things, I don’t think it has any precedent. If you ask am I concerned about self-implementation or the structure generally, I’m not. I personally, and other senior people have been up to talk to the Commissioners recently, and I think they remain committed to playing out that legislation in the right way. So I’m not concerned in terms of precedent or tone or feel of things.

Paul Patterson – Glenrock Associates

Okay, great. And then just finally, there’s a lot of talk in Congress about tax expenditures as being a means of budget discipline, so to speak. I don’t know how to put it, but whatever. Do you see any exposure? You mentioned how the steel thing didn’t work out as you had expected. Should we be concerned about any specific tax situation that you see being potentially under assault or being changed, perhaps, with the new Congress and the new budget discipline that’s showing up there?

Gerald Anderson

Well, the way those things play out is forward-looking, so they’re always working on forward-year budgets and doing impact studies on forward years. And if they change policy, whether it’s on renewables or things like REF, to my knowledge they’ve never done it backward-looking. Now they always have the right to come in and audit things to make sure that it played out according to law and so forth, but they have never—and one of the real principles of tax policy is you set it and people need to be able to rely on it and invest against it, so the changes are forward-looking. So I do expect that there’s going to be a lot of debate around energy tax provisions—renewable tax provisions for example. They will be something that people are going to talk about. I think they’ll remain, but just how large they are and so forth will get plenty of discussion.

Paul Patterson – Glenrock Associates

Okay. Thanks so much.

Operator

We’ll take our next question from John Quealy with Canaccord Genuity.

Mark Siegel – Canaccord Genuity

Hi, good morning. It’s Mark Siegel for John. I was just wondering if you guys could talk a little bit about the smart meter program, your assessment of how that’s going so far, and perhaps talk about the process for evaluating—expanding beyond your initial commitment through next year.

Gerald Anderson

So we’re making good progress on it. It’s ahead of schedule, on budget. We’ve got about 130,000 meters completed at the end of this past year. We expect to have 300,000 in by the end of this year, and that’s of a total of 600,000. And what we’ve talked to the Commission about is that we want to take a stop at the end of 600,000 meters, evaluate benefits, evaluate—you know, we had a projected list of savings. We want to step back and make sure that we’re getting those. The other thing that is true in this round of investments for us is that we got a stimulus grant, so that brought down our net investment and it brought down the cost to customers. So what we want to do, then, is evaluate based upon the savings that we’re seeing, do we see savings to customers without help from the federal government? In other words, if we need to carry the full load, do these things pay for themselves and lower customer rates? And that’s what we—we’ll take a pause to do that evaluation.

The other thing that we want to evaluate is the service improvements. These are kind of—these meters are going to allow us to do some things for customers that we’ve never been able to do, like know before they know when they’re out of power. You know, a typical example – people are off at work, come home to find their power out. We’ll know that and can get them back up and running before they ever knew they were out of power. So there will be service improvements too. But general philosophy, we’re going to take a stop and evaluate and see if we should go on.

Mark Siegel – Canaccord Genuity

Okay. And does the stimulus money—is there an embedded provision in that, that says when you’ve got to make that decision or have your funds allocated by?

Gerald Anderson

We’re fully using the—if I got your question right, we’re on an investment path to utilize those funds that were described to the federal government, and that’s all working fine. And there is no contingency related to what we do in the future.

Mark Siegel – Canaccord Genuity

Okay, perfect. Thanks a lot, guys.

Operator

We’ll take our next question from Mark Barnett with Morningstar.

Gerald Anderson

Hi Mark.

Mark Barnett – Morningstar

Hey, good morning guys. A couple of questions here. I guess I’ll just hit first on the sales side. I know decoupling is taking care of the earnings and cash flow there, but could you give me just a little bit of commentary on—you know, commercial and residential sales obviously weren’t as strong as industrial, and maybe what’s going on there – a little color around that?

Gerald Anderson

I think it’s two things. Post-crisis, I think there was a stronger mindset about use of energy in homes and commercial businesses. The other thing is that we’re investing pretty heavily around conservation, and I think there’s an impact to that. Frankly, we want that impact. The other conversation we have in the Company is managing customer bills with a focus on bill size, and so we are looking at the combined residential gas/electric bill and trying to manage it down because we feel if we manage it down, the investments we’re making will be received a lot better. And so that decline in residential average use, we welcome and working to make happen.

Mark Barnett – Morningstar

Okay, so you don’t see a lot of—I mean, what’s sort of the housing situation in your service territories? I’m not really up to date with that information.

Gerald Anderson

Housing or population? We saw—I guess the best way to do it is probably customers. We saw a slight decline in customer count during the height of the crisis, and I don’t have a trend on that now. As the economy picks back up and so forth, we’d expect to see probably that reverse and trend the other way.

Mark Barnett – Morningstar

Okay. I may have missed it, and apologies if I did, but was there a plan this year for MichCon filing to replace what you delayed last year?

Gerald Anderson

We don’t have any plan that we’ve announced, and so we don’t have anything specific on that yet.

Mark Barnett – Morningstar

Okay. And I guess just one more quick question – this is more a general big picture. A couple of infrastructure pipeline companies around the Marcellus have been talking about the opportunity to ship gas back west and north, and onwards eventually to Canada, what with the higher gas prices up there. And I’m wondering where you guys sit at the pipe? You might have some insight into that – whether that makes sense and how that might affect your gas purchases going forward.

Gerald Anderson

Well, we sit in an interesting position relative to what you described because Michigan is a big storage market, and so we actually have seen this change in gas flow dynamics impacting—you know, pipes that you thought were going to flow one way, people are talking about flowing the other direction or mixed flows – one direction one part of the year; another direction the other part of the year as retail storage, for example. So yes, what people are talking about is real. If you ask is that all figured out yet? No. It’s still pretty dynamic and end users are trying to take stock of the significant change that these shale basins have created and what that means for pipe flows and storage utilization. And we really do—if you look at our Millennium pipeline, for example, and the connection of that back through Canada to a big storage base in Michigan, we’re one of the players that would potentially see that sort of impact, and that can be a good impact. But the market is still working all that out.

Mark Barnett – Morningstar

All right, great. Thanks a lot.

Operator

And we’ll take our next question from Danielle Seitz with Dudack Research

Danielle Seitz – Dudack Research

Thank you. Most of my questions have been answered. Just one on the equity issuance. You are still using a DRIP program. How much does that provide, and do you anticipate the new equity issue to be in 2013 for sure?

David Meador

This is Dave, Danielle. The first answer would be when we originally said 100 to 200 million a year, that never involved public issuance. That was always going to be through DRIP or pension plans, and as we said, now that’s all turned off because the number is zero this year. We’re going to work hard to see if we can drive that number down to zero next year, and I have no plans right now for ’13 because as we’ve indicated, we’re not only working on cash flows but we still have that—you know, you get on to that ’13 time frame, that now circles back to when do we see monetization starting to happen in the Barnett. So it’s very possible ’13 could be zero also, but we’ll have to wait and see how that plays out.

Danielle Seitz – Dudack Research

Great. Thank you.

Operator

We’ll take our next question from Leon Dubov with Catapult Capital Management.

Leon Dubov – Catapult Capital Management

Hi, good morning guys. I was wondering if you can give me a little bit of metrics around your coke batteries business in terms of what kind of volumes you guys do there; and sort of as a follow-up to that, with the robust pricing we’re seeing for met coal, is this an asset that could potentially also be monetized?

Gerald Anderson

So on the first question, most of our—essentially all of our coke volume now is contracted. We have a little bit available in the stock market but not much. We’ve been working to get those fully contracted so the earnings stability is there. And in terms of total tons, I don’t have that at my fingertips, but it’s on the order of, I think, a couple million tons by the time you put our total position together. But if you need that, we could get that for you.

In terms of being monetized, we haven’t looked at it but it could be something, for example, if a steel company wanted to manage their coke prices and coke availability and so forth, could have an interest in. And if down the road that turned out to be the right value decision, would we look at it? Sure. Have we had anybody approach us on it or had discussions on it? No.

Leon Dubov – Catapult Capital Management

Okay. Thank you.

Operator

As a reminder, if you’d like to ask a question, it’s star, one. And we’ll take our next question from Ashar Khan with Visium.

Gerald Anderson

Good morning.

Ashar Khan – Visium Asset Management

Hi, good morning. I think you’ve answered most of the questions. I just had a query – is there an ROE concern? Dave, you mentioned a little bit in your remarks that that’s one of the reasons you took off the gas case. Is there a concern that you have that this is not sustainable? I’m just trying to get a better context of your remarks earlier on.

David Meador

No, actually I’m not too sure exactly what you’re referring to, because pulling that gas case had nothing to do with concerns about return on equity. We filed the case, and as any other case over time, after we filed it some of the assumptions started to change, and the factors we looked at said the amount of money that we would need in a rate increase to hit our targeted earnings was much smaller, and we stood back and looked at it and said we could actually pull this case and go after cost reductions and hit our objectives. And at the same time, it’s one less case for us at the Commission and it’s the right thing for customers to do, and then we can put our energy and focus together on the Detroit Edison case where there’s a lot more economics. So this is more about over time, the number got small enough we started asking ourselves the question, why are we pursuing a case versus just going back to what we do really well, which is work on continuous improvement and cost. And I think Gerry addressed the overall ROE view right now is that in the Edison case, we filed for 11 and an eighth. We believe that our position on that is supportable, and we’re going to pursue that in the case. And we think there’s other much larger value drivers for customers that we will be talking to the Commission about in the way that we filed that case that can make it a win-win for us and for customers, and that ROE isn’t one of them.

Ashar Khan – Visium Asset Management

Okay, thank you.

Operator

And that concludes today’s question and answer session. At this time, I’ll turn the conference back over to our presenters today for any additional or closing remarks.

Gerald Anderson

Well, no closing remarks. Just want to thank you all for your time and interest this morning. We look forward to keeping you posted on progress as things go on this year. Thanks very much.

Operator

That concludes today’s conference. Thank you for your participation.

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