DTE Energy Company
Q3 2016 Earnings Call Transcript

Published: 26 Oct 2016

[Operator:]

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

[Barbara Tuckfield:]

Thank you, Tanisha, and good morning, everyone. Before we get started, I would like to remind you 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 net income to operating income provided in the appendix of today's presentation. Peter Oleksiak, our Senior Vice President and CFO, will be providing a financial update for the third quarter of 2016 guidance. We also have members of the management team here that we can call on during the Q&A session. And now I'll turn it over to Peter to start the call.

[Peter B. Oleksiak:]

Thanks, Barb. Good morning to everyone and thanks for joining us today. Of course, no DTE earnings call would be complete without an update on my Tigers. So let me get that over with here. Actually disappointed to say that for the second straight season, the Tigers did not make the postseason. So the only source (1

[Operator:]

Thank you. We'll take our first question from Jonathan Arnold with Deutsche Bank. Please go ahead. Your line is open.

[Jonathan Philip Arnold:]

Yeah. Good morning, Peter. Can you hear me okay?

[Peter B. Oleksiak:]

Yeah. Good morning, Jonathan.

[Jonathan Philip Arnold:]

My question is on Michigan legislation. There was a story in the press talking about some kind of breakthrough and expectation that, yeah, this will get taken up after the election. But it wasn't clear from that what exactly might have changed in the bill. Can you give any insight as to how you guys see this playing out and what there might be new to report?

[Peter B. Oleksiak:]

Yeah. I think, in terms of playing out, there's definitely a strong push to get this legislation done in lame duck. There's a lot of public communication that's happening out there. Senator and office made this a priority for that. It is going to be a challenge potentially, given the timeframe left, but I think given the focus and attention on that, there is still a chance it'll happen in the lame-duck session. We have had some public support recently. The Michigan State Chamber came out publicly to support this bill. So I think that's a very positive movement as well. In terms of what has changed is that this bill in particular is going to be a bipartisan bill. It is related to the State of Michigan, the energy reliability that's needed in the State of Michigan. So both parties need to be supportive and both parties want to get this energy legislation passed. So, recently, there is some discussion on the renewable side potentially for that mandate. Currently, we're at 10%, potentially go up to 15%. That will help get some of the democrats on board as well. And some of the refining and, as I was mentioning, even when I've been on the road that some of it is getting the detail right around the retail open access and the capacity requirements related to that. So there is some finalization around that language. I know there's a new MISO tariff that may be out there as well that's going to help support and complement legislation as well.

[Jonathan Philip Arnold:]

Thank you. That was it. Thanks a lot.

[Peter B. Oleksiak:]

Thanks, Jonathan.

[Operator:]

Thank you. And our next question comes from Michael Weinstein with Credit Suisse. Please go ahead. Your line is open.

[Michael Weinstein:]

All right. Good morning, Peter.

[Peter B. Oleksiak:]

Hi, Michael.

[Michael Weinstein:]

Hey. With the strong quarter from the weather, just wondering if you could just comment on how that will affect O&M in the fourth quarter and your Lean In initiatives?

[Peter B. Oleksiak:]

Yeah. With all this favorability, we are going to be putting some of that back in to the business. We've done this periodically as you know, and this really helps maintain long-term really good operations. And we like to put it into customer-centric type of assets and infrastructure assets. So we are targeting potentially around $20 million of after-tax and the vast majority of that will happen in the fourth quarter. We had a minimal amount that did occur here in the third quarter.

[Michael Weinstein:]

And just a follow-up on NEXUS, as we await I think the draft EIS – or the final EIS at this point, right?

[Peter B. Oleksiak:]

Yeah. I can give you an overall update on NEXUS. We are really at this point in the late-stage constructions. Once again, we are very positive on this project. It's going to be a real strategic part of our portfolio. So, late-stage construction, the pipe is being fabricated as we speak. Another great milestone here is that we recently signed our first tap and interconnect agreement in Ohio with an LDC and we have 1.75 Bcf per day of tap and interconnect agreements and we expect to term some of those out. And that's how we're expecting to help build out the pipe. We are currently at the two-thirds and now we've been at the two-thirds for a little bit here. Some of that is with the E&P companies taking a pause with their balance sheets, but we're starting to get some express interest with the E&P companies. But I do expect a good portion of the remaining pipe being drilled will be drilled potentially within that Ohio market. We expect to receive the final environmental impact next month with a final certificate in the first quarter of 2017, commence construction, and still targeting the fourth quarter of 2017 in service.

[Michael Weinstein:]

Now, the improvement in natural gas prices and frac spreads, I'm just wondering if you're seeing an increased amount of interest in the pipeline at all?

[Peter B. Oleksiak:]

Well, we are. And there's always been a lot of interest. A lot of the pause is just with the E&P companies first getting their balance sheets in order. The other is coming up with their new capital plans and drilling plans. And there's going to be a focus on this region, in particular the Utica and Marcellus. So a lot of that, there's some internal processing that needed to happen within the E&P companies. The other benefit is we do have – with the new acquisition, there are some synergies potentially there as well that can help support the NEXUS pipeline.

[Michael Weinstein:]

Great. Thank you very much.

[Peter B. Oleksiak:]

Thanks, Michael.

[Operator:]

Thank you. And our next question comes from Julien Dumoulin-Smith with UBS. Please go ahead. Your line is open.

[Peter B. Oleksiak:]

Good morning, Julien.

[Julien Dumoulin-Smith:]

Hey, good morning. Hey. So, perhaps just following up on the last couple of questions. First, you've kind of alluded to it already, but the deal with the MISO, the PSC and actually the Governor's office as well. Can you comment a little bit on how that fits within what you're trying to achieve with the legislation? Is that also one of the reasons why you've been able to get some progress? And can you on platform on the path forward on the timing and what do you expect that to look like ultimately...

[Peter B. Oleksiak:]

Yeah. I think...

[Julien Dumoulin-Smith:]

...or how it complements?

[Peter B. Oleksiak:]

I mean, a couple of comments on that. The movement with the Governor and with MISO and the MPSC really shows that this issue really is around electric reliability in the State of Michigan. So this was kind of a potential how do we ensure some reliability and capacity in the State of Michigan. It does help complement legislation. So, that would be one where we'll have the requirements for the retail open access providers, show us your capacity plans and with a lot of local clearing requirements that'll have to be in place, given the fact that given the peninsula of state that we have, the limited amount of transmission, we need to have a lot of local generation. So this new tariff – if the ROA customers cannot get the capacity, they will come to the utilities and we'll provide it with a capacity surcharge. My understanding is MISO will be filing this new tariff with the FERC shortly, essentially next month.

[Julien Dumoulin-Smith:]

Got it. And to what extent does that achieve your goal around ROA? I mean, (16

[Peter B. Oleksiak:]

No, the goal with the retail open access, first, is to make sure that they have capacity within the State of Michigan, that we have reliability in the State of Michigan. I think that's the number one concern with that for the policy and the regulators, and this really does help ensure it, whether they got to get it themselves; if not, now they got to turn to us and we got to make sure we get it for them.

[Julien Dumoulin-Smith:]

Got it. And then turning back to Mike's question a second ago, can you comment a little bit about – obviously, there's some multiple adjacent projects going forward. Seems like you guys obviously are moving forward with your project irrespective. Is there an ability to combine projects and/or are you seeing or having conversations with the off-takers from some of the other projects thus far? Just kind of curious if you're seeing some cannibalization here.

[Peter B. Oleksiak:]

No, I can say that we definitely like our pipe where it's at. We provide a northern path. E&P companies are looking to get their product to market as they like to diversify where they're putting it. So, putting it north within the markets of Ohio, Michigan, and Ontario definitely helps. So we're really at this point concentrating on our project. And I think a lot of the interest in our project is just because of the multiple markets that it serves. So we're continuing to see a lot of interest in our projects, and we're not really kind of worried about other projects in the area. We have a great project. We think we do have the best northern path at this point in time.

[Julien Dumoulin-Smith:]

Got it. But not taking contracts or in discussions with the actual operators, the other ones, by any means?

[Peter B. Oleksiak:]

No, we were in contract – I mean, in discussions with E&P companies around the NEXUS pipeline, and if they want to get their product north, they are in discussions with us.

[Julien Dumoulin-Smith:]

Got it. Thank you.

[Peter B. Oleksiak:]

Thanks.

[Operator:]

Thank you. Our next question comes from Paul Ridzon with KeyBanc. Please go ahead. Your line is open.

[Paul T. Ridzon:]

Good morning.

[Peter B. Oleksiak:]

Morning, Paul.

[Paul T. Ridzon:]

With your recent acquisition at Storage & Pipes, are you kind of right-sized or do you think there's potential other opportunities out there?

[Peter B. Oleksiak:]

At this point in time, that's really around new acquisitions. I would say that we are not looking for new acquisitions at this size. We like to develop pipes, traditionally greenfield, that's where you get your most value creation. There is a unique opportunity here. There's a great pipe in the region that we want to be in, which is the Utica, Marcellus. 40% of the gas in the country is going to be delivered from this region. It also fits within our footprint and potentially helps support the NEXUS pipeline. So, at this point in time, we are looking at developing multiple pipe platforms, growth platforms, our NEXUS platform. And obviously, we're going to be putting a lot of push and development on that. And then this pipeline in particular, there's a lot of upside potential given the expansion opportunities here, and some new greenfield around the pipe that has yet to be drilled and put into the pipe. So I'd say the focus will be on the development of this pipe. There may be some smaller bolt-on type of acquisitions potentially. So we're comfortable right now with the growth platforms that we have in place and the development opportunities around them.

[Paul T. Ridzon:]

Thank you very much.

[Operator:]

Thank you. And we'll go ahead and take our next question from Paul Patterson with Glenrock Associates. Please go ahead. Your line is open.

[Paul Patterson:]

Good morning.

[Peter B. Oleksiak:]

Paul.

[Paul Patterson:]

With respect to the compromise, it sounds like it was kind of a Senate saying. Is the House on board with it as well?

[Peter B. Oleksiak:]

I know Mike Nofs has been working both the Senate but also the House in particular. So I think that's some of the movement you're seeing with the renewable side in the mandate. That's going to help get support within the House. So it's still kind of a wait-and-see to see if they can get it through the Senate and the House. There would be post-election. The idea is potentially to now get it through the Senate, and after Thanksgiving, work it through the House. So there's enough support within the Senate. And then that we get enough of the House Democrats, there is a chance that it can get done this year.

[Paul Patterson:]

I thought the Chamber was on board. Is it they or the schools, are they coming around to it?

[Peter B. Oleksiak:]

The State Chamber for us was a major supporter. So we're very happy with that and that's where a lot of the work has been done over the last few months. So we're very happy with their support, and that was a key support for us to get.

[Paul Patterson:]

Okay. And then the CCN part of it, I didn't understand what that does, the 225 megawatt Certificate of Need requirement. Does that mean anything?

[Peter B. Oleksiak:]

So we have a Certificate of Need process right now within the current legislation. That's a great process around kind of getting pre-approvals on prudency around. That was a $1 threshold that has moved to $2 a megawatt threshold at this point in time.

[Paul Patterson:]

Okay. Does that mean anything from our perspective? Is that something that we should be thinking about as – what does that actually feel like, I guess, is what I'm wondering?

[Peter B. Oleksiak:]

Probably it may move a little more projects within that process than the old, which we're okay with, getting kind of multiple stakeholders involved and getting the MPSC to look at these projects is the good thing before you start putting steel on the ground.

[Paul Patterson:]

Okay. And then the Ontario transmission line that's being discussed with MISO and what have you, is that something you have been involved in and do you have any more details other than sort of what I've read here in terms of timing or what's actually being proposed? How many megawatts or anything?

[Peter B. Oleksiak:]

So the Ontario – are you talking about the TransCanada?

[Paul Patterson:]

I'm talking about the Michigan Agency for Energy, and the Michigan – and Governor Snyder. I'm talking about regional transmission. You talked about connecting more on a transmission with Ontario to examine more interconnections with Ontario?

[Peter B. Oleksiak:]

Oh, yeah. Yes, yes. Yeah, that's really not our – we're not really involved into that issue. Obviously, we'll look for the outcomes of that, but we don't have a direct involvement in that.

[Paul Patterson:]

Okay. And then just finally, back to the MISO capacity proposal, what I'm wondering is, is would this be a wholesale transaction that the alternative energy provider would be charged. I mean, in other words, would they have to pay you a capacity fee or – that's why I was a little bit confused about it jurisdictionally. When I read this proposal, it sounded like they could either buy capacity themselves or they could buy it from you at some set price by the Michigan PSC. And I'm wondering, would that be considered a wholesale transaction.

[Peter B. Oleksiak:]

This really is getting at the issue that we need to have a very high local clearing requirement, which means in state generation. And either they can get generation within the state by themselves; if they can't, they can procure it from us, and we need to be compensated for that. And it would be a capacity charge put in place and the Public Service Commission would be kind of over that capacity charge and what the amount would be.

[Paul Patterson:]

Would FERC have to be that involved in this in so far as it's a wholesale transaction of the alternative that the Michigan PSC would be setting the price for? Do you follow what I'm saying?

[Peter B. Oleksiak:]

No, the FERC would not be involved.

[Paul Patterson:]

Okay. Okay. I appreciate the time. Thanks so much.

[Operator:]

Thank you. Our next question comes from Gregg Orrill with Barclays. Please go ahead. Your line is open.

[Gregg Orrill:]

Yes. Thank you. You talked about in your release and previously about building 1,000 megawatts of gas in Michigan for – I think it was 2021. When do you expect to start spending there, and what needs to be done to move forward regulatorily or otherwise?

[Peter B. Oleksiak:]

The high-level timeline on that, Gregg, is probably late next year we'll be providing – we'll be filing a Certificate of Need around that with the air permitting, everything that we would need to get the projects going. The spending on that will occur at the back end of this five-year plan. The in-service date that we put within the recent press release is 2021 to 2023 timeframe. So, the spending will be occurring within a few years. So, probably shortly after that Certificate of Need, probably within a year after that, there will be some spending occurring. Actually a little bit of spending before that just to prepare for the Certificate of Need.

[Gregg Orrill:]

And do you need to file for approval there?

[Peter B. Oleksiak:]

We would have to file with our Certificate of Need process with our Public Service Commission.

[Gregg Orrill:]

Okay. Got it. Thanks.

[Operator:]

Thank you. Our next question comes from Shar Pourreza with Guggenheim Partners. Please go ahead. Your line is open.

[Shahriar Pourreza:]

Hey, Peter.

[Peter B. Oleksiak:]

Hey. Good morning, Shar.

[Shahriar Pourreza:]

Just one quick question on the synergies that you just mentioned around NEXUS and the G&P system you purchased. I know you will obviously disclose more when you get into EEI. But synergies, when you highlighted that, is that more of a function of adding additional producers to the pipe?

[Peter B. Oleksiak:]

Really is a function. We have a clear path, contiguous path with our system that we purchased with the Texas Eastern pipeline. There's capacity that we've contracted out NEXUS has to get it to NEXUS. So it really is around the producers, the drilling plans around those producers, essentially not signing up new producers by getting into the drilling plans with the existing producers that we have on that pipe and the new assets we purchased.

[Shahriar Pourreza:]

Okay. Got it. And then just one lastly on the Michigan policy and the MISO tariff. Is there – just to confirm, there is no impact to any of your potential future coal retirements, right, if we get passage? Like, you wouldn't – there's no scenario where you would hold capacity not retired, right, on the coal side?

[Peter B. Oleksiak:]

No, there isn't. It's a combination of age of life of these plants and there's some new water rules that are being put in place...

[Shahriar Pourreza:]

Right.

[Peter B. Oleksiak:]

...that it is onerous to keep these plans going. So they are retiring.

[Shahriar Pourreza:]

Okay. Excellent. Thanks. See you soon.

[Peter B. Oleksiak:]

Thanks, Shar.

[Operator:]

Thank you. And it does appear we have no further questions at this time. I will now hand it back over to your speakers for any additional or closing remarks.

[Peter B. Oleksiak:]

I'd like to thank everybody for joining this morning on the call. And once again, I can't imagine EEI is coming up quickly, how quickly the year goes by, but I'll be seeing a number of you at the EEI Conference coming up next month. Have a great day.

[Operator:]

And that does conclude our program. We like to thank you for your participation. Have a wonderful day. And you may disconnect at any time.