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DTE Energy Company (NYSE:DTE)

Q4 FY07 Earnings Call

February 22, 2008, 09:00 AM ET

Executives

David E. Meador - EVP and CFO

Peter B. Oleksiak - VP and Controller

Nick A. Khouri - VP and Treasurer

Don Stanczak - Director of Regulatory Affairs

Paul Teske - President of DTE Gas Resources, Inc.

Analysts

John Kiani - Deutsche Bank

Samantha Dennison - Credit Suisse

Barbara Chapman - Bear Stearns

Paul Patterson - Glen Rock Associates

Paul Ridzon - KeyBanc Capital Markets

Yiktat Fung - Zimmer Lucas Partners

Operator

Good day, everyone, and welcome to the DTE Energy Fourth Quarter 2007 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Dave Meador. Please go ahead sir.

David E. Meador - Executive Vice President and Chief Financial Officer

Thank you, Kim, and good morning, everybody, and welcome to our 2007 year-end conference call. I don't know about where you are, but in Michigan it's a cold snowy morning, so the gas folks are really happy today.

Before I get started, I encourage you to read the Safe Harbor statement on page 2 regarding forward-looking statements. And with me this morning is; Peter Oleksiak, our Vice President and Controller; and Nick Khouri, our Vice President and Treasurer; and Lisa Muschong, our Director of Investor Relations. I also have members of the management team on hand to help me with Q&A, if necessary at the end of the call.

So, let me start on page 5, I want to provide a business overview before I turn this over to Peter to take you through the year-end results. DTE is positioned very well to grow earnings overtime by 5% to 6% with our two utilities focusing on high customer satisfaction, and low operating costs. The regulatory and political environment in Michigan continues to be very constructive and we will update you today on legislation.

And as a reminder when we talk about growth, there is an upside to our growth story, since our projections do not include the growth and earnings from renewable energy, which is currently being negotiated as part of the legislative package.

We have a proven track record on value creation on our nine utility businesses. Although, it's going to be a much smaller portion of our investments story going forward, we continue to make modest investments in those businesses. We also have a series of catalysts during the year that will keep you updated on, and I'll cover those in the next page. And then just a reminder on our dividend of... our dividends $2.12 a share. It was increased a little over year ago, and is very attractive today with over 5% yield.

Let me turn to slide 6, and talk about some of the catalysts for the year. We updated the Detroit Edison rate case this week and we expect staff testimony in the second quarter of this year. And then all of these I'll cover in more detail in the next couple of slides. Comprehensive energy legislation is currently progressing through Michigan. Right now the Michigan House Energy Committee and pieces of the legislation's actually being worked on by the full House.

We'll make significant investments in our two utilities this year, which is a significant portion of the growth story. This year we are going to invest $1.2 billion in the two utilities.

Now slide 42 and 43 which are in the appendix demonstrate how this growth will continue to increase rate base overtime. And again as a reminder, those slides and our other growth slide do not include renewable energy.

Another catalyst this year will be the completion of the PNI deal, and the remaining stock buyback program. While we have been targeting the end of March for the closing of that transaction, it's most likely it's going to move into the second quarter of this year. And last is the Millennium Pipeline, which is projected to go into service before the end of the year.

On slide 7, is an overview of our update on the rate case for Detroit Edison. Given the slippage in timing on this case, we were concerned that we might miss some of the 2008 economics and 2009 in service environmental capital. We updated the case earlier this week for an incremental $85 million rate request. This increase was anticipated when we released our 2009 early outlook projections in January of this year.

On the right hand of the slide is the summary of where we stand. On April 13th, we wanted to remind you there is an expiration of the $79 million rate settlement agreement and so the rates will increase by $79 million and the choice tracker also expires, which is worth about $20 million. So one way to think about that is this rate case was delayed, those two events in essence act like an interim rate increase for us.

Now we are targeting 11% return on equity at Detroit Edison this year. Even though it is going to be a slight challenge as the year progresses because there is a need for higher rates, which we won't see until early 2009.

For 2009 the rate increase should be in effect for all or most of the year, and again we are also targeting 11% return on equity next year for Detroit Edison. The hearing to reset the timetable for this case should happen soon, and we will be able to communicate the new timetable to you hopefully within the couple of weeks.

On slide 8, is our graphical summary of the updated rate case, and the couple of points I wanted to make here was the capital included in the update is now $290 million, and you can also see the PEP cost savings of $120 million just about offsets the O&M increase. So our early lead on the cost reduction initiative, which we started at the end of 2005 is played out just as we've hoped in terms of creating headroom in the rate case, and then offsetting just about all of the O&M rate increase.

We also have included in this update the merger control premium of $60 million. The total deficiency that's in the filing is now little over $280 million, and it is the first rate... base rate increase since 2006, and if you averaged it over that period the average annual increases 1.2% rate increase per year over that period.

On slide 9, I mentioned Michigan legislation, which continues to move forward. This legislation could provide wide ranging benefits for both the customers, and both utilities in Michigan. The legislation includes electric choice reform, renewable energy standard, and energy efficiency program; a file and use rate proceeding process that can help resolve the issues that we are experiencing today over regulatory lag. A certificate of need for new generation and de-skewing of rates based on cost of service.

The RPFs and energy efficiency builds were approved by the House Energy Committee in January, and the rest of the legislation continues to move forward. This is very important for Michigan, and is also as a key component of the governor state of the state speech in January. It has bipartisan support in the leadership in Michigan has actively working on the details of the legislation as we speak. We're hopeful that we can see passage of the bills by mid year, and this is a key focus for the DTE Energy management team right now.

On slide 10, is an update on Detroit Edison's Investors program. We continue to make investments and everything is on track primarily driven by the environmental program at Monroe. We will be investing about $1billion dollars in environmental controls between now and 2012 in Detroit Edison. Additional growth investments beyond what we've outlined could come from our AMI program which we're piloting this year, and then down the road a new nuclear plant. We are on track this year to submit our application for the potential new nuclear plant. And then the last as I mentioned is the investments in renewable energy that could provide upside investments in growth.

Slide 10 is a comparable site for MichCon growth story. This year's investments include $90 million investment in Western Michigan distribution expansion in the Grand Rapids area, $90 million utility gas storage project, and $50 million lateral pipe that is going to be constructed to connect the Michigan system to the panhandle pipeline. Going forward here also there could be additional growth from AMI program and a meter relocation program.

On slide 12 is an update on the monetization program. As you know we started this process by projecting that we would have at least $800 million in proceeds, and the current projection is $1.7 billion. If you look at some of the pieces here on the right hand side Antrim, the peakers and the core Barnett. All have been closed. The PNI transaction as I mentioned earlier and you know, has been delayed due to the credit markets. We wanted to make sure we communicated that we are still committed to closing this transaction. We are currently in the process of exploring other, financing, and options, and focusing on traditional bank project financing at this time.

I want to emphasize that we are committed to closing this transaction, and we would have, that we would by now if it wasn't for the credit markets. We assumed March 31st closing in our 2008 guidance. If the closing of this transaction happens after that date, you can expect about $0.02 per share increase in earnings per share for each quarter of delay, and we still expect to buyback the remaining $275 million of common stock when we close that deal.

On slide 13, there is a an update on our Western Barnett properties. As you know, we sold the core properties at the end of 2007 that closed in January with proceeds of $250 million, which was 100% return on our investment. In regard to the Western properties and the table there is the Western proven reserves at year-end were 144 Bcf, which is up 30% over 2006.

Our probable reserves are up 7%, at 192 Bcf, but you do need to take into consideration that we acquired 10,000 additional acreage in the Western properties last year, so it dilutes down the year-over-year improvement in probable reserves. And then on the bottom you can see that percent acres developed is 20%, which also was diluted by the additional acres acquired in 2007, but it still on the upside shows that there is 80% undeveloped position and it's properties.

For 2008, we plan on investing about $100 million, and we are going to drill 30 to 40 wells and produce about 5 Bcf of gas from the 30 to 40 wells, since our current projections that could change overtime depending on what we've experienced as we prove up these properties.

On slide 14, is a summary of our view on evaluation at this time for the Western Barnett. We've taken a very conservative position here, and others that might do evaluations, you could go about this differently, so it's possible that someone could do a forward projection. This is a point in time projection for us at this point in time. We've also here done a proved and probable analysis. Some people do what is known as a 3P analysis where they would include a possible reserves in their analysis, and we've not done that because we want to take a conservative view at this point in time.

The Western portion of the Barnett is different than the core, and we are excited about the possibilities here, but it's less matured than the core properties. And we've often talked about the value curve and just wanted to note that these are... if you think about the chart that we've shown in the past, these are in the left hand side of that curve, so it's less mature and certainly it's going to take sometime to prove up the properties, and take it up the value curve.

And just as a reference point, the core area of the basin there is 7,000 wells. So it's much more mature and certainly easy to get comps. In the Western part of the Barnett currently there is, slightly over 100 wells, and it's over a much wider portion of the basin. So this is very early stage in its development compared of the core properties. That said we made significant progress, and we see that the value today as outlined here.

For the proved reserves we value those reserves at $1.50 to $2 an Mcf, there is... so the range there in the right hand side is $220 million to $290 million. For the probables we've taken a conservative position of $0.25 to $0.50 an Mcf. The value of the Western probables will become clear overtime, and certainly as more transactions happen in this area and more drilling happens. So you would expect over time that, that some of those probables would actually moved up into the proved categories, and it would also be very reasonable to expect a value of those probables per Mcf would go up overtime.

The total valuation here is $270 million to $390 million. At the high-end that's almost double our current investment. And then as I mentioned there is upside taking into consideration that 80% of the acreage is still undeveloped. Also wanted to note that we have written-off our capital in the South, and we don't assume any value in this analysis for the Southern properties. Overall we believe that's a real interesting opportunity, but we think it's prudent at this point in time to be conservative in the valuation giving where we are in the developmental curve.

On slide 15 is an update on our gas pipeline and storage business. As we've outlined for you in the past we believe we are well positioned to capitalize on the strong market dynamics basically with the gas movement from the Midwest to the Northeast. Our 2008 growth projects include our Shelby 2 storage project which is 8.1 Bcf storage project. The Vector expansion project, which will come online in 2009, and the new Millennium Pipeline, which I mentioned earlier, which will go into service at the end of the year.

Before I turn the call over to Peter, I wanted to comment on last year's results. As you know, we talked last year in November, and then at EEI in November on some of the issues that we are experiencing predominantly our computer system replacement project that we were going through at that time. This is something that you only do once in a career at least for most of us, and from a company's standpoint something you do once every 20 to 30 years. We had systems that we're replacing that were over 30 years old. In total, we replaced over 160 systems. and it cause some disruption in our operations. But, now that is in place and things are certainly settling down; it provides a platform for us to drive continuous improvement going forward.

In November, we took our guidance down and we asked the DTE management team to pursue cost reductions beyond their existing PEP cost reduction targets to help offset some of the incremental costs we were experiencing at that point in time. I am pleased to report this morning that the group rallied around this issue, and we delivered on our original 2007 guidance. The results that we are reporting today demonstrate our ability to deliver in spite of challenges like the higher storm cost we experience last year or the system related cost that we experienced as we launch the system.

Another positive that also happened during the year when we took down our guidance, we were forecasting that lower load, and as Peter takes you through the earnings sell report that the load actually came in slightly positive in spite of some of the economic conditions in Michigan.

We also realized that as we report these great results through 2007, it raises the chinning bar for 2008. It's too early right now to revise guidance, but internally we've targeted $2.90 per share as the minimum performance level for 2008.

Now with that overview I'll turn it over Peter now who'll take you through the our year-end results.

Peter B. Oleksiak - Vice President and Controller

Thanks, Dave, and good morning, everyone. I'd like to start with slide 17 and the summary of 2007 accomplishments.

Overall our utility had a solid performance in 2007 as Dave just went over, and we would communicate since the second quarter both utilities were impacted by this one-time system startup cost. In spite of that we are able to deliver near authorized return levels really on those cost control initiatives that we put in place during the end of 2007.

On the non-utility side of our business we saw earnings improvements in all segments with the exception of Energy trading, which returned to our normalized earnings level in 2007 after a high income year in 2006. Actually 2006 was a reversal from accounting losses we had in 2005, but I will go with that in more detail in this presentation. I shall go over each segment in more detail.

Let's move on to slide 18 and the summary of the 2007 results. As you can see on this chart operating earnings per share for DTE was $2.82. Last week we put out our press release that earnings would be at least $2.70. By the time we have released we knew we are going to be over guidance, but we are still in the midst of our financial audit and management reviews. So we went a bit conservative on the release really in order to get it out early and indication of that we are the year-end was coming in strong.

I'd like to remind everyone that reconciliation to GAAP reported earnings is contained in the appendix. The main contributor to the years results to Detroit Edison at $2 a share with continuous solid earnings performance. MichCon contributed earnings to $0.48. The non-utility segments combined to contribute $0.83 with the coal and gas midstream and the trading company as the main contributors. Corporate and other loss for the year was $0.49. Finally I want to point that we have classified pressed a segment of discontinued operations and is now excluded from operating earnings.

Moving on to page 19, where we can see a summary of each segment's performance year-over-year. I'll be covering each segment in more detail later in the presentation. Overall, operating earnings are down $35 million, utility earnings are down slightly from 2006 levels as the full year impact of the temporary show cause rate reduction reduced the earnings contribution at Detroit Edison. But, this is partially offset by higher earnings at MichCon driven by colder weather in 2007.

Non-utility earnings were down slightly in 2007 as increased contribution from our power and industrial segment offset by the decline in the energy trading earnings, which as I indicated returned to near normal levels in 2007. As you may recall, energy trading earnings contribution in 2006 was $97 million, and once again due to mark-to-market economy timing. Finally, higher taxes resulted in an additional losses at corporate and other.

Let's continue on to slide 20 and go through some details beginning with Detroit Edison. Operating earnings for Edison are down $23 million from 2006 levels, when earnings resulted in 12% return on equity. A key driver for the decline in earnings was the full year impact of the $79 million temporary show cause rate reduction. However, this reduction was offset by a positive order in the 2004 and 2005 power supply cost recovery reconciliation case. That order allowed Detroit Edison to keep of a portion of the over recovered for customers who's rate were frozen under the rate freeze in place at that time.

During 2007, we continue to experience a shut down in the volume of choice deliveries. However, the financial impact of the reduction was reduced due to the choice record put in place this year as part of the show cause order. Electric margins also benefit from an increase in economy and weather related sales. For the increase in weather related margin was partially offset by the higher storm restoration cost. As mentioned previously, the higher computer startup cost reduced earnings in 2007. In addition we had a larger scope refueling outages from a nuclear facility, which ended up having a longer duration than originally planned. Finally higher taxes also contribute to decline in earnings. In 2007 return on equity for Edison is 10.6%.

Moving on to page 21 in the review of MichCon's performance. Earnings at MichCon were up $16 million year-over-year impacted by colder weather, and a slight reduction in customer conservation. While weather was colder year-over-year 2007 was still 6% warmer than normal. Some of the Detroit Edison MichCon earnings were reduced by our major system implementation during the year. Lower financing costs related to our gas costs recovery and the sale of base gas contributed to earnings improvements in MichCon in 2007.

As we announced last year, MichCon was able to settle its base gas case with the Michigan Public Service Commission. The settlement allows MichCon to sell approximately 3.6 Bcf of base gas for profit through 2009. In return MichCon will not increase base rates until 2010.

During 2007, we realized a significant increase in storage revenues at MichCon due to higher margin and additional storage capacity. However, this increase is offset by higher loss and accounted for gas. MichCon's return on equity for 2007 is 10.7% and almost 12% in a weather normalized basis.

Let us turn to page 22 in the non-utility business segments. Total non-utility operating earnings for 2007 are $143 million compared with the $147 million in 2006. Improvement in our coal and gas midstream segment was driven by increased storage contributions in gas midstream offset by a slight decline in coal trading business. Increased earning in our unconventional gas segment was driven by higher production in our Barnett properties offset by the sale of our Antrim properties in June.

Earnings contributions from power and industrials up significantly, 2007 benefited from increased earnings contributions from our energy services projects, and some by the restructuring actions that we took in 2006. As previously mentioned energy training benefited from significant of timing related gains in 2006, while 2007 returned to a more normal earnings level.

Let's now move to page 24, in 2008 earnings guidance. Consistent with our guidance release in December, we expect to deliver operating earnings of $433 million to $495 million of income or earnings per share of $2.70 to $3.10 in 2008. We'll continue to see a solid performance in the utilities in our targeting authorized returns in both companies. One note to point out our guidance assumes an end of March completion of our power and industrial project sale. We continue to see growing earning contribution for our gas midstream storage and pipeline investments. But, this growth will be offset by a decline in the coal transportation earnings related to synfuel in 2008.

Unconventional gas results reflects earnings from our Western Barnett Shale properties, and we expect another strong year of earnings form energy trading in 2008. Corporate and other losses would decline slightly as interest cost has reduced from 2007 levels. We will closely monitor progress during 2008 against these targets, and we will provide additional updates as we move throughout the year. Given Edison's importance to overall DTE profitability, I'd like you to take you to page 25 for an overview of the earning drivers for our electric utility in 2008.

Earnings this year will benefit from the expiration of the temporary show cause rate reduction and the choice track in 2008. As Dave mentioned earlier, this is in effect in term rate relief as we wait for the finalization of our newly amended rate case. With the help of the local economy is also a key swing factor in reaching authorized earnings in 2008.

For budgetary and planning purposes, we assume flat growth in the territory. Our guidance is based on normal storm restoration weather, and we will see higher plant related costs due to growing rate base as we implement the utility growth plan. As indicated earlier we are targeting Detroit Edison to earn its authorized returns in 2008, which is the upper-end of this guidance.

Turning to page 26 in the review of our 2009 earnings outlook. As you can see on this page, we are expecting significant growth opportunities in all segments for 2009. As always, we are targeting both the utilities to deliver earnings and authorized return level, and we will continue to focus on creating shareholder value within our non-utility businesses. The Edison outlook is dependant on the successful outcome in the current rate proceeding.

With that, I would like to turn discussion over to Nick Khouri for review of cash flow and capital expenditures.

Nick A. Khouri - Vice President and Treasurer

Thanks, Peter, and good morning. As always, improved cash flow and balance sheet strength remains the key priorities for management and the Board of Directors.

In 2007 the combination of synfuel proceeds and non-utility asset sales led to a strong overall cash year. Page 28 shows sources and uses of cash for 2007 and 2008. Last year was a peak year for synfuel net cash reaching $600 million. The combination of synfuel and non-synfuel cash generated 1.5 billion in internal resources. In addition, the execution of our non-utility modernization plan generated $1.3 billion in pretax cash, primarily driven by the sale of our Michigan unconventional gas properties. This supported approximately $500 million in parent company debt reduction, and $725 million in share repurchases.

Moving to 2008, as we discussed in the past synfuel cash is phasing out generating an estimated $200 million this year in 2008, and $100 million in 2009. Asset sales this year expected at $1.1 billion comprised with the January sale of the core properties in Barnett, and as discussed previously that power industrial transaction. Once again this year the combination of internal cash and asset sales supports further reductions in holding company debt and share repurchases.

Page 29 summarizes capital spending. As you can see, total capital reached $1.3 billion last year and is expected to grow to $1.5 billion this year. Nearly 70% of the projected capital spend is at Detroit Edison. MichCon capital is also up from historical levels while non-utility capital spending is expected at each of our business segments.

Page 30 shows DTE has improved balance sheet metrics, both leverage in cash flow metrics improved in 2007, and we expect to end this year well with in our leverage target of 50% to 52% and the ratio of cash flow to debt between 22% and 24%.

And finally SLS [ph] liquidity remains more than sufficient, we believe to offset any unforeseen circumstances.

With that let me turn it back over to Dave for a wrap up.

David E. Meador - Executive Vice President and Chief Financial Officer

Thanks, Nick. Let me wrap up on slide 32, and then we will open it up for questions.

We believe we are very attractive investment today specially at the prices that we are currently trading at. We've laid out for you our utility investment plan, which will drive 5% to 6 % growth, and we'll accomplish that growth by continuing the focus on high customer satisfaction and low cost. So as we complete our PEP initiative we're rolling right into an ongoing continues improvement program to continue to drive cost down.

We believe the regulatory and political environment in Michigan is very positive, and we are optimistic about the energy legislation, which could bring initial upside growth from renewable energy. Our non-utility businesses have a proven track record, and we have returned some of that value to you through the $725 million stock repurchase program that we did last year, and when we complete the remainder of that program when the PNI deal closes.

We've laid out some of the 2008 catalysts this morning, and we will keep you informed on our progress during the year. And last as I said earlier, our dividend at $2.12 per share is a very attractive piece of our total shareholder return story.

And with that Kim, we'll open it up for questions now.

Question And Answer

Operator

Thank you. [Operator Instructions] Our first question today is from John Kiani from Deutsche Bank.

John Kiani - Deutsche Bank

Good morning.

David E. Meador - Executive Vice President and Chief Financial Officer

Good morning, John.

Peter B. Oleksiak - Vice President and Controller

Good morning.

John Kiani - Deutsche Bank

House bill 5523, obviously if passed few things could allow for a forward-looking test here in Michigan, which I think clearly would be helpful. But, outside of that is their any precedent for the MPSE using a forward-looking test here, or using next years capital investments outside of known measurable changes, I am just trying to understand how the new '09 Detroit Edison test year fits in, and how it will be viewed by the commission?

David E. Meador - Executive Vice President and Chief Financial Officer

John, I have Don Stanczak with the us who is our, Director of Regulatory Affairs. I'll let him answer that question.

John Kiani - Deutsche Bank

Okay. Thanks.

Don Stanczak - Director of Regulatory Affairs

Well given the current known and measurable policy is the projected test year. However in the not too distance past particularly on the electric side, the commission used the fully projected test year. So these are kind of semantics in many respects. I mean we are projecting rates caused them t0 2009. But, I think if this legislation passes it would provide for more comprehensive forecast.

John Kiani - Deutsche Bank

Okay. I see what you were saying. So the two are somewhat similar, but you feel that under the known and measurable change cause you can make those additions all right. And as far as the Dave, as far as the PNI power and industrial transactions is concerned, can you walk through what steps are left, I mean is it just the financing, and can you remind us again how much debt you are looking to raise?

David E. Meador - Executive Vice President and Chief Financial Officer

It is that just the financing that as you know, we sold 50% of the equity in that transaction GE. We are working closely with GE. If you went back to the total debt amount it's $650 million and originally we were trying to do this with term loan and unsecured loans. We've shifted and we're basically working right on that... what I would describe as traditional project financing and that debt takes a little bit of time just to go through the documentation and working with the banks. So hopefully that will provide an avenue for us to close this transaction and as time goes on, it's just getting harder to say that's going to be done by the end of March, it's very likely we are going to move in the second quarter.

John Kiani - Deutsche Bank

Right. And what credit rating are you targeting for the debt?

David E. Meador - Executive Vice President and Chief Financial Officer

Nick, do you want to go ahead?

Nick A. Khouri - Vice President and Treasurer

As we can tell you what the original debt was being and the entire structure where we targeted BB. This is a different market than the bank market, and it will be... have the characteristics of a non-investment grade. Investment still, but whether we get it rated or not, we'll have to wait and see. It's a different market. It doesn't always need a rating.

John Kiani - Deutsche Bank

Got you. You still might get a private placement or something like that?

Nick A. Khouri - Vice President and Treasurer

That's the goal.

John Kiani - Deutsche Bank

Great. Okay, thanks a lot.

David E. Meador - Executive Vice President and Chief Financial Officer

Okay. Thank you.

John Kiani - Deutsche Bank

Bye.

Operator

Moving on our next question is from Samantha Dennison from Credit Suisse.

Samantha Dennison - Credit Suisse

Good morning.

David E. Meador - Executive Vice President and Chief Financial Officer

Good morning.

Samantha Dennison - Credit Suisse

Assuming Michigan does pass and out you're founded [ph], what do you see as the investment opportunity for you guys?

David E. Meador - Executive Vice President and Chief Financial Officer

I am sorry, on the renewable energy or?

Samantha Dennison - Credit Suisse

Yes.

David E. Meador - Executive Vice President and Chief Financial Officer

What we have said last year was that we saw at least $1 billion in it. It certainly could be much more than that. One of the things we'll have to work through here is not only the total investment, but over what timeframe and then what percentage would be built by the utilities versus what might be purchased on the market but, what we said publicly is $1 billion, it could be much higher than that, but you will have to wait and see how legislation works out here.

Samantha Dennison - Credit Suisse

There's $1 billion assumed you used, but yourself told 60% or is that assuming you build everything?

David E. Meador - Executive Vice President and Chief Financial Officer

The $1 billion was a rough number that assumed that we would build half and purchase half. But, I would also say that as time is got on, the total number that has grown overtime also that would be used for wins. So...

Samantha Dennison - Credit Suisse

Have you guys been buying any acreage up for wind?

David E. Meador - Executive Vice President and Chief Financial Officer

Yes, you know we have over 40,000 acres basically locked up predominately in the thumb of Michigan for a wind.

Samantha Dennison - Credit Suisse

Okay, great. Thank you. Also with Detroit Edison actually rate base up about $200 million versus your prior estimate, do you have room to exceed your 2009 guidance range to add that up?

David E. Meador - Executive Vice President and Chief Financial Officer

I think it's it really too early right now to say it now we will have to wait and see how predominant driver for 2009 is the rate cases of that we've talked about right now. So I would just say that for now I would just would like to stick with the numbers in the range that we put up for 2009 and it's really early.

Samantha Dennison - Credit Suisse

Okay, great. Thanks very much guys.

David E. Meador - Executive Vice President and Chief Financial Officer

Thank you.

Operator

And we'll take our next question from Barbara Chapman from Bear Stearns.

Barbara Chapman - Bear Stearns

Good morning.

David E. Meador - Executive Vice President and Chief Financial Officer

Good morning, Barbara.

Barbara Chapman - Bear Stearns

When everything is said and done, if you got what you ask for on the electric rate increase including the effects of the rate subsidies that is skewing what would that be percentage wise for an increase in customer bills?

David E. Meador - Executive Vice President and Chief Financial Officer

If you step back, the base rates have not gone up since 2006. So if you look at an average annual increase over that period 2006 to 2009 its 1.2% increase annually compounded growth over that period.

Barbara Chapman - Bear Stearns

Right. But, if you look at a 2009 bill what they the day that this rate increase if you got everything you asked for the day that it went in, on an average customer bill what would they be paying more than they pay to month before?

David E. Meador - Executive Vice President and Chief Financial Officer

It's a 5%.

Barbara Chapman - Bear Stearns

And that includes?

David E. Meador - Executive Vice President and Chief Financial Officer

I am sorry its 6%, for an average bill of $5 a month.

Barbara Chapman - Bear Stearns

Okay 6% or $5, and that includes the request on the rate just skewing, and does that also include... there is an interim increase also, correct? Because there is some thing falls off?

Why don't you go ahead, Don?

Don Stanczak - Director of Regulatory Affairs

That's $5 increase is after the impact of the expiration of the show cause settlement rate reduction.

Barbara Chapman - Bear Stearns

Okay. So if you take the bill, so it is actually a bigger percentage correct, than if we take up before that falls off?

Don Stanczak - Director of Regulatory Affairs

Compared to today's rates yes, it is slightly larger.

Barbara Chapman - Bear Stearns

Okay. Is it... does it make a percentage larger, percentage... I am just trying to judge the magnitude of the increase to judge any political pressure in current economics environment against the rate increase?

Don Stanczak - Director of Regulatory Affairs

I guess I gave the absolute numbers, the increase we are looking for is 240... $284 million, and the expiration of the show cause reduction is $79 million. So expiration of the show cause reduction is not that significant.

Barbara Chapman - Bear Stearns

Right, all right. Okay. All right. Thank you.

Operator

[Operator Instructions] Our next question is from Paul Patterson with Glenrock Associates.

Paul Patterson - Glen Rock Associates

Good morning guys.

David E. Meador - Executive Vice President and Chief Financial Officer

Good morning, Paul.

Peter B. Oleksiak - Vice President and Controller

Good morning.

Paul Patterson - Glen Rock Associates

I wanted to just go over the power and industrial transaction again, what is the actual... what would the impact be if for some reason the transaction were to occur, I know that you said that there is $0.02 of additional EPS per quarter, until the deal closes. But, what would happen if in fact for some reason you just weren't able to do the deal?

David E. Meador - Executive Vice President and Chief Financial Officer

If that happens I knew it over our guidance because the guidance assumed that it did happen on March 31st it would add $0.02 share per earnings for each quarter. So you'd add $0.06 a share for the remainder of the year to our guidance. And then we would not complete the stock repurchase program.

Paul Patterson - Glen Rock Associates

Okay. So you just take... we add $0.06 so then we subtract $650 million with the stock repurchase?

David E. Meador - Executive Vice President and Chief Financial Officer

No.

Paul Patterson - Glen Rock Associates

How much would... how much of the proceeds again if you could just remind me, how much of the proceeds of the $650 million go to for the stock repurchase. How less stock for repurchased?

David E. Meador - Executive Vice President and Chief Financial Officer

$275 million.

Paul Patterson - Glen Rock Associates

$275 million. Okay. Now when we are talking of the 2007 in performance of the power and industrial versus 2006, there was a mention of the restructuring and what have you... I assumed it's a little complicate to me and I apologies. Could you just go through what exactly led to the increase in 2007, and particularly, I guess the fourth quarter here versus 2006. Because I know there were something that were carved out of operating earnings. But, it looks like operating earnings sounds better because of the restructuring just elaborate a little on that?

David E. Meador - Executive Vice President and Chief Financial Officer

You are asking relative to the power and industrial business.

Don Stanczak - Director of Regulatory Affairs

Yes, there were a number of impairments and you'll see that curved out at least the impairment amounts. But, even before this impairments there were losses for those business, mainly in our generation assets and as part of our restructuring, I was selling those so when we took the impairments out, but there was losses during 2006, before those impairments. Also there was PEP tech operations as well, which is part of our power and industrial segment. So there was some improvements just because those losses were no longer there in 2007.

Paul Patterson - Glen Rock Associates

I got you. So by selling it there was... there were losses, there were operating losses by getting rid of those assets, those losses are gone and that's the improvement?

Don Stanczak - Director of Regulatory Affairs

Yes for the portion of improvement... and we are watching probably seeing underlying good performance, specially all of our coal better actually had a record production here, in the year 2007.

David E. Meador - Executive Vice President and Chief Financial Officer

And the price of coke and can the price of the value of the coke by-products went up in the year. So now you had the impairments in 2006, we actually had good business performance in 2007, and we actually... we kept the business for a whole year. So we had the benefit of that for 12 months.

Paul Patterson - Glen Rock Associates

Okay. And then when we are talking about the new form of financing... the project financing, I think if I heard correctly on John Kiani's question you guys suggested that, it was probably we are going to now move into the second, where you going?

David E. Meador - Executive Vice President and Chief Financial Officer

Right.

Paul Patterson - Glen Rock Associates

Okay. And that's because you now going to be using a different form of financing. Does that change any costs or is their any element of that that we should think about in terms of what the issues are with respect to that type of financing?

David E. Meador - Executive Vice President and Chief Financial Officer

No, it doesn't. And I... we are basically just taking a different approach. So its just the time element of restarting here with the different group, and that I'll just push it into the second quarter.

Paul Patterson - Glen Rock Associates

Okay. Is there... you mentioned that the markets were choppy, and that's obviously one reason that it appears that you guys are going for this methodology. If the markets are still as choppy as they are, do you think that that would cause any issue in terms of this new financing or, is this that we are seeing some sort of strange activity here in terms of what's going on the credit markets? Are you seeing this new... this new form of financing that's you are expecting or it's actually some of the traditional. But, are you seeing a better market in that? And do you see any issue associated with that at all?

I'll ask Nick to jump in but, the regional structure in this environment that we can't finance. Their was a point in December where we could have, but the interest rates have rose to a point where we just had this does make sense for our shareholder. So we held back, and at the original structure that we have proposed including the unsecured debt, its... you can't find answer today at all. So, that's why we shifted to other alternatives, and the project financing, right now as it's viewed that it is transactable, we are going to work our way through this, and the proof will be in the advance that we do close, but we've got enough interest from... from the banks, and we are currently going through the process of getting this put together. That doesn't mean that some unforeseen event couldn't happen that could even effect their segment of the financing market, but it looks like today given the conditions that exist today, we could not pursue this as the financing mechanism.

Paul Patterson - Glen Rock Associates

Okay. Great, thanks a lot.

David E. Meador - Executive Vice President and Chief Financial Officer

Okay.

Operator

Our next question will come from Paul Ridzon from KeyBanc.

Paul Ridzon - KeyBanc Capital Markets

Good morning, David, how are you?

David E. Meador - Executive Vice President and Chief Financial Officer

Good. Hi, Paul.

Paul Ridzon - KeyBanc Capital Markets

It sounds like in the fourth quarter Tony kind of put out a mandate to slash costs. I don't suspect a lot of that sustainable, but did you find any nuggets in there that you think you can carry forward?

David E. Meador - Executive Vice President and Chief Financial Officer

The answer would be yes. I think we've talked about this before that, yes, we did our PEP program, in this we drove over $300 million in cost productions and 1000 FTEs and headcount reduction. We are driving all our operations towards first quartile benchmarks. Some of those operations are getting close, some have the ways to go, so combination of what we are doing in PEP plus what happened at your outlet kind of renewed our conviction, that is more out there, and as we talked about giving the amount of capital that we are going to be deploying in the sensitivity around customer rates cost reductions are going to become a way of life here. So we've kind of reinvigorated our continuous improvement initiative, and every group in the company is off working on cost reductions already. This year for 2008 with the objective of offsetting inflation and keeping O&M as flat as possible.

Paul Ridzon - KeyBanc Capital Markets

You've indicated that the Detroit Edison earned of 10.6 ROE is that inclusive of SAP implementation over runs?

David E. Meador - Executive Vice President and Chief Financial Officer

Yes,it is.

Don Stanczak - Director of Regulatory Affairs

Yes, it is, going on.

Paul Ridzon - KeyBanc Capital Markets

And clearly I think your stock prices are reflection of some investor sentiment that stated the debt markets is going to be preclude getting the PNI done. Kind of how are you handicapping that internally given your new focus on looking for alternatives?

David E. Meador - Executive Vice President and Chief Financial Officer

We are cautiously optimistic I would describe it to say that we think this project financing provides a path to us, but I think everybody has been caught off guard by what's happened in and you don't know when the next shoe is going to drop, that's going to affect even something like traditional project financing, but as of today, we think it's a viable alternative, and we are pressing forward on that.

Paul Ridzon - KeyBanc Capital Markets

Is the right way to think about this is this financing is almost is like a bridge until we get stabilization in the deeper debt markets?

Nick A. Khouri - Vice President and Treasurer

No. Paul, this Nick. I wouldn't think of it that way. This is a... there should be a permanent financing structure for these assets.

Paul Ridzon - KeyBanc Capital Markets

Okay. Thank you very much.

David E. Meador - Executive Vice President and Chief Financial Officer

Okay.

Operator

: We'll take our next question from a Yiktat Fung from Zimmer Lucas Partners.

Yiktat Fung - Zimmer Lucas Partners

Good morning.

David E. Meador - Executive Vice President and Chief Financial Officer

Good morning.

Yiktat Fung - Zimmer Lucas Partners

First of all with regards to the rate case update that you recently filed at the Michigan PSC, I was wondering as if you've got any sort of feedback from either staff or your commission, whether that update is acceptable to them or what sort of extra time the staff would need to review that update and for those staff testimony?

David E. Meador - Executive Vice President and Chief Financial Officer

Don?

Don Stanczak - Director of Regulatory Affairs

Sure, as you would expect we've had some preliminary conversations with the commission staff, and there will be some delay. But, as we've indicated I expect we'll get an order in early '09. So I don't think there will be a very significant delay.

Yiktat Fung - Zimmer Lucas Partners

So when should we expect staff testimony will it be in April or May versus the original March date?

Don Stanczak - Director of Regulatory Affairs

Well I think it will be some time in the second quarter. What will happen next is there will be another pre-hearing to reset the schedule, and will no more once that happens.

Yiktat Fung - Zimmer Lucas Partners

Okay. As for the PNI transaction, is there a termination day of this agreement and how far back is DTE potentially pushback at this stage?

David E. Meador - Executive Vice President and Chief Financial Officer

In terms of termination date, there is really not a termination date, virtually both DTE and GE were targeting to get this done by the end of March, and so we were just doing that just to keep the pressure on ourselves to get this thing closed, and what they are moving into the second quarter this is really I wouldn't think about this having a cliff date that we are targeting towards, and the second part of your question was?

Yiktat Fung - Zimmer Lucas Partners

Basically I was just wondering if there is anymore room to... how much room there is to push this day back.

David E. Meador - Executive Vice President and Chief Financial Officer

It really depends since as we are talking about with earlier questions on when we get ready to actually execute on this financing, what's happening in the border markets of that point in time. So will have to... part of the answer is will see when we get their, as I said we are cautiously optimistic. But, we just don't know what unforeseen events might creep up in the broader markets.

Yiktat Fung - Zimmer Lucas Partners

And then finally with regards to the Barnett Shale research valuation [ph] that you put out. Can you just give us some sort of color with regards to how you derive the value per Mcfe?

David E. Meador - Executive Vice President and Chief Financial Officer

Paul, are you still with us?

Paul Teske - President of DTE Gas Resources, Inc.

Yes, I am.

David E. Meador - Executive Vice President and Chief Financial Officer

All right. I have got Paul Teske online. Paul heads up the group... heads up the group down in Forth Worth and I'll let him comment on that.

Paul Teske - President of DTE Gas Resources, Inc.

Yes. We look at the two categories the proved and probable. For the proved, we've got a reserve report, the values is relatively transparent as it relates to that. On the probable side, it's not an easy thing to come up with those multiples. There are not a lot of comps, there haven't been a lot of transaction in this part of the play. So this is our best internal judgment related on, how we feel about the resource and it's relative maturity as it relates to the value curve that Dave talked about earlier.

Yiktat Fung - Zimmer Lucas Partners

Basically the proved portion was based on comps?

Paul Teske - President of DTE Gas Resources, Inc.

Comps, and our own internal reserve report and valuation of that, yes.

Yiktat Fung - Zimmer Lucas Partners

Thank you.

Operator

And we'll move on to Raymond Lung [ph] from Goldman Sachs.

Unidentified Analyst

Hey, guys. Couple of questions, with respect to short-term debt it was about a billion dollars with MichCon about 455 is that really just working capital with MichCon for gas purchases?

Peter B. Oleksiak - Vice President and Controller

Yes.

Unidentified Analyst

Okay.

Peter B. Oleksiak - Vice President and Controller

MichCon is a cyclical pattern, and as they put gas in the ground they buildup CP balances and then run it off as they sell the gas.

Unidentified Analyst

Okay. And what your expectations with respect to the remaining balance of the short-term debt. Would you need to tap to capital markets, you didn't show anything like that in you sources in new system.

Peter B. Oleksiak - Vice President and Controller

No. Without talking exclusively about the plans the two utilities will be accessing in the capital markets as they fund their investments, their capital investment over there next few years. But, there is no immediate requirement to tap the Capital markets.

Unidentified Analyst

Okay. And can you... Nick can you also talk about any auction rates exposure and what's happening there? Are you guys thinking of maybe terming anything out if you do have any exposure. I think you do have some.

Nick A. Khouri - Vice President and Treasurer

Yes, no. Let's put in context we have about $7 billion in total debt at DTE Energy. We do have about $200 million of auction rate securities, and like the rest of the world the auctions are failed the last few weeks. So we are thinking about terming out those auction rates securities.

Unidentified Analyst

Okay. And what's the average rate of the auction rate currently?

Nick A. Khouri - Vice President and Treasurer

Well it's about... there are 312... with out giving too much details, it's about $200 million outstanding, most of it is right... 71.5% right now, it's the maximum rate. There is a small piece that's higher than that, but generally it's above 7% to 8%.

Unidentified Analyst

Okay, great. And finally last question any... can you give us any color on a billings, i.e. is there... has there been any rise in delinquencies and how the economy is sort of... is there... has there been any impact with the slowdown in the economy for you guys?

David E. Meador - Executive Vice President and Chief Financial Officer

No. As you know the Michigan economy, actually has slowdown slightly before the rest of the country. So we experience that several years ago and as a result of what we are seeing we actually have pursued and we are able to get a bad debt track at MichCon is where we tend to see more issues on the bad debt. So with the bad debt tracker in place and putting MichCon and Edison side-by-side there is really not much difference at this point in time versus a year ago or two years ago.

Unidentified Analyst

Okay, great. Thanks guys.

David E. Meador - Executive Vice President and Chief Financial Officer

Okay.

Operator

Our next question today is from Ben Sung [ph] from Luminous Management.

Unidentified Analyst

Hi. It looks as if 24 you are saying that's without a rate increases... without a rate increase you are going to get you are authorized 11% ROV in 2008, so is it appropriate to think of the 248 million rate increase request has been to cover cost increases and capital that's going to be invested during 2009?

David E. Meador - Executive Vice President and Chief Financial Officer

Yes, what I see I would also offer that as we progress in 2008 without their rate increase just as it makes it more challenging to actually earn your authorized return. So as the year plays out certainly we will have to look towards cost reduction with some of those cost productions could be non-recurring one-time cost reductions just help us prior to that rate increase during our authorized. And then, the second part of the answer is basically what you say that which we the rate increase helps cover the higher cost and that capital going in the service.

Unidentified Company Representative

Significant in service 2009.

Unidentified Analyst

What's the revenue think about how much of the one-time sort of cost reductions there are in 2008?

David E. Meador - Executive Vice President and Chief Financial Officer

There is two parts to that answer, one is that we starting one piece left of our continuous improvement in PEP initiatives, so we have $20 million to $30 million what I would describe is plan embedded cost reductions, and then certainly we are trying to create headroom on the cost reduction side for unforeseen events and that could be everything from higher storm to a mild summer at Detroit Edison. So we have a preprogrammed amount, and we are looking to actually build up some headroom for unforeseen events to make sure that we can earn and are authorized in 2008.

Unidentified Analyst

Thank you.

David E. Meador - Executive Vice President and Chief Financial Officer

Thank you.

Operator

And we have a question from Bill Apacheli [ph] from Citi.

Unidentified Analyst

Hi, Good morning.

David E. Meador - Executive Vice President and Chief Financial Officer

Good morning, Bill.

Unidentified Analyst

I just had a quick question. Assuming the PNI deal closes on 528, just mention about potential for further equity repurchases. Do you have any of that vacancy over 2009, preliminary 2009 guidance?

David E. Meador - Executive Vice President and Chief Financial Officer

Well the... we assume right now in our 2008 guidance, so that happens on March 31st. So then, the answer for 2009 will be yes, that happened in the prior year and this is the way to think about it?

Unidentified Analyst

Right. But I guess above and beyond the 275 repurchases?

David E. Meador - Executive Vice President and Chief Financial Officer

No, right now, that will be the remainder of what we previously announced was $1 billion stock repurchase program that was tied to the cash flows, the combined cash flows that was coming from the restructuring of the non-utility businesses and synfuel cash --

Unidentified Analyst

Okay, thank you.

David E. Meador - Executive Vice President and Chief Financial Officer

Thank you.

Operator

Our next question today comes from Mark Segal [ph] from Canaccord Adam.

Unidentified Analyst

Hi, Good morning.

David E. Meador - Executive Vice President and Chief Financial Officer

Hi, Mark.

Unidentified Analyst

Quick question regarding your AMI pile that's going on. Can you give us a status update there. How that's progressing and what the time table looks like?

Unidentified Company Representative

Give you a high level work that as it is going to be and throughout this year there's different gates during that process. One of them is going to be mid year, we'll make a decision whether to progress or not and there is another gate at the end of the year that is really just a small pilot really equivalent of the technology.

Unidentified Analyst

Okay, so are you anywhere near as close as to narrowing down a technology or committing to particular vendor?

David E. Meador - Executive Vice President and Chief Financial Officer

No. no, we are in that process right now are the operation groups and the procurement and legal teams are in the process of narrowing that down making the selection and negotiating our contract and we have not announced yet who we will work with on this pilot program.

Unidentified Analyst

Okay. And then lastly has there been any inclusion of metering so far in your rate case filings thus far or will you need PUC approval and what will be the timetable looks like?

David E. Meador - Executive Vice President and Chief Financial Officer

Don, why don't you answer that.

Don Stanczak - Director of Regulatory Affairs

In our current request and even in the original request in the rate case we did include some capital expenditures for AMI forecast.

Unidentified Analyst

Okay, all right. Thanks very much.

David E. Meador - Executive Vice President and Chief Financial Officer

Thank you. Kim, I don't know if there is any more questions, if there are then we will take one more question.

Operator

All right. And that comes from Asher Khan [ph] from SAC Capital.

Unidentified Analyst

Hi, I wanted to understand what happened in the trading business this quarter I guess if I am right it had a break even or negative result in the fourth quarter of 2007?

Peter B. Oleksiak - Vice President and Controller

For the trading business its really to take a look at the annual level there is accounting essentially the noise that happens is due to the revenue accounting of marking your fourth sales and not your inventory. So it means there is nothing unusual that happened in the fourth quarter and actually earnings came in right as projected in the original guidance.

Unidentified Analyst

Okay, so you were expecting to earn nothing in the fourth quarter?

Peter B. Oleksiak - Vice President and Controller

Yes.

Unidentified Analyst

And that's just because of what, because of the way accounting works? Is that what we should expect going forward that you should earn zero from trading in the fourth quarter?

David E. Meador - Executive Vice President and Chief Financial Officer

No. The big mark-to-market movement that has to do with the trading that you do around storage, that we've talked about in the past where the... you have this mismatch in the current accounting rules. But, the accounting rules coming down the road and fair value might rectify this. But we account for gas in storage at average inventory cost and the forward sales mark-to-market, so they don't move intend on. And so in any given quarter, you could have a mark-to-market gain or mark-to-market loss with that storage. And on an accounting basis moving up and down ultimately it settles at the real light economics. So, it's just part of the... the accounting noise that we have deal with today and has I mentioned the FASB is addressing this issue, and hopefully a lot of that storage accounting mismatch will go away.

Unidentified Analyst

And if I can end up you might have mentioned this, there is a negative 20 for the PSER adjustment for 2007 in the '08 guidance. Could you just help us to understand where... why is that getting reflected again this year?

David E. Meador - Executive Vice President and Chief Financial Officer

I think what you are looking at is basically a year-over-year impact, where it is one year or not repeated --

Peter B. Oleksiak - Vice President and Controller

Yes, this is 2007 I was mentioning and even in my speaking notes that we had a favorable order. So this is the opposite five ways for favorability in 2007 we are not going to see that favorability in 2008. Surely that was what I would just say a one time tied to that reconciliation case.

Unidentified Analyst

So, that was one time boost in '07 which is not there in '08?

Peter B. Oleksiak - Vice President and Controller

That is correct.

David E. Meador - Executive Vice President and Chief Financial Officer

Correct.

Unidentified Analyst

Okay. So either we can take it one time out in '08. Okay. Thank you.

David E. Meador - Executive Vice President and Chief Financial Officer

Okay. Thank you. And I thank everybody for joining us today. And thank you for the great questions, and we look forward to seeing you soon.

Operator

And that does conclude our conference today. Thank you all for your participation.

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Source: DTE Energy Co. Q4 2007 Earnings Call Transcript
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