DTE Energy Company
Q2 2016 Earnings Call Transcript

Published: 26 Jul 2016

[Operator:]

Good day and welcome to today's DTE Energy Second Quarter 2016 Earnings Release Conference Call. Today's conference is being recorded. At this time, I would like to hand the conference over to Barb Tuckfield. Please go ahead.

[Barbara Tuckfield:]

Thank you, Stephie and good morning, everyone. Before we get started, I would like to remind you 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 earning which is a non-GAAP financial measure. Please refer to the reconciliation of GAAP net income to operating cost provided in the appendix of today's presentation. With us this morning are Gerry Anderson, our Chairman and CEO; Jerry Norcia, our President and COO; and Peter Oleksiak, our Senior Vice President and CFO. We also have members of the management team with us to call on during the Q&A session. And now, I'll turn it over to Gerry to start this morning's call.

[Gerard M. Anderson:]

Well, thank you, Barb, and good morning, everybody. Thanks very much for joining us. I'm going to start with an overview of our results in the second quarter, as well as some key developments of the company over the past quarter. Then, I'm going to turn things over to Peter for a financial update. Then we'll wrap up and take some Q&A. So moving on to slide five, we continue to make good progress on a number of fronts this year. So with a successful first half of the year under our belt, I feel really good about our year-to-date financial results. And based upon those strong results, we're increasing our operating earnings per share guidance. We'll talk a bit more about that in a minute. We also recently increased our dividend for the seventh consecutive year, which continues the over 100-year history of issuing dividends as a company. Rachael Eubanks was appointed by Governor Snyder to serve the remainder of John Quackenbush's six-year term that expires about a year from now, July 2, 2017. Her experience is in the area of finance, so it includes project finance, municipal bond refinancing, credit-enhanced financing, variable and auction rate transactions and so forth. She also, over her career, has provided investment banking support on financial advisory and investment engagements for state government, government authorities, municipalities and non-profit organizations. So as we look forward in Michigan to a really heavy period of investment in our infrastructure, I think that her understanding of finance will be a good complement to the skills of the current commissioners. And we certainly will have somebody there who understands cash flows, balance sheet issues and so forth as a company that goes through heavy investment period. Thanks to the hard work of our employees. For the third consecutive year, DTE was ranked second in the Midwest by J.D. Power in overall Electric Residential Customer Satisfaction, that's in the large utility category. And this was our sixth consecutive year of being in the top quartile of that survey. We also achieved our best safety record in the company's history in the first six months, and that was by a wide margin, which I'm particularly proud of. I think it says something about where our employees' heads are, and if we can keep this performance, we may just be the safest company in the industry this year. And earlier this year, we won our fourth consecutive Gallup Great Workplace Award, and our results placed us in the top 12% of companies worldwide in terms of employee engagement. On the NEXUS front, that pipeline continues to progress. The project reached another important regulatory milestone, which sets us up nicely, to meet our in-service fee late next year. So I'll talk a bit more about NEXUS and those developments in a few minutes. So I'm going to move on to slide six and give you some color on our second quarter financial results. So in the second quarter, we built upon what were really positive first quarter results. We delivered second quarter earnings per share of $0.98, which I feel great about. As you know, we came into this year expecting warm weather, we planned for it, and that played during our first quarter results. And we, based on the first and second quarters, come out of the first half of the year, very well positioned. And we now have the potential to reinvest some of the weather-related favorability that may occur in the third quarter. We're seeing a hot July. And there's a warm August projected as well. So given the strong results of the first half of the year, we're increasing the midpoint of our guidance by $0.12 from $4.93 to $5.05. And given that, we now have a solid path to achieving our 10th consecutive year of meeting or beating our earnings targets. We've also been growing our dividend along with earnings. And we just recently increased the dividend by $0.16 per share. And our balance sheet continues to be in great shape. So bottom line, I feel really good about our financial position as we head into the second half of 2016. So moving on to slide seven for a little more color on earnings and dividend. We talked for years to investors about delivering 5% to 6% annual earnings per share growth, and then pairing that with healthy dividend growth. Now, on the right-hand side of the slide, in the ovals, you can see that our actual earnings per share growth over the past five years or so has been 6.5%. So really 1% above that 5% to 6%. And we have grown our dividends at 5% to 6% rate. I also mentioned a minute ago that we're increasing guidance, from a midpoint of $4.93 to $5.05. Fundamentally, this is driven by a strong performance in our Electric business and in our Gas Storage & Pipelines business, as well as a very solid first half in our Energy Trading operations. As I stated a minute ago, in keeping with the commitment to grow dividends with earnings, we increased our dividend per share from $2.92 to $3.08, which was a 5.5% increase. So I'm going to move on to slide eight now, and discuss a significant development related to our power plant fleet that occurred in the second quarter. So in June, we announced closure plans for eight coal-fired-generating units. And this announcement, combined with our decision to cease operation at three coal-fired plants, which happened in April, means that we will replace 11 aging coal-fired generation units at three sites, totaling 2.5 gigawatts, on or before 2023. Much of this coal baseload generation will be replaced with natural gas generation. But we also intend to continue to invest in wind and solar to ensure that we keep the mix in our portfolio that we want. This portion of what is a longer-term transition plan for our fleet will require about $3 billion of investment. By 2030, we'd expect to retire an additional 1 gigawatt of coal-fired generation, which would bring total retirements to 3.5 gigawatts. And in doing that, our reliance on coal would decline by about 60%. And we'd expect to roughly double our current 10% renewable capacity, and to use more gas-fired generation in a baseload role (8

[Peter B. Oleksiak:]

Thanks, Gerry, and good morning to everyone. I'd like to start with slide 11. Gerry mentioned DTE's operating earnings for the second quarter were $0.98 per share, and for reference, reported earnings were $0.84 per share. For a detailed breakdown of EPS by segment, including a reconciliation to GAAP reported earnings, please refer to slide 24, in the appendix. Slide 11 shows our quarter-over-quarter operating earnings by segment starting at the top of the page with the two utilities. Now, we experienced unusual weather this quarter which gave a boost to both utilities. April was colder than normal, while May and June were warmer than normal. Now, this unusual weather in the quarter created both heating and cooling load causing earnings for both utilities to be up quarter-over-quarter. DTE Electric's earnings were $135 million for the second quarter of this year, compared to $111 million last year. Offsetting the weather in last year's rate case, DTE Electric's earnings were lower due to the absence of the revenue decoupling mechanism amortization in 2016. You may recall, this revenue decoupling amortization was part of our strategy that extended the timeframe in between rate cases by four years. We've increased guidance for this segment given the warm weather through June. A further breakdown of DTE Electric's quarter-over-quarter results can be found in the appendix on slide 19. For DTE Gas, earnings for the second quarter were $13 million compared to a loss of $7 million last year. The variance was due to cooler weather in April of this year, increased revenue related to our infrastructure replacement program, and planned initiatives in response to the warm weather we experienced in the first quarter. As we discussed in our first quarter call, we entered (13

[Operator:]

Certainly. Thank you. We will now take our first question from Michael Weinstein (20

[Unknown Speaker:]

Hey. Go Tigers. Good morning.

[Peter B. Oleksiak:]

Good morning.

[Gerard M. Anderson:]

Good morning.

[Unknown Speaker:]

First question is about the $3 billion of additional investment from the retirement of coal generation by 2023. That's correct?

[Gerard M. Anderson:]

Yeah. The timeframe – so we're going to work through (21

[Unknown Speaker:]

Is that part of the $18 billion that you had previously announced for 10 years?

[Gerard M. Anderson:]

Yes.

[Unknown Speaker:]

Okay. So that number of $18 billion doesn't change?

[Gerard M. Anderson:]

That's correct.

[Unknown Speaker:]

Okay. And on NEXUS, I just wanted to – I think you mentioned this, but could you reiterate the level of interconnect agreements versus the capacity of the pipeline, and also how those interconnect agreements are being converted over to full contracts?

[Gerard M. Anderson:]

Yeah. The pipeline is 1.5 Bcf, and the interconnect agreements are 1.75 Bcf. Those interconnects are independent of what we already have contracted on the pipeline (22

[Gerardo Norcia:]

Sure. Thanks, Gerry. So right now, the pipe is two-thirds full, and the environment, as we see it, is starting to improve significantly in that region, in the production region that NEXUS serves our gas pipes (22

[Unknown Speaker:]

Okay. Thanks. And now, hey, one last question. You're going to – you mentioned that you might push off the equity raise this year, but I noticed in the guidance, the share count isn't different. That's obviously just for convention, or...?

[Peter B. Oleksiak:]

Yeah. We are still planning on the $100 million, but we're really monitoring that the summer regular the (23

[Unknown Speaker:]

All right. Thank you very much.

[Gerard M. Anderson:]

Thank you.

[Operator:]

Thank you. We will now take our next question from Shahriar Pourreza from Guggenheim Partners. Please go ahead.

[Shahriar Pourreza:]

Good morning, everyone.

[Gerard M. Anderson:]

Good morning, Shar.

[Shahriar Pourreza:]

So just on the NEXUS, the additional conversations you're sort of having in the Midwest, can you just maybe disclose whether that's with shippers or additional LDC or electric demand?

[Gerard M. Anderson:]

I guess, primarily with other LDCs.

[Shahriar Pourreza:]

Yeah.

[Gerard M. Anderson:]

(24

[Shahriar Pourreza:]

Okay. Got it. And it's too early to figure out whether this thing can be upsized to a little over 2 Bcf?

[Peter B. Oleksiak:]

Correct.

[Gerard M. Anderson:]

Yeah. That will be later. I think step one is, bring it in, get it well contracted for current capacity. And step two then is to take on expansions. And expansions, as we've talked in the past, they always bring good economic value.

[Peter B. Oleksiak:]

One of the things that we're finding, that I'll add, is the – a lot of the pipelines that are greenfield pipelines, that are proposing to take gas out of this region, are facing significant delays and oppositions. And right now, our pipe is not faced with that. So we feel that we may be one of the first greenfield pipes to the market.

[Shahriar Pourreza:]

Got it. That's helpful. And then, just on the coal retirements; is there any more upside to that retirement, because even if you shift to the latter part of the decade, you'll still have a little over 3.5 gigawatts of coal, or is that sort of you see that envision within the portfolio?

[Gerard M. Anderson:]

So by the end of 2030, I think we'll have everything retired at our Monroe plant. The Monroe plant is the one plant that we invested in scrubbers and SCRs. It's a big plant, it's 3,000 megawatts. But that will be what remains, and essentially all the other coal will be retired and replaced through that plan of renewables and gas that I described.

[Shahriar Pourreza:]

Okay. That's helpful. And then just lastly, on the growth trajectory, on the earnings standpoint, how should we think about it off the higher base of $5.05? Is it sort of supportive? Are you comfortable at 5% to 6% growth off of $5.05, or still within that $4.93 is the base?

[Peter B. Oleksiak:]

We're indicating at this point it's off the original guidance. We'll continue to assess 2017 and beyond. But at this point, it's off the original guidance.

[Gerard M. Anderson:]

So that's been pretty much our pattern, is that our original guidance, if we exceed, we grow earnings off the original guidance than the prior year. But I guess, I'd just keep pulling you back to actual performance, which has been 6.5%. So I think, our pattern is pretty well established at this point.

[Shahriar Pourreza:]

Thanks. Solid results. Congrats.

[Gerard M. Anderson:]

Thank you. I appreciate it.

[Operator:]

Thank you. We will now move on to our next question from Neel Mitra from Tudor Securities. Please go ahead.

[Neel Mitra:]

Hi. Good morning.

[Gerard M. Anderson:]

Good morning, Neel.

[Peter B. Oleksiak:]

Good morning, Neel.

[Neel Mitra:]

I had another question on the NEXUS pipeline. You expressed that there had been a lot of support from Michigan, (26

[Gerard M. Anderson:]

So let me comment on the Attorney General first. If you watch sort of energy discussions and dynamics in Michigan, our rate cases and most things, it gets filed around energy. There's usually a challenge of some sort or another, put out by the Attorney General. You just need to understand whether or not the challenge really is fundamental. But it's still – that's just the way of saying not unusual or surprised (27

[Don M. Stanczak:]

So as Gerry indicated in his comments earlier, we've already put NEXUS in our PSCR cost recovery plan. I think it covers a five-year period, and of course, the first cost will actually incur within (28

[Gerard M. Anderson:]

And that was a case being reviewed, that I quoted from earlier, where the staff was (28

[Neel Mitra:]

Got it. Okay. And then my second question. Could you just generally comment on what's going on in the Power & Industrial segment? Is it seasonality, because right now, I guess, you're at $38 million of earnings versus $90 million to $100 million for the full-year, and then in the presentation, you commented on maybe some weaker steel offset by more positive REF earnings?

[Peter B. Oleksiak:]

Neel, there's two dynamics happening. Now, one of them you mentioned was the seasonality that will occur with our REF units, actually the first quarter with a little bit lower volumes given the warm weather, winter we're seeing actually reverse coming here in the summer with a hot weather we're experiencing. (29

[Gerard M. Anderson:]

I guess, one comment would be that, just as in the E&P sector, you're beginning to feel the turn there. Same in steel, that there you're beginning to feel the turn in the steel sector. So I think it begins to bode well for 2017 and 2018 as that sector gets some win behind it.

[Neel Mitra:]

Okay. Great. Thank you.

[Gerard M. Anderson:]

Thank you.

[Peter B. Oleksiak:]

Thank you.

[Operator:]

Thank you. We will now move on to our next question from Paul Ridzon from KeyBanc.

[Gerard M. Anderson:]

Hey, Paul.

[Paul T. Ridzon:]

Good morning. Congratulations on a solid quarter.

[Gerard M. Anderson:]

Thank you.

[Paul T. Ridzon:]

Just kind of pick up at DTE Gas. Just wondering how much of that is kind of leaning out the business in response to the first quarter?

[Peter B. Oleksiak:]

It is. It is basically all of that. You look at the year-to-date results, year-over-year they're relatively flat. We knew going into the year, we're going to have a warm first quarter that did play out, and we plan for the rest of the year to make it up. And the second quarter, the O&M levels, in particular, were down quite a bit that helped offset those first quarter earnings. One thing we're looking at right now given the strength in our Electric utility, and we always like to manage typically on combined utility bases that we essentially will start investing back into the gas utility and getting those O&M levels back to normal levels.

[Paul T. Ridzon:]

So if we look for the balance of the year at gas, as far as O&M, have you caught up kind of where you want to be?

[Peter B. Oleksiak:]

We still have some investment we're going to making for the balance of the year. We are still committed to the guidance range as well for that segment.

[Paul T. Ridzon:]

And then, if you were to expand NEXUS from 1.5 Bcf to 2 Bcf, that's just incremental compression. What would that involve and what's the capital opportunity?

[Gerard M. Anderson:]

Jerry, you want to take that?

[Gerardo Norcia:]

Sure. It would involve, to get to 2 Bcf a day, would involve some compression and some looping (31

[Paul T. Ridzon:]

And any sense of the capital?

[Gerardo Norcia:]

Not yet. That's something that we haven't worked out quite yet. We're trying to get to the 1.5 Bcf first, and then, I think, we'll quickly move to that 1.75 Bcf once the pipeline gets built, and people starts to get interested in more economic expansions.

[Paul T. Ridzon:]

And then lastly, is there anything going on behind the scenes in Lansing with regards to energy policy and legislation?

[Gerard M. Anderson:]

So we continue to work this summer with some of the principles. I think what's likely come fall is that there will be activity again in the Senate. Kind of running out of time there with all the dynamics in the legislature between plants and roads and Detroit schools and things. So I think, there will be activity in the Senate. And then there'll be a chance that something could get passed in the Senate in the session in September, but we'll see. And then, I think, everybody will watch the election, and see what the election dynamics mean for the Michigan legislature, with the possibility that we would pick back up and pass legislation in the lame duck session at the end of the year. So if legislation is going to pass this year, would be in the lame duck. I guess I'd keep reminding folks that this is not so much a financial discussion, in fact it's not a financial discussion, really doesn't affect our five-year plan. But it is an energy reliability discussion. And at some point or another, we need to get – we need to be clear on who is building power plants for 10% of the market, and right now the answer is, nobody. And until we get policy in place that ensures that somebody does it, there's risk of reliability issues for the state. So if it doesn't happen this year, it'll happen at some point when it becomes clear that we need to take care of that.

[Paul T. Ridzon:]

Thank you for the update.

[Gerard M. Anderson:]

You're welcome.

[Peter B. Oleksiak:]

Thanks, Paul.

[Operator:]

Thank you. Ladies and gentlemen, we'll now take our next question from Steve Fleishman from Wolfe Research. Please proceed.

[Steve Fleishman:]

Yeah. Hi. Good morning. The higher guidance for 2016 for the midstream segment, I might have missed this, but can you just explain what's driving that for the full year guidance?

[Peter B. Oleksiak:]

Some of that – we are seeing a strong earnings coming across the multiple segments and sub-segments in it, and projects within that. It's tightening the guidance, pulling up that bottom end of the range. So we are seeing strong results for the year, and so we're feeling comfortable now of pulling up that bottom end of the range.

[Gerard M. Anderson:]

What it doesn't include, Steve, is the increased drilling activity that we now expect. So I think (34

[Steve Fleishman:]

Okay. But, you noted that it does not include Southwest most recent announcement.

[Gerard M. Anderson:]

Correct.

[Steve Fleishman:]

Okay.

[Peter B. Oleksiak:]

(35

[Steve Fleishman:]

Okay. And then, one of the areas you've talked about for growth at P&I is co-generation. So I'm wondering if there's any update on new opportunities there.

[Gerard M. Anderson:]

I would say that the portfolio discussions there on co-generation is as full and interesting as it's been in years. And we don't have one to tell you about that's popped yet, but I think we all feel that, out of that portfolio discussions, we're going to have some that do play through. So we hope to be able to give you a positive update sometime over the next six months.

[Steve Fleishman:]

Okay. Thank you.

[Gerard M. Anderson:]

Thank you, Steve. I appreciate it.

[Operator:]

Thank you. We move on to our next question now from Brian Chin from Bank of America. Please go ahead.

[Brian Chin:]

Hi. Good morning.

[Gerard M. Anderson:]

Hey, Brian.

[Peter B. Oleksiak:]

Good morning, Brian.

[Brian Chin:]

Just piggybacking off, the Swinn (36

[Gerardo Norcia:]

We've seen two rigs move into the area that we're operating with Southwestern. So that's a very encouraging sign. So our expectation is that they'll continue to complete the ducks, as well as drill new wells with those two rigs.

[Gerard M. Anderson:]

And when you say sensitivity, you're talking about upside this year and what it means for next year. Is that what I'm hearing?

[Brian Chin:]

That would be helpful. Yes.

[Gerard M. Anderson:]

Yeah. I think that what we probably ought to do is, let our team get a better sense for kind of the pace of completions, and what we're seeing there put a fence over that (37

[Brian Chin:]

Great. And then, just going back to the...

[Gerard M. Anderson:]

(37

[Brian Chin:]

Understood. And then, just going back to the equity issuance question. So you gave a little bit more clarity on the equity issuance thoughts this time. Can you talk about, for the $200 million to $300 million equity issuance for the next two years to three years, should we be marginally shading our thought process on 2017 and 2018 as well, or do you still feel comfortable with the $200 million to $300 million in equity issuance over the next two years to three years?

[Peter B. Oleksiak:]

I'm still feeling comfortable with the $200 million to $300 million in the next two years to three years. It really does relate to the amount of capital spend we're spending at both our utilities and our non-utility business. So (38

[Brian Chin:]

Excellent. Thank you very much.

[Gerard M. Anderson:]

Thank you.

[Operator:]

Thank you. As there are no further questions in the queue, I will hand back to the speaker for any additional or closing remarks. Thank you.

[Gerard M. Anderson:]

We had Gregg Orrill. Did he sign off? We had heard Gregg wanted to come in with a question.

[Operator:]

He removed himself from the queue. Thank you.

[Gerard M. Anderson:]

Removed himself. Well, great. Well then, we're out of questions.

[Operator:]

Sorry for that. He just came back. Sorry for that. He just moved back to the queue. I will take his question now if you wish.

[Gerard M. Anderson:]

Pretty good.

[Operator:]

Perfect.

[Gregg Orrill:]

Thanks Gerry.

[Operator:]

(38

[Gregg Orrill:]

Two quick ones. On the DTE Electric variance analysis for the quarter, there was a negative $8 million around rate base and other. What was that, was that bonus depreciation?

[Peter B. Oleksiak:]

No, it's standard actually (39

[Gregg Orrill:]

I got it. Okay. And then on the PSCR, when are you looking for the outcome on that? And are there any other – I guess, we've talked about the drivers in general. Is there anything else that you would point out that's noteworthy there?

[Gerard M. Anderson:]

On the PSCR case?

[Gregg Orrill:]

Yeah.

[Gerard M. Anderson:]

Okay. I'll have Don answer that as well in terms of when that will play out.

[Don M. Stanczak:]

So in terms of the timing, I'd expect the commission order later this year, split (39

[Gerard M. Anderson:]

We've spent a lot of time talking to the Energy committee chairs, the MEDC, the Michigan Economic Development Corporation, and the agent, the administration, about NEXUS. So they kind of get how it fits into the gas supply picture here in the state is the state (40

[Gregg Orrill:]

Okay. Thank you.

[Gerard M. Anderson:]

Thank you.

[Gerard M. Anderson:]

I think, with that, we are done with questions. So I would just reiterate what I said at the outset. Six months in we're off to a really good start financially and otherwise. So we look forward to giving you another positive update in three months. And thanks very much for joining us this morning.

[Operator:]

Thank you. Ladies and gentlemen, this does conclude today's conference call. Thank you for participating. You may now disconnect.