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Executives

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

Peter B. Oleksiak - Vice President of Finance and Member of Internal Risk Management Committee

Daniel G. Brudzynski - Former Vice President

Don Stanczak

Analysts

Mark Barnett - Morningstar Inc., Research Division

Caroline Bone - Deutsche Bank AG, Research Division

Naaz Khumawala - BofA Merrill Lynch, Research Division

Brian Chin - Citigroup Inc, Research Division

Andrew Weisel - Macquarie Research

Andrew Levi

Timothy Yee - KeyBanc Capital Markets Inc., Research Division

Kevin Fallon

DTE Energy (DTE) Q3 2012 Earnings Call October 24, 2012 9:00 AM ET

Operator

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

David E. Meador

Thank you, and good morning, everybody. And thank you for joining us. And just to start off here, welcome to our third quarter call. And as we're getting started, I encourage you to read the Safe Harbor statement on Page 2 of the document, including the reference to our forward-looking statements.

Turning to Slide 3. With me this morning are Peter Oleksiak, our Senior Vice President of Finance; and Dan Brudzynski, who is our recently appointed Vice President and Treasurer. And if you recall, Dan was the Vice President of Regulatory Affairs and before that, Controller, and now is back in finance in the treasury role. And then Mark Rolling, our Director of Investor Relations. I also have members of the management team with me if needed during the Q&A session.

Now turning to Slide 4. This morning, we're going to cover our third quarter results and give you an update on our outlook for the remainder of this year. We'll also be at EEI, which is a little over 2 weeks away, where we will provide additional details and our growth plans.

So let's turn to Slide 5. Our investment thesis summarizes how we think about growing the business and delivering value to our shareholders. We have a disciplined plan that provides 5% to 6% long-term earnings per share growth. And if you combine that with our current annualized dividend of $2.48 per share, we deliver a total shareholder return of 9% to 10%. And as always, this is all underpinned with one of our key priorities of maintaining a strong balance sheet.

We have solid growth plans at both of our utilities. At Detroit Edison, that growth is driven primarily by environmental mandates in the form of mission controls and renewable energy. And at MichCon, the growth is driven by infrastructure investments, including cast iron main replacements and a program to move gas meters outside of customers' homes.

Here in Michigan, our utilities operate in a constructive regulatory environment, which is supported by solid legislation that was passed in 2008. And we believe our responsibility is to earn that construct every day. We utilize our continuous improvement capabilities in everything we do to control cost, to minimize rate increases and to improve the quality of service that we provide our customers.

On the nonutility side of the business, we continue to capitalize on the growth opportunities we see in our Gas Storage & Pipelines segment and the Power & Industrial businesses.

Turning to Slide 6, is an overview for the quarter. Our operating earnings for the third quarter came in at $1.31 per share compared to $1.07 per share in the third quarter of last year. And with 3 quarters of the year now behind us, including the summer cooling season at Detroit Edison, we're confident in narrowing the earnings guidance to $3.80 to $4 per share. And at the same time, increasing the midpoint by $0.10 to $3.90.

Like much of the Midwest, the last 2 summers here in Michigan were warmer than normal. But during the third quarter of last year, the revenue decoupler at Detroit Edison covered weather, so we didn't see the earnings benefit last year. Now that the elimination of the decoupling mechanism at Detroit Edison in April of this year, we see the impact of this summer's warm weather flowing to the bottom line.

MichCon, which typically has an operating loss in the third quarter, saw the benefit of higher transportation and storage revenue, along with lower O&M cost. And this resulted in a small operating income for the quarter. Earnings at the Power & Industrial projects were up over third quarter of last year as the REF business line continues to ramp up. And the combination of some unique trading opportunities in last year's third quarter and a tough market condition this year resulted in lower quarter-over-quarter earnings at Energy Trading.

Peter will take you through additional details in the third quarter results for each business line in a few minutes. Our balance sheet remains strong and we generated $1.7 billion in cash from operations through the third quarter of the year. In fact, the results and the strong cash performance are coming out so strong that we are increasing our cash flow guidance for 2012. And Dan will take you through both cash flows and capital spending in greater detail in a few slides.

We have been talking to you about our intent to exit the E&P business. And late last year, we laid out our plan to prove up an oil formation in the Barnett acreage, referred to as the Marble Falls. We have been a front-runner in this newly emerging oil-rich formation, which is located just above the Barnett Shale. We completed our drilling plan for the year, and we're making good progress towards full monetization of these assets. We opened our data room in early September and the bids are due at the end of this week. So we'll be able to keep you posted on our progress and give you an update at EEI in a couple of weeks.

Now if I can shift to the growth areas of the company. We're making substantial investments from renewable energy at Detroit Edison. If you look at the wind generation that we already have online and the investments that we're making, including the PPAs that are underway, now we will soon have 700 megawatts of renewable energy capacity. This is nearly 8.5%, which is well on our way to meeting the renewable energy standard at Michigan, which is 10% by 2015, which we believe is a good standard and a sensible approach to renewable energy in Michigan.

On the nonutility side of the business, we're excited about the growth potential surrounding both the Gas Midstream assets that we have in the Marcellus Shale region. Our first major growth project is the Bluestone lateral and gathering system, and that's moving along nicely. We've secured all the permits and right-of-ways and construction is underway as we speak. We expect to have a lateral pipe in service by the end of the year. And additionally, the gathering system will support our anchor tenant, Southwestern Energy, as they continue to draw wells ahead of that lateral being put in service.

More recently, we announced a new proposed pipeline in the Utica Shale. This pipe would be developed jointly with Enbridge and Spectra to move gas from the Utica Shale to markets in Ohio, Michigan and Ontario, Canada. This would originate in Northeast Ohio and travel into Michigan, where it would interconnect with the Vector Pipeline, which provides access also into Ontario. It would be a 250-mile large diameter pipe and capable of moving at least 1 Bcf of gas a day. The initial investment is estimated to be $1.5 billion and our share would be 1/3 or $500 million.

We're currently running an open season on this proposed pipe and that would run through the end of November. And we'll work with interested parties to establish binding agreements in the first half of next year. And if the timing goes as planned, that pipe would go into service in early 2016. We expect these new projects to provide substantial growth in earnings and help take the Gas Storage & Pipelines business from $60 million in earnings this year to $100 million in earnings by 2015.

In the P&I segment, we're seeing good operational performance and throughput at our 5 sited REF machines. If you remember, there's 9 in total. And we're making good progress in siting the remaining 4. In fact, 1 of the 4 began commercial operations at a non-DTE site earlier this week. And we've executed agreements with another utility to relocate a unit at one of their sites. We're also engaged in advance discussions with several other potential host sites for the remaining 2 machines. So we're making good progress there.

On the earnings call last quarter, I announced that we were acquiring a portfolio of on-site energy projects from Duke Energy for a little over $200 million. As of last week, we closed on 12 of the 14 projects and expect to close on the remaining 2 sometime next month. Going forward, we see these projects contributing to our growth aspiration for the Power & Industrial projects from $50 million in earnings this year to $125 million by 2016.

Now if we can turn to Page 7. I'd like to shift gears and give you an update on some developments on the regulatory front. MichCon is in the midst of a general rate case that was filed in April. At the end of September, we filed testimony with the Michigan Public Service Commission to self-implement up to $34 million beginning in November. This case will continue to play out over the next several months with the final decision no later than April of next year.

At Detroit Edison, we were successful in reaching a constructive outcome related to the termination of the revenue decoupling mechanism and the related $127 million regulatory liability. As you might recall back in April, the Michigan Court of Appeals issued a decision that the MPSC exceeded its authority when it ordered Detroit Edison to adopt a revenue decoupling mechanism. Through the first quarter of 2012, Detroit Edison had accrued $127 million liability related to the pilot RDM, which represents hot weather, primarily in prior years, 2010 and 2011.

Rather than taking the full $127 million into income upon the Court of Appeals decision, we filed an accounting application seeking authority to amortize that amount into income in 2014. The accounting treatment combined with other cost-saving actions would help offset the need for new rates in 2014 and is a key component of our plan to potentially push out the need for base rate increases until 2015. On September 25, the MPSC issued an order granting our request.

Now turning to Slide 8. I'd like to provide an update on our 2012 earnings guidance. With 3 quarters of the year behind us, including a warmer-than-normal summer, we're confident in narrowing and raising our earnings per share guidance for the year. At Detroit Edison, the weather favorability not only allows us to increase the earnings guidance but also provide an opportunity for us to reinvest in our electric systems to improve the distribution system and power plant reliability. This includes things like line clearance and preventative maintenance to the distribution systems, power plants and our vehicle fleet.

The outlook for MichCon has improved as well. You may recall that the unusually warm winter created quite a hole in MichCon in the first quarter. And we began signaling that they'd have to work really hard to hit even the bottom end of the range of their guidance. As a result of some one-time cost reduction actions that the team implemented, we're confident in reaffirming MichCon's earning guidance of $110 million to $115 million. The storage and transportation revenue at the Gas Storage & Pipelines segments are coming in strong, pushing guidance for this segment to a point estimate now of $60 million.

Finally, Energy Trading continues to see fewer opportunities in a challenging and choppy market. So from where we stand now, we think the guidance range of $10 million to $25 million is appropriate, which includes approximately $10 million of after-tax roll-on that we expect to show up in the fourth quarter. So in total, we're confident in raising the midpoint of our earnings per share guidance to $3.90 with the range of $3.80 to $4 per share.

And with that, I'll pass it over to Peter, who will take you through some additional details on the quarter.

Peter B. Oleksiak

Thanks, Dave, and good morning, everyone. I'd like to start on Page 10 and third quarter earnings results for the quarter. DTE's operating earnings per share was $1.31. Detroit Edison contributed $1.13 and MichCon, which typically incurs an operating loss this quarter, actually came in $0.02 positive income. And I'll talk about more of that coming up.

The nonutility segments combined to earn $0.22. The drivers to the nonutility second quarter results were Power & Industrial at $0.13; Gas Storage & Pipelines at $0.08; Energy Trading at $0.01; and finally, Corporate & Other had a loss of $0.06 in the quarter.

Let's move to Slide 11 as summary of the quarter-over-quarter performance by segment. Operating earnings for consolidated DTE Energy were up $44 million in the quarter or $0.24 per share. Detroit Edison's operating earnings was at $194 million, up $37 million from the prior year. The favorable year-over-year performance was driven by warmer-than-normal weather flowing this year through earnings.

Last year, a revenue decoupling mechanism was in effect, which temperature-normalized revenues. Now we continue to see stability in underlying load at our electric segment with temperature-normalized sales flat in the quarter net of a 1% impact of energy efficiency program reductions. Service territory industrial sales continued to grow, up 3% year-to-date.

As noted earlier, the third quarter is typically a loss for our seasonal gas utility business. However, MichCon had an operating gain of $4 million for the quarter, up $15 million from prior year. The improvement to earnings was driven by higher transportation and storage service revenues along with lower lost gas expense in the quarter and lower O&M. This quarter is a clear demonstration that our continuous improvement efforts are paying off at MichCon. For example, the improvement in lost gas expense this quarter is a direct result of improvements in reducing fiscal losses through a series of operational improvements in system and in interconnects, improvements in metering technology and a step-up in distribution reliability investments.

Our nonutility segments are down $8 million in total, primarily driven by our Energy Trading segment, partially offset by higher earnings at the 3 other segments. Energy Trading is down $21 million in this quarter year-over-year. The year-over-year results are driven by a combination of a stronger-than-normal third quarter 2011. And a larger portion of this year's economic performance is subject to accounting timing. For your reference, we provided our standard year-to-date economic to accounting earnings loss for this segment in the appendix, which shows the economic earnings in '12 versus '11.

Another driver in the quarter-over-quarter performance is Power & Industrial project segment, which was up $10 million. This is driven primarily by the growth in our REF business line. Unconventional Gas Production improved earnings $2 million, breaking even in the quarter. The improvement was driven by higher oil production. Our production is up actually 97% year-over-year. As Dave mentioned, we are in the final strokes of a targeted year-end sales process for those properties. Finally, Gas Storage & Pipelines segment was up $1 million for the quarter to $14 million, and like MichCon, benefit from higher storage and transportation revenues.

That concludes an update on the earnings for the quarter. And I'll turn the discussion over to our Treasurer, Dan Brudzynski, who will cover cash flow and capital expenditures.

Daniel G. Brudzynski

Thank you, Peter, and good morning, everyone. Before I begin, let me say it's good to be back here within finance at DTE. And I look forward to working closer with all of you on this call in the future. As I take over from our prior Treasurer, Nick Khouri, our commitment to cash flow and prudent balance sheet management remains a strong as ever.

Now turning to Slide 13 and year-to-date cash flow and capital spending. 2012 cash flows are up, driven by increased cash recovery at the utilities, primarily related to the PSCR and the choice tracker regulatory recovery mechanisms in 2012 and an early 2011 cash pension contribution. This is slightly offset for the year by higher corporate tax payments. Capital spending is slightly higher in 2012 due to our investments in the Bluestone pipeline, as David mentioned, and higher base operating capital at the utilities, slightly offset by some lower renewables investment, a reminder that 2011 includes some large investments in our Gratiot wind park, which has since been placed into service.

Then moving onto Slide 14 and the outlook for the year. We are raising our guidance for cash from operations to $2.2 billion, driven by warm summer weather, again we plan for the year at weather-normal levels, and the impact of the RDM court ruling at Detroit Edison. Our original guidance at the beginning of the year assumed the decoupling balances we have begun to be refunded to customers this year. And as Dave mentioned earlier, the RDM amortization will begin in 2014.

In addition, cash at our nonutility businesses is also expected to be higher in 2012. Capital spending is projected to be higher also. You'll see that detail to the right on the slide, where nonutility investments are up as a result of the acquisition of the on-site energy project portfolio from Duke Energy within our Power & Industrial group this October. We also anticipate a slight remixing of CapEx at Detroit Edison but still yielding roughly a total of $1.2 billion.

And finally, finishing up with a look at the balance sheet and our credit metrics on Slide 15. Leverage and FFO to debt remained well within our targeted ranges. Liquidity is strong and our rating agency outlooks are positive. We've issued $160 million in equity year-to-date into our pension and benefit [indiscernible] program for the year.

And now for the third quarter wrap-up, it's back over to you, Dave.

David E. Meador

Thanks, Dan. As we laid out for you, the results through the first 3 quarters are very solid. With a benefit of favorable summer weather, we're able to reinvest in our electric generation distribution systems and confidently raise the midpoint of our earnings guidance per share by $0.10. Setting aside the unusual weather this year, which is providing upside at Detroit Edison and pressure at MichCon, on a temperature-normal basis, both utilities are on track to earn their authorized returns.

Longer term, the utility growth plans are underpinned by mandated environmental-related investments and we're also seeing nice growth opportunities at the nonutility businesses. When you put this altogether, they combine to provide an overall long-term earnings growth per share of 5% to 6%. And as we indicated, we always do this by maintaining a strong balance sheet and solid cash flows.

We'll be at EEI in a little over 2 weeks, as I mentioned, and we hope to get a chance to see many of you there. For those of you not going to EEI, you can tune in to Gerry Anderson's presentation via the webcast, Tuesday morning, which is at 9:45 a.m., Mountain Time. And that's 11:45 a.m. for those of you in the Eastern time zone. And you'll be able to join that webcast through our Investors section on our website.

And now we would be happy to take questions.

Question-and-Answer Session

Operator

[Operator Instructions] We'll go first to Mark Barnett with Morningstar.

Mark Barnett - Morningstar Inc., Research Division

Just a couple of quick things. With the RDM gone, what's the likelihood that you look to address volumetric changes through some other alternative mechanism?

David E. Meador

Well, it's possible down the road. As we've indicated, our approach and strategy right now is to stay out of rate cases for multiple years. So if everything works out, well, we would not be filing a rate case until 2014 for 2015 base rate changes. In the meantime though, and you can certainly check this out with CMS in a couple of days, they have filed a rate case, where they have proposed a mechanism to basically address what you're talking about. So we'll watch that rate case go through. And I think there is some openness to dealing with some of the volume changes, especially that might come through in between rate cases relative to energy efficiency.

Mark Barnett - Morningstar Inc., Research Division

And with that, should you propose such a filing that wouldn't require a full base rate case though? Is that correct?

David E. Meador

Don, do you want to take that question? Don Stanczak is our Director of Regulatory Affairs.

Don Stanczak

No. Typically, if you're looking to implement any kind of tracker, it has to happen within a rate case.

Mark Barnett - Morningstar Inc., Research Division

Okay. All right. That's helpful. And just one more item. It's a small thing, but can you give a little bit of detail on what was driving your stronger transportation and storage results, given that many of your peers have felt some significant pressure on those businesses so far this year?

Peter B. Oleksiak

Even the combination of the storage was really with the -- a lot of the natural gas here in the region and really finding a home for that storage. And so we were seeing, on a short-term basis, some favorable margins and took advantage of that both in our MichCon and our GSP segment. On the transportation, actually our Millennium Pipeline is benefiting from that Marcellus Shale production, and we're seeing that in the results.

Operator

And our next question will come from Caroline Bone with Deutsche Bank.

Caroline Bone - Deutsche Bank AG, Research Division

You had said on the Q2 earnings call that storm expense would offset maybe about 1/2 of the weather benefit in July. Could you quantify what that was for the quarter?

Peter B. Oleksiak

Yes. Quarter overall had a $50 million weather impact. So the storm expense, actually we had that first storm in the July. Actually from then, we didn't really have a lot of catastrophic storms. Actually year-over-year, if you look at it, storm expense is down on a year-over-year basis. So we did see most of that margin favorably flow through.

David E. Meador

So that was -- if you'd go back to that second quarter call, we were only into really a month of the quarter. And at that time, we've just come through a pretty bad storm in July. But as the rest of the quarter played out, there was margin favorability way beyond that storm. So the storm offsetting half of the margin improvement is not accurate. It turned out to be a lot less than that for the quarter.

Operator

And our next question will come from Naaz Khumawala.

Naaz Khumawala - BofA Merrill Lynch, Research Division

Just a quick question for you all. If you don't mind, what base are you using for the 5% to 6% growth rate?

David E. Meador

You should, when you're looking at forward years, use our original guidance of $3.80 per share.

Naaz Khumawala - BofA Merrill Lynch, Research Division

Okay. So not on the new midpoint of the new 2012 range?

David E. Meador

No. One way to think about it is what we're seeing in this uptick is primarily weather, which is not normal weather. So after seeing coming through at Detroit Edison and so on a forward-looking basis, the right grounding point is $3.80.

Naaz Khumawala - BofA Merrill Lynch, Research Division

Understood. And then I think you'd said, and sorry if I missed this in the prepared remarks, but that some of the weather was -- you did a reinvestment of O&M?

David E. Meador

Yes.

Naaz Khumawala - BofA Merrill Lynch, Research Division

How much is that? And then how much -- so an ongoing basis, kind of what level of O&M should we expect?

Peter B. Oleksiak

Right now, we're looking at investing probably around $20 million to $30 million of O&M back in the businesses. Early on, when we saw the weather impact swing the other way, first quarter, we actually put some continuous improvement in one-time cost actions. So absolute O&M probably will be up around $20 million, but we're targeting probably closer to $30 million from our reinvestment. And it really is one-time type of investments, kind of shoring up our distribution systems, our power plant reliability type of expenditures.

Naaz Khumawala - BofA Merrill Lynch, Research Division

Yes. No, that makes sense. And then if you can talk about kind of over the summer, did you see -- given the hot weather, was all your generation running, assuming there was no differentiation due to gas prices or anything?

David E. Meador

No. In Michigan or even in the Midwest, there's very, very little gas switching capability. As a matter of fact, [indiscernible] if you look at it on a capacity basis, it's even 10% of the capacity and [indiscernible] can switch to gas. So the coal plants run predominantly all out because we don't have that capability.

Peter B. Oleksiak

And actually, our coal plants are having a good year from reliability.

Operator

[Operator Instructions] We'll go next to Brian Chin with Citi.

Brian Chin - Citigroup Inc, Research Division

On Slide 14 for Detroit Edison, the capital expenditure guidance numbers have moved around a little bit between environmental and renewables. Can you just talk about that a little bit? And then also just a longer-term CapEx story for '13 and '14, is that going to be given out at EEI? Or what's your thought about giving a little bit longer-term view on CapEx?

David E. Meador

Right. On the -- first, on the capital of what's playing out in the renewables, as we accelerated some of our renewables spend because we were -- like many, we're looking at the potential for extension of PTCs and trying to watch for unserviced date. And at the same time, we were also getting great opportunities on the procurement side. So there was a conscious decision there to pull ahead some of the spending. And on the environmental, what is playing out there is the success that we're experiencing on the DSI testing. Now if you recall that the DSI testing, we said that it turned out to be much more successful than we thought. And it's causing us to shift some of our capital spending over several years. And we will lay that out at the EEI when we lay out our capital for multiple years. We'll give you that in several weeks. But what you will see is it's going to allow us to make some DSI-related investments over the next couple of years and defer some of what we would've thought we would've been doing on scrubbers on some of our plants. And that will play out in the capital numbers that we'll show you.

Operator

And our next question will come from Andrew Weisel with Macquarie Capital.

Andrew Weisel - Macquarie Research

In terms of weather-adjusted load growth, if I heard correctly, it was about 1% of a negative impact from energy efficiency. So the total number from the supplemental slides here show flat year-over-year load growth. It's a little bit lighter than I was expecting. Can you give a bit more commentary? I mean, we see the macro data on auto sales and things like that. Can you just talk a bit more about what you're seeing and what your expectations are for the next few years?

Peter B. Oleksiak

Yes. This is Peter. First, let's talk about the macro indicators. We look at unemployment. Actually this time last year, unemployment was 1% higher, so we're seeing a 1% decline on employment. Housing starts is another key indicator, up about 50%, so seeing some strong housing starts. And as you mentioned from the auto sales on an annualized basis, they've recently just come up with their numbers and they're at 14.9 million units. So we really haven't seen those levels probably for 5 to 6 years. So all indications are real strong from an economic indicator. On the residentials, on a year-to-date, temperature-normalized were flat. And typically for that segment, we will see about a 1% to 2% estimate on energy efficiency. So one way to think about it, we have growth, organic growth happening there that's offset by energy efficiency. The other thing that we really monitor from an economic perspective is the industrial. And we are seeing a 3% growth there year-over-year. And we are seeing strength in the autos and the steel segments.

Andrew Weisel - Macquarie Research

Okay. So do you have any thoughts as far as what you're expecting for, say, '13 or the next few years in terms of weather-adjusted load growth?

Peter B. Oleksiak

We are anticipating probably close to about 1% growth, net of energy efficiency.

Andrew Weisel - Macquarie Research

Okay. So meaning, plus 2, minus 1?

Peter B. Oleksiak

That's correct.

Andrew Weisel - Macquarie Research

Okay. Great. And then my only other question, the lowered expectation for trading business. How should we think about the sort of longer-term run rate of earnings contribution? I know it's very difficult to predict and it's volatile. But should we be taking down kind of numbers from, I believe the prior guidance was about $40 million as a run rate?

David E. Meador

We will give you our early outlook at EEI in a couple of weeks. But what you're seeing in this year, and I think generally, what you're going to see going forward is we want to plan conservatively for that group. We still are not wavering from our 5% to 6% earnings growth projections. But it's a group that whether I do guidance or I'm doing it internally, I don't push them on earnings because I don't want to change the risk profile of that business under any circumstances. So we plan conservatively. And at the same time, we're going to hit our 5% to 6% growth numbers. And we'll outline that by business segment at EEI for you.

Operator

And our next question will come from Andy Levi with Avon Capital.

Andrew Levi

I think most of my questions were answered. So I guess, weather normalized guidance, just to understand it would have been like, $3.65 to $3.85. So we backed out about $0.15 for year-to-date weather. Is that kind of the way to look at it?

David E. Meador

No. We don't -- I don't know I have that at our fingertips. But you can take the excess weather and back that out.

Andrew Levi

It was about like $25 million, right, or something like that? I think it was. Okay.

David E. Meador

Right. But the other thing that's happening here, as we talked about, was O&M. We're trying to be very flexible on how we operate the company to work around weather. So the first half of the year, we were pressing hard down on O&M. Now we find ourselves in a situation where we're reinvesting in O&M. And that's directly related to weather. So I wouldn't doing that otherwise, so you have to net that all together.

Andrew Levi

Okay. And then relative to kind of the Barnett Shale sale and the need or no need for equity -- I mean, again I'm sure it will be something that will be discussed at EEI. But can you kind of give us an idea for '13? Are you not going to need any equity in '13? Is that kind of the way to look at it?

David E. Meador

Well, our base plan that we've laid out hasn't changed, that we're going to be spending significant amounts of capital over the next several years. And we are still projecting that on average, it's about $300 million a year of equity that we would do through our benefit plans and through the pension plan. We are working our way through the Barnett sale, it’s all real-time right now. And as you know, we have a placeholder that we've put in our sources and uses for $300 million. And it's reasonable to say that if we got significantly over $300 million that would put less pressure on the need to issue equity. But we'll be able to update you at EEI. I don't know that we'll be far enough through the sale process. But as that plays out, we're going to lay out a base number on equity for next year. And then again whether the Barnett sale comes in very healthy or we find other investment opportunities, we would be wiggling the equity number. But at the end of the day, our goal is not to be doing a public issuance and to do this through the benefit programs.

Andrew Levi

Okay. And on the gas pipeline segment, I just want to make sure that I heard that correctly. You said you'll be at $100 million by the end of 2015, not '16?

David E. Meador

It's '16.

Andrew Levi

It's '16. Okay. Because I thought you said '15 with the new investment with NEXUS. But okay. So it's '16. I misheard, I apologize.

David E. Meador

Right. And NEXUS, just to be clear, that it's a proposed pipeline. And right now, the projection is looking at everything that we'd have to do, including FERC approval and so on, as that pipe would go into service at the beginning of '16. So that would be the first year that you'd actually -- if everything works out according to schedule, that you would actually see earnings impact from NEXUS.

Andrew Levi

Okay. Which is in line with what you have said in the past. I thought I heard '15, so I thought...

David E. Meador

Okay.

Andrew Levi

And then last question is, and this again may have to wait for EEI, but -- so the only kind of -- blemish is too strong a word. But obviously, the trading segment didn't meet expectations this year, and obviously, is the one part of your business that's not predictable. How should we think about that for '13? Or does that need to wait for EEI?

David E. Meador

I think we should just wait. As we've said before, that this is not part of our growth story and we had went through a period where, on average, the earnings of cash flow was about $50 million a year. And we're going through a period right now where it's $20 million to $30 million a year. And we're okay with that and still being able to hit our growth objectives.

Operator

And our next question will come from Timothy Yee with KeyBanc Capital Markets.

Timothy Yee - KeyBanc Capital Markets Inc., Research Division

Just 2 quick questions. Do you think it's still possible to have the remaining 2 REF machines sited and operational by year end? Or might that go into early 2013?

David E. Meador

Right now, based on where we are, it's going to slip into the beginning of 2013.

Timothy Yee - KeyBanc Capital Markets Inc., Research Division

Okay. And then could you just discuss a little more on this 25 x 25 Proposal 3 ballot, and then how that's tracking and how that might play out in Michigan?

David E. Meador

Sure. Thanks for the question because we feel pretty strongly about this, that it's a terrible thing from a public policy standpoint that we don't think this is good for the state of Michigan. It's not good for our customers and we certainly don't want out-of-state groups coming into Michigan and hijacking our Constitution. So the business community, if you look at the Michigan Chamber, the Detroit Regional Chamber, the Michigan Manufacturers Association and the state of Michigan, they're all very aligned in the opposition to defeat this proposal. And that's our intent, to defeat the proposal. So we're working hard right now. And the polling data is showing that the more the people learn about this and the vagueness of how it's written, that the support for this continues to go down every day as we speak. So right now, we're focused on defeating it. And obviously, if it passes, we can talk more about the implications of that down the road. But I hope I don't have to talk about it after the election.

Operator

[Operator Instructions] Our next question will come from Kevin Fallon with SIR Capital Management.

Kevin Fallon

I had a question for you on the O&M levels at Detroit Edison for this quarter. It looks like they were actually down in 3Q '12 versus 3Q '11. I was wondering why that was.

Peter B. Oleksiak

That really is -- if you look in the quarter, we're talking earlier about the storm cost, where we did see a storm early in the quarter. It was pretty quiet after that. Actually, storm cost this year versus last year, we're about $20 million less this year versus last year.

Kevin Fallon

Okay. And for modeling purposes going forward, should we look at the authorized ROE for Detroit Edison as kind of the target for where you guys should come in? Or it's the floor?

David E. Meador

We -- our goal is to consistently earn our authorized. That doesn't mean that we won't slightly under-earn or slightly over-earn. But I think from your standpoint, the way you should view this is it's a company that's objective is to consistently earn its authorized. Because of the way renewable energy works and energy efficiency works here under the law, there's a slight uptick over authorized that we can still earn. So for example, at Detroit Edison, where the authorized is 10.5%, we actually have the ability with those other 2 mechanisms to earn 10.6%, as an example. So there will be slightly over-earning before that. And I also think that we can work within the bandwidth around authorized. But my goal is not to wildly over-earn in any year because we don't think that's the right thing to do in running these businesses.

Kevin Fallon

Okay. And finally, on the MichCon rate case with the self-implementation of the $34 million, do you need to get the commission to vote on that? Or can you guys just do that as planned on November 1?

Don Stanczak

This is Don Stanczak. We can just self-implement. Now in the past, the commission has issued orders on self-implementation, but they have not thus far on the MichCon case. So if they don't issue an order, we can just self-implement on November 1.

Operator

And Mr. Meador, we have no further questions in the queue at this time.

David E. Meador

Okay. Thank you, and I appreciate everyone's involvement today and the great questions you have. And we look forward to seeing you at EEI. Thanks again.

Operator

This does conclude today's conference. Thank you for your participation.

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