Operator: Good day and welcome to the DTE Energy First Quarter 2013 Earnings Release Conference Call. Today's conference is being recorded.
At this time, I'd like to turn the conference over to Mr. David Meador. You may begin.
David E. Meador - EVP and CFO: Thank you, and good morning everybody, and welcome to our first quarter 2013 earnings call. Before we get started, I encourage you to read the Safe Harbor statement on Page 2, including the reference to forward-looking statements.
Turning to Slide 3, with me this morning are Peter Oleksiak, our Senior Vice President of Finance; Dan Brudzynski, our Vice President and Treasurer; and Anastasia Minor, our Director of Investor Relations. I also have members of the management team with me, if needed, during the Q&A session..
Now moving on to Slide 4, as you know we will be providing a full business update and outlook at our analyst meeting in New York next week on May 1st. It’s just a couple of days away. We have several hours scheduled with you with what we believe is very interesting material to take you through. So, this morning if we can I’d like to keep the call focused on the quarter, but as always, I’d be happy to take any of your questions.
Now turning to Slide 5, this is our investment thesis, and it describes how we will provide value to our shareholders. We believe that our discipline growth plans will provide a 5% to 6% long-term earnings per share growth along with an attractive dividend yield. A key enabler to this plan is maintaining a strong balance sheet, which allows us to manage our risk and access capital under favorable terms.
Growth plans at both utilities are robust and we will lay this out for you in next week in more detail. DTE Electric’s growth is largely driven by operational investments, mandated environmental controls, and renewable energy needed to meet Michigan's 10% (RPS) 300. At DTE Gas, the growth is driven by infrastructure investments in cast-iron main replacement and relocation of meters out of the customers’ homes. These important infrastructure investments were the subject of the infrastructure recovery mechanism order that was issued by the Michigan Public Service Commission on April 16th, and I will cover that in an upcoming slide.
The 2008 energy legislation and regulatory structure of Michigan provides constructive environment for us to work within; however, as you know, we don't take this for granted, and it’s incumbent on us during this favorable construct every day. We continue to focus on our system of priorities, including highly engaged employees, distinctive continuous improvement capabilities, and top decile customer satisfaction. That’s another area that we’re going to spend a fair amount of time on next week.
Our non-utility businesses provide with low risk and diversified growth opportunities to complement our regulated utilities.
Now turning to Slide 6, an overview of the first quarter; I’m pleased to announce earnings of $1.34 per share versus $0.91 in the first quarter of 2012. Substantial amount of that increase year-over-year is related to weather and we will be talking about that as we go through this. But it’s a nice start to the year, especially after thinking about last year first quarter and the start we had last year, given the extreme weather conditions last year.
In the first quarter of 2012, we talked about that and the impact on the entire company, but especially on the DTE Gas segment earnings last year. This year we had near-normal temperatures, actually it was slightly below normal, and it explains the significant portion of year-over-year change.
But it shouldn’t be lost that we also have continued to focus on continuous improvement and making structural changes needed to stay out of rate cases and also to reach our aspiration of being the best operated energy company in North America.
A couple of the quarter-over-quarter drivers I’d like to point out is first of all our continuous improvement efforts had led to reduced benefit expenses and also efficiencies in our gas distribution system. The rate case settlement at DTE Gas also provided some year-over-year improvements in earnings.
Finally, our P&I segment benefited from the acquisition of a portfolio on-site energy projects late last year as well as higher earnings from the Reduced Emission Fuel projects.
The balance sheet remained strong and we generated approximately $600 million in cash from operations in the first quarter. This along with credit upgrades for Moody’s and Fitch that we talked about in our last call put us on track to meet our balance sheet goals for 2013, and we will provide a full outlook for the year at the analyst meeting next week.
Now turning to Slide 7, last week the Public Service Commission approved our proposed infrastructure Recovery Mechanism for DTE Gas. This mechanism covers a five-year period beginning in 2013 with the total projected investment of $400 million over that period or about $77 million annually. This mechanism streamlines the recovery of these costs through the surcharge, which will be reconciled each year to reflect actual spending, and that surcharge will remain in place until the next rate case.
So, with that overview, I'll now turn it over to Peter who will take you through the quarter in a little bit more detail.
Peter Oleksiak - VP, Controller and IR: Thanks, Dave and good morning to everyone. I’d like to start with Slide 9 and the first quarter earnings results. For the quarter, DTE Energy’s operating earnings of $1.34 is consistent with reported earnings, but the two utilities, DTE Electric contributed $0.66 and DTE Gas came in at $0.55. The non-utility segments combined, they earned $0.21.
The drivers for the non-utility first quarter results were Gas Storage and Pipelines at $0.10, Power and Industrial Projects at $0.07 and Energy Trading at $0.04. Finally, Corporate and Other had a loss of $0.08 for the quarter.
Let’s move to Slide 10 and a summary of a quarter-over-quarter performance by segment. Operating earnings for consolidated DTE Energy are up $78 million for the quarter. Both our utilities, DTE Electric and DTE Gas, colder weather in 2013 and lower benefit expense contribute to favorable earnings from 2012. DTE Electric contributed $19 million more year-over-year. More than half of this was weather improvement. Typically, you don’t see such a large weather improvement for our electric business in a non-summer quarter, but last year we had one of the warmest winters on record.
DTE Gas had an increase of $44 million for the quarter, and given the size of the increase, I will more cover more details on DTE Gas in a moment. Our non-utility segment’s operating earnings are totaled up to $13 million, improvement driven primarily by the higher earnings at our Power & Industrial Projects and Energy Trading segments. Gas Storage & Pipeline earnings are flat from prior year due to growth in transportation revenues across all of our pipeline platforms offsetting lower storage earnings for the quarter.
Our Power & Industrial Projects segment is up $4 million from 2012. This increase is driven by earnings related to our on-site energy projects recorded in the fourth quarter of 2012, growth and renewable earnings related to our coal or wood waste plants coming online and increased Reduced Emissions Fuel earnings.
At Energy Trading, improved market opportunities contribute to the 2013 increase from last year, and the quarter’s performance is in line with our expectations.
Page 21 of the appendix contains our standard Energy Trading page which shows both economic and accounting performance.
Finally, our Corporate and Other segment came in favorable by $2 million from last year, primarily to lower interest expense.
Now let’s turn to Page 11 and walk through some of the quarterly detail for our gas business. Operating earnings for DTE Gas are $96 million, up $44 million from the prior year. The largest driver for this quarter’s improvement is the record weather we had in 2012 not returning in 2013. The (cold) weather improvement of $26 million actually can be broken into two pieces that 2012 is warmer than normal weather is actually $23 million unfavorable last year and an improvement for this year. The weather this year was slightly colder than normal and it contributed $3 million of earnings.
The rate case settlement received in the fourth quarter of 2012 drives an additional $7 million of margin improvement for the first quarter of this year. Continuous improvement efforts on our gas distribution system helped to drive lower lost gas for the quarter by 6 million.
Lastly, changes in our benefit plans derived additional $5 million of earnings improvement over last year. That concludes an update on our earnings for the quarter.
I’d like to turn the discussion over to Dan Brudzynski; he will cover cash flow and capital expenditures.
Daniel G. Brudzynski - Vice President and Treasurer: Thanks, Peter and good morning. Now, moving on to Slide 13 and the first quarter cash flow results. As Dave mentioned, cash flow remained strong in 2013. Favorable weather impacts primarily in DTE Gas were offset by the timing of planned pension contributions in 2013. Cash is comparable in the first quarter to 2012 and is tracking in line with our guidance for the year. Capital spending is roughly the same as 2012 and I will cover those details on the next slide.
In the financing arena, we successfully financed $375 million of long-term bonds that of electric utility in the first quarter of 2013.
No moving on to Slide 14 and some detail on capital spending. 2013 investments are relatively flat overall. We had lower investment at DTE Electric, driven by a refueling outage in 2012, were partially offset by higher gas investments, Fermi renewal and advanced metering infrastructure or AMI and the Bluestone lateral and gathering capital spending into 2013.
Then finishing up finally on Slide 15 and I’ll look at the balance sheet. As we continue to grow a strong balance sheet is a key priority to us at DTE and our metrics remained within the targeted ranges. Our financing plan is on track for 2013 with 100 million of equity already issued in the first quarter, and the bond financing I mentioned earlier. Our liquidity is sufficient with a successful extension of our credit facility to 2018.
With that, now I will turn it back over to Dave for the wrap up.
David E. Meador - EVP and CFO: Thanks, Dan. I'll wrap up on Slide 17. As he laid out for you, we have a strong first quarter with substantial year-over-year earnings improvements as I said earlier, I was thinking about last year we started out in the first quarter and we were quite, quite deep in the hole because of the extreme weather last year. So it's a great way to start 2013. The approval of the Infrastructure Recovery Mechanism for DTE Gas, as we have outlined, is the key component, not only making the necessary improvements in that business to improve the distribution system, but it gives us a lot of flexibility in terms of staying out of rate cases in the gas business. Going forward, the combination of operational and mandated utility investments, and then also investments in the low-risk non-utility growth opportunities combined, are expected to provide us with 5% to 6% earnings per share growth.
As we mentioned, next Wednesday, we are going to be going into much more detail regarding our system of priorities and our growth prospects at the analyst meeting. The meeting’s at 8.30, breakfast at 7.30, if you would like to join us at the New York Sheraton Times Square. If you are not attending in person, you are welcome to listen to the webcast and a webcast will also be archived, and you can find the link to all of that on our Investor Relations website.
With that we'd be happy to open up for questions now.
Operator: Kevin Cole, Credit Suisse.
Kevin Cole - Credit Suisse: Congrats on the IRM tracker. Slide 7 is helpful, but, I guess, given your comments, given that this is a five-year tracker, are you expecting that you are going to stay out from filing a DTE Gas rate case for the five-year period, while earning your allowed return?
David E. Meador - EVP and CFO: We will go into multiple year plans next week in more detail, but as you know, one of our (Northstar) is to earn our authorized return year in, year out. We are also very focused as you know also, on cost and customer bills, so our goal is to stay out of rate cases as long as possible, while meeting our objectives and we have laid that out to the electric business, and this tracker, it will allow us to stay out of rate cases for multiple years. So we are evaluating that. Certainly, we will talk in more detail next week, but this is going to give us a period of stability, which is joining the electric business. As I am anticipating, we will not be in rate cases for several years at least.
Kevin Cole - Credit Suisse: So with the 1Q DTE Gas operating earnings coming in at $96 million versus full year guidance at $113 million to $118 million, that seems to imply that the fourth quarter would be somewhere around $17 million to $22 million, but DTE Gas normally earns or at least should earn between $50 million and $60 million. So for the rest of the year, do you expect to ramp up your O&M spending, and I guess bank some O&M for the future or just kind of come out at the end of the year above your guidance range for DTE Gas?
David E. Meador - EVP and CFO: As you are pointing out this is a great start to the year on many segment of the business and certainly better than last year. Our normal practice is to update our forecast and review that with the Board and evaluate what you are pointing out, which is our lean in an invest scenario. So our goal is to earn our authorized return to the extent that we have favorable conditions, including weather. Our inclination is to pull ahead investments in the business and the opposite is also there. We are evaluating that right now. We are going to talk to our Board and we will take you through that in more detail next week at the Analyst Meeting.
Operator: Julien Dumoulin-Smith, UBS.
Julien Dumoulin-Smith - UBS: I wanted to ask you a very quick question here regarding your O&M. As far as it goes, first quarter seems to have been quite positive. How do you feel now with regards to full year? I mean, should we continue to expect this kind of a trend, a decline year-on-year throughout the balance of the year?
David E. Meador - EVP and CFO: That’s another I hate to continue to kind of push questions to next week, but we are going to update you next week on not only the full year, but we are going to update you on multiple years next week, including our thinking on O&M. One item I would like to point out is that what we have said is we are going to continue to work hard on O&M. We need to do that on behalf of our customers and one of the (plans) on that is just continuous improvement, but we have also signaled that we are always looking for structural changes in our costs and using that as a lever to stay out of rate proceedings as long as possible. So, we were able to achieve a couple of our structural changes and continue to work on continuous improvement and we will lay that out for you next week in terms of our thinking on O&M and how that all plays through both in the gas and the electric business in terms of staying out of rate cases as long as possible.
Julien Dumoulin-Smith - UBS: Perhaps let me clarify. In the first quarter, how one-time versus sustainable were the cost reductions that we did see here, if you will? Maybe that's a more type of a question, some of the lost gas improvements, for example?
Peter Oleksiak - VP, Controller and IR: I would say, probably you’re close to two-thirds of that will stick. We did have some generation outage timing in there, but as Dave mentioned, some of the structural cost changes and I too was mentioning that the benefit expense will continue to flow through. The lost gas improvements for now – we did see a physical lost gas come down by 40% in the quarter, and we are anticipating that will stick as well.
Julien Dumoulin-Smith - UBS: Perhaps, just broadly speaking again, going back to the notion of staying out, is there any potential to use some of the amortization of the liability here beyond 2014 on the Electric side? Any kind of sense as to how that's going to play out here?
David E. Meador - EVP and CFO: The amortization of the liability, are you speaking to the former decoupling…?
Julien Dumoulin-Smith - UBS: Yes.
David E. Meador - EVP and CFO: That again is something that we are evaluating. Right now, the way that the regulatory proceeding is laid out, we don’t have an option right now. We have to amortize that into 2014, and as we have indicated our current thinking is that we would file in ‘14 for rates in ‘15, but as we continue to press down hard on costs, we are asking ourselves the question that you are asking, which is could you ever move that amortization if you didn’t need it in this year end. It’s something we are evaluating but right now we have not made any decision. We are also evaluating the (feel) from question can we stay out even further, not file in ‘14 and possibly push that one year later and again we will go into more detail next week, but it’s just directionally an indication of how we are managing the company in our costs which was right now if we could file in ‘14, we will do that, but if we can push ourselves further or when eventually we file, make it a smaller number as possible by still hitting our growth targets and maintaining our balance sheet targets, we are going do that.
Operator: Paul Ridzon, KeyBanc.
Paul Ridzon - KeyBanc: Congratulations on a solid quarter. I guess, I will ask the question differently. When did you implement these benefits changes? In other words, how long do we have before we lap them?
David E. Meador - EVP and CFO: When it happened here it was based on what we had done in our salary plans our union contracts. We actually had to go through re-measurement process and I think it will be laid out when we file our 10-Q for you. So we had to re-measure our benefit plans in the way the accounting works that amortizes into income over a four-year period.
Paul Ridzon - KeyBanc: When did you do that?
Peter Oleksiak - VP, Controller and IR: It was the end of last year, when we did our year-end calculations for the benefit expense for 2013, that’s really where you are seeing it now. But it was end of last year.
Paul Ridzon - KeyBanc: So is it reasonable to expect the next three quarters we should see something similar on the benefits side?
Peter Oleksiak - VP, Controller and IR: That’s correct.
Paul Ridzon - KeyBanc: I know you're probably going to punt it for next week, but obviously there has been discussion on MLPs?
David E. Meador - EVP and CFO: Actually, I don’t have to punt it to next week. I’d rather just talk about that right now if we could. We are always asked this. It seems like every meeting I am in with investors, they are asking are we thinking about this and what’s our view of this. The answer is we are constantly looking at all of our financing techniques and we have been studying MLPs at a detailed level ever since these things started evolving, including watching in particular C-Corps that have now MLPs versus the large MLPs, but that said we don’t believe that we have the scale at this time and to move on an MLP. We also continue to ask investors what they think about DTE proceeding and we honestly are getting mixed feedbacks on the thoughts about a company that has the mix of businesses that we have. So we are predominantly as you know a utility company with 70% to 80% utility having an MLP. Next week, we are going to take you through out Midstream growth aspirations and as part of that I will just offer that we constantly evaluate MLPs and other alternatives, and at some point given future scale, we will give it more serious considerations. So some have asked recently, it sounds like the tone is changing at DTE Energy and the answer will be it is when the segment was earnings $30 million a year and we got to ask this question. We answered it one way. Now that we are earning $50 million with aspirations, well over $100 million, I think we are just signaling that as this business grows, it’s something that we will take a look at, but as of today as you know we have been able to grow this business organically and create value without an MLP. So nothing’s imminent, but as this business segment grows, it’s something that is incumbent on us and can’t certainly evaluate.
Operator: Andy Levi, Avon Capital.
Andy Levi - Avon Capital: Most of the questions were asked. Just back on the benefits, so whether it's on the Gas side or the Electric side, we should just annualize that number? Is that the way to look at it, David?
Peter Oleksiak - VP, Controller and IR: (indiscernible).
Andy Levi - Avon Capital: And then the same on the lost Gas or is that kind of seasonal?
Peter Oleksiak - VP, Controller and IR: Seasonality.
Andy Levi - Avon Capital: And on the benefits side was that contemplated in your forecast that you gave earlier in the year?
Peter Oleksiak - VP, Controller and IR: This is part of the strategy around delaying the rate proceeding even a few years ago when we were taking a look at we potentially would have needed new rates given the size of our capital spend in ‘13, we knew that we had a design change here that would give us some headroom to stay out of proceeding.
Andy Levi - Avon Capital: So the forecast that you gave for this year, the $3.85 to $4.15, I believe contemplated this.
Peter Oleksiak - VP, Controller and IR: That is correct.
Operator: Paul Patterson, Glenrock Associates.
Paul Patterson - Glenrock Associates: I hate to circle back on the MLP, but you mentioned that, at a certain point, you'd be more likely if you had the economies of scale. Could you give us a sense of as to what that would be?
David E. Meador - EVP and CFO: I am not sure there is an exact number. As you know, you want to look at not only what you have today, but you want to look at your pipeline on growth. There is a company who never wanted to be in a situation where I created a structure and then I found myself wanting to add growth to that structure that was beyond anything that normally would be in scope or strategy for this company. I don’t think there is a magic answer. I don’t know. I think right now – and we will take you through this next week. We are looking at how far we can push this Midstream segment, and also what are the range of options that we see happening in this whole Marcellus shale play right now. Obviously as this business grows and assuming that MLPs are still allowed down the road, as you know there is a very attractive cost to capital structure here that that will again continue to take a look at. But I wanted to be careful about it just right now. People shouldn’t expect that next week there is some announcement around MLPs. What we want to say is that as this business segment grows, we will continue to evaluate this but it’s just not – we don’t feel where is the right level today.
Paul Patterson - Glenrock Associates: Then on the weather-adjusted sales growth, it looks like it was flat. Does that include the impact of leap year?
Peter Oleksiak - VP, Controller and IR: Yes it does. Like one day in the quarter, as we go through the year it becomes less significance, but (indiscernible) it was flat. Actually at this point we are expecting our full year to come and close the 2% growth increase.
Paul Patterson - Glenrock Associates: I thought you guys were expecting 1% after the impact of energy efficiency. Has that changed now?
Peter Oleksiak - VP, Controller and IR: It has. Actually the Industrial in particular you see in the quarter was up 3%, actually we are anticipating to grow to 5% to 6% by year end.
Paul Patterson - Glenrock Associates: Okay. So it's all driven by Industrial.
Peter Oleksiak - VP, Controller and IR: Predominantly.
David E. Meador - EVP and CFO: But still are long term
Peter Oleksiak - VP, Controller and IR: Long term is 1% (indiscernible) energy efficiency.
Paul Patterson - Glenrock Associates: Could you say what the impact of energy efficiency is?
Peter Oleksiak - VP, Controller and IR: Approximately 1%
Operator: Kevin Fallon, SIR Capital Management.
Kevin Fallon - SIR Capital Management: I just wanted to see if I could get a little bit more color before the meeting next week on the potential opportunities at the utilities. Should we think about the current capital program as kind of a floor, or is that the full assessment of the need, as you see it, or just directionally, which way you're thinking there?
Peter Oleksiak - VP, Controller and IR: I know we have laid out in terms of our capital spend for utilities in our base, we have the environmental and the renewable, that’s pretty much kind of playing out over the next few years as we have indicated in the past and the Gas are really is with IRM, really that program is going to drive the incremental growth for gas utility.
David E. Meador - EVP and CFO: Normally, at an event like this will give you a five-year look, we are going to go longer than five years because we have been getting questions about is there a cliff out there after you go through this wave of environmental spending and the answer is no and we will lay that out in more detail. I think we have been saying that for a while now, but we just haven’t given multiple years of an outlook, and then also trying to explain what are the dynamics over time over many, many years. What’s going to happen with the generation fleet? What do we think is going to happen with renewable energy and then base infrastructure investment in both gas and electric utility and we will lay that out in more detail next week.
Kevin Fallon - SIR Capital Management: Just one other one; back to the MLP for a moment, just a question. On your internal plans, if you achieve your current internal plans, do you achieve the thresholds that would warrant the scale to do an MLP, regardless of whether you would or wouldn't do it?
Peter Oleksiak - VP, Controller and IR: I think that’s just one criteria around scale. I think there is other questions that as you know that have to be asked and answered, including there is a company that’s 70% to 80% utility and going to remain a C-Corp, what are the challenges and complexities around us having an MLP for our investors, and our long term investors will like that or not. So one of the criteria is continuing to get feedback from our investors around that and as we said there has not been a project yet that I couldn’t take on in terms of our organic growth because I didn’t have an MLP. So we have been able to grow this business and we will continue to grow without one.
Operator: Kevin Cole, Credit Suisse.
Kevin Cole - Credit Suisse: I guess since you opened the can of MLP worms, I'll follow up on that. I guess given that you are in the growth phase of the business today and you will need a significant amount of capital to grow the business, doesn't it make more sense to MLP it today? That way, you can get the benefit of the cheaper cost of capital when you're funding that growth.
David E. Meador - EVP and CFO: I understand the math in this Kevin as well as you do that using an MLP for lower cost to capital, you could lay that out. I have laid that out. I think just as other criteria to this, other than just saying I am going to bring a source of lower cost to capital to a company like DTE. Again, I am not saying that this is imminent because it’s not and I am not saying that we won’t take this more seriously down the road. I just don’t know that there is a trigger threshold that we are going to do this. So we are evaluating yet we are constantly doing this and evaluating it with our outside advisors and our Board and at the same time we are not there right now. So I just wanted to be careful that if someone thought that we were coming to New York to announce an MLP next week, it’s not next week.
Kevin Cole - Credit Suisse: I guess when you are doing the math too, are you expecting to – like when you run your MLP synergies, are you spinning it out completely? That way you can get the full benefit of an MLP. Or is your math, you are dropping it down, and you're still keeping it underneath DTE Corporation which…?
David E. Meador - EVP and CFO: I’d rather not getting into those specifics because as you know there is a lot of alternative ways even when you say someone could do an MLP, there is different alternatives including whether the parent is keeping some of the limited partnership holdings and then is it some of your assets, all of your assets and so on. So, I think over time some day we will continue the dialog with you and others on including getting feedback from people about how they feel about this company doing something like that.
Operator: It appears there are no further questions at this time.
David E. Meador - EVP and CFO: Okay, thank you again, everybody. We look forward to seeing you next week and the meeting starts at 8.30. Take care.
Operator: That does conclude today's conference. Thank you for your participation.