DTE Energy Company (DTE) Q3 2013 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the DTE Energy Hosted Third Quarter 2013 Earnings Release Conference Call. Today's conference is being recorded. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Dave Meador. Please go ahead, sir.

Thanks, Andrea, and I apologize to you for that music while you're on hold there. We were hoping to have Tigers theme song playing while you're on hold, but that didn't work out so well this year. Maybe next year. But good morning, and welcome to our third quarter 2013 earnings call. And before we get started, I encourage you to read the Safe Harbor statement on Page 2, including the reference to forward-looking statements. Moving on to Slide 3. With me this morning are Peter Oleksiak, our Senior VP 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. Looking at Slide 4 on the agenda here. We're going to provide results on the third quarter performance and also update you on our financial goals for the rest of the year. Gerry Anderson will be presenting at the EEI Conference in a couple of weeks, where he'll provide you an in-depth business update and details on the growth plans. So this morning, I'll focus the call on the quarter and the remainder of the year, but as always, I'd be happy to take questions on any topic. So moving to Slide 5. This is an overview of our business strategy and investment thesis. Our growth plans for the next 10 years of both utilities are robust. Our electric utilities growth over the next 5 years is driven by operational investments, environmental controls, renewable energy, and then if you look out to the second 5 years, new generation, which is going to replace some of our coal fleet, but the gas utility growth is driven by infrastructure investments and meter relocation. We also have meaningful low-risk growth at our non-utility businesses, and they provide diversity, both in earnings and geography. And as I have said, we'll provide more details for all these businesses at EEI in a couple of weeks. We operate in a very supportive regulatory environment, and we work hard every day to continue to earn that construct. Our effort, as you know, begins with highly engaged workforce and an ongoing focus on continuous improvement. This enables us to continue our cost savings track record. And also, it enables our utilities to consistently earn their authorized returns. We also continue to focus on operational excellence and customer satisfaction that we believe is distinctive in our industry. Our dividend payout range is 60% to 70% of earnings, and we target a strong BBB credit rating. Our strategy altogether provides for a consistent 5% to 6% earnings growth and attractive and increasing dividend and all of that with a strong balance sheet. If you turn to Slide 6. This is our earnings and dividend growth slide that we've shared with you in the past. We remain confident that our growth plans will deliver our 5% to 6% earnings per share growth. In fact, for this year, we're tightening our range on our guidance of $3.95 to $3.14, and we're going to affirm our $4.05 midpoint, which Peter will go over in a little bit more detail in a minute. The midpoint provides 6.6% growth over our weather-normalized earnings of last year, which were $3.80. We're also reiterating our confidence in our 2014 early outlook, midpoint of $4.27 per share, which provides about 5.5% growth and which is right in line with our long-term growth outlook. But back to the chart, if you look on the left-hand side, you can see we've actually exceeded our commitment of 5% to 6% growth by delivering 7% annual growth from 2008 to 2014. As you know, we increased our dividend each year, starting in 2010, and earlier this year, we increased it to $2.62, which was a 5.6% increase. Based on the $4.05 earnings per share midpoint this year, that dividend gives us about a 65% payout. And as our earnings continue to grow, we would expect to grow our dividend over time. And then on the bottom, you can see our overarching goal is to earn $1 billion by 2017, and we're well on our journey to do that. Turning to Slide 7. The Michigan economic turnaround continues. We have actually one of the better economic growth rates in the nation, which by the way, when Peter talks about our load numbers, it's directly reflected in our load growth. If you look at that measures that we track, auto production, housing starts, new customers, unemployment, just to name a few metrics, they all continue to trend very positively. We're also being recognized by many external organizations in areas that demonstrate progress that Michigan is making. On the bottom of Page 7, we've just highlighted a handful of these. If I included all of them, I'd have to have more pages in the presentation. As the state continues its strong economic comeback, the city of Detroit continues to work through the resizing of city government. We are in the bankruptcy filing that happened earlier this year. This is the first step in Detroit's recovery, and we believe the process will address its financial problems in a sustainable way. We also continue to believe there will be no impact on DTE Energy as a result of the bankruptcy. I realize how Detroit's often portrayed in the national news, which is not often showing the signs of the city moving forward and the progress that's really being made that we see every single day here. There's a lot of positive momentum on economic development and job creation and real estate development in the city. For example, Google recently named Detroit 1 of 7 new entrepreneur technology hubs in the entire country. Detroit was 1 of the 7. So I'm very confident that Detroit and Michigan will continue this positive momentum and will come out stronger both as a region and a state. While I'm discussing the city and the state, it's a good time just to mention the energy policy work that's going on in Michigan. The MPSC is currently issuing its fact-finding reports. They came out of a collaborative work with stakeholders over the last year. Final reports on the 4 areas, which were energy efficiency, renewable energy choice and then other considerations, and an example on that bucket would be electric reliability, are expected to be issued by the end of November. These findings should help set the foundation for the governor's long-term energy policy recommendations. We expect the governor to take a balanced approach for the state, ensuring that the policy makes sense for Michigan residents. Now moving to our financial overview on Slide 8. We continue to have strong results in 2013, and we're very confident in our earnings guidance midpoint. And we've tightened the guidance range, as I've mentioned, to $0.20. Our year-to-date operating earnings of $3.09 per share are up $0.01 from 2012. Third quarter operating earnings were $1.13 per share compared to $1.30 last year. It's important to remember that we experienced extremely warm weather last year. In fact, it was one of the warmest summers on record, and it provided the electric utility $40 million of favorability in the third quarter of last year. This year's electric sales returned to a more weather normal condition. And like the second quarter of this year, we experienced lower benefit expenses due to our benefit design changes that we made. Our gas utility earnings returned to a more typical performance in the third quarter. Last year, the gas business benefited by a number of onetime items that are not repeated this year. We're very confident in our earnings targets for gas, and we're raising our guidance for the segment to a range of $125 million to $130 million, which is a $10 million increase. And Peter will take you through the details in a minute. The balance sheet remains strong, and we generated approximately $1.7 billion in cash from operations year to date. We're increasing our cash flow guidance for 2013 primarily due to improved working capital and summary timing of capital investments at DTE Electric. So we're on track to meet our balance sheet goals for 2013 with a strong credit rating from each of the agencies. Before I turn it over to Peter, I just wanted to comment briefly on the challenges around quarterly earnings guidance, which we don't provide, and the consensus that comes out from sell-side analysts. As you know, our overarching goal is to deliver for the year both our guidance at midpoint, and to earn our authorized return at both utilities, and we have an established track record of doing that. We've explained in the past how we're managing our O&M, primarily around weather with our lean and invest strategy. This year, changes in retiree health care triggered $60 million to $70 million of favorability earlier in the year. And when you couple that with the first quarter gas favorability, we started out the year in a very strong position. So we initiated higher O&M for reinvestment in the second quarter and the third quarter. Normally, reinvestment based on weather favorability would have been timed later in the year. So we actually launched our reinvestment strategy much earlier than we do normally. But given that background, even with lower trading earnings, we're very confident in the $4.05 for the year. And as you know, we always plan the year and the forward years with some contingency in our planning. So with that background, let me turn it over to Peter, and he'll go through some more details on the quarter.

Thanks, Dave, and good morning, everyone. I'll just start with Slide 10 on the third quarter earning results. For the quarter, DTE Energy's operating earnings are $1.13. As a reminder, there's a reconciliation to GAAP reported earnings included in the appendix. The 2 utilities, DTE Electric contributed $1.02, and DTE Gas, which typically incurs an operating loss in the third quarter, came in at a $0.07 loss. The non-utility segments combined to earn $0.21 for the quarter. The drivers for the non-utility results are Gas Storage & Pipelines at $0.09, our Industrial Projects at $0.15 and the Energy Trading segment at a loss of $0.03. Finally, Corporate & Other had a loss of $0.03 as well. Let's move to Slide 11, a summary of the quarter recorded performance by segment. DTE Electric contributed $15 million less earnings year-over-year, and DTE Gas had a decrease in earnings of $17 million. I'll cover details around our both our electric and gas utilities in a moment. Operating earnings for our 2 non-utility growth segments are up a combined $7 million in the quarter, offset by a loss in our Trading business. Our Gas Storage & Pipelines segment for the quarter, earnings growth in our pipeline assets is partially offset by lower storage earnings. Incremental pipeline growth is starting to flow through the bottom line in the second half of the year as volumes increase in our Bluestone and related gathering investments. Power & Industrial earnings are also higher for the quarter, driven by increased earnings from our reduced emissions fuel projects and our on-site energy project portfolio acquisition that occurred last year. Year-over-year growth in the segment will continue for the remainder of the year. At Energy Trading, accounting for economic hedges related to longer-term transactions and economic earnings not yet realized for accounting purposes is driving the loss for the quarter. The economic income for the quarter is comparable to last year. In the appendix, we've included our standard Energy Trading slides to show both economic and accounting performance. Finally, our Corporate & Other segment came in favorable by $4 million from last year due primarily to lower interest and taxes. I'd like to now turn the talk to the 2 utilities in more detail, starting with the electric utility, if you turn to Page 12. The DTE Electric earnings variance is mainly driven by the return to relatively normal weather this quarter compared to the 2012 abnormally hot weather. Actually, cooling degree days last summer and the quarter were 40% higher than normal compared to this year, which actually was relatively close to weather normal. This weather difference is driving $40 million in lower earnings in 2013. I know individuals on this call are always interested in what's happening with our underlying electric service territory load. We continue to see growth in underlying load with temperature-normalized sales growth at 3% in the quarter compared to the same quarter last year. And actually, for the year, on a year-to-date basis, normalized sales are 2% higher in 2013 and actually is driven by growth in all of our segments. Also driving year-over-year earnings is reduced benefit expense. Dave mentioned that in his opening remarks. As you recall, on the first 2 quarterly calls, I talked about structural cost changes we made to retiree health care plan. This benefited electric earnings this quarter by $14 million. Typically, we don't talk about the next quarter on the call, but looking to the fourth quarter drivers for the electric business, we'll see a lot of quarter-over-quarter growth driven by the benefit expense reduction, which will flow and improve the fourth quarter results and also by significant reinvestment spending last year that occurred in the fourth quarter that's not occurring this year. Just as a reminder, last year we did spend $20 million of reinvestment really driven by that weather favorability with the majority of that occurring in the fourth quarter. Moving on to DTE Gas on Slide 13. As I mentioned earlier, the gas business typically sustains a small loss in the quarter. In fact, the DTE Gas showed earnings of $4 million in the third quarter, and 2012 is atypical for the gas company and is driven mainly by short-term cost reduction actions or lean actions the company took to offset its slow start to the year last year. During the earnings call last quarter, I talked about reinvestment into our core utility assets that would be occurring in this year. For DTE Gas, this drove $6 million of the variance of this quarter from 2012. An increase in rate base-related expenses is the primary driver in the other variance of $5 million. Let me now move to the total enterprise and the guidance for the remainder of the year. As shown on Slide 14, we are nearing our EPS guidance from $0.30 to $0.20 while we're maintaining our midpoint of $4.05 for all of our segments. In addition, we are remixing our 2013 earnings guidance, reflecting strong earnings at our gas utilities and the economic earnings that will not be realized for accounting purposes this year at our Energy Trading segment. At DTE Electric, growth in the electric sales as well as renewable investments and lower benefit expense have funded our reinvestment activities. We expect DTE Electric to achieve the guidance range of $480 million to $490 million. At DTE Gas, year-to-date earnings have been very strong, driven by favorable weather, higher weather normalized consumption and lower benefit expense. We'll continue O&M reinvestment in the last quarter of the year at our gas utility segment funded primarily by this usage and benefit expense favorability. As I mentioned earlier, Gas Storage & Pipeline and Power & Industrial Projects segments are on track to achieve their guidance with the Bluestone Pipeline and Gathering system ramp-up and the incremental earnings associated with our reduced emissions fuel business line flowing through the remainder of the year. That concludes an update on our earnings for the quarter. And I'd like to turn the discussion over to Dan Brudzynski, who will cover cash flow and capital expenditures.

Thanks, Peter, and good morning, everyone. Beginning on Slide 16 and our year-to-date cash flows. Through September, cash from operations is $1.7 billion, which is comparable to 2012 levels. Capital spending was slightly higher than last year due to increased spending at the electric utility and increased investments in our Bluestone pipeline and its related gathering assets. Electric utility capital is higher due to increased spending on our nuclear operations, system reliability and environmental projects, partially offset by the retiming of our renewable energy spend. Overall, DTE's net cash is down slightly year-over-year. Slide 17 lays out this detail for the year-to-date capital expenditures. You can see the increases in electric utility capital as well as the non-utility businesses, which as I said earlier, reflects increased investments in Bluestone. The gas utility is comparable to 2012's levels. Turning to Slide 18 and a look ahead for 2013. As David mentioned earlier, we are increasing our cash flow guidance for 2013 with cash from operations expected to be slightly higher than the original guidance and capital spending expected to be slightly lower. Our increased cash guidance is driven by the timing of surcharge collections at DTE Electric. Our prior guidance had assumed recovery of these under collections over 2013 and 2014 and also lower corporate tax payments. The change in capital is primarily due to the retiming of dry sorbent injection, or DSI, installations based on a 1-year compliance extension that was granted by the Michigan Department of Environmental Quality. And you can see that detail in the table on the right of that page. And finally, finishing up on Slide 19. As David mentioned, our balance sheet remains strong with leverage and FFO metrics in line with our targets. Our financing plan is on track. As we have issued approximately $300 million of equity into our benefit and DRIP plans by year end and the remaining DRIP plan in effect, we expect total equity issuance for the year to be slightly over that $300 million. We have issued about $800 million in debt and continue to have sufficient liquidity. And with that, I'll turn the discussion back over to Dave for some concluding comments.

Thanks, Dan. Let me wrap up on Slide 21. As we laid out for you, we're on track to reach our 2013 earnings per share guidance and that we narrowed our guidance from $0.30 range to $0.20 range with a $5.05 -- $4.05 midpoint. We are increasing our cash flow guidance, and Dan took you through that. The balance sheet is exactly where we want it to be. Going forward, our robust operational and utility investments, together with low-risk non-utility growth opportunities, are expected to provide 5% to 6% annual earnings per share growth and dividend growth. As I mentioned, we'll be at EEI in a little over 2 weeks, and we hope to see many of you there. Gerry Anderson will be providing a detailed business update for each of our business segments. The presentation that Gerry will provide will begin at 11:15 Eastern Standard Time on Tuesday, November 12. For those of you not going to EEI, you'll be able to join that webcast through our Investor Relations website. And Andrea, with that, we'd like to open it up for questions.

[Operator Instructions] And we'll go first to Kevin Cole with Credit Suisse. Matthew Davis - Crédit Suisse AG, Research Division: It's actually Matt Davis. Just a quick question on the O&M reimbursement program and the timing for this year and look -- in the fourth quarter and looking at it versus last year. I know you guys said that you had spent $20 million extra last year, and then this year, you kind of had reaccelerated that earlier in 2Q and 3Q. And so what kind of year-on-year changes, and what are we looking at in the fourth quarter?

Yes. Last year was predominantly in that fourth quarter, so I would say about 3/4 of that. And then this year, we just have -- we've had some small remaining amount, but actually, the majority of it, if not all of it, has been spent already this year. Clearly, you'll see that fourth quarter last year flow to the bottom line. Matthew Davis - Crédit Suisse AG, Research Division: And how will this level of O&M flow into 2014? Should we expect this is kind of like a normalized level of O&M or increase, decrease?

The reinvestment really is kind of on a year-by-year basis. So if you look at normalized O&M, I would take the reinvestment off of that. And we've described before, basically going through the year, we have a couple of different plans. One of them is the weather normal plan. The other one is more of an invest plan, if we get additional revenue in. So next year, we're projecting out -- as we talk about productivity and relatively flat O&M, but as we get into the year, we'll make the decision whether we reinvest.

So long term -- well, first of all, we are still back at our 2005 O&M levels, which is about $1.5 billion, and our goal is to hold it a $1.5 billion through the next several years. So year-to-year, you might get some shifting back and forth, certainly quarter-to-quarter -- or quarter-over-quarter as you see this year. You'll see that happen, and we want to try to help you through that. So if you're looking forward, I would just assume that we're going to hold O&M flat as we have been, which is offsetting inflation and also offsetting new O&M that's coming into the business. Matthew Davis - Crédit Suisse AG, Research Division: Okay. And then secondly, what kind of guidance are we -- should we expect to get at EEI? Are we going to be getting additional CapEx guidance, additional segment earnings guidance? What level of detail should we be expecting?

Yes. We definitely will talk a little more detail around 2014. So you can expect an update around '14 guidance.

And then we've already laid out, as you know, 10 years of CapEx for the utilities. There probably will be some refinement about there. There will probably be some more clarity about our thinking about the transformation of our coal fleet over time and how that plays out and plays hopefully into the governor's new energy policy and hopefully what we see transpiring in Washington. So I think we have a pretty good story to tell about over time, how some of the coal fleet will close just naturally because it's coming down to life and how that will be replaced and do that in conjunction with expanded renewable energy policy and so on. So I would expect Gerry to go into more detail on the utilities and energy policy and then clearly more details on the non-utilities.

Our next question will be from Andrew Weisel with Macquarie.

It sounds like the utilities are strong. I appreciate the color you just gave me O&M reinvestments and 3% weather-adjusted load growth at the electric business, if I heard you right. Any change to your plans about the timing of the next round of rate case filings?

No change right now.

Yes, no change, yes.

Yes. We're still thinking that we are going to be filing next year for the electric business with new rates in '15. And the gas business that we are -- we have the infrastructure tracker and that with ongoing cost control is going to allow us to stay out 3 years or longer. So we go into '14 with a lot of stability and no rate cases.

Great. Next question on the pipelines. It sounds like Bluestone is ramping up pretty nicely. Can you give us an update on NEXUS, the Utica pipeline? Specifically, I'm curious what you're hearing from producers right now, when you think contracts might start being signed, and what might be a range of possible in-service dates?

This is one of the projects that Gerry will talk more about at EEI. But just to generally give it some tone, we still get positive indication so that not only the demand for the gas in Michigan and Ontario at the Dawn connection, but also, as all of us are watching the wells in the Utica play, a lot of positive signs there. So I think what we're thinking our way through right now is as the Utica develops, which pipes in the region go through the expansion first. So either they're going to be additional compression or looped, and then at what point in time are there going to be new pipes built? And as this plays out, I still -- I would characterize this as very positive. And the timing right now in terms of in service, our thinking has not changed. I think it's in the 2016, 2017 time frame. But again, we'll give you more details at EEI.

Great. And then lastly, just for the Trading business, it sounds like some timing issues on accounting earnings versus economic. Given that you're basically a small loss year-to-date versus your updated guidance range, should we assume that catches up in the fourth quarter? Or might some of this fall into 2014? And for now, are you still comfortable with the $10 million to $30 million guidance range for 2014 earnings?

You want to answer that, Peter?

Yes, I will answer that. I guess first, I can talk about the guidance -- the overall timing. We do have in the appendix -- we do lay out the difference between the economic and the accounting and there's a $14 million timing in the quarter. There is -- a few million of that will come back in the fourth quarter. The rest of that actually will play through on 2014, 2016. And I wish I could take a moment and talk a little bit more around the timing that we're seeing. Actually, there's 2 pieces on this. One of them is related to economic hedges, and we talked about this in the past, kind of this one side of the accounting that occurs. So as we hedge in transactions, the accounting-related to those hedges actually kind of get mark-to-market versus more accrual base if one would be a transaction. Actually, there's a bigger piece of this timing that is tied to the mix of the types of transactions. Actually, this business, we're moving more towards from pure trading type of transactions that get immediate accounting and economic recognition to transactions related to origination deals and contracts tied to assets and actually the accounting of this flows with the transaction. So that describes some of the longer tail, and this roll-on is really tied to those transactions. But Andrew, one other -- you're talking about the guidance. Actually, the guidance, revised guidance is $5 million to $15 million. So we did take down the guidance for the segment.

That was for this year. I was asking about next year.

We're thinking our way through that. My general sense is, as you know, this is not part of our growth story at all. And over time, hopefully what you're going to see is our other -- you look at our non-utility businesses in the midstream and Power & Industrial, they're growing 15% to 20% per year. And just as a strategy, working with you all, I want to de-emphasize Trading. And so we're working our way through that. And either we'll have an update at EEI or when we finalize our guidance in January.

Our next question comes from Matt Tucker with KeyBanc Capital Markets.

Most of my questions have actually been asked and answered. I guess I wanted to ask the first question kind of in a different way. When you look at the implied fourth quarter guidance on the electric side, it implies something like $30 million to $40 million year-over-year earnings growth or 50%-plus. Given weather was only drag about $5 million last year and assuming normal weather this year, should we assume most of that is coming from O&M? Or could you just talk a bit a little bit about the drivers there?

It's probably split half. Some of that benefit favorability we're seeing in the third quarter. So you saw that level come through. That same level is going to come through in the fourth quarter. And the other, as I mentioned, we had a $20 million reinvestment last year. About 3/4 of that is going to flow through favorability in the fourth quarter.

And actually, as you look at the fourth quarter, what -- the implied fourth quarter, it is actually pretty typical for a fourth quarter result for the electric utility. Actually it's getting it back to more of a typical fourth quarter result.

Got it. And kind of a similar question, maybe similar but opposite on the gas side. The guidance implies a pretty steep year-over-year drop-off. Is that again primarily just on O&M reinvestment?

That is correct.

[Operator Instructions] Next, we'll hear from Julien Dumoulin-Smith with UBS.

So you guys already asked about -- or answered regarding NEXUS. But on the Bluestone side, you had some developments in the quarter regarding new agreements, et cetera. Could you perhaps provide a little bit more color about added CapEx and perhaps further achievements after the Southwest deal?

I would just tell you, this is an exciting time for us, an exciting time for that segment. So as you know, in the whole midstream space, the estimates over the next 10 years is there's going to be $1 trillion of investments made because you have to get this gas to market. And we're putting a lot of our muscle into not only what we can do on Bluestone, on the Bluestone area, with Southwestern and other producers, but we're also looking at what other opportunities there could be for us. So I would just characterize this as very positive. And not that we're coming out with any major announcements at EEI, but it's just something I think Gerry Anderson will talk more about at EEI. And then, as things develop here, certainly we'll provide more color around that. But we are talking to Southwestern as we speak about deepening and furthering our relationship not only in that basin but possibly in other basins.

Great. And I presume that would involve the CapEx update at EEI, just to be clear?

Yes.

Great. And then just going back to the Trading side, just again to be clear on this one. It's clearly not necessary reversal in '13, but as you think about the accounting risk as the operating -- or I suppose that's the description, that would materialize in your operating earnings beyond 2013, so perhaps there's a little bit of a tailwind here into '14 and subsequent years?

As far as the strategy to get these more origination or non-derivative type of transactions, it does kind of build some income base for this business over multiple years.

Got you. Is there anything in particular you can point to for subsequent years here?

Not at this time.

The next question comes from Greg Gordon with ISI Group.

You mentioned pretty specifically in the context of answering other questions that you expect to be able to hold your O&M absolutely flat over the next few years. Can you comment on what you're seeing? And I know interest rates have come back down from their peak, but in terms of what you're seeing in terms of changing discount rate on your pension plans, and how significant an O&M reduction on the GAAP pension expense you might be looking at and what your funding status might look like given where interest rates are today?

Sure. And actually, before I do that, I want to correct myself. On O&M, we are striving for flat O&M. And at the same time, we're exploring further structural cost changes over time. And it's part of our strategy around trying to keep rates as low as possible for customers. So we have this one goal for O&M, and at the same time, we're looking for opportunities for step function changes. And I think at EEI, we'll talk more about that. An example of that is what we just did with retiree health care where this year, we're going to see $60 million to $70 million of benefit and on an annualized basis. Next year, it's $70 million to $80 million on retiree health care. So we continue to look for opportunities on that. On the pension side, and I'll ask Peter and Dan for help, the discount rate continues to move. You only measure that once a year. So you measure that at the end of the year. But we expect with interest rate movement here, the discount rate will go up and that, that in addition to real good returns on our assets, we're seeing our funded status go back up. Do you have those numbers, peter?

Yes. And then you have the funded as over the 80%. So we're well on our way over the next few years to get fully funded. And I guess in the benefit, and as we talked about this, the strategy with the retiree health care, it really is part of our bridging strategy coupled with the need to stay out, as well as our affordability for our customers. And actually, next year, there is another portion since we had 2 changes. We have one on our salary plan, our union plan. And actually, the union plan, the benefits are flowing in the second quarter. But we're going to start to see some additional favorability. And that's why the group goes up to 70% to 80% from the 60% to 70%. So, and as you mentioned, there was another tranche of favorability that's coming related to discount rates. And actually, we like that. For next year, I said, once we really settle in what that accounting is and what it's going to be, we'll update you in terms of where we're at on our overall earnings as well as investment plans within utilities and if this holds it'll be good for our customers as well, in terms of overall...

Just to be clear, this is completely away from retiree health care, but just on pension, given the way your performance has been and given where discount rates are trending, you would expect to have to fund less on a cash basis, A? Secondly, you would expect a significant reduction in your GAAP operating expense, is that correct?

Over the next several years. So we -- as we mentioned, we're 82% funded, and we'll have a couple of years of cash contributions. Our goal is to be fully funded by 2016. We're already starting to shift our asset allocation in terms of immunizing our risk to future interest rates changes. So as we increase our funding, our cash contributions will be much less and our pension expense will be much less. And we will then have hopefully immunized ourselves to any future interest rate changes down the road. You're spot on on that.

Our next question comes from Jonathan Arnold with Deutsche Bank.

Just a quick one. I want to make sure I heard you right. You talked about 3% versus the underlying electric sales growth. Was that the third quarter versus third quarter last year?

Yes, that was -- it's kind of a third quarter over third quarter.

And it seems to have picked up slightly as you move through the year. What is your best guess where you're going to finish the year? And how are you thinking about 2014 and beyond?

Yes. We think right now on a total year basis, we're going to be at the 2%. Actually, as you know, year-to-date, we're 2%. Residential, right now, year-to-date, is 2%. We think that'll settle in at 1%. And then our industrial will be settling at about 4% for the year. So we're thinking 2% there may be a little up -- bias upwards on the 2% but still thinking that it's going to be a 2% growth. And then on a go-forward basis, we're looking at about a 1% growth. And that's actually including energy efficiency, so net of efficiency.

1% net of efficiency going forward, is that how to break down between the segments roughly?

I'd say it's probably residential relatively flat. That's typically how we've given usage, and that's where your energy efficiency programs are. And both the commercial and industrial are pretty relatively equal and make up that 1%.

We do have a follow-up question from Julien Dumoulin-Smith with UBS.

Sorry, I wanted to follow up here just on transmission, actually. I mean, some of your peers out there have been talking about it of late. Any thoughts to perhaps pursuing something comparable?

Not at this time. For those of you that were in Grand Rapids yesterday, I saw the PowerPoint from CMS also, and I'm curious to learn more about that. But we don't have any plans like that at this time.

We'll go next to Kit Konolige with BGC.

On Bluestone, David, you talked about making some progress there. And I understand there'll be more detail at EEI. Can you just give us a sense of where you stand relative to your comments at the second quarter? You talked about, I think, $650 million of investment to go there and expectation that you could get to $100 million in earnings. The target was higher than that, and you talked about white space. Can you fill us in on what kind of progress you've made in those terms?

We -- I'd rather hold that for EEI. We're making a lot of progress in filling in that white space and continue to get questions about can you grow this beyond the $120 million. And we have a fair number of balls in the air right now, but the answer is it possible yes, and that's what we're working our way through right now. Everything we see there, as you know, the amount of gas that's coming out of that Susquehanna County in particular is, I think, a paradigm shift for a lot of people. And so what you're seeing in the whole region, including our assets, is that over time, you're going to see pipes filling up. You're going to see expansions happening faster than people thought at Bluestone and at Millennium. And then there's ongoing opportunity for whether it'd be laterals tying to that Bluestone pipe or additional gathering system contracts. So whether it would be Southwestern and/or others, I think over time, you're going to see us come back with higher investment numbers and higher earnings than we've previously disclosed. That's not -- I don't think you're going to see us change our 2014 numbers, but there is a lot of positive activity in the space right now.

And Kit, this is Peter. I know the $650 million actually is kind of spend-to-date. We were thinking about and talking about this now as a go-forward spend. We're looking at $1 billion to $1.3 billion of capital on the segment from '13 on, and we'll give you an update at EEI in terms of where we're at.

We'll take our next question from Mark Barnett with MorningStar Equity Research.

So just a quick question on something smaller that you mentioned about your cash flow guidance for the year. You talked about the improvement, I guess, in working capital versus your plan. Is that something that's going to be more or less sustainable or kind of a non-repeatable thing that we shouldn't expect for 2014?

I would characterize it as non-repeatable, more of a onetime.

It's related to underrecoveries. We have the PSCR, the GCR. We had some reconciliations around the choice tracker that went away roughly over a year ago. And we had some under-recoveries. We settled the cases, got them done earlier. So the collection on those under-recoveries started a little earlier. So they were -- we were planning them to bleed a little bit into '14, but it turns out that they'll occur mostly in '13.

We'll hear next from Andrew Levi with Avon Capital Advisors.

So just kind of sticking with the gas and the infrastructure. It sounds like things are moving along quite nicely, maybe a little bit faster than what you guys anticipated earlier in the year for the outer years. At what level of -- whether it's net income or capital opportunities, do you start to consider doing an MLP?

As you know, we don't have an exact number. And we've said for some time that we needed to get more scale. And it wasn't just more scale on what I had today, but I also feel strongly that I need line of sight to an investment -- a set of investments. So as you know, when you set these up, you would have to have a pool of assets that you either currently own that you could drop in over time or a line of -- a good line of sight on investments going out many, many years, not 1 year or 2 years but more than that. And we're focused right now on the development side to create that pool of assets, either the assets I have on the ground right now or a line of sight on CapEx for multiple years. And that's where we're putting our time and energy. And over time, we'll clarify our thinking on MLP, but it's too early right now. We just don't have the scale on our view.

Okay. But I guess it's something that you're working towards, I guess is what's fair...

Yes, where we're working towards and putting, as I've indicated, our shoulder into is the development side. And that's where we're putting all our time and energy and resources to see how we can grow this business and grow it in a high-quality way as we've done in other segments that we've -- it's just not earnings growth for earnings growth's sake. We're still trying to stick to our discipline and making sure we have high-quality returns.

[Operator Instructions] We'll go next to our follow-up question from Matt Tucker with KeyBanc Capital Markets.

I apologize if you commented on this and I missed it. But there were several media reports earlier this week indicating that you'd all reached a deal to sell refined coal to Wisconsin Energy. Would that represent the placement of your eighth REF unit? Are you able to comment on that at all?

Normally, we haven't been commenting on host sides because we're in the middle of placement and negotiation. So usually, I would say no. But they pulled an environmental permit. So it was disclosed, and that is the eighth unit. And we're working on the ninth unit that we hope to have placed and up and running in early 2014.

And what would be the timing on the operations of that eighth unit?

Like spring.

Normally, it's a 4- to 6-month period to construct, relocate and then get it up, test it and up and running. But this is all in line with not only next year's guidance but our longer-term guidance that we provided for that segment. So these relocations are happening on the right time line with the right tons of coal host locations. So everything is on track there.

And our final question today will come from Ashar Khan with Visium.

My questions have been answered.

Good. Thank you.

Okay, well, great. And thank you, everybody, for joining us. And again, for those of you that will not be at EEI, you can get the webcast presentation on November 12 at 11:15 through our website. And thanks again, and have a great day and a great weekend.

And with that, once again, ladies and gentlemen, that does conclude today's call. Thank you for your participation, and have a great day.