DTE Energy Management Discusses Q3 2011 Results - Earnings Call Transcript

| About: DTE Energy (DTE)


Q3 2011 Earnings Call

November 04, 2011 9:00 am ET


Peter B. Oleksiak - Chief Accounting Officer, Vice President, Controller and Investor Relations Officer

David E. Meador - Chief Financial officer, Executive Vice President and Member of Internal Risk Management Committee

Nick Khouri - Vice President, Treasurer and Member of Internal Risk Management Committee


Kevin Cole - Crédit Suisse AG, Research Division

Naaz Khumawala - BofA Merrill Lynch, Research Division

Paul T. Ridzon - KeyBanc Capital Markets Inc., Research Division


Good day, and welcome, everyone, to the DTE Energy Third Quarter 2011 Earnings Release Conference Call. Today's conference is being recorded. At this time I'd like to turn the conference over to Dave Meador. Please go ahead, sir.

David E. Meador

Thank you, and good morning, everybody. Welcome to our third quarter earnings call. And before we get started, I encourage you to read the Safe Harbor statement on Page 2, including the reference to forward-looking statements.

With me this morning are Peter Oleksiak, our Vice President and Comptroller; Nick Khouri, our Vice President and Treasurer; and Mark Rolling, who's our Director of Investor Relations. I also have members of the management team with me that I can call on during the Q&A period.

This morning, we'll cover the third quarter results and the final order we recently received in the Detroit Edison rate case. We'll be at EEI next week, and we'll take the opportunity there to update you on our long-term plan, including an early outlook of 2012 operating earnings. We'll provide updates on the growth story at the 2 utilities, as well as Power & Industrial's REF business line and Gas Storage and Pipelines' Bluestone Project.

Additionally, we'll provide an update on how we will finance our growth plans over the next several years. Gerry and I will be at EEI Monday, so the focus on this call will be on the quarter and 2011.

Let me start on Slide 5. We have a disciplined growth plan that will provide 5% to 6% long-term earnings growth per share, which when combined with our attractive dividend, provides a 9% to 10% total shareholder return. And all of this is always set around one of our north stars, which is maintaining a strong balance sheet.

But utilities have robust growth plans. At Detroit Edison, the growth is driven primarily by mandated environmental controls and renewable energy. While at MichCon, the growth is driven by infrastructure investments including a long-term cast-iron main replacement plan and a program to move gas meters outside of customers' homes. In Michigan, we are supported by both the 2008 comprehensive energy legislation and a very constructive regulatory structure. And we see it as our responsibility to earn this favorable construct every single day. We utilize continuous improvement capabilities to ensure our utilities are as efficient as possible, and that, at the same time, we're minimizing rate increases to our customers. This intense focus on continuous improvement has resulted in O&M cost, which in absolute terms, are lower than 2005 levels. That means over the last 6 years, we've offset over $325 million of inflation. This has enabled both of our utilities during their authorized returns, and at the same time, we've improved operational metrics throughout the company by holding down rate increases to customers.

We continue to see attractive growth opportunities in our non-utility businesses as well, particularly on the empowered industrial projects in the Gas Storage and Pipelines. And as I mentioned, we'll take you through our long-term growth plans at the EEI Financial Conference on Monday and Tuesday.

On the next couple of pages, I'll provide an overview of the quarterly results, the rate order and also an update on our guidance. So turning to Slide 6, are the highlights from our third quarter. We continue to have a good year and turned in another solid quarter. DTE Energy had operating earnings of $1.07 per share compared to $0.96 in the third quarter of last year. The key quarter-over-quarter drivers include lower earnings at Detroit Edison due to higher plant O&M spend in the quarter. Power & Industrial had one-time non-repeating items last year in the third quarter, so earnings this year are lower. Our Midstream business continues to provide solid earnings, and Energy Trading earnings are up sharply driven by ongoing improved economic performance.

With 3 quarters of the year behind us and the final rate order at Edison now completed, we're confident in tightening our operating earnings guidance for the year to $3.50 to $3.70 per share, from $3.40 to $3.70 per share, moving the midpoint up $0.05. And I have a page on the guidance coming up that we could take you through.

The balance sheet remains strong, and we will hit all of our goals for the year. Also we just recently renewed our $1.8 billion credit line, taking them out 5 years with a nice reduction in fees. And we have received the final order at Detroit Edison, which I will now cover on the next page which is Slide 7.

But first let me set the context for the Detroit Edison rate order. The comprehensive energy legislation, which was passed in 2008, had features that were negotiated among all key stakeholders. This included the renewable energy and energy efficiency plans, the skewing of business rates for business customers and a 12-month rate case cycle with 6 months self-implementation of rates. Over the last few years, there were several tracking mechanisms added to our regulatory framework, including a bad debt tracker, the storm and restoration tracker and an electric choice tracker. What probably wasn't contemplated was the complexity of how to deal with multiple tracking mechanisms being modified or eliminated during a period of self-implementation. This is further complicated this year by a separate depreciation case at Detroit Edison, which was finalized in June. The good news from a complexity standpoint is that almost all the trackers have been removed. But the bad debt, the storm restoration and choice trackers were eliminated. But we still retain a modified revenue decoupling mechanism at Detroit Edison. The Detroit Edison will be a simpler story going forward, although we do have a couple of reconciliation cases to work our way through. And then as a reminder, at MichCon, we still have a bad debt tracker and the decoupling mechanism there also.

In the Detroit Edison case, the intersection of the trackers, self-implementation and the depreciation case add a complexity and we had one item that we asked the MPSC to relook at this week, and we really appreciate the commission resolving this in a timely manner. It was related to the accounting treatment of the impact of change and depreciation rates during the self-implementation period. There are some other technical issues in the case that we will pursue in a rehearing process and we'll file for that rehearing in the next several weeks. Beyond that, it was a constructive order and we look forward to working with the existing commissioners and the new Chairman.

On page 8, there's an update on our 2011 operating earnings guidance. Overall, we're tightening our earnings per share range by bringing up the lower end of the range by $0.10 and increasing the midpoint $0.05 to $3.60. The lower range for Detroit Edison incorporates the partial year 50 basis points reduction in the authorized return on equity for that utility. We now expect unconventional gas to have a tiny loss for the year as we continue to prove up the oil reserves in the Marble Falls and prepare those assets for monetization. Energy Trading, as I previously noted, is having a very solid economic performance year-to-date, giving us the confidence to move their range closer to historical earning levels. The revised guidance is $593 million to $628 million, with the midpoint of $3.60 per share.

Now let me pass it over to Peter Oleksiak, who will take you through some additional details on the quarter.

Peter B. Oleksiak

Thanks, Dave. Good morning, everyone. Let's start with Slide 10 and third quarter earnings results.

For the quarter, DTE's operating earnings per share was $1.07. I'd like to remind everyone that a reconciliation to GAAP reported earnings is contained in the appendix. Detroit Edison contributed $0.92, and MichCon, which typically incurs an operating loss in the third quarter, came in at $0.06 loss.

The non-utility segments combined to earn $0.27. The drivers for the non-utility second quarter results were Energy Trading at $0.13, Gas, Storage and Pipelines at $0.08, Power & Industrial Projects at $0.07 and Unconventional Gas Production at $0.01 loss. Finally, corporate & other had a loss of $0.06 in the quarter.

Let's move on to Slide 11 and a summary of the quarter-over-quarter performance by segment. Our operating earnings for consolidated DTE Energy are up $20 million for the quarter. Detroit Edison's operating earnings was $157 million, down $8 million from the prior year. I'll cover more details on Detroit Edison in a moment. As noted earlier, the third quarter is typically a loss for the seasonal gas utility business. MichCon had a non-operating loss of $11 million, down $5 million from the prior year. The decrease in earnings was driven by a true-up of the final rate order in 2010 and lower storage revenues in 2011. Our non-utility segments are up $23 million in total, primarily driven by our Energy Trading segment, partially offset by lower earnings at our Power & Industrial projects. Energy Trading is up $34 million in 2011, coming off a loss of $12 million in the third quarter of 2010. The improvement is driven by a favorable economic performance and the benefit of accounting timing. As Dave mentioned in his update on earnings guidance, the trading company is essentially back at historical levels of income with a strong third quarter performance. For your reference, we provided our standard year-to-date economic to accountings earnings walk for the segment in the appendix, which shows the improved economic earnings in 2011 versus 2010.

Another driver in the quarter-over-quarter performance is the Power & Industrial Projects segment, which was down $14 million in the quarter, which is primarily resulting from non-repeating earnings last year from the steel industry fuel's tax credit.

Lastly, corporate & other was up $10 million from last year primarily to lower interest in 2011. We expect attributable ability reverse in the fourth quarter with the timing of tax-related expense.

Page 12 shows an earning loss for Detroit Edison. Again, the company produced operating earnings of $157 million for the quarter, a decrease of $8 million from the prior year. We experienced a $1 million improvement in margin driven by self-implementation rates recorded in the third quarter, offset by the revenue true-up recorded as a result of the October final order.

Even though electric utilities decoupled, we closely monitor sales levels and the underlying economy for our region. Overall, temperature-normalized service area load was up just over 0.50% in the quarter and close to 1% up year to date. Industrial load is up another 2% year-to-date, temperature-normalized driven primarily by the automotive sector. As a note, we had a very hot summer with a lot of storm activity as did much of the country. Edison's revenue decoupling mechanism and restoration tracker neutralized those impacts from hitting the bottom line. The primary change in earnings for the quarter is an increase in the timing of plan, maintenance and O&M expense within our generation fleet. We are still on track to achieve our O&M plans for the year.

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

Nick Khouri

Thanks, Peter. As always, improved cash flow and balance sheet strength remains a key priority for management and Board of Directors. For the first 9 months of this year, DTE Energy's cash and balance sheet metrics are on track to hit our full-year goals, and in fact, are nearly equal to the historically strong year we saw in 2010.

Page 14 summarizes our balance sheet metrics. We expect to end this year well within our targeted leverage and cash flow ranges. In addition, we have completed our 2011 funding requirements, including a $200 million contribution into our pension plan earlier this year. As we've said all along, we do not foresee the need for new equity in 2011. Liquidity remains strong, especially as Dave mentioned with the recent 5-year extension of our $1.8 billion of credit facilities.

Page 15 provides an overview of DTE's cash flow in the first 3 quarters of this year versus the same period last year. Cash from operations at $1.5 billion was on par with a strong internal cash seen last year. As expected, capital is up compared to last year, which I will detail in a minute. All told, net cash after dividends was a positive $100 million through the first 3 quarters of 2011.

Page 16 details capital spending. Year-to-date, total capital at DTE is up about 20%, or $180 million from the prior year. Capital at Edison is higher, reflecting an increase in both environmental spending and the acceleration of Wind Projects in Michigan. As we discussed on our call last quarter, we have accelerated the timing of our wind investments in Michigan. Renewable capital in 2011 is now projected at $350 million for the full year, up from the original guidance of $50 million. Since renewable investments at Detroit Edison are funded with a pre-existing surcharge, the new capital can be supported without an increase in customer rates while still maintaining our balance sheet target.

At MichCon, both operational and expansion capital is up this year, while non-utility capital is down due to the 2010 equity contribution from Millennium, as that pipeline went into service.

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 2010, allowing us to accelerate our investment in the renewable portfolio for Detroit Edison. Now let me turn it back over to Dave to wrap up.

David E. Meador

Thanks, Nick. Let me wrap up on Slide 18. 2011 is shaping up to be another good year for DTE Energy, which is allowing us again to deliver on the commitments that we've made to you. The solid year-to-date results and increased certainty around Detroit Edison, we're narrowing our guidance range for the year and moving the midpoint to $3.60 per share. We continue to make investments, as Nick outlined in this capital schedules, necessary to drive our long-term growth. And we look forward to sharing our future plans with you in more details next week at EEI. Gerry and I are scheduled to deliver our presentation at 9:45 on Tuesday morning, and we look forward to seeing many of you there next week. And with that, we'd be happy to take your questions.

Question-and-Answer Session


[Operator Instructions] We'll go first to Kevin Cole of Credit Suisse.

Kevin Cole - Crédit Suisse AG, Research Division

With the ROE reset, will this impact your ability to grow, I guess, from '11 into '12 by your stated 6% EPS growth or are there kind of some easy tweaks that you can do to your current strategy to support the growth?

David E. Meador

We'll lay out our 2012 and future growth plans next week, but we're still confident that we can grow 5% to 6% off the base of the original midpoint of this year. So if you took $3.55 forward, we're comfortable with everything that we see right now in the portfolio businesses, in addition to what we can do at Detroit Edison to hit that objective.

Kevin Cole - Crédit Suisse AG, Research Division

Okay. And then, I guess, now since given your rate cases are largely just capital-focused. Are you going to, I guess, maybe see about working a commission or feeling out their interest in trying to build as a longer stay-out periods that way you can kind of avoid the year-on-year volatility over this?

David E. Meador

Sure. Our sense, first of all, as I mentioned, that our rate proceedings will become much simpler with the removal of many of these trackers. And our general approach and philosophy is to stay out of rate cases as long as possible. As you know, we're very sensitive to the impact of rate increases on our customers, so we do everything we can do including ongoing continuous improvement to stay out of rate cases. That said, we are going to be looking for example at the Gas business, with what you see across the country is the majority of what's happening on rates there is related to infrastructure investments. And it's pretty common to have infrastructure-related trackers for gas LDCs and that's something we're very interested in at MichCon, which would allow us even to stay out of rate cases even further. But for the most part at Detroit Edison, I think what you're going to get to over time is it's going to be assets placed in service is going to be the primary issue that we'll be covering off in these rate cases and that's pretty routine for us. We don't have disallowances, and as you know, most of the capital here is mandated capital.

Kevin Cole - Crédit Suisse AG, Research Division

Okay, that's very helpful. And then my last question is, I guess, on the State, 10% by 2020, renewable standard. Will your prefunded renewable energy surcharge fully fund the rest of the capital -- or the rest of the renewable program to meet the standard?

David E. Meador



And our next question comes from Naaz Khumawala with Bank of America.

Naaz Khumawala - BofA Merrill Lynch, Research Division

Do you mind just giving us an update on the economy and what you're seeing in terms of residential and commercial sales?

David E. Meador

Peter, you want to take that?

Peter B. Oleksiak

Yes. I mean, when you look at it, there's a nice schedule on the supplemental, actually it's on the last page, that gives you your temperature-normalized service area, that's what we look at really to get a pulse on the economy. Residential right now is actually flat year-over-year. We're probably anticipating that going forward. That's actually where a lot of our focus on our energy efficiency is at -- and actually industrial, we are seeing pickup of this year around 2% year-to-date, and we're anticipating that to continue on. And the commercial, we're seeing a pick up as well. So we're feeling pretty good in terms of a recovery here. And actually, when you look at next year, we're looking at roughly about 1.50% before efficiency growth.

Naaz Khumawala - BofA Merrill Lynch, Research Division

Okay, great. So in the sense that you're uncollectible tracker, was set -- it was moved in the base rates and it was set on 2011 test year or whatever you filed for the tracker, given that sales have come down, is that concerning at all?

David E. Meador

No. We're comfortable with where that is set. And then just as a reminder, as we go into the heating season, we do have a bad debt tracker at MichCon for the gas LDC.


[Operator Instructions] We'll go next to Paul Ridzon of KeyBanc.

Paul T. Ridzon - KeyBanc Capital Markets Inc., Research Division

I was going to ask for an update on REF, but I guess I'm going to get shot down and told to wait till next week.

David E. Meador

Yes. Because my sense is we have some new PowerPoint slides that we'll be talking off of that'll make it a lot easier to do than I could do here, but we're going to outline for you where we are on the existing machines and the host siting construction process and then also how we see that ramping up in 2012 and 2013. So we'll lay that out in a fair amount of detail next week. So the PowerPoints will be out first thing Monday morning.

Peter B. Oleksiak

Monday. Yes, Monday.


[Operator Instructions]

David E. Meador

Well, it sounds like we don't have any other questions on the quarter. As you know, we're pleased with where we are in the quarter and for the year, and we're happy that we could tighten the guidance and raise that midpoint $0.05. And we do look forward to seeing everyone next week. We've -- we're booked pretty solid both days and if you're not scheduled for a 1-on-1 and you have time to come to our presentation on Tuesday morning, that would be great, because as we just mentioned with Paul, we're going to be laying out in more detail how we see the businesses growing over the next several years, including some new detail on the REF business line and an update on the Bluestone Project. But thanks for joining us and we'll see you next week.


And that does concludes today's conference, ladies and gentlemen. We appreciate everyone's participation today.

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