DTE Energy Company (DTE) — Q1 2019 Earnings Call Transcript

Thank you, Rachel, and good morning, everyone. Before we get started, I would like to remind everyone to read the Safe Harbor statement on page 2 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 the management team to call on during the Q&A section. Now, I’ll turn it over to Gerry to start the call.

Thanks, Barb. Good morning, everyone. Thanks for joining us today. So this morning, I will give you a quick recap of our performance in the first quarter. And then I will turn it over to Peter to provide a financial review, and then Jerry Norcia will take you through some of our investment activities, a bit around our long-term growth, and then we'll take your questions. So I'm going to start on slide 4. We continue to make good progress on several key fronts. First of all, I'll just start by saying that our first quarter financial results were strong. They added materially to the contingency that we have for the balance of the year. We came into the year with contingency and we've added to that in the first quarter. Given that, with a quarter behind us in 2019, I'm really confident that we're well positioned to deliver on our financial plans this year and extend our streak of being able to meet our commitments to you. Longer term, as you know, we continue to target 5% to 7% operating EPS growth through 2023. Just as a reminder, our initial guidance for 2019 is the starting point for that growth. A big part of consistently reaching our financial goals is our workforce and our company's culture. I'm pleased to say that just about a month ago, we received Gallup's Great Workplace award for the seventh consecutive year. Gallup has been in this business for a long time, decades. Over that time period, only 10 other companies in their global database have ever received seven of those awards in a row. It speaks volumes about the focus and mindset of our people, and I'm really proud of that accomplishment. As we look forward to the next five years and continue to invest heavily in our capital plan, we also remain committed to maintaining a strong balance sheet. Our plans call for us to issue between $1 billion and $1.5 billion in equity over the next three years, with up to $250 million of that this year. Peter will talk a bit more about that in a few minutes. I'm sure you are all also aware that the State of Michigan is in the midst of a fundamental transformation in the way we generate electricity. In line with that, last month, we filed an integrated resource plan in which we laid out our thoughts on how we will generate electricity in the future. The IRP, which was submitted to the Public Service Commission on March 29, outlined the steps that we will take over the next five years and beyond to transition to a cleaner generation mix. We will do this by adding substantially more renewables, increasing our energy efficiency investments, and retiring our coal plants sooner than we had previously announced. For context, in early 2017, we were one of the first energy companies in the industry to voluntarily commit to reducing carbon emissions 80% by 2050. Our plan over the last two years has evolved, and we've accelerated that commitment by a decade. The IRP lays out our intention to reduce carbon emissions 80% by 2040, with a commitment to a 50% carbon emissions reduction by 2030 and a one-third reduction by 2023. I'll talk more about our IRP in just a minute. In our gas utility, DTE Gas, we're accelerating the pace of gas main renewal, investing an additional $450 million in capital over the next five years. This will reduce the timeframe to complete the main replacement program from 25 years to 18. As the weather has warmed, our team has begun spring and summer gas main replacement activities. In our gas storage and pipeline business, we're moving towards completing our acquisition of the Generation Pipeline, which should be finalized in the second half of this year. This acquisition fits well with our strategic growth plans for NEXUS and aligns with our goals in Ohio, especially Northern Ohio, as well as Michigan, Chicago, Ontario, and other markets with Marcellus and Utica gas as those resources continue to grow. In our power and industrial business, we continue to make progress in developing both industrial energy services projects and new renewable natural gas (RNG) projects. We are finalizing agreements for two new RNG projects to be incremental to the projects we've developed in recent years. We also expect our Ford Motor Company cogeneration project to become operational in the fourth quarter of this year. Construction is moving ahead at a fast pace on that project, and we're also finalizing the acquisition of a new cogeneration project that Jerry, our COO, will describe shortly.

Thanks, Gerry. Good morning, everyone. For a change, I always like to give an update on the Detroit Tigers, and if you hear a smile in my voice here, it's because we won both games of a doubleheader yesterday against the Red Sox. We are above 500. It's an exciting start to the season, and hopefully we can build on the wins we've had here in April. Let me turn the attention now to the financial results for DTE. I'll start the review on slide six. The first quarter came in strong with earnings at $374 million. This translates to $2.05 per share for the quarter. You can find a detailed breakdown of EPS by segment, including our reconciliation to GAAP reported earnings in the appendix. Starting with our utilities, both benefited from a cold start of the year compared to last year. The results of our electric utility show DTE Electric earnings were $147 million for the quarter, which is $5 million higher than the first quarter of last year. This increase is driven primarily by colder weather and the impact of new rates implemented last year. Our electric business also had higher operations and maintenance expenses, increased depreciation, and other expense-related items to rate base growth. DTE Gas had first quarter 2019 operating earnings of $151 million, which is a $40 million increase from the first quarter of 2018. The earnings increase is primarily driven by the impact of new rates implemented late last year and colder weather. Additionally, there was approximately a $10 million tax timing item that we reversed in the second quarter of 2019. The operating earnings for our Gas Storage and Pipeline business segment were $48 million for the quarter, which is down $14 million compared to the first quarter of 2018. This quarter's results are in line with our 2019 full-year guidance. Last year, we had one-time positive earnings related to AFUDC earnings at NEXUS as well as returning to normal gathering volumes this year. For our power and industrial business segment, operating earnings were $26 million, which is $16 million lower than the first quarter of 2018. This decrease is primarily due to the REF tax equity transactions that occurred in the fourth quarter of 2018. Previously communicated, we entered into equity partnerships in our REF units and accelerated cash flows of about $100 million per year for the next three years to support other growth projects. This has lowered earnings this year by around $40 million compared to 2018. Most of our newly originated P&I projects will start adding to earnings late this year and early next year. Our Energy Trading business had operating earnings of $5 million, marking an earnings increase of $4 million from last year. Our trading segment achieved particularly strong performance with its power portfolio this quarter. The appendix contains standard energy trading reconciliations showing both economic and accounting performance. Finally, corporate and other results were $13 million favorable compared to the first quarter of last year due to the timing of taxes. Overall, DTE earned $2.05 per share in the first quarter of 2019, which is $0.14 higher than the first quarter of last year. Let's move to our balance sheet on slide 7. We expect to issue between $1 billion and $1.5 billion of equity over the next three years, including $250 million this year. Year-to-date, we've already issued $150 million, mainly contributing to our pension plan in March. Our credit metrics are well within the targeted ranges set by the rating agencies, so we continue to maintain a strong balance sheet, supporting our capital investment program and growth plans, which positions the company to maintain a strong investment grade credit rating. With that, I'll hand it over to Jerry Norcia, who will go over our utility and non-utility growth projects.

Thanks, Peter. As Gerry mentioned, DTE had a strong start to the year, and we continue to build on our solid long-term plan. I want to highlight several significant achievements of both our utility and non-utility businesses. I'll start on slide 8. In January, the Michigan Public Service Commission approved DTE's proposal to expand our Michigan Green Power program for businesses and industrial companies, thus improving the renewable energy program Gerry described. This program is now available to all DTE customers, including residential, commercial, and industrial customers. In February, we launched our operating Wind Park in Michigan, which is DTE's most cost-effective wind project to date. The 65 turbines will provide enough clean energy to power more than 50,000 homes. Last summer, we broke ground on our Blue Water Energy Center, which is our natural gas combined cycle power plant that will help us meet our goal of reducing carbon emissions. Gerry highlighted the fact that Michigan is undergoing an energy transformation and how our recent IRP filings define how we will transition our generation fleet to cleaner energy. That plan provides for necessary home-grown 24/7 power at times when renewable resources aren't available, while also aggressively growing our renewable energy portfolio. As for our gas utility, DTE Gas has begun implementing elements of the recently approved rate order, including our accelerated main renewal program. I am very pleased with the progress of this program, which will ramp up significantly now that the weather has improved. Additionally, we announced plans to reduce methane emissions from our gas utility by more than 80% by 2040. We have made good progress so far, achieving a 20% reduction through 2018 from our baseline. We are also leading an industry coalition aimed at reducing methane emissions in the supply chain of pipes and producers. Now I'd like to update you on growth opportunities at our gas storage and pipeline business. In our year-end call, we announced that NEXUS is acquiring Generation Pipeline in a 50-50 partnership with Enbridge. This is an example of an add-on business that aligns directly with GSP's long-term growth strategy. Millennium Pipeline recently completed a 0.2 Bcf per day expansion in the first quarter, bringing the total capacity to 1.2 Bcf per day. We have numerous additional expansion opportunities within our gathering and transport platforms. NEXUS and Link continue to perform well, with NEXUS contracted to approximately 900 million cubic feet per day under long-term contracts, drawing around 1.2 Bcf a day. The balance of those contracts are short-term contracts. On the industrial energy side, we are seeing progress in the development of both industrial energy projects and renewable natural gas. The RNG market is poised to continue its growth trajectory into the future. We are finalizing agreements on two new greenfield RNG projects and are in advanced discussions to secure additional RNG projects this year. Along with the Ford Motor project, we are in late-stage negotiations on additional cogeneration projects. We will provide details on these as they progress and move towards closure. Our P&I queue continues to remain very strong.

To wrap up, I feel great about our first quarter results and our position to continue our growth in the years to come. Our utilities continue to focus on necessary infrastructure investments, specifically in clean generation and improvements to reliability and the customer experience. Our non-utility businesses continue positioning us for growth. Our balance sheet is strong, and we have solid credit ratings. I'm confident that we are on track to continue delivering on our long-term 5% to 7% operating EPS growth rate. We feel good about our ability to continue to provide the premium total shareholder returns that we've delivered over the past decade. With that, I would like to thank everyone for joining us this morning. Rachel, you can open it up for questions.

Hi, good morning, guys. It's actually Constantine for Shar, who had to hop on another call. Congratulations on good earnings. Just one quick question for you, Gerry, thanks for going over the business growth at GSP. You mentioned that there's a mix of greenfield and gathering opportunities and some potential strategic acquisitions in the future. In terms of thinking about how you're going to deploy capital into that business, what's the mix there and how are you thinking about it?

Our first priority is always organic growth. What we're seeing right now is significant organic opportunities in our existing platforms. The Generation Pipeline is an example of that, as we close on that and then move to connect it with NEXUS, it will be a great market sync for that pipeline. We also have several other opportunities across all our platforms that we're pursuing, and we feel really good about those. Most of those are organic in nature, either connectors or expansions. Additionally, we see opportunities for strategic asset acquisitions that connect to these platforms, which we will also pursue.

And magnitude-wise, do you think it's going to be closer to something like generation or slightly bigger, just considering the overall $4 billion to $5 billion number over the five years?

Right, I think we're focused on building out that opportunity set, and I can tell you that we're in line with our guidance this year in terms of growth capital for both P&I and GSP, and feeling really good about that opportunity pipeline. As we secure those, we're securing EPS growth for the future.

In addition to that, the things we've looked at for acquisitions range anywhere from the scale of Generation Pipeline to the scale of Link, with a wide range in between. Our capital numbers focus more on value and accretion than a strict capital number, and earnings number.

Okay, and just a quick follow-up on the GSP business. You mentioned a mix of shorter-term contracts on NEXUS. Is there a plan to fill that with longer-term contracts, or are the economics currently favorable enough to keep it as it is?

Certainly we're looking to move the balance of the capacity to longer-term contracts. We feel optimistic since the basin we operate within continues to grow at 5% to 6% per year, which is significant. Additionally, we're seeing some other pipelines facing strong headwinds in terms of going into service. It's an opportune time for us to secure long-term contracts at favorable pricing.

I would say we remain consistent with what we've communicated for nearly a year, predicting the base to go short takeaway in the early 2020-2021 timeframe. If any of the pipes in the region delay or remain unbuilt, it intensifies that dynamic.

Great. That's really great color. And just one last question on a more strategic end, as you mentioned the 25-75 non-regulated to regulated business mix. Is that the target going forward over the next five years?

Yes, as we model forward, that's where we keep landing.

And the IRP, I assume, supports some of that growth on the regulated front?

Yes, that's right. The IRP, along with voluntary renewables, supports growth while we’re engaged in a significant capital replacement program in both gas and electric distribution. This keeps the mix at roughly 75-25.

Okay. Perfect. Thanks. That's all for me.

Thanks so much. Hi, guys. I wanted to understand from an economic perspective on coal plant retirements. Most utilities realize customer bill benefits from these retirements. How do you see that play out in your IRP? Do you foresee customer bills remaining flat, or possibly increasing?

Regarding our bills overall, our goal is to keep rates increases to low single digits as we invest in distribution and generation. We believe we'll be able to achieve that. In regions where wind costs are competitive, there certainly can be benefits to the bills. We’re focusing on bring renewables in alongside modest increases, and we believe we can keep overall bill increases affordable.

Understood. So while the impact isn't as significant, it remains manageable within the current plan?

Correct. We wouldn't be committing to reductions of 50% and 80% if we hadn't modeled that it would be manageable from both a price and reliability perspective. We've invested a lot of time studying this, and it's absolutely workable. Furthermore, technology is likely to evolve in ways that make this transition more manageable and possibly happen sooner than anticipated.

That's interesting. You mentioned voluntary contracts; do you expect those to accelerate the pace of transformation? How does that impact the bills of those who sign up for voluntary contracts?

The contracts are established with customers individually, and these customers are funding their renewables. The balance of customers doesn't cover those costs. Our commitment is that at least 25% of our supply will come from renewables by 2030. These voluntary contracts may boost that to around 30% for our state. The renewable energy credits from these projects are allocated to those specific customers only.

Got it. Thanks for that. Final clarification: on the gas business, the $40 million increase in Q1 2019 versus the same quarter in 2018, was growth derived from rates or some other factors?

We've had a strong start to the year. You mentioned several factors, including weather variability and tax items. Half of that $40 million increase relates to weather and tax timing year-over-year. The other half is more permanent. A recent rate case has facilitated new orders and higher rates, allowing us to enjoy a disproportionately large share of that in the first quarter since most annual volumes occur during that period. There’s also NEXUS-related revenue that benefits the utility customers.

NEXUS has enabled valuable investments in the utility, which also benefit utility customers. The increase is due to the new rate case internalizing new capital in the rate base and the NEXUS impacts.

Thanks so much, guys. Appreciate the detail.

Thank you.

Good morning, everyone. I wanted to follow up on the IRP discussion and clarify what's currently reflected in your CapEx budget. There have been updates and accelerated timelines as mentioned in the IRP. How does that reconcile?

The IRP is quite specific for the first five years, consistent with the plan we laid out at EEI last year, including our Blue Water Energy Center and the renewables needed to meet our 2021 commitment under the RPS. We also have voluntary renewables in the plan, with 600 megawatts planned, and we're already over halfway there just one quarter into the first year.

Understood, thank you. And what about pursuing midstream acquisition plays? Are you still exploring options there?

As mentioned earlier, we’re looking at a range of potential acquisitions, both organic and for those that can support our ongoing projects. We're actively pursuing all opportunities.

Hi, good morning. Just following up on the IRP, specifically regarding the mix between DTE Electric ownership versus PPAs, particularly for wind versus solar. Does wind represent a more compelling utility-owned proposition against solar over the next five years in Michigan? Or is there not a significant difference?

During the timeframe from 2008 to 2016, there was no substantial evidence showing that third parties could bring renewable capacity more cost-effectively than us. So the legislature passed in '16 allows utilities to own 100% of renewable capacity. We believe we can manage that at or below what third parties can do. For now, that means wind, but we believe solar will follow suit as tech improves.

I wanted to shift gears and ask about RNG projects. Are there any updates on the cogeneration project acquisition?

The cogeneration project we're discussing is an existing operating facility with long-term contracts, which we feel good about.

Operating costs advantages are also critical given our team's experience managing these assets efficiently.

Hey, a couple of questions on the electric rate case regarding the infrastructure recovery mechanism. If it isn't approved, how does it affect subsequent filings?

One proposal is to set up a workgroup to finalize the IRM details rather than using the rate case to wrap it up. I think there's strong support for the mechanism as we pursue reliability and grid modernization.

There's been really strong backing for our investment profile over the next five years, and we expect this mechanism to move forward in a reasonable timeframe.

On the gathering and processing side, any updates on volume growth expectations for the next few years?

We expect the Appalachian Basin to grow at 5% to 6% over the next decade. Our assets are well-positioned to capture that volume growth.

Link continues to perform well, and we are on track with current drilling activity around our assets confirmed by our plan for this year.

I think the last update indicated 80% contracting. Is that still a fair representation?

We're seeing gradual increases in the levels of contracts, and as we continue to build out, we'll provide updates moving forward.

Right, finally, any updates on the P&I side relative to the $15 million in growth you're targeting?

We're exceeding our expectations in P&I and have most of our growth locked in for this year with strong outlook for the upcoming periods.

Thank you.

Thanks, good morning. Regarding the GS&P first quarter results and the decline in earnings, did this align with expectations mainly due to Atlantic Sunrise?

Yes, last year's strong results were partially boosted by events tied to NEXUS. The $14 million drop aligns with our guidance for these segments. We predict ongoing contracted growth to help achieve our goals.

The first quarter results aligned with our planned expectations for the year.

The IRP doesn't highlight a significant commitment to battery storage. How do you view the landscape for this technology?

Michigan has a robust storage solution with our Lamington pump storage facility, which can handle many short-term fluctuations introduced by renewable sources. We see opportunities for battery storage on a smaller scale for niche applications within our distribution systems.

Thanks for the insights.

Good morning, guys. Just checking back on the cogeneration acquisition and your focus on developing new opportunities; is this still the direction or was this truly an opportunistic move?

Your assessment is accurate. We are focused on developing greenfield projects continuously, while also monitoring opportunistic acquisition opportunities.

Are there more acquisition opportunities on your radar?

Yes, we have a broad array of organic and acquisition opportunities we’re examining. We will actively pursue favorable scenarios.

Good morning! Appreciate you taking my questions. Firstly, could you clarify the voluntary renewables program regarding ownership in the rate base?

Contracts in this program are signed with individual customers on five-year terms; if expired, they revert to the rate base. The arrangement behaves as a utility asset while ensuring negotiated returns that resemble rate-based ROEs.

Would you say most growth will come from the residential and commercial sectors resulting from commitments from large companies?

Yes, most of the growth is likely to stem from those sectors. However, the overall feedback from various customers may result in growth across a broader range of segments.

Lastly, regarding the midstream gas market, should tightness in takeaway capacity be needed to hit your 2023 targets or would that represent possible upside?

We believe NEXUS is running full from a contractual perspective. We anticipate favorable pricing and long-term contracts to emerge, attributed to the basin's growth.

As we mentioned, producers will benefit from increasing long-term demand, and producers in the area will continue generating growth beyond current expectations.

Thank you for the insights!

Thank you.

Thank you for joining the call. We're off to a good start for 2019, and we feel we're positioned to have a strong year. We believe we have an increased certainty of outcomes for 2019, and we're looking forward to adding 2019 to a decade of meeting our forecasts and earnings commitments. We look forward to giving you further updates mid-year and beyond alongside the numerous investment opportunities we've outlined. Thank you again, and I look forward to talking to you soon.