Feb 24, 2009
Executives
Gerry Anderson – President and COO Dave Meador – EVP and CFO Nick Khouri – VP and Treasurer Peter Oleksiak – VP and Controller
Analysts
John Kiani – Deutsche Bank Dan Eggers – Credit Suisse Paul Ridzon – KeyBanc Paul Patterson – Glenrock Associates Yiktat Fung – Zimmer Lucas Reza Hatefi – Decade Capital Phyllis Gray – Dwight Asset Management
Operator
Good day, everyone and welcome to the DTE Energy year end 2008 earnings conference call. Today's call is being recorded.
At this time I would like to turn the conference over to Gerry Anderson. Please go ahead, sir.
Gerry Anderson
Well, thank you very much everyone for being on the line this morning. With me here today are Dave Meador, our CFO; Peter Oleksiak, the Controller, Nick Khouri, the Treasurer and Lisa Muschong, Director of Investor Relations.
By way of introduction as I look back on 2008 and look forward to 2009 it strikes me that there are two things that we've been working on at DTE for the last three years that are proving key to dealing with an economic downturn both nationally and here in Michigan. And one of those things is the Michigan Energy Legislation which we passed in 2008 and the second is the cost reduction and operation improvement efforts that we've had underway since 2005.
Both of those were really undertaken in anticipation of a period when we would be doing significant investment in the rate base of our two utilities and that's going to come down the road. But with hindsight both the legislation and the cost initiatives are proven to be critical at a time of economic retrenchment because they are allowing us to address both revenues and costs in our utilities real time without lag.
The legislation has a key provision from this perspective and that's file and use of tariffs. It's designed to enable investment without regulatory lag.
That's really why we tried to put that in place in Michigan because we do see significant investment in the future, but it's also allowing us to deal with a period of declining demand with real time adjustments. Similarly, the cost reduction effort that we've had underway since 2005 was undertaken to reduce costs in anticipation of rising rates as we make investments.
We really wanted to minimize those rate increases. We've taken several hundred million out of our costs since 2005 and by doing that have gotten good at cost reduction.
So when the downturn came we were able to move quickly. And as you will see our plan calls for $100 million of additional cost take out in 2009.
And one perspective I'd offer on this is that that cost reduction could feel like an undisciplined scrambled and unsustainable set of reductions. It is not.
Our people have gotten good at this over the past three years. I've been asked “Isn't it harder to take out costs since you've been taking out costs here recently?”
And the answer I give is that it's actually easier in some sense because your people have developed the skills, the tools and the knowledge and that enabled us to react quickly as the national economy moved into retrenchment late in 2008. So taken together the file and use rate making and the cost reduction initiatives are enabling us to put forth a 2009 plan that will provide solid earnings in a soft economic environment.
Is going to allow us to hold our cash flows and our credit metrics in line and allows us to confidently support our dividend at current levels. In addition, I think it's fair to say we are working well with the Michigan Public Service Commission.
We work jointly together last year on legislation. That was a process that built trust between our organization and the Public Service Commission.
I think recent proceedings for both Detroit Edison and Michigan have been fair and constructive. That's not to say that the commission isn't going to push us appropriately.
They will. But I think the state wants DTE to invest significantly in Michigan.
They want us to be part of the economic solution here in the state. And they know that we need to be healthy for that to happen.
On slide number 4 there are really three topics that we want to cover today. I'm going to give an overview of 2008 and a quick look forward to 2009.
I'll then turn it over to Dave Meador who is going to go into the 2008 results and 2009 guidance and plan in more detail and then we will talk at the end about future investment and growth opportunities that the company has. So on slide number 5, I think it's fair to say all in all we had a successful year in 2008.
We achieved EPS growth year-over-year of 3%. That was despite the emergence of a challenging economy in the second half of the year.
Right into December we thought that it was going to be more like 6% growth. We did have a catastrophic storm on December 29th as it turned out.
That was about 20 million in total cost. So that was something we had to absorb at the end of the year.
Our cash flow and Balance sheet metrics were right where we wanted them to be. In fact, we came out a bit ahead of our cash flow goals.
I would say that our most significant accomplishment last year from a strategic perspective was the passage of Energy Legislation that significantly improved the regulatory structure in the state and the climate for investment. And as I've just described also gives us some tools to deal with current downturn that simply weren't there prior to the legislation.
That legislation also put in place two new important growth platforms within the utilities, those being renewable energy and energy efficiency or energy optimization. And importantly, both of those have dedicated funding streams.
So we won't be asked to make the investments and look later for the cash flows and earnings to cover them. Those cash flow streams are available upfront.
We have solid earnings in our non-utility businesses and put in place several new investments we think are going to play out well in the future. And we continue to have strong focus on cost reductions that have put us in a position to continue those in 2009.
On slide number 6 I said I think our most important accomplishment of '08 was the legislation strengthened the state regulatory framework. That had four key provisions.
The first being provision that dealt with customer choice. Customer choice was capped at 10% by the legislation just as fundamentally we dealt with securing of rates so costs are now, rates are now cost-based.
And the fact that we also have a choice tracker I think is we can pretty fairly say that something that was a big issue for us three years or four years ago has been effectively dealt with. Second key provision of the legislation was file and use rate making.
I think many of you are aware that we are on a rate case cycle that took 18 months to 24 months. The legislation calls for rate cases now to be dealt within 12 months so there is a hard deadline in 12 months.
We can self implement after six months and we use a forward test here in the cases. So the sum of all that is that we really have dealt with a regulatory lag and that's true both for capital investments and for changes in load which is more to the point this year.
The renewable portfolio standard in energy efficiency provisions put in place what I think is a program that does a nice job of balancing between significant investments and renewables and energy efficiency, balanced by provisions that provide off ramps and cost controls. So for residential customers, for example, the impact is capped at $3 a month for the RPS provisions.
Important to us is that as I mentioned there are separate funding provisions that put us in a good position from a cash perspective to fund these programs. Finally there is a certificate of need provision that will be important to us when we take on major investments some years down the road.
So we feel we enter 2009 with a good regulatory framework in place. And on slide number 7 that's laid out.
We have 11% allowed our ROEs at both of our utilities; Detroit Edison 11% was confirmed in the rate case order that came out in late December of 2008. We have a file and use rate making provisions that I've just discussed.
We have a number of important tracking mechanisms that helped to manage risk. Storm tracker was added in the Detroit Edison case in December.
We have an electric choice tracker and an uncollectible tracker at Michigan which is also important in the current environment. And I think you know that we have both power supply cost recovering and GCR provisions in the two utilities.
In terms of regulatory priorities for the coming year we continue to work on strengthening our relationship with our customers and our regulators and we know those go hand in hand and I think the key things that we can control to make that happen are to continue to work our costs so that the rate impacts on our customers are as small as possible and the second is customer satisfaction. Just a quick indicator of our work there.
One of the things that's tracked by our commission is complaints from customers and those are down 30% over the last two years. We've really been working hard on that as part of our overall regulatory agenda.
We have two important rate filings this year; Detroit Edison filed its next rate case on January 26. We expect to self implement under that case in July.
Michigan will file a case in mid 2009 that will then play out in mid 2010 and we will supplement under that case early in 2010. There are couple of additional tools that we are talking with the commission about; one is an uncollectible tracker at Detroit Edison.
There is interest in pursuing revenue decoupling at both utilities and so we will discuss that in the current Detroit Edison rate case and there is clearly interest at Michigan to discuss decoupling both because of the energy efficiency work that we are going to be doing. Finally one of our key success factors is to get the renewables and energy optimizations program kicked off well this year and on that front we file for the first time we have an initial filing in about a week on those.
So in addition to working this regulatory agenda we continue to work our cost agenda. Slide number 8 discusses that.
You can see on the left hand side what we've played out over the last few years. Since 2005, our cost in absolute terms have gone down 60 million but in reality the costs we've taken out has been far more than that because clearly in that time period we've had wage increases for much of that period commodity prices were rising sharply.
We put in place new scrubbers, new SCRs which brought operating costs and a new SAP system. And the costs of all of those things were not only offset but more than offset by the several hundred million dollars that we've taken out of costs since 2005.
And as I mentioned the 2009 plan calls for us to take an additional $100 million out of our O&M. So turning an overview of the 2009 plan on the next slide.
I would start by saying that I believe the plan is based on realistic assumptions about the economy and about electric demand. We started our thinking about demand levels by doing a detailed bottom up build.
We have the ability to model our service territories plant by plant, facility by facility, and we've done that. But in addition we have then taken what that modeling provides us and compared that by looks back at prior periods when we had strong economic retrenchment.
And the sum of all that is that we are actually planning for the softest two-year period in the post war era. We were down 3% last year.
We were looking at another 6% in electric demand this year. We feel in doing that that we've been realistic in what we're planning for.
In addition to that we're trying to build in flexibility in our plan to deal with anything else unforeseen that may come up. So we are dealing with that economic weakness really in two ways from the written cost perspective and from the revenue perspective.
And on the cost side I just mentioned the $100 million of additional cost take out. On the revenue side, we will be able mid year this year to offset load decline through self implementation in Detroit Edison through the file and use implement provisions.
Then in addition to those two things we're looking for solid performance out of our non-utility businesses. In terms of goals for this year we're looking to preserve solid earnings levels that comfortably support our dividend.
You can see that the center of our guidance is at 290, which is right where we finished up last year. This plan enables us to deliver strong cash flows and balance sheet metrics.
To help preserve the balance sheet we have delayed some capital expenditures. You will see that our plan year-over-year down over $300 million on capital.
That's not unusual. Many in industry around the country are taking that step.
With that said longer term we do expect the return to 5% to 6% EPS growth tied to investments in environmental upgrades at our power plants, the renewables in energy efficiency programs that I mentioned and investments in our non-utility businesses. Exact timing of that is hard to pinpoint.
And it really will be tied to when the broader economy begins to make the turn and we and others are comfortable beginning to invest fully in that program. So to wrap up from my piece is this in slide number 10.
Our fundamental goals in 2009 are to successfully implement a full regulatory agenda. There is a rate case for Detroit Edison, filing for MichCon and the RPS in energy optimization programs.
Secondly, we are going to go hard after costs and continue to deliver cost savings and we are going to do that in a way that's sustainable that helps us to accelerate deliver cost savings and we are going to do that in a way that's sustainable that the improvement that we've been trying to make at the company. And finally we are going to execute the plan that Dave is about to layout for you.
We think it's a realistic plan that will provide us, stable earnings, strong balance sheet, support our dividend comfortably and put us in a position to emerge from 2009 ready to resume growth as economic conditions ease. So with that as introduction over to Dave to talk more about '08 and '09.
Dave Meador
Thanks, Gerry, and good morning. I'm going to start on slide number 12 with an overview of 2008.
We achieved our operating earnings of $2.90 per share versus $2.82 per share in the prior year despite a very challenging national recession as Gerry mentioned. As you know we proactively started taking our costs in 2005 and in May of last year when we saw the recession start to bite down hard we saw trends both in the electric load and in bad debt expense that we didn't like.
We have to proactively went to work to offset these items which allowed the utilities to deliver respectable earnings in 2008 despite a difficult recession. Our non-utility businesses performed well and provided $130 million of earnings last year.
And our operating metrics improved also on many fronts, actually too many to call out here, but some notable examples as we continue to focus on regulatory relationships, customer satisfaction, employee morale and operations include a couple of the following. Gerry mentioned the MPSE complaints which is a key area of focus actually is tied to our incentive plans.
We brought down those complaints 9% in 2008 bringing our two-year improvement to 28%. Our employee safety after several years of working with us really hard is now at first quarter tile and we're not giving up there.
Fermi just completed one of its best operating years ever with now 387 days of continuous improvement and a 98.8% capacity factor last year. On the balance sheet, we've always pointed out that our balance sheet strength is a key priority for us at DTE.
Nick will cover this more in a few slides down the road here but we weathered the financial market storm of 2008 very well. We had 1.3 billion in cash from operations and strong liquidity of 1.1 billion and we maintain strong credit metrics.
Now let me turn to slide number 13 with a more detailed look at 2008 results. Detroit Edison came in at 331 million and while O&M was down $84 million year-over-year it was outpaced by lower load and higher bad debt expense.
Two other items that impacted Edison Gerry mentioned was we had losses on our assets and our nonqualified benefits plans last year. That impacted both Edison and MichCon and then an ice storm that showed up very late in the year.
Without those last two items we believe we were on track before they showed up to actually deliver on Edison guidance for the year. MichCon had slight improvement in earnings year-over-year.
MichCon is in a settlement period which we right now have frozen rates until January of 2010. Results here were driven by higher based gas sales which was part of the settlement and weather.
This was partially offset by lower storage margins and conservation. The non-utility businesses contributed 130 million in earnings.
Gas midstream continued its track record with improved earnings in 2008 and a notable achievement for this group was the Millennium Pipeline which went into service at the end of the year. Power and industrial was down slightly mostly related to coal services which had some volume loss in 2008 due to synfuels going away.
Unconventional gas was down slightly year-over-year. We sold the Core Barnett in early 2008 for 260 million, which was 100% IRR on our investment.
So that net income from the Core properties went away, but the remaining properties in western Barnett did well in 2008 with gas and oil prices high during most of the year. The updated reserve data for unconventional gas is in the appendix on Page 37 with total reserves up 29% at 432 BCF and producing wells up 32% at 156 wells.
And trading had another very good year. The Group's economic margin was well over 200 million, which translates into about $80 million in economic net income.
There's details on this business in the appendix on Page 32. However, due to mark-to-market accounting not all of that economic profit is recognized in 2008 and will benefit the future years.
So the total here is 471 million or $2.90 per share with about 163 million shares outstanding. On slide number 14, I'll shift and talk about guidance for 2009.
As Gerry indicated our goals are to deliver stable earnings during this recession and at the same time preserve and strengthen our financial metrics to support future growth. The plan assumes realistic and I would also argue conservative assumptions about electric load which I'll cover in more detail on the next slide.
We are targeting earnings at Detroit Edison of 355 million to 385 million and at MichCon of 70 million to 80 million. Gas midstream will show continued earnings growth with a full year Millennium Pipeline now coming in service and new storage projects coming online.
The power and industrial business was impacted by the economy and while coal services within that group will be up year-over-year in 2009 the coke battery sustained significant volume declines as the steel industry volumes have come off. Depending on how the stimulus package which is directed at infrastructure and the autos works out there is potential upside to these numbers as the steel volumes return to their historical levels.
In energy trading we are projecting to continue at a steady state of delivering at the $40 million to $45 million rate of earning. The business will benefit from some of the role on from 2008 economic profit that I just mentioned.
However, that will be offset by reduced margins in 2009. So, the total here for 2009 is 445 million to 505 million or 275 per share to 305 per share with 164 million shares outstanding.
Starting on slide number 15 I'm going to take a couple of slides here to walk through our thinking on a key driver of earnings and I know something that you're interested in and that's electric load. But first let me step back and give you some background.
In 2008, electric load was flat year-over-year for the first two quarters and by the fourth quarter reflecting on the weakening economy it was down 3%. We use a variety of factors to project load including looking back to history including prior deep recessions and we also do an auto facility, plant by plant build up as we are doing our analysis.
So, let me take you through this an each panel going clockwise on slide number 15. On the top left we use an in-house economic modeling process to project a continued decline in auto production.
2009 service territory production is projected to be down at about 1.4 million units down from 2008. This is consistent with an annual sales forecast that you might hear about nationally of 10 million to 11 million units and certainly down from the 16 million units that the autos were running at an early 2008.
The rest of the U.S. auto production as you can see on the bottom of those stack bars is down as well down from a peak in 2007 or for the rest of the country down 22% over that timeframe.
Over the years the direct automotive exposure has become a smaller piece of the electric load at Edison and while important to the overall Michigan economy is only about 5% to 6% of gross margin at Edison. In terms of total load loss on the top right hand side of the slide we dug back into history and looked at the largest load drops in the post war period.
The 2009 guidance assumptions are in line with the severe recessions of the 70s and the early 80s. However, our mix also has changed over time as you can see with industrials coming down from 40% of load in 1974 to about 25% of load today.
So while we expect about a 14% drop in that segment of our load it's certainly a much smaller piece of the pie. On the bottom right we display the rules of thumb on load that we thought would be helpful which is $15 million pretax for residential for 1% load loss versus 13 million for commercial and 5 million for industrial.
And on the bottom left just to show you some history and then our projections after showing a 3% drop in 2008 we are using a projected 6% drop in 2009 and then flat going forward. With the mid year file and implement that Gerry mentioned the actual margin loss will be about half of what we show you in these charts.
So slide number 16 summarizes the load and planning assumptions pulls us together. We believe the underlying auto production assumptions are conservative and we assume unnamed plant closures that haven't been announced in our planning.
I want to reemphasize that automotive is only 5% to 6% of the margin and within that automotive slide, Chrysler is 2.5% of load and about 1% of margin just to size this up. The reduced automotive exposure is behind industrial load going down over the years from 40% to 25% as I mentioned.
The guidance assumes what we believe to be a very realistic and what I would support a conservative load assumption and that offset with the cost reductions that Gerry talked about and the partial rate self implementation that we will do in July of this year. Given all of this we have Edison being targeted at 10% return on equity and then we deliver on all our balance targets for that business.
Post-2009, we expect Edison to return to its authorized return on equity which today is at 11%. As a side note, our January actual load as we close the books came in about a 1.5% favorable to our planning assumptions and just to keep in mind that Chrysler had an extended shutdown that started in the holidays and kept their plants closed for all of January, so, if you are trying to get a sense of our – the realistic perspective of our load assumptions we think January is a good indicator of how this year might play out that we came in slightly favorable to our assumptions.
On slide number 17 as a year-over-year walk for Detroit Edison, I've covered on margin and load already. So let me comment on a few other items.
Edison's employees benefit costs will be higher due to lower asset levels in those plans. Next, the December 2008 rate increase will provide about 55 million in earnings and a combination of the mid year self implementation and cost reductions will provide roughly 90 million to 120 million of earnings for the year.
So that brings Edison to a total of 355 million to 385 million. Slide number 18 is an assumption page for MichCon.
This business as I mentioned earlier is operating under a settlement agreement which froze rates until 2010 – January 2010. During this period MichCon has faced higher costs and declining margins.
And to mitigate some of that pressure an agreement was reached to sell what we refer to as the first base gas sale which happened in 2008. We're currently have pending a proposal and we're seeking approval for a second base gas sale that will happen in 2009.
The current plans are to file a new rate case under the new law for MichCon this summer and self implement rates in January 2010. And the same thing with Edison, MichCon intensely focused on cost reductions and we expect this business also to return to its authorized return on equity next year.
On slide number 19 is a year-over-year walk for Edison where you can see – excuse me, MichCon. Here you can see similar to Edison we've got higher pension expense.
The remaining base gas sale in 2009 is lower than what was sold in 2008. And then we also have higher depreciation and interest.
This is partially offset with additional cost reduction actions that we're taking in that business and brings the total guidance for MichCon to 70 million to 80 million. Now let me turn it over to Nick who will take you through a brief overview of capital and cash and liquidity.
Nick Khouri
Thank you, Dave. Good morning.
These are times of unusual stress in the credit and equity markets and it's – in times like this that our prior commitment to improve cash flow and balance sheet strength pace real dividends. We are managing both short term liquidity and our long term debt and equity targets to weather the current storm.
Page 20 details capital and cash flow for both 2008 and 2009. Total capital for DTE reached 1.48 billion last year, up about 165 million or 13% from 2007.
Most of last year's capital increase reflected higher spending at Detroit Edison. Moving to 2009, our plan is based on capital expenditures of approximately 1.15 billion.
As Gerry mentioned responding to the local economy year-over-year capital has been reduced for all segments of DTE, but a little over half of the decline is due to retiming of environmental spending at Detroit Edison. And as Dave is going to mention later we still expect to spend about $1 billion in environmental remediation during the next five years but we have delayed spending in 2009 to create additional balance sheet flexibility.
The right hand side of page 20 shows standard cash flow statement for 2008 and 2009. Last year, free cash flow was negative about 200 million.
Asset sales and dividends roughly offset each other leaving about a $200 million increase in total outstanding debt. This year free cash flow is expected to be positive by approximately 200 million.
After dividends and asset sales we expect to be at about net cash neutral. Also this year as shown in the bullet on the bottom of Page 20 we will return to funding our dividend reinvestment plan and internal compensation plans with new shares, which was temporarily suspended during the monetization program.
Looking beyond 2009 as we've said in the past we expect to issue new shares from time to time to support the utilities growth plans. Finally, we ended last year within our leverage target of 50% to 52% and the ratio of cash flow to debt between 20% and 22%.
Page 21 shows here on liquidity. We have total bank credit facilities of 1.9 billion supporting our commercial paper program.
In late September and early October we drew down 400 million of credit line to assure us flexibility in case of CP markets did not reopen. By year-end we had paid back 150 million of this drawn amount.
For us, the CP market is returned to pre-crisis pricing. In fact, CP rates are now generally below levels of last fall.
As a result we will pay down all of last year's bank draw by the end of this month. Against this capacity of nearly 2 billion at year-end we had 349 million of commercial paper outstanding and 300 million of letters of credit leaving unused capacity of over $1 billion.
It's also important to note that we have only $1,200,000,000 bond maturity this year. Of course, we expect to opportunistically issue debt at the utilities from time to time to improve liquidity and fund our utility investment program.
We believe we have a plan and sufficient contingency to manage the current credit crisis. With that let me turn it back over to Dave to discuss future growth opportunities.
Dave Meador
Thanks Nick. Let me continue on slide number 23.
Thanks Nick. Let me continue on slide number 23.
We have outlined our thinking on 2009, and I want to shift here for a couple of pages, and discuss DTE's future growth post the economic crisis. Our investment outlook supports our long-term growth rate of 5% to 6%.
First on the utility side of the business we have said most of the utility capital is compliance in nature and while we have some flexibility, and we have shifted some of that capital out of 2009, the money eventually will be invested. The utility growth plan is heavily driven by new and existing state and federal regulations that drive environmental investments.
Additionally, Michigan's Energy Legislation as Gerry talked to will drive significant investment, in renewable power and energy optimization. On the non-utility side of the business, we'll expect to return to a more historical level of investments post-recession.
As you know we pursue projects with premium returns and have a long history of creating value for our shareholders. On slide number 24 is an environmental investment outlook.
Based on our current regulations on the books, we project that we will spend over $1 billion on mandated environmental expenditures. As you know, we have a long history of full recovery of environmental expenditures in Michigan.
Also we will continue to play an active role in shaping the state environmental policy as well as through EEI, and Gerry and Tony's role there on Federal environmental policies going forward. On slide number 25 is an overview of Detroit Edison's renewable energy program.
We'll file our RPS filing for Detroit Edison and the energy optimization filing for both utilities on March 4. There will be much more detail on those filings and we will put out an investor relations summary after we make the filing.
I do want to point out that these two programs will result in substantial investments over the next six years. Renewable energy will be substantially made up of wind and we will drive over $1 billion in capital spending.
While energy optimization where we are filing with the premise that we will be capitalizing up to two thirds of those expenditures, we will start with about an annual expenditure for the two utilities of 50 million and that will grow over time. On slide number 26, I would like to briefly touch base on the opportunities in our non-utility businesses.
In Gas Midstream, this is where we owned about 90 BCF of storage, 40% of the Vector Pipeline and 26% of the Millennium Pipeline, we see ongoing expansion in both storage and pipelines to capture a value from the new gas supply flows from the Midwest to the Northeast. In power and industrial, this is where we have our four coke batteries and pulverized coal projects.
We also have our coal services business and our non-regulated renewable business line, where we have 20 landfill gas projects and three wood burning power plants. Here we see growing renewable energy opportunities in both landfill gas and the ongoing conversion of coal boilers to waste wood.
In unconventional gas, where we hold 60,000 acres in the western Barnett, our strategy is to continue to develop the remaining properties to create maximum value. We will continue to monetize properties at the right time, both in their development cycle and during the future favorable commodity markets.
Let me wrap up on slide number 27. Our results in 2008 were respectable in an extremely challenging environment.
As Gerry laid out for us, the Michigan Energy Legislation provides key new tools to address the impact of a week economy, and also the two new utility platforms, renewable energy and energy optimization have dedicated funding mechanism. The energy optimization surcharge will start in June and the renewable energy surcharge will start in the fall.
Our 2009 plan is realistic and we believe if needed we are prepared to respond to any new news that comes on the economic front. And our dividend at $2.12 per share is well supported by our plans to provide an attractive yield at current prices.
And with that, we're more than happy to take your questions at this time.
Operator
Thank you. (Operator instructions).
Our first question is from John Kiani from Deutsche Bank.
John Kiani – Deutsche Bank
Good morning.
Gerry Anderson
Good morning. John.
Dave Meador
Good morning.
John Kiani – Deutsche Bank
A few questions. First, on the 2009 guidance, just wanted to be clear it sounds like there – is there an incremental 100 million of cost cutting or O&M savings that is assumed or embedded in that guidance?
Gerry Anderson
Yes, we are pursuing an incremental companywide $100 million cost reduction.
John Kiani – Deutsche Bank
So I guess that's about $0.38 a share or so based on my calculations. Can you talk a little bit about where that's coming from and what the drivers of that $0.38 are?
Gerry Anderson
I would say, John, that it's heavily already in place. We saw the economy softening like everybody else did in the fourth quarter and by year-end we had moved to put our leadership and team in place around the plans we just talked about.
These aren't back end weighted or anything of that nature. They are I would say 90% to 95% implemented at this point.
And they really are playing out around the company, significant piece of Detroit Edison, MichCon as well. And then the non-utility businesses have dug in on costs to in this environment.
Dave Meador
John, just to build on that, just to give you a sense, 60 million to 70 million of that comes just right through procurement. We virtually brought commodity spend and PO by PO, and brought in a lot of our relationships and just said we know commodity prices have come off and we wanted a significant step down in prices and got that.
We also pressed hard on contract labor and other outside spend and working all the other levers. With the goal that 80% of what we're doing, we wanted out of the box we wanted to be sustainable savings, not just scope reductions or one-time cost cutting.
And then during the year we are going to work our continuous improvement hard to backfill that other 20%. That we – there were one time things that we did that are not sustainable but over time we want to backfill that.
John Kiani – Deutsche Bank
And so then – that's helpful. And so when we think abut the rate case filing, the rate increases you're asking for, for O&M at Detroit Edison I guess are net of these decreases at the utility?
Gerry Anderson
That's right. So we are going to be – I think we will be in discussions with the regulators about the cost reduction efforts.
They know we're pursuing those, but we do see pressures on costs in addition to pressures on revenues. Both of those are assumed in the case.
John Kiani – Deutsche Bank
I see. And then also one other question.
I guess looks like you all had sold some base gas in the quarter. Can you talk a little bit about if you expect that to recur or not and how much the efficiency of the storage facilities were improved?
Gerry Anderson
Well, we did pursue one last year and we will be pursuing one this year. There are limits to the number of those that you can do.
So, I wouldn't see that as an ongoing recurring item. But this really was the basis of the agreement that we reached with the Commission and a number of other parties, the settlement that we reached around MichCon to essentially not be in a rate case until early next year.
But in return, we were able to sell base gas from these facilities.
John Kiani – Deutsche Bank
And is the amount you are assuming in your 2009 guidance roughly the same as 2008 or I came up with about $0.07 or so?
Gerry Anderson
It's down a little. I think in the walk for MichCon, you can see that there is an $8 million difference between the two sales.
So that's the differential. I think the volumes a little different, but the price environment is also lower.
John Kiani – Deutsche Bank
Sure. Sure.
Okay. Thank you.
Gerry Anderson
You bet.
Operator
Moving on our next question is from Dan Eggers from Credit Suisse.
Dan Eggers – Credit Suisse
Hey, good morning.
Gerry Anderson
Hi, Dan.
Dave Meador
Good morning, Dan.
Dan Eggers – Credit Suisse
Hey, can you just talk a little bit about maybe a little more color on the bad debt expense trends at Detroit Edison and MichCon, if they are substantial, and what are the mechanisms for trying to resolve that through the first half of '09 and then with the rate case how that gets trued up for us?
Dave Meador
This is Dave. If you looked at MichCon, net of the tracker, the bad debt expense for 2007 was 41 million.
In 2008, it was 48 million. So net of tracker it's up slightly.
If you recall we get $0.90 on the dollar over what is in base rates, which was $38 million. And we believe that tracker mechanism is working well and as we refile the MichCon rate case in June of this year, we are assuming that will continue.
Detroit Edison's expense is up. It was – in 2007 it was 65 million.
In 2008 it was 87 million, but the 87 million includes an accounting shift as we wanted to be more conservative in how we recognize bad debt expense for Detroit Edison. So we are assuming.
And then on Detroit Edison, we are pursuing a tracker in this rate case, similar to what we have at MichCon. But until then for 2009, we're assuming flat year-over-year bad debt expense.
We believe this is peak that we're on top of this and those that can afford to pay we're working closely with them on getting assistance and we believe there's going to be additional assistance in the stimulus package that's coming through. And those that can afford to pay that aren't, we are being pretty aggressive on that front also.
Dan Eggers – Credit Suisse
Are you seeing any meaningful trends kind of late pays and kind of the time of bills outstanding at this point?
Dave Meador
We had already seen that. I think we have talked before that.
Our recession in Michigan led the national recession, so that played out really in 2006, 2007, 2008 for us. And I think you're going to see in other service territories, they are going to be catching up to us, but we had already seen our arrears go up and our bad debt expense go up and we believe that's plateaued.
Gerry Anderson
I guess one additional comment would be at MichCon, we do have the tracker. We are working hard on a real basis to on our collection efforts, and on getting Federal assistance to people.
So we think that, that is not a significant exposure. At Detroit Edison we did have, Dave mentioned, an accounting adjustment last year that overstated on a real basis what we had on uncollectibles.
So the flat this year does show some increase in underlying uncollectibles, offset by this accounting adjustment last year. And similarly, the combination of our collection efforts and trying to get some of the increased aid to people we really feel we can keep it where we have shown it.
Dan Eggers – Credit Suisse
I guess since we're going to go through the first of the new rate cases with the legislative action in place, can you walk me through how you guys will adjust rates given the weak volumes in '08, probably the lower expectations for demand growth in '09, than you would have had a few months ago how that all rolls in or how that gets adjusted from what you filed to the implement date?
Gerry Anderson
You are specifically talking here about the volumes?
Dan Eggers – Credit Suisse
We talk about all of the volumes is probably one of the big headline numbers I would assume.
Gerry Anderson
Well, part of the rate case is a forward projection on volumes, so we took our best shot at realistically projecting what volumes would be in this environment. And when July comes, we will have an opportunity to see where things stand versus the projections that are there in the rate case.
And I think one of the things we will self-implement on will be our actual experience around volumes. So six months into this case, we are going to true up to where we see actual volumes at the time.
And as the case plays out over the balance of the year, we expect it to be resolved by year-end, and new rates in effect early next year. I think we will be able to see where volume goes, relative to the full year projections that we had in the case.
Dan Eggers – Credit Suisse
That would mean that really minus 6% volumes would hurt the first half of this year, by July the file and implement will true you up, so you are not going to have any more drag, that's how it, correct?
Gerry Anderson
That's right. So – one way to think about it is we are going to true up the volumes in the regulatory process and the cost reductions are aimed at dealing with any period that we don't have that true-up.
Dan Eggers – Credit Suisse
And I guess either Dave or Nick on Slide 21, you show the liquidity, but you also make note that 975 million of your credit facilities expire in '09. When are you guys thinking you are going to get that renewed, just to make sure there is a little cushion in what has been a pretty volatile credit market.
Nick Khouri
This is Nick. We are going to start early.
In fact, we are starting now. As you say about half of the 1.9 of bank credit comes due this October.
But we do have a strong group of 22 banks, 23 banks, no single bank having more than 9% of the total amount we need. So we are going to start now, have plenty of time, and we are confident we are going to get back up to that 975 million that we have right now.
Dan Eggers – Credit Suisse
You are thinking about that $1 billion of liquidity is where you guys think your comfort level is? Is that the right number?
Nick Khouri
That's what we tended to have. This is – it cycles throughout the years as commercial paper goes up and down because of the needs of the utilities.
But essentially we've targeted $1 billion of unused capacity year in and year out.
Dan Eggers – Credit Suisse
Got it. Okay.
Thank you, guys.
Gerry Anderson
Thank you.
Operator
Our next question will come from Paul Ridzon from KeyBanc.
Paul Ridzon – KeyBanc
What was the benefit of the base gas sale in '08?
Dave Meador
22 million pre-tax.
Gerry Anderson
22 million pre-tax. Roughly 60% of that after-tax.
Paul Ridzon – KeyBanc
And what was the accounting change for your bad debt at Detroit Edison? What did that at the year by?
Gerry Anderson
Peter, do you want to answer that?
Peter Oleksiak
Approximately like $15 million. Really what that was, was taking a look at the entire reserves, the deep dive, and really kind of more of a reflection of what we thought the collectability was going to be.
So really what a pull ahead of reserves that Gerry mentioned. It was somewhat of anomaly when you look at the underlying year.
Paul Ridzon – KeyBanc
It really went from like 65 million to 72 million , is that fair?
Peter Oleksiak
65 million to approximately 80 million. We ended up around $85 million for the year for Edison.
Paul Ridzon – KeyBanc
But that 85 million includes 15 million of accounting changes?
Peter Oleksiak
Yes. Right.
Paul Ridzon – KeyBanc
Okay. And then at MichCon bad debt went from 41 million to 48 million, but you absorb only 10% of that incremental 7?
Is that the right way to look at it?
Nick Khouri
The 7 was the incremental that we absorbed.
Peter Oleksiak
Yes, if you look at the number pre-tracker, it went from 70 to 126 on a gross basis. After tracker, it's 41 to 48.
Paul Ridzon – KeyBanc
And then the 100 million of savings on O&M, we shouldn't think the O&M line is going down 100 million, it's going down 100 million than originally planned, is that?
Gerry Anderson
It's going down 100 million, but there obviously, there always pressures the other way inside businesses. So when I talked about 200 million over the last few years, you can see that the actual number is down 60, but that's offset wage increases and price increases, et cetera.
So we have some of those pressures this year and we are throwing the 100 million against that.
Paul Ridzon – KeyBanc
So net-net the O&M line should be up still?
Gerry Anderson
It depends by business, but yes, on some of the businesses you can see from the Detroit Edison rate case that we have got a significant cost reduction, offset by cost pressures, so there is a net up there. And we will deal with that and how that plays out in the rate process.
Paul Ridzon – KeyBanc
On a consolidated basis what should the O&M line do?
Dave Meador
I would expect it to net-net to go down that this is different than other years where you had 3% to 4% wage inflation plus other items that you buy inflating, in the last five years inflating them much higher than that so we are seeing deflation on many of the things that we're procuring. And we haven't made a final decision yet, but we might not have wage inflation this year, is another factor.
So we've got some decisions that we have yet to make, but generally, I would expect that O&M would be going down, net of all the other offsets in this environment.
Paul Ridzon – KeyBanc
And Nick you said mentioned a couple of times that you will need to tap equity markets for Detroit Edison initiatives. Can you kind of talk about, is that above the DRIP and kind of when you anticipate the timing of that and the methodology to do that?
Nick Khouri
What we have said this morning, what we have said consistent with the past is that 2009 we are turning the DRIP back on and the current plan does not foresee any additional equity in 2009. And past that, it will depend on – our first target is our balance sheet targets obviously, and how much we issue and when and how will depend on both our capital plans and whatever is required to meet our balance sheet target.
Gerry Anderson
I think just to add to that we've talked about the renewable and energy optimization programs as a source of growth, but they do have their own funding streams. So we don't see that as a cause of equity issuance.
So it would really come down to investments in the environmental programs that our power plants and perhaps some growth at MichCon that might be the variables and we have some flexibility around that. As you know, the compliance date on environmental is 2015.
So it probably depends on how the economy picks up as to when we feel comfortable moving back into that spending stream. And it is really that spending that will eventually require equity to keep the balance sheet in place inline.
Paul Ridzon – KeyBanc
Okay. Thank you very much.
Operator
(Operator instructions). Our next question is from Paul Patterson from Glenrock Associates.
Paul Patterson – Glenrock Associates
Good morning, guys.
Gerry Anderson
Hi, Paul
Nick Khouri
Good morning, Paul
Paul Patterson – Glenrock Associates
Just on the level of self-implementation, what kind of – what are the limits to it I guess? What would stop you from, what are the limits in terms of what stops you from necessarily putting in the entire rate amount?
Gerry Anderson
Well, I guess a couple of comments and then maybe Dave can add. One would be that any amount that we would self-implement that was above the amount that was ultimately awarded, we'd refund, and you refund that with interest.
So there is a discipline in the process. And I think the second would be that our plan is to implement for things that we think are a quite certain part of the process, so we will know what our load has done and we will self-implement for that.
We will know what our investments in change and rate base have been and so forth so we will implement those items. There will probably be some other items that are going to be more matters of discussion and judgment back and forth in the case and those are less likely to be implemented.
Paul Patterson – Glenrock Associates
Okay. Do we look at the 89 million to 119 million which includes O&M reductions and what have you – how should we think about the breakdown between the – I'm looking at slide number 17, how should we think about the breakdown between self-implementation and these O&M reductions and these improvement in stuff?
Dave Meador
We actually don't think that it's in our best interests and it's early, I will talk about that in a minute, to start giving a breakdown and say this is in February how much I think I am going to self-implement in July. Part of the answer is also, I don't know.
As Gerry indicated our inclination right now is that we would self-implement items that are known and measurable and as I would describe as hard rate adjustments and that could include load, bad debt, and assets that go into service. And we are going to have to wait and see and we will make an assessment in June.
We will look at load, we will look at bad debt at Detroit Edison and we will also look at our underlying rate base and we will make a decision at that point in time as to how much we will self-implement. We think as we step into this for the first time as a company, it's something that we have to not overreach on and we also have to be mindful of what's going on in the economy and with our customers.
So these will be things, it will be a – that's why we described it as a partial and try not to signal too specific, because to do that would assume more than I know at this point in time.
Paul Patterson – Glenrock Associates
Fair enough. Let me ask you guys on the economic outlook.
Just from a sort of a big picture perspective, thanks for all the detail, much appreciated, I guess what I am wondering is that we do hear sort of the horror stories that come out in terms of what might happen to the national economy, if one of the big three goes under. Obviously, there is hyper ably a lot of things that one hears in the media, what have you, but, can you give us a flavor what would I mean how these projections correspond, if in fact, we did have one of the big three go into receivership or something, how that – how do we look at that, I mean you guys gave us the number for the load from the auto and stuff, but how do we think about that in terms of the economic impact on Michigan on your service territory and how does that correspond to something that you guys are projecting right now?
I mean you guys mentioned flexibility that you guys are prepared to deal with some contingencies and everything and that you clearly been assessing the situation. How should we think about if we are to see a headline cross saying that one of these guys wasn't going to be around, how should we think about that in terms of impacting you guys?
Gerry Anderson
We will probably tag team this, Paul, but let me just start it. I would say, first of all, when people talk about employment impacts, in the auto sector, there are significant employment impacts nationally.
The autos are a bigger employer than they are an energy user. So if you were to compare auto to steel or petrochemical in terms of energy intensity, they just aren't there.
They are a big employer. It’s true in Michigan, but it's true in a number of other states as well.
The second thing I would say is that we actually tried to be very realistic about this in terms of facilities that will be operational facilities that won't and we've assumed some significant consolidation, because we think that will happen. I don't think it makes sense for us to be specific as to company or facility, but I would generally characterize things the way I've just described it.
Finally when you talk about headlines about somebody going into restructuring, we had experience in other industries that have gone into restructuring. The real question there then is, is the process one where the facilities come through restructured, operational, and in a better position to be more healthy long-term?
So I think the question is, is the government going to ensure process here that's orderly where there is restructuring done and hard decisions made, but that's done in an orderly and structured process. Our judgment is that at this point, in this economy, and in this administration, decision to say that we're going to pursue in a disorderly unstructured process in the auto industry is highly unlikely.
So our anticipation is that there will be hard decisions made and restructuring of the sort that we've assumed and that the autos will come out with a much more competitive cost and benefit structure, which long-term for us is going to be a healthy thing in this state.
Paul Patterson – Glenrock Associates
Okay. Thanks a lot, guys.
Gerry Anderson
Thank you.
Operator
Our next question will come from Yiktat Fung from Zimmer Lucas.
Yiktat Fung – Zimmer Lucas
Good morning.
Dave Meador
Good morning.
Yiktat Fung – Zimmer Lucas
Can you first of all comment on the payout ratio that you target in for long-term?
Dave Meador
We said the dividend payout ratio were about 70% now. We've said before we targeted about 70% to 80% payout ratio funded mostly from the utilities.
Yiktat Fung – Zimmer Lucas
Okay. So basically you guys are right on target?
Dave Meador
Within the range, yes.
Yiktat Fung – Zimmer Lucas
Okay. And secondly, you talked a bit about targeting on balance sheet when you are assessing equity needs.
What exactly do you target?
Dave Meador
We target – you can measure it in a million different ways, but we target leverage as I said leverage somewhere between 50% to 52% and a cash flow metric FFO to debt of somewhere between 20% and 22%.
Yiktat Fung – Zimmer Lucas
Okay. And just one final question.
I know that you guys aren't really talking about specifics of that self-implementation. I was just wondering when you do the self-implementation, do you assume the ROE that you guide in the previous rate case or do you assume what you file in this current rate case?
Dave Meador
We assume that previous rate case. So 11% right now for Detroit Edison, which is what we just received in December.
Yiktat Fung – Zimmer Lucas
Okay. Got it.
Thank you so much.
Operator
Our next question is from Reza Hatefi from Decade Capital.
Reza Hatefi – Decade Capital
Thank you very much. When I look at slide number 17, and you have 10.0 ROE as part of your 2009 guidance, is that a GAAP ROE?
Dave Meador
As opposed to?
Reza Hatefi – Decade Capital
As opposed to regulatory ROE?
Peter Oleksiak
It is a GAAP ROE.
Reza Hatefi – Decade Capital
Is your regulatory ROE about 100 BPs or so lower than your GAAP ROE?
Peter Oleksiak
Not too many differences at this point in Edison between the wrap and the GAAP ROE.
Reza Hatefi – Decade Capital
Is it the same case – is it the same for the MichCon ROE that's the GAAP and the regulatory are fairly equal?
Dave Meador
Pretty close.
Peter Oleksiak
Pretty close.
Reza Hatefi – Decade Capital
Okay, great. Thank you very much.
Dave Meador
Okay. Thank you.
Operator
Our next question is from Phyllis Gray from Dwight Asset Management.
Phyllis Gray – Dwight Asset Management
Good morning. I have a question about slide number 20.
Dave Meador
Okay.
Phyllis Gray – Dwight Asset Management
The adjusted cash from operations projection for 2009, does that include any synfuel production payments or refunds?
Dave Meador
It includes about $100 million of synfuels not production payments or refunds, but it does include some of the credits that we build up during the synfuel years we're using.
Phyllis Gray – Dwight Asset Management
Okay. And the capital spending of 1.5 billion lifted for 2008, what is the difference between that amount and the amount in the cash flow statement that was provided with the earnings release?
It seems a bit higher.
Nick Khouri
We're looking that up now. We think it's investment in joint ventures, different treatment of that, it's a cash flow statement.
The bottom line cash flow statement should be the same.
Phyllis Gray – Dwight Asset Management
Okay.
Nick Khouri
But we'll have to look that up, we think it's investment in joint ventures and how it's treated and what category it's treated on the cash flow statement.
Gerry Anderson
We can get back to you with the specific reconciliation.
Phyllis Gray – Dwight Asset Management
Okay. Thanks very much.
Gerry Anderson
You're welcome.
Operator
And that's all the time we have for questions today. Speakers, I will turn the conference back to you for additional or closing remarks.
Dave Meador
I just want to thank everybody for joining us today. And as always if you have any follow-up questions or concerns feel free to call the Investor Relations department.
And then as I mentioned, we will be making our filing on the renewable energy and energy optimization on March 4th and we will get a deck out right after that. And again, if you have follow-up questions on that, feel free to call Lisa and her team.
Thanks again.
Operator
That does conclude our conference call today. Thank you all for your participation.