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DTE Energy (NYSE:DTE)

Q1 2012 Earnings Call

April 27, 2012 9:00 am ET

Executives

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

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

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

Don Stanczak -

Analysts

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

Leslie Rich - J.P. Morgan Asset Management, Inc.

Kevin Cole - Crédit Suisse AG, Research Division

Brian Chin - Citigroup Inc, Research Division

Paul Patterson - Glenrock Associates LLC

Andrew Levi

Unknown Analyst

Ashar Khan

Operator

Good day, and welcome to the DTE Energy First Quarter 2012 Earnings Release Conference Call. Today's call is being recorded. At this time, I'd like to turn the conference over to your host, to Mr. Meador. Please go ahead, sir.

David E. Meador

Thank you, and good morning, everybody, and welcome to our first quarter earnings call. 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 Controller; Nick Khouri, our VP and Treasurer; and Mark Rolling, our Director of Investor Relations. I also have members of the management team with me if needed during the Q&A session.

If you turn to Page 4, this morning we're going to cover our first quarter results, and we'll also discuss the recently filed rate case at MichCon. We'll be at the AGA financial forum on May 7 and 8, and we'll take that opportunity to update you on some of our growth projects of the 2 utilities, as well as the Gas Storage & Pipelines' Bluestone Project in the Power & Industrial, Reduced Emissions Fuel business line.

We're expecting a high today of about 55 degrees here in Detroit. Actually it's a nice, sunny day, which is consistent with what you would expect here in Michigan in April. This is a sharp contrast to the first quarter, where we experienced anything but seasonal weather. Similar to many other parts of the country, the MichCon service territory saw one of the warmest winters on record. The mild temperatures were great news for our customers in form of lower utility bills. But as you've seen in our recent press release, the warm weather had an impact on the first quarter. We did include about $8 million of that weather from January and early February when we provide the guidance.

So with that said, let me start on Page 5. We have a disciplined growth plan that will provide 5% to 6% long-terms earning growth per share. And when you combine that with our attractive dividends, it provides a 9% to 10% total shareholder return. All of this is set around one of our north stars and that's maintaining a strong balance sheet. Both of the utilities have robust growth plans. At Detroit Edison, as we played out for you, 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 out of customer homes. The importance of these infrastructure investments is evident in the rate case that we filed last Friday at MichCon. We have a very constructive energy legislation framework in Michigan and also a regulatory structure, and we see it as our responsibility to earn that favorable construct every single day. We utilize continuous improvement, capabilities in everything we do to ensure that our utilities are controlling costs and minimizing rate increases to our customers and also ensuring great customer experiences.

Many of you have heard us talk about our intense focus that we have on continuous improvement. This is something we've been working on for many years, and I'll talk more about that when I talk about how we're going to offset weather this year. But it's something we take great pride in. As we look at the challenges of the quarter, we're going to use this continuous improvement program as a lever to help pull us in line with what our goals are for the entire year.

We continue to see attractive growth opportunities in our non-utility businesses, both at the power industrial projects and Gas Storage & Pipelines. And as I mentioned, we'll give you a more detailed update on that at AGA in just over a week.

On Page 6 is an overview of the quarter. In the face of the unusually warm winter, DTE Energy had operating earnings per share of $0.91 compared to $1.11 on the first quarter of last year. Detroit Edison earnings were flat year-over-year, while MichCon's earnings were down significantly due to the weather. Earnings at Energy Trading were down a little from last year, and we are reaffirming our full year operating earnings per share guidance of $3.65 to $3.95, and we're targeting the midpoint of $3.80. We'll leverage our cost and revenue opportunities across the portfolio businesses to offset the first quarter weather. And as we've indicated, it's a priority for us, and our balance sheet continues to remain strong. We generated over $600 million of cash from operations from the first quarter, and Nick will talk about that a little bit later in the call.

Turning to Page 7, with the first quarter behind us, I'd like to take a few minutes to take you through how I'm thinking about our full year 2012 guidance. With a final order in the Detroit Edison rate case last fall, we are expecting earnings to be relatively flat year-over-year. And this is consistent with our original guidance that we provided you. As you know, the summer cooling months and storm activities are drivers of results at Detroit Edison, and much of that still lies ahead of us. Assuming normal weather, I am confident that Detroit Edison will hit its target and actually might get slightly above midpoint. With the biggest part of 2012 heating season behind us, MichCon is going to need to work hard to reach its guidance range for the year. But with continuous improvement and potential onetime cost actions, the bottom end of the range is achievable.

Gas Storage & Pipelines continues to provide solid earning streams. Additionally, we're looking at some revenue opportunities here in this business to help offset the challenges at MichCon. Year-over-year, we're expecting reduced emission fuels or REF, as we call it, to deliver a nice bump in operating earnings at the Power & Industrial projects. We're also looking at revenue enhancement opportunities in this business to offset the first quarter weather and other business units. So, for GSP and the Power & Industrial group, we're looking to drive both of those to the high end of their guidance range.

As Peter will explain in a few minutes, Energy Trading saw a small loss for the first quarter, and that was also driven by unprecedented warm weather across the country. Our expectation for this business is to deliver results over the next 3 quarters similar to annualized historical levels, thus making it achievable to reach the low end of their guidance. And we expect the holding company to have improved results over last year, and that's driven mainly by lower interest rates. So in total, we remain committed to our original earnings per share guidance of $3.65 to $3.95 and target the midpoint of $3.80.

Now turning to Page 8 is an overview of the rate case that we filed last week at MichCon. MichCon's gone nearly 3 years without a base rate increase. Now recall we filed a case in 2010 and then we withdrew it when we determined that we could achieve our authorized return on equity without additional rates. The current rate of filing is just for under $77 million, that equates to roughly a 4% increase annually in base rates since the last rate increase. When you couple this with a decline in natural gas prices, the typical residential customer will see a lower bill in 2013 compared to recent years. This combined equates to an annualized 5% decrease in residential bills. The 2 biggest drivers in the rate case are capital investment and lower sales. We're seeing lower midstream revenue at MichCon and continued customer conservation since our last rate case, and we continue to make investments in our aging infrastructure.

Other highlights of the case include a simplified decoupling mechanism, an authorized return on equity of 11%, which is consistent with MichCon's current authorized level. And maybe the most important element of this case is a proposal to implement an infrastructure recovery mechanism to support the investments needed in replacing cast iron mains, moving gas meters out of customer homes and continuing the pipeline integrity work in our transmission system.

Before I hand it over to Peter, I'd like to also provide you an update on recent developments at Detroit Edison. As many of you have seen on April 10, the state of Michigan Court of Appeals issued a decision relating to an appeal on the January 2010 MPSC order. The 2 items of interest here are the revenue decoupling mechanism or RDM and AMI, the automated meters.

First, regarding the RDM, the court determined that the MPSC exceeded its authority when it authorized Detroit Edison to adopt the revenue decoupling mechanism. As of March 31, 2012, Edison had accrued on its book a regulatory liability related to the pilot RDM, which predominantly represents weather in prior periods. The MPSC has until May 22 to appeal the decision to the Michigan Supreme Court, and they are collecting comments through May 18. We will comment as part of that process, but ultimately, we're going to have to take the lead of the commission, so we're waiting to see how the commission plans to proceed on this.

We've always been supportive of an energy efficiency-only mechanism, and when coupled with a well-functioning energy efficiency incentive program, we've been supportive of that. If this is appealed by the MPSC, it could take some time. Before we learn of the Supreme Court, we'll hear the appeal. And if the appeal is taken, it's likely that process will take months to years before it's completed. So we're going to continue to maintain the RDM liability on our books, and we also will not be implementing the 2012 RDM until we get further direction.

The second item of note is the court's decision as it relates to AMI. Back in January of 2010, the MPSC approved the inclusion of $37 million in rate base related to the AMI pilot program. However, the court found that the record of evidence in the case was insufficient and has remanded this to the MPSC for further review. We provided the cost benefit analysis of the AMI program and we believe this will be resolved in a positive manner. So with that background, let me pass it over to Peter, and he'll take you through the quarter with some additional comments.

Peter B. Oleksiak

Thanks, Dave, and good morning to everyone. I'd like to start with Slide 10 in the first quarter earnings result. For the quarter, DTE Energy's operating earnings are $0.91 consistent with reported earnings. Detroit Edison contributed $0.56, and MichCon, which was affected by the unusually warm weather, came in at $0.31. The Non-utility segments combined earned $0.13. The drivers for the Non-utility first quarter results were Gas Storage & Pipelines at $0.10, Power & Industrial Projects to $0.05 and both Energy Trading and Unconventional Gas Production at a loss of $0.01 each. Finally, Corporate & Other had a loss of $0.09 in the quarter.

Let's move to Slide 11 and a summary of the quarter-over-quarter performance by segment. Operating earnings for consolidated DTE Energy are down $32 million for the quarter. Detroit Edison's operating earnings are $96 million, down $1 million from the prior year. I'll cover more details on Detroit Edison in a moment. MichCon, which typically has a strong first quarter, had operating earnings of $52 million, down $31 million from prior year, with 2/3 of its variance due to the warm weather in 2012 and 1/3 driven by colder-than-normal weather in the first quarter of 2011. In other words, the whole variance is due to weather. Our Non-utility segments in total are down $3 million, driven primarily by the change in our earnings at our Trading segment. Similar to our gas utility, our Trading business was also impacted by the unusually warm weather. In particular, this impacted our full requirement services transactions, which historically has produced solid earnings. In the first quarter of this year, we saw weather that was close to 3 standard deviations. We price our full requirement deals and has the physical commodity assuming some weather volatility, but not to the extreme as we experienced.

So in the first quarter, the business saw lower margins and lower volumes and with long and towering gas hedges in the low-priced markets. Page 21 of the appendix contains our standard Energy Trading Page, which show both economic and accounting performance. In addition to the lower margins on the existing deals, the level of economic margin and new deals was also down this quarter in comparison to the same period last year. Keeping on the same page and moving to the Power & Industrial projects, this segment was down $2 million. Last year, in the first quarter, there was some lumpy earnings related to the early extinguishment of an outside energy contract that shows up at the year-over-year variance. As Dave indicated earlier, our growth plans for the P&I business are on track and we are comfortable with achieving the full year guidance in the segment and are driving towards the upper end. Gas Storage & Pipeline earnings are up slightly from the prior year due to the growth in the pipeline transportation revenues. Finally, Corporate & Other was up $3 million from last year due primarily to the refinancing activity done last year at historically low interest rates.

Now, I'd like to turn to Page 12 to walk through some quarterly details for Detroit Edison. Operating earnings for Detroit Edison are $96 million, down $1 million from prior year. There are a lot of ins and outs for this segment this quarter. Margin for the quarter is up $9 million, driven primarily by the 2011 rate order, partially offset by warmer winter weather.

In the supplemental page that we provided with the earnings release, you will see that actual sales for the quarter are down 3% year-over-year, quarter-over-quarter. This decline represents the impact of weather on the electric-related heating load. Absent the weather impact, load was relatively flat for the quarter and we are forecasting approximately a 1% increase for the total year. Industrial sales were up 1% in the quarter, which is a continued indication of the improving economic activity for Michigan. Another item to note is O&M for the quarter impacted earnings by $8 million, primarily due to increased weather-related customer restoration activities and an increase in benefit expense, which we anticipated with lower discount rates.

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

Nick A. Khouri

Thanks, Peter. As always, improved cash flow and balance sheet strength remains a key priority for management and Board of Directors. Through the first quarter this year, DTE Energy's cash and balance sheet metrics are on track to hit our full year goals. Page 14 summarizes those balance sheet metrics. We expect to end this year well within our targeted leverage and cash flow ranges. In addition, we appreciate a series of credit improvements by the rating agencies so far this year, including an upgrade at Fitch and a positive outlook at Moody's. As discussed in prior calls, we are on track to reach $300 million of new equity in 2012 through a combination of employee compensation, dividend reinvestment and pension contributions.

Finally, liquidity remains strong with over $1.4 billion of available liquidity at the end of the quarter. Page 15 provides an overview of DTE's cash flow in the first 3 months of this year versus the same period last year. Cash from operations at $600 million was down slightly from last year, reflecting higher tax payments this quarter. As expected, capital is up compared to last year, which I will detail in a minute. All told, net cash after dividends was positive $100 million in the quarter.

Page 16 details capital spending. So far this year, total capital at DTE is up sharply from the prior year. Some of the increase is timing, for example, capital spending related to the schedule of refueling at Fermi. But overall spending so far this year is consistent with the 25% year-over-year increase we expect in 2012. In the first quarter, capital was higher in all our business units, including renewable business in Detroit Edison and non-utility capital in our Gas Storage & Pipelines and Power & Industrial business lines.

In summary, DTE's cash and balance sheet targets are on track, supporting higher levels of investment across all our business.

Now let me turn it back over to Dave to wrap up.

David E. Meador

Thanks, Nick. Let me wrap up on Slide 18. As with many in the industry, the first quarter of 2012 was a challenging one. However, we see this is as an opportunity to improve as a company. When we talk to our employees about our goals for the company and the challenges we face, we talk about working to make DTE Energy the best operated energy company in North America and a force for growth and prosperity in the communities we live and serve. So this is an opportunity for us to get better at everything that we do. And I have confidence, as we've seen in the past, that our employees will help us get there. Additionally, we continue to make investments necessary to drive our long-term growth and we look forward to sharing more details of our plans at AGA in early May. We're scheduled to deliver our presentation on Monday, May 7 at 2:15 p.m. Mountain Standard Time or 5:15 p.m. for those in the Eastern time zone that might be calling in. Now with that, we'd be happy to take questions now, Corinne.

Question-and-Answer Session

Operator

[Operator Instructions] And we'll take our first question from Paul Ridzon with KeyBanc.

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

A lot of your unregulated businesses are kind of tied to coal, and obviously that market has softened up. Kind of what are you seeing -- how is that impacting your businesses? And then are you seeing any impact on the appetite for the REF program as you seek out partners? And then just lastly, with gas prices down here, how is that impacting the Barnett process?

David E. Meador

Yes, let me take these one at a time, and I might get some help from Peter and Nick as we go through this. So if you look at what's going on with low gas prices and then the impact on coal and think about DTE, actually one of the things that we've enjoyed over the years is our portfolio businesses do have different drivers, and because of the way we're contracted and so on, it's really worked out well for us. So you take the midstream businesses as an example, where we have long-term contracts with tenors of 7 to 8 years on the Pipes & Storage. And there's not only no impact there, we're actually seeing an opportunity near term on short-term storage deals. If you went over to the Power & Industrial business, there's really no impact related to coal prices and the Power & Industrial. And actually what we're seeing is some opportunity to sell some of our coke battery output that was not contracted for. In longer term this gas price environment actually is an opportunity for that business, and I think you'll hear Gerry talk more about that at AGA. But a low gas price environment would give that group an opportunity to look at some new growth opportunities down the road. And then when you go over to Barnett, I think we have to stop thinking about this as gas play. If -- right now we are drilling specifically for oil in the Marble Falls and 80% of the revenue is coming from oil and natural gas liquids. And so we are exiting that business, but we are exiting on oil and NGLs, not on gas.

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

And aren't you -- looking at your income statement and cash flow statement, it looks like there was some gains and charges. Can you kind of give some more color as to what those were?

Peter B. Oleksiak

There was an impact last year in the first quarter. If you recall, we did talk about it, it was with -- we had an original unit down at our Fermi site that we took a charge, really, at the retirement accounting that we took there.

David E. Meador

Was there something more specifically that [indiscernible]?

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

Yes, go ahead right in front of me. I'll follow up with it offline.

Peter B. Oleksiak

When I look at that, that's the one that's kind of popped on the statement, is that retirement charge last year.

Operator

Next question will come from Leslie Rich with JPMorgan.

Leslie Rich - J.P. Morgan Asset Management, Inc.

I wondered if you could help me understand decoupling at the gas utility. I was under the impression that you had decoupling there, so I guess I'm a bit surprised that the mild weather had such a big impact on net income.

David E. Meador

Go ahead, Peter.

Peter B. Oleksiak

Yes. The decoupling that was implemented at the gas utility was really a usage on base. Decoupling -- actually weather did flow through that decoupling mechanism, so it really is kind of working as designed. The weather does flow through.

Leslie Rich - J.P. Morgan Asset Management, Inc.

Okay. And then...

David E. Meador

Leslie, we were not -- that has never included weather protection at the gas utility.

Leslie Rich - J.P. Morgan Asset Management, Inc.

Okay. And then on the electric, because of the court decision, you won't collect or accrue for any decoupling there going forward.

David E. Meador

Correct. The -- basically, what the court said was that the 2008 law was very specific about authorizing gas decoupling, but was silent on electric. And the -- so the judge concluded that the MPSC didn't have the authority, so that -- I think the way you have to think about it is there is no decoupler right now. And again, we'll have to wait for the MPSC to take a position. Whatever happens would be a perspective issue anyways. Unless, for example, if the MPSC decided to appeal and the Supreme Court overruled the judge, then this could still be in place. But we don't know exactly what the MPSC will do. And if they did appeal, it's uncertain whether the court would hear it. And if they did hear it, ultimately what the outcome would be.

Leslie Rich - J.P. Morgan Asset Management, Inc.

Okay. And then just finally with low gas prices and dark spreads being compressed, are there any thoughts in terms of your CapEx program on scrubbers? Or your overall generation mix over time?

David E. Meador

No. Not at this time. As you know, we've laid out our environmental program at AGA, I think Gerry will be talking a little bit more about the ongoing testing we're doing with DSI. But right now, when we look out going forward, our environmental program as we see it is not going to change.

Operator

Moving on to Kevin Cole with Crédit Suisse.

Kevin Cole - Crédit Suisse AG, Research Division

Dave, can we -- I guess just kind of rehash Slide 7, the guidance slide, just to make sure I have this right. So for Detroit Edison, you expect to be in the midrange of the guidance? And then...

David E. Meador

Midrange and possibly slightly above midpoint. If you did the walk down here you'll see that MichCon were driving to the low end of the range. Gas Storage & Pipelines we -- as I indicated, we're seeing some opportunity in some near-term storage deals, and we're going to work hard to drive that to the top end there. The Power & Industrial business, we see driving to the top end also there.

Kevin Cole - Crédit Suisse AG, Research Division

And then with -- I guess with trading. If I remember right this time last year, you were able to give us some, I guess, hard numbers or, I guess, pretty good color on the shaping for the rest of the year. Is that more of an AGA event or do you have any commentary like that available?

David E. Meador

Well, we'll certainly talk more at AGA. But our sense right now is if you look at historical numbers for the remaining 3 quarters, we feel that we will be able to get to the low end of the range. You got to keep in mind that what we saw in trading here was specifically weather driven, something that we see it really 1/3 standard deviation of that around RFS deals. And so there would be no -- I view that as a onetime event, not a recurring event.

Peter B. Oleksiak

Kevin, this is Peter. There may be some lumpiness in the remaining of the year by quarter, and a lot of that, it is -- we have to roll on accounting which we reserve and then release as the deals are done. And so -- but as Dave said, if you cannot take the remaining of the year, looking at historical level of activity, we're comfortable with the low end.

Kevin Cole - Crédit Suisse AG, Research Division

Okay. Yes, seasonality is always kind of tough on the business. And I guess so now on with REF, because we've been hearing some more chatter from a few of the larger Midwestern utilities that they're looking at that technology. Can you offer any color on the footprint that your license allows?

David E. Meador

We've said before, the counterparties that we're talking to are Midwest utilities. And we've also said, we know there's some other competing similar technology, but we are also making progress on the 4 relocations. And again, I would expect an update at AGA, but if you look at 2012, just backing up, there's 9 machines, and 5 basically are driving the earnings for this year. And then we're going to relocate the 4, and we expect to be able to give you more insights on the 4 at AGA. But think about the 4 as the driver to 2013 earnings and not 2012.

Kevin Cole - Crédit Suisse AG, Research Division

And then so the upside, that will be achieved through on 2012 that we described earlier, that's just through some more volumes being put through than expected?

David E. Meador

Well, the upside in Power & Industrial businesses is coke sales that we hope to be lacking in soon. But we've also said to the extent we can accelerate -- there's a timing issue on the 4 relocations. If you accelerate, we'll pick up additional tonnage this year.

Operator

[Operator Instructions] We'll move on to Brian Chin.

Brian Chin - Citigroup Inc, Research Division

Question on the -- going back to the decoupling mechanism in the MPSC appeal. We were sort of under the impression that either you guys or the MPSC could appeal the decision. But sort of listening to your comments, particularly in response to Leslie's questions, it sounds like you may not want to appeal it, or can you just give us a little bit of color on depending how the MPSC appeals process goes. Are you guys intending to appeal it as well? Just give us a little bit of color on your thought process there.

David E. Meador

Yes. The ball is really in their court, and I don't -- because they're taking comments right now, I don't think they've indicated what they're going to do. So if this is appealed, it's likely going to be appealed by the MPSC.

Brian Chin - Citigroup Inc, Research Division

Okay. So, it's not as though you guys would have your own appeal. Largely, even though you have the ability to appeal it, you'd watch to see what the MPSC does and use that as a -- as sort of the , okay, that's as good as the appeal as the whole process can face.

David E. Meador

Right. I think that's the right way to characterize this. We -- as we've said, we were happy with the revenue decoupling mechanism to address energy efficiency. We think going forward, you could address energy efficiency through another mechanism. For example, you could have EE tracker that works with an incentive program that gets you to the same place. I don't know if they'll consider that or not, because again, I think right now we're just in our comment period. And then if we did not have decoupling, we've also said that even though it's slightly makes the risk profile for the company is higher, we have always had the ability to file rate cases and self-implement. And because of the level of capital, we'll be in regular rate cases. So we were okay with the decoupling mechanism. And if there wasn't one, we would be okay also. But we'd be very interested in something that would specifically address energy efficiency.

Brian Chin - Citigroup Inc, Research Division

Got it. And then if the decoupling mechanism ultimately sort of goes away and before you guys have the ability to put in something like an EE tracker. Is there -- if I remember right, I think that there's a regulatory liability on the books that might be released. Could you talk a little bit about that? What would happen on the balance sheet if that decoupling mechanism would ultimately go away?

David E. Meador

It's really too early right now. We do have a liability accrued on the books. And what the MPSC might do, for example, whether they would appeal, whether the Supreme Court would hear this, what the Supreme Court ultimately does -- I think we've just taken a position. It's too early to speculate on what might happen with that liability. And as we get more insights to that, certainly we will know in May what the MPSC's position is, then we can provide you more color on that.

Operator

And we'll move on to Paul Patterson with Glenrock Associates.

Paul Patterson - Glenrock Associates LLC

With respect to the weather impact on kilowatt hour sales, I saw the revenue impact, but I wasn't clear on what the weather normalized growth would have been, in your best estimation, if you backed out the impact of weather in the leap year.

Peter B. Oleksiak

This is Peter. Let me take you there. The impact of the leap year for the total year is pretty immaterial. It's one extra day in the quarter, so there's probably close to 1% impact in the quarter. But by the end of the year, it's noise. So when you looked at it -- and I know you'll see in the supplemental we provide the actual sales, and I'll take it really class by class. First, the total actual sales were down 3%. Now the residential sales were down 5%, and I'll say that was predominantly weather. If you temperature normalize that, it'll be relatively flat in the quarter. And then on the full year for residential, we are looking at a relatively flat. And our energy efficiency programs really are targeted at that segment. So that's our assumption right now, it'll be flat in a temperature-normalized basis. The industrial sales -- actually, this class is pretty weather insensitive, and it was up 1% for the quarter. Now for the total year, right now our projection is there's a 2% growth for that. So that 1% actually is in line with that and maybe a little bit higher than we're anticipating from a run rate perspective. The commercial sales was down 3% in the quarter, and once again we look at that as all weather. We do see a little bit of uplift and the temperature normalized in the quarter and then the full year. It's about a 0.5% that we're going to be anticipating on a temperature-normalized basis.

Paul Patterson - Glenrock Associates LLC

Okay. Great. And then just – there is a lot of talk about Detroit having its fiscal problems? Should we -- how should we think about the impact on you guys if there is any? Just -- what do you think the outlook is there, if you care to posit an opinion there? But also, how should we think about that as being a potential impact on sales or any impact on you guys that we should -- if there's any?

David E. Meador

I'll start, and I'll ask Nick for help here also. I think Detroit right now and we have a great governor and mayor that are working together to work through this issue. And I am more optimistic about not only Michigan but more optimistic that Detroit is going to pull out of its issues than I have been in a long time. We're seeing real interesting economic development. We're seeing a lot of young professionals move in to the city, and there's some real positive signs. If you look at us directly, Detroit has a -- is a very, very small piece of our business. The city itself is current on its bill, so I don't see any direct dollar risk there. And it's just something that we do what we could to because it's part of our corporate aspiration here, to be part of the growth in Michigan and Detroit, to do what we can do to be helpful with both the city and the state.

Paul Patterson - Glenrock Associates LLC

Okay. And then on the REF and the coke sales and everything that -- I guess you guys could give us a little more detail at AGA. Should we think of it this -- can you give us any sort of flavor as to what we might be seeing or?

David E. Meador

Well, on the coke, we just have a small portion of coke that is not contracted because those coke batteries are contracted out through 2014, '15 and '16. And so there is a small portion that was open that we're going to take advantage of current prices to lock in. And the way to think about it, it'll help drive that business to the high end of their guidance is what it will do. And then on REF, we are actively negotiating with potential host sites. And I think by the time we get to AGA, Gerry will be able to give you more insights on that. But we have objectives to have those machines relocated during this year, basically, to be in place to help drive 2013 earnings. And right now everything looks like it's on track.

Operator

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

Andrew Levi

Actually, Paul took care of me, so I'm all set. And just -- but just to understand for your forecast for sales, it's 0% residential, 2% in industrial and 0.5% for commercial, is that correct?

Peter B. Oleksiak

That is correct. And one thing if that if you -- all in, I think I did mention that, it's about a 1% all in before energy efficiency. Then if you -- that impacts about 0.5% for us.

Andrew Levi

Okay. So these numbers are all before energy efficiency?

Peter B. Oleksiak

They include. Yes, they include the energy efficiency.

Operator

Moving onto Catapult from Gutteman Origongi [ph].

Unknown Analyst

I got a quick question for you. Just want to ask about this customer restoration expense that kind of drove or went up this quarter, is that going to be recurring? Or just a onetime?

Peter B. Oleksiak

Well this is something that we -- in our guidance a full year forecast. And storm and restoration costs are typically lumpy throughout the year. But when you look at it on a total year basis, there's some consistency. So when we do our planning process, we look at basically recent history and averages around that. Having said that, we did see larger than traditional in the first quarter, and actually, weather-related about 3x as many customers were impacted. Some of this ties back to that warmer weather that we saw that really impacted the MichCon business. But we did see some increase storm activities that we normally don't see in the first quarter.

Operator

[Operator Instructions] We'll now move on to Ashar Khan with Visium Asset Management.

Ashar Khan

Dave, just a quick -- on the MichCon rate case, can you get just give us what is 100 basis point sensitivity to the revenue requirement?

David E. Meador

Don, do you want to answer that? Here's Don Stanczak with our Regulatory Affairs.

Don Stanczak

Yes. Their -- MichCon's equity is about, as I recall, $500 million, so about [indiscernible].

Ashar Khan

If $500 million is in this case, so that would be like what?

Don Stanczak

I'm sorry, it's $1 billion, so 1% would be about $10 million.

Ashar Khan

1% would be about $10 million aftertax.

Don Stanczak

So if you kind of pretax it up, it would be about $15 million.

Ashar Khan

$15 million or $16 million, okay. And you mentioned Cap structure and ROE. What's happening in the Cap structure? Is there more equity in there or what from before?

Don Stanczak

It's deferred taxes is really what's driving the reduction. Deferred taxes are up that's why the change in capital is a reduction in revenue requirement.

Operator

And we do have a follow-up from Brian Chin with Citigroup.

Brian Chin - Citigroup Inc, Research Division

Just one more question on the RDM. So while it's sort of in a little bit of appeal limbo right now, if load recovers, does that go with the some type of regulatory asset? Or do you actually get the benefit from that at the interim while we're sort of waiting for all this?

Peter B. Oleksiak

Yes, from an income perspective right now, we are accounting that we do not have an RDM, so any type of load increase or margin increase would flow to the bottom line. Having said that, we did have weather impact the first quarter for Edison. So even this year, the load increase, I would look at it really just offsetting that first quarter weather.

Operator

We actually do have a follow-up from Paul Ridzon with KeyBanc.

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

Actually, a couple of follow-ups. Is one of the potential fixes around decoupling just to have the legislature insert the word electric into the energy bill? Is that feasible?

David E. Meador

I don't think this requires or anyone would want to go legislative relative. That would be a lot of heavy lifting. I think it would be a lot easier -- if they choose to do it, it would be a lot easier to just to adjust a regulatory mechanism. So again, I don't know what direction the commission will take on this, but you could modify the energy efficiency incentive program that's already in place just to account for the over and under energy efficiency load. As an example site, it will be much easier path to handle this through a regulatory path and not ever go legislatively.

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

Okay. And then just back to my question, I'm looking at the cash flow statement. You've got -- it looks like a $19 million gain in there? It's the third line down after net income.

David E. Meador

No, we'll have to get back to you. So I suspect you're going to find it's a number of small things as we continue to press on cash and make sure that we're optimizing our cash flows.

Operator

And that does conclude our Q&A session for today. Mr. Meador, I turn the conference over to you for any additional or closing remarks.

David E. Meador

Well, thanks, again for joining us, and hopefully we've laid out the year for you. We're pretty confident with all the actions that we're going to take on the revenue and the cost side, that we'll be able to deliver on our commitment of $3.80 per share. And as a reminder, again, for those that won't be at AGA but would like to listen in on the webcast, it's on Monday, May 7 at 2:15 Mountain Standard Time or 5:15 for those of us in the Eastern time zone. And thank you. And for those of you that'll be at AGA, we look forward to seeing you there. Have a good day.

Operator

Ladies and gentlemen, that does conclude today's conference. We thank you for your participation. Have a great day.

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