DTE Energy Company (DTE) — Q2 2018 Earnings Call Transcript

Thank you, April, and good morning everyone. Before I get started, I would like to remind everyone to read the Safe Harbor statement on page two of the presentation, including the reference to forward-looking statements. Our presentation also includes references to operating earnings, which is a non-GAAP financial measure. Please refer to the reconciliation of GAAP earnings to operating earnings provided in the appendix of today's presentation. With us this morning are Gerry Anderson, Chairman and CEO; Jerry Norcia, President and COO; and Peter Oleksiak, Senior Vice President and CFO. We also have members of management to call upon during the Q&A session. And now I will turn it over to Gerry to start the call.

Well, thank you, Barb, and good morning everyone. Thanks for joining us today. So this morning, I'm going to give you a recap of our performance for the second quarter and also share some thoughts on our long-term growth plan. And then I'll hand it over to Peter, who will provide a financial review and some additional color around our increased earnings guidance. And then, Jerry Norcia will wrap things up by providing more detail on the progress of both our utility and non-utility growth plans. And then, we will take your Q&A. So, I'm going to start on slide five. I told you on the first quarter call that I feel good about our financial performance, and halfway through the year, I feel even better. To be honest, financially we are crushing it this year. And so, both utilities are right on track, and both GSP and P&I are having an exceptional year. And so, given this, we are increasing our 2018 EPS guidance midpoint by $0.35, or a full 6% to $6.13. And this new guidance implies growth of nearly 10% versus our actual in 2017. Cash flows are also very strong. So we are increasing our cash flow guidance for the year by 200 million. And as Peter will discuss later, we expect this cash flow strength to reduce our equity issuances over the three-year period. On the regulatory front, I'm encouraged as well. So, on the first quarter call we told you that our recent electric rate case was a bit low. Since then, on rehearing, the MPSC increased the case outcome by just a little more than 10 million. And that outcome also had important benefits for one of our local communities. So, their decision was appreciated. MPSC also recently approved our plan to move forward with a 1,100 megawatt combined cycle plant to help backfill some of the coal plant retirements that we have coming. We also recently filed a 1.7 billion renewable energy plan with the Public Service Commission, an investment that will help backfill the retiring coal plants and meet the 2021 RPS requirement that we have here in Michigan. In July, we filed an electric rate case, and importantly that case includes an IRM provision, or an infrastructure recovery mechanism that we discussed extensively with the MPSC in a series of meetings before the filing. And Jerry Norcia is going to give you more detail on that provision in a bit. And finally, our gas rate case will be finalized in September, and we expect the outcome in that case to be without surprises. So moving on to slide six, I want to transition to a discussion of our future growth. So, both of our utilities are evaluating investments that would be additional to those in our current plan. So, in the electric utility, those investments are tied to voluntary renewable projects with large customers, and those discussions are progressing well with the customers. In the gas business, we filed a plan to further accelerate our gas main replacement program, and Jerry will give you additional color on both of these areas in a few minutes. There is a lot going on at GSP related to future growth. So NEXUS construction is now 80% complete and progressing well. In fact, a group of us along with some board members flew to the pipeline route yesterday, and saw mostly dirt covering pipe, so that's a good sign. On our Link asset, the DTE Board recently approved a $250 million gathering expansion investment for a key customer. And overall, the Link asset just continues to surprise to the upside. We also have four other laterals or expansion projects that are either under construction or have recently been completed. And Jerry will give you some further color on those in a little bit. Finally, we are evaluating acquisitions that are of a scale analogous to Link. And as we look at those, we will keep you abreast of the work in that area. So P&I also has a lot on its plate relative to future growth. So, the Ford central energy plant that we recently closed is now in full construction. We've also begun construction on an RNG or Renewable Natural Gas project in Wisconsin, and we sense that there are more projects like these two that I just mentioned that will be coming. So we expect to close an additional one to two cogeneration or RNG projects this year. And the development queue behind those projects continues to be very strong. And so given all of that, we now expect P&I's 2022 earnings to be materially above the $70 million that we have previously disclosed. We also remain committed to our 5% to 7% EPS growth rate target over the five-year plan. So there's been some discussion about whether we can hit those targets out in 2022, so I want to spend a minute on that topic. And I'll address the topic from two vantage points; looking forward and looking back. So let me start with the forward look. So there are a range of long-term EPS forecasts out there for us, and in our eyes a few of them are light. And for those who are light we see a few key themes. These forecasts tend to be light on future utility earnings, heavy on future holding company expenses, and heavy on future equity issuances versus our plan. And the combination of these factors account for the perceived shortfall. I'll also say that our portfolio of growth opportunities feels better than it did even six or nine months ago. We continue to look for and find good investment opportunities, which has been a pattern for the company over the years. So that brings me to the second vantage point I mentioned earlier, and I'm moving on to slide seven now. The five-year forward growth targets that we have provided you over the years versus what we have actually achieved are shown on this slide. So, for example, if you look at the second set of bars from the left, seven years ago, in 2011, our targeted EPS growth rate implied an EPS level in 2016 of $4.64. We actually delivered five years later, in 2016, $5.28. Similarly, in 2012 our five-year forward growth estimate for 2017 was $4.97. We ended up beating that last year by $0.62 or 12.5%. And based on the guidance update that we've given you this morning on this call, the 2018 EPS growth target that we provided to you back in 2013 looks pretty conservative now given that we expect to come in $0.90 higher or over 17% above what we told you we were targeting for this year five years back. So what's the point of this backward look? Well I have to tell you every one of those five-year projections that we gave you over the years felt challenging at the time. I can vouch for that. And every one of those five-year plans had some level of growth that we expected to play out and we're committed to finding but hadn't yet fully pinned down. And our pattern shows that we've been able to more than fill those future growth goals. So as I look forward five years to 2022, things feel much the same. There are challenges in the plan. It wouldn't be a decent five-year plan if there weren't some challenges in it. But the challenges feel very analogous to those that we have not only met in the past but have materially beaten over the past decade. So I hope that's some hopeful perspective on our future growth. And of course we'll provide you a more detailed update on all of that later this year. And with that, I'm going to turn things over to Peter for the financial update.

Thanks, Gerry, and good morning everyone. I'm going to start on slide nine. Before I get into the quarter I always like to give an update on my Detroit Tigers. While the Yankees, Red Sox, and Astros battle for the best record in the American League, after last night's loss to Kansas City, my Tigers are now 17 games below 500 and deep into the rebuilding process. On the positive side, my minor league prospects are looking good, including the number one draft pick, so there is a bright future ahead for my team. But it really can't come soon enough for me. Now turning to our financial results, as some of them were positive, DTE is off to a great start this year. As Gerry mentioned, the first half-year came in very strong. We had operating earnings of $247 million or $1.36 per share. And for reference, our reported earnings were $234 million or $1.29 per share. And you can find a detailed breakdown of EPS by segment, including a reconciliation to GAAP-reported earnings in the appendix. Let's touch on each of the segments in detail starting with our utilities. We had very interesting weather during the quarter that provided some favorability for both utilities. Our Gas utility experienced a very cold April, actually the second coldest April on record. And our Electric utility experienced warm weather in both May and June. In fact, May was the second warmest on record here in 2018. This weather was positive for both utilities, so a perfect utility quarter for us. To review the quarter-over-quarter earnings variance I will start with Electric utility. The DTE Electric earnings for the second quarter were $163 million, $15 million higher than the second quarter of last year, driven by new rate implementation and the warmer weather I just mentioned, partially offset by higher O&M expenses and rate-based growth. A more detailed year-over-year earnings variance walk for DTE Electric can be found in the appendix. DTE Gas operating earnings were $14 million, or $13 million higher than last year, driven primarily by the cooler April weather. The Gas Storage and Pipeline business, operating earnings were $60 million in the second quarter, $20 million higher than last year. This increase is due to lower corporate tax rates, as well as increased gathering and transport volumes across the platforms, mainly at Bluestone. Future growth that we anticipate at GSP is showing up earlier than we thought, and we're essentially seeing growth that we expected to play out next year roll into this year, which really solidifies earnings across this year and 2019. And the strong cash flows that go along with the earnings are going to help reduce equity needs for us. Operating earnings for Power & Industrial business was $43 million, which is $13 million higher than in the second quarter of last year. This increase is due in part to higher REF volumes, and our waste wood renewable plans performed better than last year. We have been saying that we continue to optimize our REF assets until they begin to sunset in 2020 and 2022. And then, we expect to see some earnings upside from these assets in the near-term. While these earnings upsides we are seeing result from higher throughput at some of our existing REF sites. We also moved some of our units to larger sites where they can handle higher volumes. Now these incremental earnings can now be monetized for accelerated cash flow. You will see these earnings for cash trade play out next year as we get tax equity partners for some of these projects. There is a strong growth in our non-utility this year. We have increased guidance at GSP and P&I which I will discuss on the next slide in a minute. Rounding out our growth segments in the second quarter is Corporate & Other, which is at $9 million unfavorable compared to last year due to tax reform and higher interest expense. The Energy Trading had operating earnings of $8 million in the second quarter, up $4 million from last year driven by stronger performance of gas portfolio. So overall, DTE is at $1.37 per share in the second quarter of 2018 or $0.29 over the last year. Let me turn to the next slide. Let me start with the DTE Electric, it is why our guidance increased. You may remember in the first quarter we guided towards the lower end of the range. Now with the favorable weather we experienced this quarter, we now expect to land firmly in the middle of the range for this year. For the DTE Gas, we feel comfortable with the current guidance range for 2018. As I mentioned, both GSP and P&I we are having a very strong year. We are increasing the guidance range of GSP to $225 million to $235 million due to the growth in gathering and transport volume. At P&I we are increasing guidance range to $150 million to $170 million due to higher earnings from our area of assets and strong results from our steel projects. Our non-utility businesses differentiate DTE from our peers and continue to provide some very good long-term growth opportunities for the company. We are decreasing guidance for Corporate & Other due to taxes and other items that should be considered one-time in nature. As I mentioned, DTE Energy had earnings of $8 million in the second quarter and is on track to have another solid year. Year-to-date trading had earnings of $9 million. So we are comfortable with the $5 million to $20 million guidance range we have been putting in the trading business. Overall, we feel very good about achieving our new operating EPS guidance this year. And with this, we provide stronger cash flows and will allow us to reduce equity issuances, which I addressed already. The earnings strength we are seeing this year is a continuation of a decade-plus pattern. Let's turn to slide 11. You can see this. You can see as we have met and/or in most cases exceeded our annual earnings guidance that was provided to you for the last 11 years which is over a decade. Over the front-half of the period, we got 4% to 6% annual EPS growth. In most recent years, we have guided to a 5% to 7% growth. But as you see from the green ovals on the top of the slide, our EPS growth over the last decade has been closer to 8% and our growth over the last five years approaches 8.5%. So, it has beaten our 5% to 7% EPS growth rate over a decade which is a great track record. Now prior to turning it over to Jerry Norcia, I would like to give you a brief update on our cash flow on the next slide, slide 12. This year's strong earnings and cash performance not only demonstrates for the 11th year in a row our ability to deliver results but also immediately helps our EPS growth in the future. We are upping our cash forecast this year by $200 million and reducing our expected equity issuance by $100 million across 2018 to 2020. This year's total issuances are reduced from a previously disclosed $300 million to $250 million. Our goal is to minimize equity issuances next year outside of the Link converts. And we are targeting $100 million to $200 million. Now I would like to turn to Jerry Norcia to discuss our long-term growth.

Thank you, Peter. I'll begin on slide 14. We continue to see growth in our utilities fueled by our investment in infrastructure and generation due to a lot of positive things going on in our electric utility that will help secure our generation reliability and improved customer satisfaction. As Gerry mentioned, the Public Service Commission approved the need for a new natural gas plant earlier this year. This is a 1,100 megawatt natural gas combined cycle plant that we are building at a cost just under $1 billion. Along with renewable energy, natural gas will be a critical part of our power generation capacity in the decades ahead. New plant is scheduled to break ground in August of this year, with full construction underway in mid-2019. We expect the plant to go into service in 2022 which fits with the timing of three coal-fired power plants being retired in the 2020-2023 timeframe. Earlier this year, we submitted our renewable plan to the Public Service Commission. We are planning to double our renewable capacity to 2,000 megawatts by 2022, investing approximately $1.7 billion in renewable energy over this timeframe. We're also adding 300 megawatts of new wind capacity to supply a voluntary renewable energy program for large industrial customers who are looking to reduce property measures. In July, DTE Electric filed a general rate case, which included a three-year infrastructure recovery mechanism, which we call the IRM, designed to reduce rate case frequency. This proposed IRM would recover our distribution investments, our new natural gas bio power plant and certain fossil generation, and nuclear investments. These investments total approximately $1 billion per year, and are critical to modernizing our distribution system and improving our reliability for our customers. This current rate case is the fourth and the last five years for DTE Electric. The company's need for rate increases has been, and is expected to be largely driven by the needs to replace critical infrastructure to safely and reliably serve our customers. For the proper IRM in Electric Company to address this critical infrastructure, we believe that maybe held to defer filing rate cases on an annual basis. IRM creates alignment, certainty, and continuity for our investment strategies as it relates to modernizing and renewing our infrastructure. And it also creates tremendous efficiencies in our ability to engineer, procure and construct the infrastructure when we know years in advance what our work will be. All of this accrues as a benefit to our customers and reduces the frequency of highly repetitive regulatory proceedings. As you know, we have a recovery mechanism for our main renewal capital at our gas utility, and this has worked very well in helping our efforts to improve safety and reliability in our gas main infrastructure. The recent rate filing also included a request for an electric vehicle program, which we call Charging Force. This program will help customers realize the benefits of EVs and reduce barriers to EV adoption through communication, residential charging support, and charging infrastructure. The filing also incorporates the customer benefit of Tax Reform. We have a legislative 10-month rate case cycle in Michigan, so we expect these new rates in the electric to be effective in May of 2019. Now moving to DTE Gas, we began reducing customer rates for Tax Reform in July. Our general rate case is progressing. The rate case includes a proposal to increase the annual number of miles of main replacement, increasing the base from a 25-year base through a 15-year cycle. This proposal will allow the system to be hardened at equipment pace and will significantly decrease O&M cost over time. As always, when considering the investment in system hardening, we are very focused on rate affordability for our customers. We filed the plan with the Public Service Commission to return the balance of benefits from the tax rate decrease to customers. This rate reduction will go a long way towards mitigating the effects of the gas rate case, and will allow us to achieve our new affordability goal, achieve our affordability goals. Now let's move to slide 15 to provide an update on our Gas Storage and Pipeline business. I'd like to start with an update on the NEXUS pipeline. Before I highlight some of the progress we have made on construction, I want to take a step back and talk about the project as we see it. It is a long-term project that will help grow this business segment for many years to come. We're very encouraged by forecasts of future production in the basin served by NEXUS. The pipe is located over the most prolific, one of the most prolific dry gas basins in the country. The basin's production capacity is expected to grow significantly from 28 BCF a day to 40 BCF a day by the end of the next decade. Forecasters are also predicting that the basin will be short in capacity in the very near future. And our ongoing discussions with producers of the seas and industrials reflect this sentiment. We have enough volume under discussion to fill the pipe, so this pipe is clearly needed and well-positioned. Given this, we are focused on getting long-term deals to provide a strong base for NEXUS for years to come. We expect these deals to play out after the construction is complete and the pipe goes into service. This is something that is accounted to play in our financial plan. Speaking of construction, we have made significant progress in all aspects of construction, and we are approximately 80% complete. 100% of mainline walling on the pipe is completed, leading this walling as a key milestone in any pipeline project, and we are in very good shape with this phase. Regarding our horizontal threshold drilling, we have completed 16 of the 18 HDDs we need to drill, which is another key phase in construction and the two remaining HDDs are pretty minor in terms of size. So all in all, we are pleased with how the NEXUS project is coming together. We look forward to growing this platform much like we have done with our other existing pipeline assets, and we expect the pipe to be a strong contributor within GSP for many years to come. Our Link collateral and gathering asset continues to perform well and they progress towards future growth. Jerry mentioned the $250 million expansion of Link that our Board of Directors recently approved. This is the third expansion of Link. This investment is really coming along well. Volumes and investments are coming in faster than a pro-forma plan we have shared with you. Additionally, we are currently evaluating a number of acquisition opportunities roughly the size of Link. We have multiple assets under consideration, and we are in detail evaluation base of one asset in particular. As I've said before, when talking to investors of potential acquisitions, we are very disciplined in our approach, we are focused on assets that fit strategically in our GSP portfolio and keep our business mix where we like it. We will continue to update you on our progress in this area. As far as some of our other GSP projects, they are progressing well. Millennium's Valley Lateral was recently placed in service after receiving approval from the FERC. This is an 8-mile lateral that moves natural gas to a 720 megawatt power plant in New York. This is a good size lateral that can deliver 130 million cubic feet of natural gas. Also in Millennium, we have the Eastern System Upgrade on track and in service in the fourth quarter of this year. This expansion will provide 220 million a day of additional capacity under the Northeast markets. On our Bluestone pipeline, we will complete ongoing construction of a 100 million a day expansion by the third quarter of this year. Finally, on the Birdsboro Lateral, we are in full construction mode. This 14-mile lateral is expected in service in the fourth quarter. So as you can see, we have a lot of positive momentum in our GSP business and we will continue to update you as these are progressed. Now I'd like to move on to the Power & Industrial business on slide 16. Our P&I business continues to see progress on the development of both industrial energy projects and renewable natural gas projects. We began construction in the Ford Motor Company central energy plant that we have discussed with you in the past. We are also finalizing agreement on other cogeneration projects for large industrial customers in the Midwest. We expect to close the project this year. In our RNG business, we have made progress since our last call. We finalized the agreement on one of the gas capture projects we told you about, and have started construction. This project is in Wisconsin, and we expect it to be on service in early 2019. Between these two business lines, we have been evaluating about 10 projects as a result we have closed one RNG deal this year and expect to close one or two deals on the cogeneration RNG's base later this year. So we are feeling really good about the progress for current P&I projects. We believe we have a good pipeline of future projects with secured growth in this business. We previously told you that our 2022 earnings goal is $70 million, and that we needed $45 million in income from new projects developed between 2017 and 2022 to hit that target. By the end of this year, we expect over two-thirds of the $45 million to be in hand, only three years into the five-year period. So given this, as Jerry said earlier, we expect P&I's earnings by 2022 to be materially above the $70 million level. Now, I will wrap up on slide 17, and then we will open it up for questions. All in all, I feel great about the position we are in both our utilities and non-utilities to deliver another strong year in 2018. We delivered strong second quarter results and significantly increased our 2018 operating EPS and cash flow guidance. Our utilities continue to focus on necessary infrastructure investments to improve the reliability and the customer experience. With additional expansions in business development, we continue sustainable growth with the non-utility businesses. Given this, I'm confident that we are on track to deliver strong EPS and dividend growth that will drive premium total shareholder returns, and we are confident in our plans to reach our 5% to 7% long-term EPS growth target over the five-year plan. With that, I'd like to thank everyone for joining us this morning. And April, you can open the line for questions.

Hey, this is actually Richie Ciciarelli here for Shar. How are you guys doing today?

Doing fine, thanks.

All right, good to hear. Just wanted to touch a little bit on your Midstream growth strategy, can you just provide a little bit more color on your evaluation process for acquisitions, like how much is it from gathering and processing versus transportation assets? And can you just maybe touch on the long-term strategy, how much is fueled by acquisitions versus organic growth opportunities?

Well, the assets that we're looking at right now are gathering and transportation, so there's some high-pressure transmission as well as gathering assets that we're looking at. In terms of mix into the five-year future, there is a balance that we try to maintain between what I would call purely demand-charged style projects and what I would call demand-and-variable charged projects. So that mix there, we try to maintain. We try to maintain a good balance. So there's a balance of both gathering investments through acquisition as well as organic development.

The other thing I would say is that we have had a pattern of building a platform and then expanding organically from the platform. In many cases our best growth comes from those organic expansions. So if you look at Millennium, Millennium led to Bluestone, which was an organic expansion. Bluestone led to some gathering, which has turned out to be a nice business line for us. And that whole area continues to produce growth opportunities. So for example, we recently reached an agreement with Cabot there which we think will be a good relationship, a positive relationship for us in that area. And we see Link playing out analogously where we made an acquisition but we expect that acquisition to lead to a host of agreements like the one we just mentioned where we've got Board approval and are ready to anchor a $250 million investment with one of our counterparties there. So that's the thought process that's worked out well for us. And these acquisitions we're looking at are meant to repeat the same pattern.

Got you, guys. That's very helpful. That's all I had. Thank you.

Thank you. Appreciate it.

Hey, good morning everyone.

Good morning.

Hey. So wanted to follow-up a little bit here on the comments on the long-term guidance, perhaps just to kick it off, can you comment a little bit on how you think about the Link-sized acquisition and the context of the 5% to 7%, and how that might position you within that guidance range? And then separately, let me also just throw these other questions in there while you talk about the 5% to 7%. How do you think about the P&I segment, specifically you talk about being materially above that. Certainly in an '18 context you're certainly tracking very well. How much of that is REF-related versus some of these other elements like RNG? And when you say materially can you maybe expand a little bit more on that?

Sure. So maybe I'll start with P&I. So yes, we're having a very strong year in 2018. And as Peter told you, we had focused on optimizing these projects and positioning them to get as much as we could out of them, which is going better than we thought. But we're also moving toward the phase where we're going to be doing tax equity transactions. And the goal there is to accelerate cash flows and then redeploy those cash flows into other growth projects, debt reduction, and equity reduction. So I think what we're going to see out of the P&I projects is higher earnings in the short-term, and then the long-term benefit will come from the higher cash flows that the projects will generate versus what was in our plan even a handful of months ago. Concerning the Link-style acquisitions, we are looking at those. We're disciplined about how we go about those. So we'll do it if it's right for us to do. But if it is I think it would be one of the things that really helps us shore up our 5% to 7% growth targets. So we aren't saying if we do one of those we're going to raise the 5% to 7%. It's really meant to achieve that. It'd say in general those platform investments, as I've described them, have surprised us to the upside. So the whole Bluestone platform certainly did. So far the Link platform is. So we're seeing things come at us faster on Link than we had anticipated. And so our take for Link is everything we've seen there is positive. So if we think we can do another of those, and we like the investment then our history would suggest that they're fruitful places to firm up and fill out the growth plan that we shared with you.

Other area that we're seeing strength in at P&I is our steel business. With the surge in steel production, we're seeing the value for coke that we produce go up this year. And we expect that that will provide some value next year as well.

And then long-term with P&I, I think Jerry mentioned this, that we continue to add cogeneration projects. And I think in part that's a reflection of the positive natural gas environment in the United States and the confidence that industrial producers have in that fuel. On top of that, there's a real push nationally to bring some renewable into natural gas, that's true both at the federal level through the EPA and in various states. So for example, California has a renewable natural gas push in the transportation sector. And currently there the sector is short supply, so it's providing favorable dynamics. And so in this renewable natural gas space, which as an area we haven't been doing it as renewable, but we've been doing waste methane capture for decades. It's an area we have the skills for, but it's one of these niches that I think we've stepped into that has some very favorable growth wind behind it. So we think that's going to be an attractive area for us to grow, and is one of the things that's convinced us that the $70 million number that we've been communicating for the last couple of years feels conservative now. And then we think we're going to materially beat that.

Got it, excellent. Can you comment a little bit on the utilities then, I mean you obviously alluded some incremental capital spend specifically to the renewables program, et cetera. You delineated a capital plan through '22 for electric and gas of 10-4 and 2-1 respectively previously. Can you elaborate just where you stand relative to those perhaps as well just to kind of give me some…

We'll give you a full capital kind of re-stack later this year. But I can say that the voluntary renewables has added about $450 million of renewable investment to the plan that we communicated previously. And we also have the item Jerry mentioned, which is the acceleration of the gas main replacement as additional to the gas plan. And that's a program that as we further look at both operating impacts, environmental impacts of an old system, we just think we've got to move and get that system fixed and modernized. So that's an acceleration as well.

Got it, excellent. And then lastly on the GSP segment, just to make sure I'm understanding what you're saying. Obviously the Link would be incremental. How far above plan are you when you talk about your original Link investment that you talked about and/or anything else? I mean is there anything new that we should be considering in the context of the 2022 CapEx plan and earnings growth target range?

Well, I guess I would say that we're multiple years ahead of plan. So in 2018 we kind of sit where we thought we might be in terms of volumes and so a couple of years from now. And I'd say we've more than locked in our base case and are now working on upside to that. So we got to continue to produce good results there, but it's a lot better than being behind, I'll say that, to be well ahead of plan. And the dynamics there continue to be positive. I mean we bet on the asset because the reserves are such high quality, and that's what's playing out. The nation continues to deplete and needs to drill to replace production. And this is a very good place to do that. So, one of the producers there substantially increased plans versus what we thought they would do in our pro forma and it's accruing to our benefit.

Excellent. All right, guys, thank you so much.

Thanks, Julien.

Thanks, guys; really impressive results all the way around the horn.

Thank you.

I understand that you all are quite confident in the long-term plan. However, when considering the earnings base for your target of 5% to 7% growth through 2022, I would like to clarify how you're approaching this. Given the cyclical nature of the steel business and the challenges the REF business may face, it’s important to understand the base you’re using to set that target. I am concerned that investors might not fully align with your long-term vision, particularly due to the cyclicality in steel and potential declines in the REF segment. Additionally, there may be some cyclicality in Midstream. I just want to ensure we grasp the contrast between the starting point and endpoint so we can adjust our expectations accordingly.

So we're still guiding off of where we always have, off the initial guidance we gave you for 2018. And we're clearly seeing a very strong earnings performance this year. So if you look at GSP, for example, I mean our guidance year-over-year is up over 40%. And that business is not going to be up 40% every year. So we're not guiding to that. But it's great to see your long-term plans evolve at the front end of your investment period because it brings certainty and allows you to move on and focus on adding to that rather than trying to peruse what you hoped you could. So yes, we're still guiding to 5% to 7% off of our initial guidance from this year and 2022. And we know that, for example, in GSP, there may be times when we bring a lot to the table in a particular year. And some year down the road may be slower. But that's fine as long as the overall growth rate is good. And P&I, yes, we've talked about REF and the sunset there, and harvesting cash flows from that business. We've been talking about that for five years or more. So that's not news. But you mentioned steel. That is a business where I think the breezes are generally good, so people talk a lot about tariffs where the prices for domestic steel are up some 20% and we are seeing increased production. Probably gives us an opportunity here as we see that strength to bring some contract term to some of our positions, so we'll be looking to do that. And then some of the other businesses, cogen and REF, those are all businesses where we see longer-term trends.

Yes, I wanted to mention that the steel business is providing us with some advantages, and it already is. However, the main growth in P&I is driven by long-term contract asset investments. This growth is particularly tied to the cogen deals we are pursuing, and we are very close to finalizing another one this year. Additionally, the RNG deals represent more asset investments with long-term contracts. So if you were to analyze where the growth in P&I will come from, it will primarily stem from these two types of investments.

Yes, but that's what I thought. I just wanted to get a sense. You're actually replacing over time some of these more cyclical revenue streams with longer-lived assets with more predictable revenue streams. Is that your summary?

We mentioned last year, perhaps even earlier, that in order to meet our long-term growth plan for P&I, we required $70 million in recurring earnings, which included $45 million in incremental earnings. Last year, we achieved $15 million of those incremental earnings, and this year we expect to secure another $15 million. We are now two years into our five-year plan and have completed two-thirds of it. The fundamentals are more promising than they were a year or two ago. When we consider all of this, we believe P&I will contribute positively to reaching our growth target of 5% to 7%. Overall, the outlook is more favorable than it was a year ago.

Okay, thank you guys. I appreciate it. Have a good day.

You as well.

Hi, actually it's for Michael.

All right, good morning.

Good morning. I wanted to revisit the pipeline segment. It showed strong performance this quarter and in the first half, but what are we expecting going forward? It seems to suggest a weaker second half compared to the first half.

Well, we've raised guidance in this sector, as Peter and Gerry had mentioned for the balance of the year, so we're not predicting a lower second half.

Yes, the second half is going to be strong just like the first half, which is why the guidance is up so strongly. And I mentioned the 40% growth rate year-over-year, some of that's taxes, but some of it is just fundamental volumes on our various platforms. So we expect a strong second half of the year as well.

So, so far is any one-time non-repeating items in this first half?

No.

Yes, not in the Gas Storage & Pipelines, there is no…

Okay.

No, I would say the only one-time non-repeating item that I've mentioned is 40% growth. And I don't expect to see that repeat here.

Yes, I mean as Gerry mentioned, yes, there was the tax change that you'll see, the one-year bump around the tax reform, a lower corporate rate.

Yes, okay. Thank you very much.

Thank you.

Good morning. Congratulations on the quarter, not so much the Tigers.

Cleveland is going well, so…

Just to follow-up on that, I mean the first quarter you said the unregulated businesses were coming swinging and you pointed to the top end. And now with the second quarter under your belt you're actually raising guidance. Is there any conservatism built in there for the second half of the year?

You mean do we have any contingency left?

Yes.

Yes, we have some room left if we were to run into unfavorable weather or storms, et cetera, we could cover those.

I was wondering about the unregulated businesses. How much more strength are you anticipating for the second half of the year, and is there potential for additional growth?

Yes, Paul, this is Peter. In terms of the guidance for non-utility, no, we're feeling really good where we're at right now with our non-utilities segments. As Gerry mentioned, that we do have contingency still in our Utilities segment, depending on how weather plays out, we may have upside overall to guidance whether it'll be coming from our utilities segments.

We discussed the weather patterns in the second quarter, noting a cold April and a hot May, with June and July being warm as well. July continues to be warm, which has been favorable for us. This positive weather impact adds strength to our utilities, helping us with the contingencies we mentioned. We might also see some additional benefits from the non-utilities, but we will need to see how the rest of the year unfolds. We're providing you with the best guidance we can at this time.

Thank you, Peter.

We appreciate you all joining us today. We have very positive long-term outlook, and we are determined to meet the goals we have set for ourselves.

Well, again I want to thank everybody for joining the call. As I said at the beginning of the call, we had a great first half of the year. And our increased guidance shows that. The second half of the year as I mentioned, I think we are really well positioned also. So I think you will see some really surprises, 2018 will be a strong year. I also feel really good about the position that we are in to continue the track record of delivering premium results that we have shown over the last 11 years. So we look forward to providing you with updates as we move through the year and as we move through our longer term plan. Thanks for joining. We look forward to talking to all of you soon.