DTE Energy Company (DTE) Earnings Call Transcript & Summary

Welcome, everyone, and thanks for everyone joining today. Very happy to have DTE Energy with us today to talk about what's a pretty exciting story, a lot of things up coming as well. We've got Jerry Norcia, who's President and CEO of DTE Energy; as well as Dave Slater, who's President and CEO elect of DTE Midstream, to talk to us today. In the background there, too, is Barbara Tuckfield, the Director of Investor Relations. To start us off before the Q&A, I'm going to hand it over to Jerry for some opening comments, and then we'll get back to questions. Jerry, thanks very much for coming.

Well, thank you, Dan, and good afternoon, everybody, and thank you for joining us today and your interest in DTE Energy. I would start by saying that 2020 was truly a remarkable year of challenges, but also great accomplishments for our people, our customers, our communities and also our investors. Just starting with our people, we had the safest year on record in DTE history. And we also had tremendous engagement results hitting the 95th percentile as measured by Gallup. From a customer perspective, our electric reliability improved significantly, and we were ranked #1 in gas residential customer satisfaction in the U.S. Midwest. We also went to great lengths to streamline energy assistance to our low-income customers and seniors such that during the pandemic they did not have their services interrupted, and we learned much from that. We worked very closely with our regulators and the government on that. We achieved many successes on a regulatory front such that our pricing and base rates remain flat this year in the electric business and gas business. As it relates to our community assistance, we -- our foundation really sprang into action and did many incredible things such as leading an effort to deliver 51,000 electronic tablets to Detroit public school students who have typically no access to electronic learning in Detroit itself. So that was a huge accomplishment. From an investment perspective, we achieved great success all across our business units in 2020, which set us up really nicely for 2021, and we're off to a great start in 2021. And also, not only 2021, but beyond that. We also announced at that point last year that we were going to spin DTE Midstream, which David Slater will speak about here in a moment. And I'll just close by saying that we're very well positioned to continue with our 5% to 7% EPS growth and also a commensurate, 5% to 7% dividend growth as we look forward for DTE Energy, post spin. So with that, I'm going to turn it over to David Slater to give us an update on the -- a quick update on the spin and how that's progressing.

Thanks, Jerry, and good afternoon, everybody. Glad you could join us. So with regard to DTE Midstream, a few important milestones were accomplished in 2020 that I'm really proud of. Number one, we delivered strong financial results across all of our platforms, produced an adjusted EBITDA of $713 million which was above our original plan. Second, we placed a significant asset, the LEAP pipeline, in service, and we did that ahead of schedule and under budget in the midst of a pandemic and delivering for our customer down in Louisiana. So very important milestone, really proud of the team for being able to accomplish that. Third, we continue to advance contracting on NEXUS. We executed a 3-year contract with an Ohio utility and continue to see strong interest in NEXUS as we progress the contract term on the open capacity. I'd like to also mention that we announced a net 0 emissions target by 2050. We did that early this year, making us one of the first midstream companies to announce such a goal. And I personally believe this will evolve to become a significant part of our business over time for Midstream as we move forward. Just a quick update on the spin. We believe that the spin of the Midstream company out of DTE will unlock significant value for both our utility investors and for future midstream investors. Both entities will move forward as effectively a pure-play entity, and we believe that will create a lot of value. The spin is well underway. We expect completion by mid-year. We filed our SEC Form 10, and that will become public later in the second quarter. We also have met with rating agencies. We are going through a RES/RAS process, and we'll be initiating a debt raise in the second quarter pre spin. Throughout the process, we'll be hosting events with analysts and with investors, and are planning to do a roadshow later in the second quarter just before spin. With that, I'll turn it back to you, Dan.

All right. Thanks very much, Jerry and David. Appreciate that. Let me start just with the first set of questions. So this is, first, to Jerry Norcia. So maybe you can take us back a little bit and take us again through the thought process, what led you to decide to spin DTE Midstream? And what do you think the benefits of that are? And have there been any surprises while you've been executing?

Sure. So this goes all the way back to the fall of 2019, and even the summer of 2019. Right after I became CEO of the company, we started to think about the future of DTE for the next decade. And when we met with our Board in September of 2019, we talked a lot about a pivot towards more of a pure-play as well as a much heavier investment agenda in wires and renewable generation -- regulated renewable generation. So that was sort of a direction that there was consensus around in the fall of 2019. But we had not yet at that time figured out the mechanics of how we might do that. And then as we started progressing forward, we acquired the Haynesville assets in the midstream space and started to examine the growth capability of midstream in its own merit, and really found that there was a significant amount of capital that we could deploy in that business and had a very strong and robust growth agenda and strong cash flows and had scale. And at the same time, we were also looking at 2 utilities, our electric and gas utility, where our electric utility was experiencing 7% to 8% growth and our gas utility was experiencing 9% growth. And based with the facts that we had really 2 premier entities, one was a pure-play utility, it could be a pure-play utility and 1 a pure-play natural gas midstream company with scale and great leadership. We felt that a spin made a lot of sense and could actually unlock a significant amount of shareholder value. And so we started to work on that in the spring of 2020. And by the fall of 2020, we had made the decision to do a tax-free spin to our investors of our DTE Midstream assets. So that's how we got there. We feel that this will create significant value for our shareholders by being able to invest in either a pure-play midstream company or a pure-play set of utilities that have great regulation here in the state of Michigan. How is it going so far? It's going well. We filed the Form 10. We received very minor comments from the SEC and have responded to those. And so we're well on track for a midyear spin date. The next step will be getting the rating agency results. We've met with rating agencies and are getting our debt rated for the midstream company and are also -- then we'll be raising debt after that.

Yes. And actually, the first question that's coming in is a question around that. What are your expected capitalization ratios and coverage ratios going to be for the spinco, and then also for the remainco? And what are your thoughts on what the appropriate ratings are going to be?

So I'll talk about the remainco, and then I'll let David speak to spinco. So remainco, obviously, this is a credit enhancing transaction, and typically, as DTE, as it currently as we would target 18% FFO to debt, we feel that with the credit enhancing nature of the spin that DTE remainco can go to 16% FFO to debt and still have significant amount of cushion on all of our ratings to remain BBB as we are today. And David, do you want to speak to spinco?

Yes. Thanks, Jerry. So Dan, what we're targeting is the 4x debt-to-EBITDA ratio as we launch the new company, DTM. And looking at a 2x dividend coverage ratio in terms of setting an appropriate sector related dividend for the new company.

Maybe a second question just around the spinco is what the growth prospects are for each. I know, Jerry, you've given an update on some of your objectives around decarbonization, that's been a driver. And then also on the T&D side with optional solar being a driver as well. Can you walk us through the growth prospects for remainco? And then same question for you, David, in terms of where is the growth going to come from after the spin for your side, too?

We're pretty excited with DTE remainco in terms of our growth prospects. We're going to have a heavy investment agenda, as you mentioned, and as I've mentioned, in our distribution business, our wires business as well as regulated renewables. So our electric company, we're expecting 7% to 8% growth, which is our largest utility entity, and that's for looking out 5 years. And what I will tell you, that's really been driven by the age of our system and the need to modernize and automate the electric grid. We also have one of the largest voluntary renewable programs where we're selling green power to companies like General Motors, Ford Motor Company, University of Michigan, various hospital systems and also residential customers. We've got about 25,000 residential customers signed up right now. Basically, they sign up to green up their power, and what we do is we build wind assets and solar assets behind those contracts to supply the need for greener power. So pretty exciting. It is one of the largest programs in the country. We've signed up about 150 megawatts so far, and it continues to grow each and every day. Even during a pandemic, I was surprised that we've got significant commitments from companies like General Motors and Chrysler and Ford, and they just kept ramping up their desire for green power. And we're also getting that desire for small commercials and residential, as I mentioned. So those are the 2 areas in the electric company. And in the gas company, we're seeing about a 9% growth rate, and that's primarily being driven by modernizing our distribution system there. We still have about 3,000 miles of cast iron pipe. That's on average about 65 years old. And we're renewing that at the pace of about 200 miles a year. So in the gas company, we've got at least 15 years of investment horizon in the electric company. I would say it's about the same, at least a decade, if not more, of capital backlog that we need to keep investing to renew wires and poles and transformers and substations. So a tremendous need for a system that was built well over 100 years ago.

Right. David, what's the growth path look like? And there's a related question to that as well, which is back to the target debt ratio. The question is new normal seems to be moving towards sort of 3x leverage. So how does that impact your growth opportunities as well?

Yes. Dan, why don't I start with sort of the growth opportunities. So right now, we have a very robust inventory of development opportunities that we're working on. They are very much what I'll call greenfield related around -- in and around our existing asset footprint. Some of them are very tied to our existing assets, some are in the region that we're concentrated in and focused on. There's about a $1.5 billion capital investment agenda there is the way I would describe it. We had a great track record over the past decade of deploying capital and doing it in a really responsible way that generate the returns that investors expect. We expect to continue to do that at DTM with the same type of discipline that we used at DTE. In terms of the leverage, again, our guidance is 4x coming out of the gate with DTM. Over time as the company grows, the one thing that DTM does generate is strong free cash flow, and we'll provide more color around that when we get on the road pre-spin. But we definitely understand that the segment right now, there's a strong desire in the segment to delever. Other midstream companies have much higher leverage ratios than what we're expecting coming out of the gate. So we obviously will balance that with incremental capital deployment.

So I guess the question I have, it's kind of along what you were just talking about so again, more of a longer-term question. So if I kind of look at your service territory on the electric side, and I guess, on the gas side as well, there's going to be, at some point, I guess, is my opinion, a large transition for a number of your customers. And I guess that's more on the automotive side as the country becomes more electrified in that area. And so whether it's Ford or GM, they're going to make that pivot. And I think -- I don't know what the loans will be, but let's just say, they make the pivot and they're still building, they're building as many electric cars as they are gasoline cars. But I guess the other part, and this is why I'm just curious to make up of your service territory and what you're thinking longer term, how it may be affected either positively or negatively is kind of the suppliers, the parts, all that industry, because as you know electric cars don't have as many parts not a combustion turbine engine. So can you kind of talk about that and how much of your load is dependent on that? And what are you kind of thinking of in the future? Again, this is several years or more down the line, but I know utility people are long-term thinkers, and I know you guys are.

Sure. So 2 things. I mean the first thing is I'm really excited about EV load coming. And the fact that it would generate significant top line growth for us from a margin perspective is something that we're excited about. We're also nervous in the sense that we're putting a lot of infrastructure in the ground to make sure it can accept that new load. And I had our people kind of study what this might look like, and I have to go back to the 60s and 70s as the air conditioning started to become dominant in America. And I think we're going to see similar type of growth and adoption rates. And obviously, a car will consume a little more than an air conditioner. But it does run less and it loads less on a system because it usually reloads at night versus running all day and running during the peak of the heat, if you will, here in Michigan. So that feels really good to us and feels like a great opportunity. But I think you're also right there. There will be a corresponding transformation of some of the local tool and dye shops and part suppliers that will supply to the EV manufacturers. So there'll be gains like we hear our big 3 talk about building factory batteries and electric motor factories to sort of assemble and build that equipment themselves. So that will create opportunity. But there'll be a corresponding restructuring of some of those suppliers. And we do expect that. Too early to tell how big or how transformative that will be. When? What we see in every forecast that we look at, I've talked to all 3 of the CEOs, all right, actually, 2 of the 3 of the CEOs of the Big 3 General Motors and Ford, and their advice to us is here's a band of probabilities. And make sure that everything that you do works inside of those band of probability. So -- and all of those probability start to ramp up sometime mid-decade and later and probably start to become impactful at the turn of the next decade is when we'll start to see some of these changes have a real impact on load, a real impact on transformation of some of our smaller industrial customers.

What percent of your load is kind of around suppliers, parts, things like that? And I assume there -- I don't know if our industrial or commercial customers or a combo of the 2.

So Barb, our automotive load is about 6% to 7% of our total sales. But Barb, is that about right?

That is, as well as our auto suppliers are about 2%.

Yes. So about 8% altogether of our sales volumes.

And margin-wise, is it so -- do you guys make money off of them? Or...

It's a lot smaller than our residential. So I would say it's probably less of an impact on gross margin than, say, an equivalent, 6% to 8% in our residential customers. It's about 10:1 kind of ratio, if you will. So it's going to be a smaller impact.

And do they help lower the rates for your residential customers? Just to load itself because it's now...

Well, all -- yes, I mean, to the extent that the load is there, it certainly does contribute, right, to keeping rates stable. I mean we don't like to lose any load. But I think that it's not hugely impactful if we would start to have some rationalization there. And it's hard to predict right now how big that will be and how these guys will reinvent themselves, right, to build different parts. But there will be less parts. And I think Michigan is going to have to compete is really what's going to be critical here.

It's something that's been in my head. And then, Jerry, a couple of questions here about the remaining unregulated businesses at DTE classic. So starting really with the trading business. Can you talk about the role of the trading business going forward post spin? And then also just given the events in Texas, any update on how you all fared around the polar vortex a few years ago?

So the trading business is 1 of our nonutility businesses. It's very small. We don't count on that business for very much of a contribution, nor we don't look to grow it either. What we've used that business for is multiple purposes. One is to gain market insights and intelligence in the commodity markets that we're in like gas and electricity. And also some of the environmental products that we're in like renewable natural gas, for example. And we have also used it to manage risk inside the company. So that's what we've used it for. So it generates typically anywhere from $20 million to $30 million of net income and brings in about $40 million to $50 million of cash for us per year on average. What happened in Texas? We had movement up and we had movement down. On a net basis, we're basically on top of our plan. Yes, we had a modest long position in storage down there with very low-risk to the downside. But with the commodity prices racing up there, we made a little bit of money. And then we had a retail provider that we were supplying wholesale power to that defaulted. So that was the down. And together, we're flat to slightly up.

Okay. Great. And can you talk a little bit about the P&I business from here? The -- have you offset all of the tax credit roll downs at this point and then also RNG?

So the 2 primary investment vehicles there for P&I going forward, and we're looking at a bit of a rebrand there as will show up in the fall or early next year, started to really focus on what I would call, renewable natural gas and cogeneration. So ESG complementary investments, ESG friendly to our current agenda as we move towards decarbonization at DTE Energy going forward. Will we replace all of it? The replacement of those earnings, Dan, you'll see a smooth transition where we'll continue to print 5% to 7% EPS growth this year and in our future years, long term. And that will be a contribution not only from the replacement of P&I earnings, but also the early high-growth rates that we have with our gas company and electric company in the first several years of a 5-year plan. We're seeing growth in our 2 utilities that's significantly higher than the 7%, 8% at the electric company on an average over 5 years and 8% to 9% at the gas company. So that's how we'll replace those earnings and have a nice smooth path towards 5% to 7% EPS growth.

And the environmental objectives that will be there, how are you poised to meet them with your new plan? And then David, the question goes beyond just legislation, but also some of the agency appointments and some of the early pushback at least on permitting use of federal lands, et cetera. What's the outlook from the administration as regards to midstream gas?

Sure. Let me start...

You want me to go first, Dan? Yes, okay.

Please.

I would say, from our perspective, the greatest impact will be on our electric company. We had announced net 0 by 2050 and and full retirement of our coal fleet by 2040. Last summer, Dan, we had started working on how could we accelerate the retirement of that coal fleet. We just didn't see it as 2040 final retirement of all coal. We didn't think that, that would survive both -- no matter what the administration was going forward post election. And I think the Biden win is pressured to decarbonize the economy. It's only emboldened enough to accelerate our work to see how quickly we can retire our coal plants. And you might say, well, what's the -- what are the barriers to acceleration? Well, it's not technology because we can certainly replace coal with natural gas and renewables. So the technology is available. But I would say the biggest barrier would be affordability. So we're going to need to really look at what are the costs and benefits to our customers to retire coal early and make sure that we can pace it in a way that our product still remains affordable for our large industrial base here in Michigan as well as our residential and commercial customers. So I view it as opportunity. I think the pressure to decarbonize faster for the Biden administration will become opportunity for us. I know that EEI, which represents all the electric companies in America, is busily working with the Biden administration to see if there's legislation that could actually enable and accelerate this transformation in a practical way.

Okay. And Dave, on the midstream side.

Yes. Maybe I'll start with the -- some of the new policies were -- the first one related to drilling on federal lands. That, I think, over time, is going to create a bias to certain basins that aren't reliant on large tracks of federal land. Most of the basins that have a lot of federal lands in play are the Western basins in the country, natural gas basins. So it likely will be supportive over time of Appalachia, Haynesville and any other basin that doesn't have a significant amount of federal land associated with it. So that would be the first point. I think if we talk about decarbonizing the economy here in North America, the one thing that I know that we are in talks with the administration on AGA, I actually Chair AGA this year, is today about 1/3 of the energy we consume every day is carried by this large grid of pipeline and storage infrastructure across the country. That's a really foundational infrastructure for the competitiveness of the country over time. It creates a lot of resiliency and reliability, especially for gas-fired generation on the electric system. And it enables larger quantities of renewables to come online over time and still create the reliability that's required on the grid. So a lot of these assets work in tandem. I think there's becoming a clearer and better appreciation by the administration of those interconnections and how they work together. I think what happened last month in Texas and what happened last summer in California are many case examples of the importance of those connections. But I think if we look forward, what is exciting to me is, okay, what are the investment opportunities to decarbonize the space. So there's lots of, what I call, low-hanging fruit with existing technology, whether it be what I'll call mechanical applications on the assets themselves for their direct emissions. But other opportunities like carbon capture and sequestration technology that exists today for the companies that have the skill sets to be able to do that, to be able to pipe, capture and sequester gases. That's something that's right in our wheelhouse to do. So I think those opportunities going forward in time will become greater. There'll be more of a market pull for that from lots of different customers as well as some of the low carbon fuels that we talked about earlier, making sure that those -- there are no barriers of entry for those fuels into the system. So whether it be RNG, like we talked about, whether it be types of hydrogen and hydrogen blend in the network, making sure that we can accept that and kind of blend down the carbon footprint of the commodity itself. But still present itself in a useable form to the end user.

Okay. And along those lines, just for long-term investors in midstream assets, given the unevenness of the transition to renewables, the opportunity for blue and green hydrogen, the storage opportunities you spoke of in RNG, how do you get comfortable around what an EBITDA growth rate looks like? Or can you do that at this point?

It's a good question. It's different than the utility sector, right, where there is a much clearer longer-term line of site on capital projects. I think when you look at the midstream space, there's not the same guidance, public guidance for longer-term growth rates than there isn't in the utility sector. And I think it's -- there's just more variability in the sector. But that being said, when we look at our business, there's -- and we'll be sharing this as we approach the spin, really clear line of sight, in my mind, of incremental opportunities in and around the assets. So I think that's a long term question, Dan, like long term, 5 years and beyond as how things continue to evolve. But I think just like the electric business that has pivoted and transformed itself, and moved towards renewables. I think over time, the infrastructure that I talked about, we'll be looking for incremental investment opportunities to lower the carbon impact of that system over time. And I think we're just in early days. And I think that will become clear. At least my thinking is that it will become clear very quickly. If you look to Europe as a proxy, Europe seems to be more advanced in this than we are. They're talking about large-scale carbon capture, sequestration large scale, versions of hydrogen, whether it's blue or green. They are clearly recognizing the value of the infrastructure that's in the ground and how do they use that to accelerate their lower carbon future. So Europe may give us an indication of where we're going to ultimately go to here in North America.

Yes. It would be a shame not to use some of the infrastructure that's already there. A different question from a shareholder basis versus what we've talked about so far, this one, I guess, goes to both of you. So how is management compensated? And what are the share ownership mandates of the remainco and the spinco? And have those changed for the remainco as a result of the spin? I'll leave it to you on that.

Sure. So senior management, the most senior management of the company, is obviously compensated for total shareholder return with long-term incentives. So our long-term incentive plan which [Technical Difficulty] see here, which will probably mean that our employees will be working from home quite a bit still, and that will drive a significant amount of uptake in residential use. And you can imagine because it is roughly 10:1 ratio between margin from residential customers versus commercial customers, which is where the office space resides, we like it when our customers work from home.

Yes, yes. And you said you're still seeing about a 6% net charge from last year.

Yes, about 6%. Last year, we were seeing 8% to 10% most of the year, and I think it's dropped to about 6 -- right around 6%, which is still quite significant. Barb, did I get that right?

You do, yes.

That's great. And David, how are you thinking about dividend policy and peer dividend policy in the midstream space?

Yes. Dan, we're looking at wanting to have about a 2x coverage ratio for our dividend. We haven't announced the exact percentage, but maybe I'll say it this way. If you look across the sector and look at the average, I think we're going to land pretty close to the average in terms of the dividend percentage that we'll pay out.

Okay. Okay. That's great. There are a couple of questions that have come in over the e-mail as well. One is just a story that came out that U.S. Congress has launched a probe into clean coal tax credits. And so I guess, just a question of, first of all, is that what we would think of as just normal congressional probe action? And then second, can you remind us what the -- what you've got left in your credit collection business?

We're essentially done with our reduced emissions fuels business at the end of this year, and all of our tax credits have been approved by the IRS. And so we're feeling pretty good about it. But we'll have to dig in a little more into this congressional action, understand that more, yes.

I don't know much about it. It's just, I guess, an article. And then there was also another news item just to clean up on for the trading business, which is Brilliant Energy has filed Chapter 7, and they're listed as a counterparty to DTE. Can you update us on what kind of credit risk fallout, if any, you've seen from the Texas trading? I don't know whether you want to call it issue.

Sure. So as I mentioned earlier, we had an up in our gas business selling natural gas into that market, offset by this issue, Brilliant Energy issue, where they defaulted. That's the only party that's defaulted. And so as I mentioned, we fully reserved for that. And after full reservation for their default, we're still essentially flat to slightly up in our trading business.

All right. Perfect. Yes. I guess, the other thing for Dave is just update on what you're seeing around contracting activity for NEXUS.

Dan, the contract that I alluded to in my opening comments, that's with East Ohio Gas, the utility in Northern Ohio. So they came on with a 3-year contract at what I would describe as anchor shipper type rates on the NEXUS system. So that was really encouraging, bring another utility onto the asset. We're in the final phases of a couple other agreements right now that I expect will be able to be more public on shortly. And again, it's kind of what I've been talking about probably over the last quarter, which is we're moving the duration. We're pulling the duration out now from seasonal to annual to multiyear, and we're seeing the value on the asset as well. So we're doing that at rates that are aligned with what we were expecting. So it's encouraging. There's a fundamental effect happening in the background here, where there hasn't been any other material projects constructed out of the basin over the last couple of years. And the basin continues to progress. It continues to grow. And some of the demand pulls on the other side of the pipe are continuing to evolve as well. So we're seeing some of those fundamentals emerge in this contracting activity and expect to be able to do more going forward.

Okay. That's great. That's encouraging. And then you'd mentioned earlier also the debt financing that you're going to go out to market with. What is the purpose of that? Is it restructuring existing debt? Or maybe you can take us through the use of proceeds there.

Sure Dan, what we'll be doing is we'll be raising new debt for DTM, and the proceeds will go back to DTE to pay down the debt that is on DTE's...

To very competitive with renewable resources going forward as we model the price of delivering power from our nuclear asset, I would say there is 1 fundamental difference. The cost will be similar, but the fact that it runs 100% of the time and it's dispatchable and it's not intermittent, there is significant value to that in our grid. And it enables us to build wind and solar assets on the grid that without dispatchable generation like nuclear and natural gas in the future, you can't build renewable assets because there's nothing to back them up. So I think nuclear and gas are going to play a very fundamental role going forward in our generation fleet.

Okay. That's terrific. Well, that comes -- that brings us to the end of the questions that I have and the end of the hands raised. So let me hand it back to you, Jerry, for some closing comments.

Sure. Well, first of all, thank you for your interest in DTE Energy, and I hope I've answered most of your questions. As you can see, we've got 2 very exciting opportunities that are continuing to progress at DTE Energy. One is pure-play electric and gas utility with $19 billion of investment in front of it for the next 5 years and more beyond that. So lots to do here in Michigan on the regulated front. And then we've got DTM, which is an emerging midstream play company that's going to be, as you heard, well financed, pay a really attractive dividend and also has some nice organic growth prospects in front of it. So again, a very clean and very -- be a very well-run company by David Slater and his team. And we look forward to hearing more from you. So thank you.

Great. Yes. Thanks very much. Thanks very much, David as well. Really appreciate all the time today. And everyone, have a good day.

Thank you.

Thanks a lot, Dan.

Take care.

Thanks, Dan.