DTE Energy Company (DTE) Q4 2012 Earnings Report, Transcript and Summary

Good day, and welcome to the DTE Energy Fourth Quarter 2012 Earnings Release Conference Call. Today's conference is being recorded. At this time, it is my pleasure to turn the conference over to host, Mr. Dave Meador. Please go ahead, sir.

Thank you, and good morning, everybody, and thank you for joining us. And welcome to our 2012 year-end earnings call. Before we get started, I'd like to remind you to read the Safe Harbor statement on Page 2, including the reference to forward-looking statements. With us this morning is Gerry Anderson, our Chairman, President and CEO; Peter Oleksiak, our Senior Vice President of Finance; Dan Brudzynski, our Treasurer; and Anastasia Minor, our new Director of Investor Relations. We also have members of the management team with us to call in during the Q&A session, if needed. And before we get started, I'd just like to point out that we have scheduled an analyst meeting on May 1 in New York. We haven't done one in about 4 years, so we just thought it was time for us to come to New York and give you an update on a lot of the businesses and how we're going to continue to grow each of the business segments. It also gives us an opportunity to bring a broader group of the management team and -- so you can see the depth and talent that we have at the company. So given that, this call, we'd like to focus on 2012 earnings and 2013 plans. But as always, we'd be more than happy to take your questions during the Q&A session. So with that introduction, I'd like to turn it over to Gerry Anderson.

Well, thanks, Dave, and greetings to all of you. Thanks for joining us this morning. I am going to start out this morning with a look-back on 2012 and our accomplishments, then I will turn to some of the drivers of our long-term growth and then we'll hand it back to Dave for a financial update. So I'd start by saying that I'm encouraged by our progress and results in recent years. And I attribute that progress, in large part, to our focus on what we refer to at the company as DTE Energy's system of priorities. And that system of priorities is shown on Slide 5. Your first reaction may be, why is Gerry taking me through this page full of boxes and arrows on a year-end earnings call? But the answer is that this page really does describe the way that we're running DTE Energy and I think it's helpful for you as investors to understand that. And it describes an interdependent set of 6 priorities, which, I think, if we execute well against, will yield strong outcomes for all of our constituents, including you, our shareholders. And it all starts on the left-hand side of the slide, the far left-hand side, with highly engaged employees. And I have come to believe that this is the first and most important. I often say to our leaders, you can't be an excellent company, you can't produce excellent result for shareholders if you're getting mediocre energy and focus from your people. And if we don't get this right, everything to the right of that employee box doesn't work. But if you do get that right, then you got a shot at the next 2 to the right, which is doing a great job for your customers and building an ability…

Thanks, Gerry. I will go through the financial updates, starting on Slide 21, and try to do that quickly so we can open up for Q&A. Operating earnings for 2012 came in strong at $3.94 per share. And just as a reminder, there's a reconciliation in the Appendix where we provide our GAAP reported earnings reconciliation. So starting on the left-hand side of the slide. DTE Electric earned $2.81 per share. This is a significant step-up from our initial guidance range for the segment of $2.56 to $2.62 per share and this was driven by warm summer weather. DTE Gas came in at $0.67 per share, hitting the top end of our guidance. Gas distribution system improvements and onetime cost actions outpaced the impact of a record warm winter in 2012. And then nonutility businesses, Gas Storage & Pipelines earned $0.36 per share and Power & Industrial earned $0.30 per share. These results are at the high end of the guidance for these segments and were driven by strong performance at several projects. Energy Trading finished the year at $0.07. And finally, Corporate & Other incurred a loss of $0.27 per share. As Gerry indicated, the total year was not only higher than our original guidance midpoint of $3.80, which we projected our 5% to 6% growth off of, but it was also higher than the last guidance midpoint of $3.90 provided at the fall EEI conference. I'd like to congratulate all of the employees at DTE Energy for another great year on many fronts, including all the initiatives that Gerry covered, but also on our financial performance. Now turning to Slide 22 and a summary of the year-over-year performance by segment. Operating earnings for consolidated DTE Energy are up $40 million for the year or $0.19 per share. DTE…

[Operator Instructions] We'll take our first question from Kevin Cole with Crédit Suisse. Kevin Cole - Crédit Suisse AG, Research Division: I guess, first on the midstream and the NEXUS pipeline, I guess, as it shows on Slide 17, it appears that the NEXUS pipeline better optimizes your current midstream and storage footprint. And so how do you expect the NEXUS pipeline to do this with your current assets and what other growth projects you see kind of like building off this pipe?

Well, the interesting thing about NEXUS -- but, first of all, it's just a raw play on what we think is going to be a great resource in Eastern Ohio. And we have a market approximate to those resources in Michigan that is looking for added diversity of supply. But Ontario, if you studied dynamics in Ontario, Ontario gas use is really strong in terms of growth, particularly as they transition their power generation sector away from coal to natural gas. So they're -- they project a strong need for this, and thus, we've got 2 Canadian partners sponsoring the pipe. The other interesting thing about the project is that it plays right into our storage platform in Michigan and -- right across the river in Dawn, Ontario, there's another major Canadian storage platform. So the pipe not only brings supply, but it brings it into one of the largest storage hubs in North America. And as these shale resources come on and really dominate, they're going to need storage assets and storage hubs like the one that we have in Michigan and Western Ontario to help them deal with a relatively flat supply versus a fluctuating load. So we think it'll be good for the future development of our storage as well. The Vector Pipeline, as well, we're interested to see how that's going to play out. Whether we may, in the end, end up pushing Utica supply west through Vector up into Illinois and Wisconsin, we're already serving customers up there, but think that bringing the Utica supply on will give us greater opportunities to continue to use that asset. So I think the point of your question was that if it's something that helps us optimize existing assets, and I would agree with you, that we think as it develops it'll be a great fit. Kevin Cole - Crédit Suisse AG, Research Division: Good. I guess, Gerry, while I have you, I guess, we've been hearing a lot from the Obama administration and other involved parties regarding carbon policy. And I know you're chairing the EEI CEO panel to address carbon. So I was kind of hoping to get your initial thoughts on where you see carbon policy going and whether the prior policy that were set -- or the policy targets set by EEI are a reasonable starting point?

When you say the prior, are you talking about in the prior legislative rounds of discussion? Kevin Cole - Crédit Suisse AG, Research Division: Right, back in 2007 and '08 when this was more topical?

Yes. Well, a couple of comments. This time, because the legislature has not been able to agree on anything around climate change, the emphasis is going to shift to the EPA. One of the things that needs to be understood is the degrees of freedom that the EPA has to act. And I have had pretty sophisticated lawyers taking a look at the language of the Clean Air Act to understand what the EPA can and can't do. And what's clear is that it's not very clear and it's not very tested. They will act under a segment -- a section of the Clean Air Act that has not been the primary area of activity in the past. And so what they can do there is not well understood. So one thing I would say is both the industry and the EPA need to understand that more clearly and discuss the approach. I can almost assure you that, that's going to get tested in the courts. The courts are ultimately going to determine the EPA's degrees of freedom. I think the industry, as to whether the legislation would represent a starting point, the industry is not that far along in terms of thinking it through. I think what we need to do and one of the things that I and my role will be trying to do is see if we can come to a common viewpoint as to what we think is productive for our industry, productive for the country and so forth. But we're pretty early in that thinking and I would not assume that the discussions back in '07 and '08 are necessarily the starting point for discussions with the EPA.

We'll take our next question from Brian Chin with Citi.

Dave, I've got a question for you on Slide 25. On the cash flow from operations guidance, can you just break down a little bit the reduction in cash from operations? I do see your little footnote at the bottom in terms of equity issued. So if we take that into account, it looks like there's about $0.5 billion of reduction in cash from operations. So if you could just give a little bit more color around those comments that you have over to the right side of the slide?

I would actually start by pointing out on Slide 24 that we actually had a, what I would describe, as more of a temporary peak in cash from operations in 2012. So if you look at the $2.2 billion compared to 2011 cash from ops or even if you went back a prior year that we had higher cash from operations this year, partly due to these onetime items that are coming through. So we had tracker collections or surcharge collections and we also the timing of our benefit payments that did not happen in '12 that are going to happen in '13. So when you put this together and kind of normalize some of the onetime items, I wouldn't characterize this as a reduction in cash from ops as actually when you get into '13 we're at a more normal level if you looked at our long-term planning. So it's more nuanced between what played into 2012 versus a reduction in 2013.

[Operator Instructions] We'll take our next question from Mark Barnett with Morningstar.

Just a quick question on the REF units. You placed one, you've got another, you've got another couple you're in talks with. Is there any possibility that you can talk about maybe some -- the length on the contracts where you're placing these and maybe with the 5 that were already in place last year?

I missed what you said. What would you like to know about the contracts?

Oh, I'm sorry, the duration.

Oh, the duration. The contracts generally run through the end of the tax credit period, which is out in the 2020-2021 time frame. And so they run through the life of the credit. They could be extended beyond that because these units have environmental value. But as you know, the credits give quite an economic punch to the project. So that's where we've contracted.

Okay. And I know that this won't necessarily impact you as you are planning to kind of stay out. But I'm wondering if in the governor's proposals, do you expect to see, there's been a little bit of talk around this, maybe a change to the self-implementation process for rates?

Well, I think it's probably premature to say. There have been questions around it, primarily coming out of the House. The House has a lot of new members, many of whom weren't even around in 2008 when that whole concept was developed and implemented. The Senate has -- in fact, the guy who runs the Senate Energy Committee was a principal author of the legislation while he was in the House. So you don't see questions coming out of the Senate. But in the House, you do have newer members. John Quackenbush was actually there to testify the other day, started to field questions on that topic and other topics that are just general to how does the law work and what was the rationale for various provisions being put in place and so forth. So I would say it's early. There has -- John Quackenbush has come out and generally said, look, I -- we've got a 1-year limit on rate cases. Maybe we ought to just make rate cases even faster. And if you do that, it kind of makes the self-implement moot. So it's a 12-month. If we back up into 12-month, then your 6-month self-implement, at some point, becomes not that important. So that's a possibility, too, that we would target somewhat shorter rate cases and just say we're going to do them in 8 months, for example, and that's, that and which should be fine with us if that's the way it played out.

And at this time, we have no further questions. I'd like to turn the conference back over to our speakers for any additional or closing remarks.

All right. I just want to thank everyone for joining us this morning. As you know, this was a pretty upbeat call for us. We're really pleased with what happened in 2012, and we're looking forward to deliver on our commitments again in 2013. And we look forward to seeing you at our analyst meeting on May 1. Thank you.

Thanks very much.

Thank you. Ladies and gentlemen, this does conclude today's presentation. You may now disconnect.