Q3 2022 DTE Energy Co Earnings Call
Good morning, and welcome to DTE Energy's Q3, 2022 earnings conference call.
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I would now like to turn the call over to Barbara Cockfield Director of Investor Relations Ms. Tocqueville. Please go ahead.
Thank you 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 earnings which is a non-GAAP financial measure. Please refer to the reconciliation of GAAP.
Earnings to operating earnings provided in the appendix.
With us this morning are Jerry Norcia, Chairman, President and CEO , and Dave Ruud Senior Vice President and CFO .
And now I'll turn it over to Gerry to start the call. This morning.
Thanks, Barbara and good morning, everyone and thanks for joining US let me start by saying that three quarters of the way through 2022, we're on track for a very successful year and will continue to be well positioned for the future.
This morning, I will highlight some of the successes we have accomplished this year and Dave will provide a financial update and wrap things up before we take your questions.
We are very well positioned to achieve our operating EPS guidance.
The six dollar guidance midpoint provides over 8% growth from our 2021 original guidance midpoint.
As many of you know we will be filing our integrated resource plan or ERP next week.
This filing will provide updates on our path for de carbonization, and our commitment to continuing to provide clean reliable and affordable energy to our customers.
Our team has been working hard on this filing going through multiple scenarios and taking into account stakeholder feedback to develop a plan that works best for all of our customers.
As well as incorporating the benefits of the inflation reduction act or the IRI.
I'm extremely proud of all of our team members, who have put their energy into this filing naturally the ERP will impact our five year capital plan.
We are excited to provide further details in a couple of weeks.
Along with our capital plan update we will provide an update on our long term growth strategy at this conference.
We will also provide updates on our voluntary renewables program migraine power, which continues to show substantial growth.
This week, we subscribed a new 400 megawatt customer increase in the program to 2100 megawatts of subscription.
As climate change remains our generation's defining public policy issue DTE.
DTE is committed to doing our part by continuing to invest for our customers and to ensure reliability.
Our electric grid needs to be modernized to be resilient against extreme weather and also be able to accommodate significant new demand that will be coming in the future.
Our electric grid will continue to see increased load as the pace of electric vehicle adoption accelerates.
We are focusing on updating and improving our aging infrastructure for this additional demand, while continuing to provide safe reliable and affordable energy.
Recently, we saw the passage of the IRI.
Let's move to slide five to discuss how we are delivering for all of our stakeholders.
We know that with our engaged and talented team we will continue to deliver for our customers communities and investors.
DTE was recently named a top 10 employer in the state of Michigan by Forbes magazine.
Additionally, after our most recent engagement survey with Gallup DTE ranks in the top 4% of companies worldwide and employee engagement, which continues to give me confidence that our team will deliver for our stakeholders.
We also continue our efforts to support our customers as I mentioned earlier, we will be filing our ERP next week.
This will provide detail on our plans to generate safe.
Clean reliable affordable energy as we accelerate our decarbonization efforts.
We continue to be an integral part of the community with.
We recently joined the city, Detroit and the White house to form the Detroit three equity partnership. This ambitious program aims to build Detroit's tree canopy by planting tens of thousands of trees over the next five years.
Ruling urban areas, while providing beauty and air quality improvements. The program will also hire and train workers to plant and maintain the trees in the city bring.
Bringing jobs to our community.
We're also partnering to drive economic development in the state of Michigan.
Our next energy recently announced that they will be bringing 2000 jobs to Michigan.
With a $1 $6 billion of investment in new battery operations, we are helping the state transitioned to our new automotive future with electric vehicles.
Given all of this positive momentum we also feel great about our financial position as we head into the final months of 2022 and are on track to achieve our 2022 operating EPS guidance, let's turn to slide six with the opportunities we have in front of us.
DTE is on track to make significant customer focused capital investments across our businesses. These investments are transforming the way we produce power as we shift towards renewables and natural gas and away from coal generation.
Two important factors affecting our grid, our climate change and emerging electrification technologies, we need to build the grid of the future to ensure we can continue to provide clean safe reliable and affordable energy.
Additionally, at our gas utility we continue our important main renewal work, which further reduces greenhouse gas emissions I'm happy to say we are on target to complete another 200 miles this year.
Finally, a DTE vantage, we continue to add new R&D projects and other energy solution projects for our customers, which enables growth with a focus on de carbonization.
We execute on all of this investment with a sharp focus on customer affordability.
And ensuring that we continue to manage our business to achieve that.
Our distinctive continuous improvement culture drives cost management, the shift from coal to natural gas and renewables also helps to further reduce operating costs are diverse energy mix helps reduce fuel costs as well.
And that allows us to maintain flexibility to adapt to future technology advancements.
Supports this transition to renewable energy, while achieving customer affordability goals.
<unk> further enhances opportunities for growth at DTE vantage.
With that let me turn it over to Dave.
Thanks, Gerry and good morning, everyone.
Let me start on slide seven to discuss how the inflation reduction act helps accelerate dte's clean energy transition, while also helping customer affordability.
As Jerry mentioned, the IRA has a lot of positive elements for DTE to benefit both our utility and non utility businesses.
Jerry discuss a significant capital investment that we need to make for our customers to provide cleaner generation and to improve and prepare the grid for electrification.
The IAA really helps maintain our customer affordability goals, while we execute this plan.
The wind and solar production tax credit support a more affordable acceleration of our clean energy transition as we build our renewable portfolio.
The ability to transfer tax credits will eliminate the need for tax equity partners, which allows us to retain an additional 40% of the investment for our projects.
The ptc's for nuclear generation support affordability by providing credits for our production based on the market price environment.
The IAA provides new investment tax credits for RMG, making some of the projects that we're working on at DTE vantage, even more attractive.
And allowing potential LNG projects to be more economic for our utilities the.
The increased tax credit for carbon capture and sequestration can benefit both our non utility and utility operations. The credits make more projects economically attractive, which enhances our business development opportunities and enables us to better help our industrial customers achieve their environmental goals.
The tax credits can also support future baseload generation with carbon capture and storage for our utilities.
Lastly, we don't see a material income or cash impact from the corporate minimum tax given our current tax carryforward position and accelerated depreciation provision in the IRR.
Overall, we view the IRA is beneficial for customers and supportive of the transition to cleaner energy, while maintaining affordability.
Let's turn to slide eight to review, our third quarter financial results.
Operating earnings for the quarter were $311 million.
This translates into $1 60 per share.
You can find a detailed breakdown of EPS by segment, including a reconciliation to GAAP reported earnings in the appendix I'll start the review at the top of the page with our utilities.
DTE electric earnings were $363 million for the quarter. This was $21 million higher than the third quarter last year drew.
Driven by accelerated deferred tax amortization in 2022 that was implemented to delay our rate case filings and keep us out of rate cases over the last three years.
These were partially offset by higher rate base costs and cooler weather.
Moving onto DTE gas operating earnings were $7 million higher than the third quarter last year.
The earnings variance was due to the implementation of base rates, partially offset by higher rate base costs.
Let's move to <unk> vantage on the third row.
Operating earnings were $26 million.
This is a $47 million decrease from third quarter last year due to the sunset of the RF business at the end of 2021, partially offset by higher earnings from industrial energy services.
On the next row, you can see energy trading earnings had a decrease of $33 million from the third quarter of 2021, mainly due to the performance of the power portfolio compared to last year.
As I mentioned in our second quarter call. There is also a reversal of the timing favorability in our physical gas portfolio.
As our strategic long positions used to support physical positions were transacted. This quarter. This reversal may continue in the fourth quarter.
Year to date energy trading earnings are $32 million and we are on track to achieve full year guidance of 20 million to $35 million.
Finally, corporate and other was favorable $29 million quarter over quarter, which is primarily due to the timing of taxes and a one time tax true up in 2021 that we mentioned third quarter call last year regarding.
Regarding the balance sheet for corporate and other we have already successfully remarketed the senior note associated with the equity converts this quarter.
And we'll pay down the $1 5 billion of parent debt coming due in November with the proceeds from the equity conversion the pay down of these notes and the early remarketing of convertible debt are good examples of measures taken to reduce interest costs.
Our planning process contemplated inflationary pressures and rising interest rates and we are confident that we will offset increased costs with no impact to our long term growth.
Overall, DTE earned $1 60 per share in the third quarter.
Me wrap up on slide nine and then we will take your questions.
In summary through three quarters, we're having a strong operational and financial year and we are on track to achieve our operating EPS guidance midpoint of $6 per share, which provides a our 8% growth from our 2021 original guidance midpoint.
As Jerry mentioned, we'll be filing our ERP in early November which will lay out our plan to support cleaner energy and the modernization of our electric grid, while focusing on affordability and reliability.
We believe the IRA supports affordability for our customers and positions <unk> to continue to grow in the near and long term.
We look forward to seeing you at EI, we will lay out our 2023 early outlook in our five year plan as we incorporate the details of the ERP.
With that I. Thank you for joining us today, and we can open the line for questions.
As a reminder to ask a question. Please press star followed by the number one on your telephone keypad.
Your question. Please press star one again.
First question comes from Nick Campanella from Credit Suisse. Please go ahead. Your line is open.
Hey, good morning team. Thanks for thanks for taking my questions here.
Good morning, I, just wanted to say Nick Good morning. Good morning, just wanted to ask on the ERP I know, it's I know it is pending and coming soon but.
No.
Common equity funding any thoughts there.
Dave do you want to take that sure.
As you mentioned, Nick we're going to give more guidance on our capital plans at EI.
So you're right we have a good opportunity with the ERP and the IRA to invest some additional capital.
We do have a strong balance sheet and rating agencies are full.
Got it thanks, and then I guess as it just relates to the electric rate order are not order, but you've got an ALJ.
I think you filed some exceptions as well just when do you see that kind of coming to fruition.
Are you still kind of feel comfortable in kind of given this outlook.
My understanding is that preceding comes after when you'd give the outlook. Thanks.
Yes.
Feel comfortable with where we're headed both the ALJ positions and staff positions.
If you take various components of that are quite supportive of our plan. So we view it as supportive of our long term plan and certainly there is strong alignment to make the investments in the grid as well as the clean generation. So there is strong alignment there as well.
Alright.
Thank you.
Thanks, Our next our next question comes from Shar <unk> from Guggenheim Partners. Please go ahead. Your line is open.
Hey, guys good morning.
Sure sure.
Jerry just starting off with the IRA and how that has impacted your thoughts I guess around the IRB I mean, obviously, there is clearly customer benefits and lower cost, but does that trigger kind of any sort of a revision to your planning inputs versus prior to the enactment right because we've been talking about this IRB.
For some time.
Where we could see an opportunity to avoid that tax equity and increase our rate base.
<unk> had a very positive impact on our ERP from two perspectives one.
Certainly lowered the cost of all of our investments in renewables as well as long term and improve the outlook for carbon capture and storage in our in our ERP, So very positive benefit to affordability, which allowed us to accelerate our transition.
And so I think youll see that when we roll that out next week, so a very positive impact from the IRI.
Of course, you know.
What the tax credits are 26 points.
From a megawatt hour on solar and wind PTC.
Ptc's on nuclear all of those are going to have a beneficial impact to our plan.
In terms of tax equity.
With the IR array in the provisions in our era, making tax credits transferable.
No longer need tax equity structure, which significantly.
Simplifies our plan, but also removes an investment partner. So we have now the opportunity to investor greater amounts in our renewables build out.
The positive impact overall.
Got it perfect and then just.
It sounds like I mean, you guys are even more constructive on the vantage segment post IRI, but simultaneously theres, obviously been some really high premiums paid for R&D assets.
We're really kind of changed your thoughts or even internal debates on whether you would ever put vantage under a strategic review.
And Conversely, since I already potentially accelerates vantage is growth.
Does it even make sense in terms of the business makes for DTE guys target as it were.
Thinking about regulated utility exposure.
So the way we're looking at vantage right now sure.
Ed.
It'll be our non utility business will be 10% of our portfolio.
Oh array.
The investment tax credit for R&D of 30%.
Just made the projects we were looking at even more economic.
Significantly lifted the IRS.
Any of the projects that we're looking at and then the co Gen.
The investment tax credit of 30% that also helps projects that we've got in the pipeline become much more economic so were excited about that so that 10% that we're looking to create and continue the great advantage is just become much more economic.
The last one is carbon capture and storage, which we have started to explore and have some interesting small opportunities in that arena as well, which not only will be beneficial to vantage, but will also be beneficial to our electric utility as we think about carbon capture and storage as it relates to our generation assets, so really starting to understand.
That business in a deeper way so overall I would say the impact on vantage from the IRI again was quite positive.
<unk> has had.
<unk> impact in our thinking as it relates to our electric utility as well as vantage in terms of creating a more opportunity in both.
Both business segments.
Got it terrific, thanks, guys and Gerry Congrats on a side comment on the latest addition to your family see you guys. Soon at EI. Thank you. Thank you Sir.
Our next question comes from Jeremy Tonet from Jpmorgan. Please go ahead. Your line is open.
Hi, good morning.
Good morning, Jeremy.
Good morning, just wanted to start off on R&D landscape, if I could given the Arcadia sales here.
What looks on the surface to be quite a robust valuation paid there just wondering any thoughts from your side on that transaction and whether that impacts here go forward R&D strategy.
Yes.
Hi, Jamie this is Dave.
As we've said we're always looking at our portfolio considering options. We did see the <unk> sale and I think it really highlights the value that others see for RMG and really the growth potential for LNG.
And so first gives us confidence that we're going to find more high growth potential projects.
Also.
We'll make us continue to look to make sure that we're doing what's best for the long term value of our shareholders right. Now we're just really confident in our business development pipeline, we continue to grow that and continue to find really accretive projects for us.
Got it so even with this level I guess of interest in this space in <unk>.
Expected rates of return on these projects.
We have some really good projects that are in our pipeline right now some of these are conversions and some with the IRA.
Of them become even more attractive so we still have a really strong business development pipeline that we see and the vantage business.
Yes.
R.
Our business development pipeline as.
As we look out a few years.
Well stocked with the highest return projects in the R&D space and we've also got a few industrial projects co Gen projects that we're pursuing.
That will bring value.
Long term value to the vantage business units.
It feels like the pipeline to US is very strong in terms of growth with high quality high quality investments.
Got it that's helpful I'll leave it there thanks.
Our next question comes from David Arcaro from Morgan Stanley . Please go ahead. Your line is open.
Good morning, Thanks, so much for taking my question good morning.
I was wondering if you could give a perspective on the commission's order that they recently kicked off.
Related to outages and safety I'm wondering what you think should come out of this in terms of potential policies or penalties or anything like that.
Sure. So as we look at the Commission order.
Our discussions with the commission continues to be really collaborative now, let's say the relationship is in a good place ultimately I think the result of this order is that it will create even stronger alignment as it relates to our investment agenda just to give you a feel for in our system on average operates at about 99, 9% availability now.
Best in class is 90, 997% availability of the grid. So you can see that this is a highly reliable industry.
When it comes to providing power to our customers.
All of our investment plans are really pointed at how do we get to that 90, 997% availability for our grid.
I feel that this process with the commission.
We will create stronger alignment and theres a lot of value for our customers to go even from 99, 9% to $99 97.
And we'll start to lay all that out.
It will be I believe it'll be a good process and it will come to a good conclusion.
Got it thanks, and does that sound like more operational changes are capex investments.
How could that improvement play out.
Well when I look at our circuitry.
We've got systems that need to be replaced and modernized and automated and as we rebuild new circuits.
And upgrade those circuits modernize them isn't required significant amount of capital investment and I think youll see that in our planning as we rollout our new planet.
Hi.
We continue to accelerate this strategic capital that we're investing in the grid in addition to our maintenance capital.
But it will be primarily a capital driven process.
Got it that makes sense and then I was.
Just wondering if you could comment.
Into 2022, given the strong results.
Yes, we have had a strong year in 2022 and as we as we look at our.
Our portfolio over the few years, we do try to balance what we can do in 'twenty, two and 'twenty three across all our businesses. So that we have been able to.
Find some opportunities to help 2023 as we go through this year too because as you've seen 22 has been a nice strong year for us.
Okay. Thanks, I appreciate the color.
Our next question comes from <unk> Kim from Goldman Sachs. Please go ahead. Your line is open.
Yeah. Thank you I think just one for me remaining just as we think about I guess the update said you guys will give it especially the the long for long term growth rate a lot of positives here that you mentioned what are some of the offsetting factors that we should consider and on a net basis do you still see overall.
<unk> is a positive I guess on netting out basis, I would think of whether it's concentration or maybe holding company leverage refinancing.
Items.
I'll start and I'll turn it over to Dave and Sue, but overall net positive.
We view.
Our ability to invest on behalf of our customers to really transform our generation fleet.
To a cleaner more reliable fleet.
As a significant opportunity and that'll be the basis of our ERP.
And also the investment in the grid to drive increased resiliency.
And reliability of the grid will be a significant opportunity for us. So this is going to crater.
Transformative opportunity and how we deliver power produce power for our customers, but also create a very significant investment opportunity for our investors to invest against all of this.
Many of our investments.
<unk> pointed at.
Areas that will reduce operating cost as well. So for example, our generation transformation will be a net positive to our customers investing in our grid ultimately will be a net positive to our customers. So we're pretty excited.
This historic transformation that we're undertaking at DTE Electric company.
Okay got it.
Maybe I'll just throw in one more.
As we think about the updated growth plan coming out of AI.
The base I guess year or.
EPS that we should be contemplating when you gave your role for thanks.
And we do a roll forward, we always go back to original guidance. So this would be on 2020 to original guidance.
Got it. Thank you so much okay. Thank you.
Our next question comes from Paul Zimbardo from Bank of America. Please go ahead. Your line is open.
Hi, good morning, and thank you.
Good morning, just wanted to follow up on a comment you made about <unk>.
Interest rates.
You said, if I heard right contemplated higher rates in the plants had no impact on long term growth just to clarify is it that you assumed kind of rates up here or is it that you have other offsets cost or elsewhere and the plan to dampen that impact and fully offset.
Yes.
We have a tendency to plan conservatively and we look at a lot of risk and and.
Depending.
Hey, regardless of how rates move regardless of how rates move we will be able to offset those with other other things within our plan.
Okay, Great and then.
Broadly could you discuss kind of how demand has been on voluntary renewables throughout 2022, I know it's been a very eventful year you had the large automaker announcement on solar this summer and just if you could discuss kind of incremental partnerships using that model from four that you're contemplating.
Yes.
Well, it's been an extraordinary year for our voluntary renewable program actually as a matter of fact this week we.
Executed.
Or in the process of executing an agreement for another 400 megawatts of sales long term commitments and this takes US now to a total of 2100 megawatts sold.
<unk>, which is well above our expectations, we would be at this point in time. So we will provide an update on how.
How do we see.
This progress and are successfully.
Impacting our long term plan. So we'll update you on that but it's been an extraordinary success story.
Yes.
Okay great.
On a super quickly do you think you can replicate the kind of success you've had in 2022 and 2023.
Well, we've got significant opportunities in front of US the pipeline is strong and will continue to grow that program and then as we look at transformation of our generation fleet that will also bring new opportunity to the renewable fleet. So renewables will be a big part of our agenda going forward here at DTE.
Okay, great. Thank you very much.
Our next question comes from Michael Sullivan from Wolfe Research. Please go ahead. Your line is open.
Hey, there good morning.
Good morning.
Hey, Jerry.
This one is actually for you just following on that.
<unk> impact can you just.
Let us know what youre, assuming for the repairs tax deduction on your.
Kind of end result, there.
Yes, Thanks, Mike Yes, right now we're looking at is written so we think that the way. It's written it does apply to things like storm repairs.
And it doesn't get the favorable treatment under the BMT.
Even with that we don't see that this is going to have a big income or cash impact on our plan.
We do know that Eas advocating to have this have this included in that we would benefit from that also but.
We've already we've already modeled that we can mitigate any cash or income impact from the BMT.
I'll start.
Okay. That's super helpful. And then just sticking with that I think you mentioned.
Some cushion versus credit metrics can you just refresh us on where where youre at on <unk> today and what the thresholds are.
Yes.
That's a little different across the agencies, but right now were around 16% <unk> to debt you can see the thresholds by rating agencies are in the 13% to 14% range. So we.
We do have some cushion there too.
To those to those levels.
Great. Thanks, Thanks, a lot.
Our next question comes from Travis Miller from Morningstar. Please go ahead. Your line is open.
Good morning, Thank you.
Good morning, Travis good morning.
With respect to the PRA was enough detail out on that such that the full impact will be included in the IR Pea or is there more to come I know you'd be able to incorporate it in your own forecast, but it's 100% of it is incorporated in the IRB.
<unk>.
It is it is incorporated.
Dave do you want to add or any thoughts to that well, we'll see the details as they get specified over the over the next year, but understanding what's going to happen.
At the high level for our generation.
Incorporating the ERP and then Hal.
Oh It goes into our plan, we can we feel like we can model that but how it how it plays out specifically is still yet to be decided as you know.
Okay, great. Thanks, and then.
Just real quick any election issues in Michigan.
Have a material impact on either short term or long term outlook.
But certainly we've worked well with.
Various administrations over our history.
<unk> dominated administrations Democrats dominated administrations.
We.
We'll see what happens in November but.
It feels like the Capex that exists today will likely remain intact in terms of political structure, but we'll know more after election day.
Whatever the results, we feel that we have productive relationships.
That there is clear understanding.
And strong support for that.
Okay, Great I appreciate it.
Thank you.
Our next question comes from Anthony <unk> from Mizuho. Please go ahead. Your line is open.
Jerry Dave Good morning, Congrats on a good quarter.
Good morning, Anthony.
Anthony.
I just had one quick one and I appreciate it if you want to hold an answer until you make the filing for the IRB.
Just if I understand correctly, there is a lot of consensus building.
Two the actual filing just looking for some insight into how does that still accurate.
Any particular topic or issue that you've got some more feedback than others.
Well I would say Anthony we did an extensive amount of stakeholder engagement throughout this process more than I believe we've ever been in.
So that's been quite valuable to us.
I would say.
Most revealing for US was when we tested our customer opinions across broad demographics.
What we saw was strong alignment.
With our ERP and that will certainly be very evident when we file the AARP.
Other stakeholders regulators and legislators I would say support of course as we get into the details will have to work out those details and I'm sure that.
Some states will have different opinions, but I'm pretty confident we're going to work through all of that.
With a really strong ERP that supports.
So fortunately transformation fundamental transformation of our generation fleet.
Thank you Anthony.
Yes.
Our next question comes from Ryan Levine from Citi. Please go ahead. Your line is open.
Good morning.
Hey, Brian Good morning, Brian accidents, and good morning, given the tax incentives for R&D and your comments around higher IRR is what are the constraints to accelerate these growth projects in your portfolio and for your outlook.
I would say the constraint is keeping.
Keeping that portfolio at 10% of our overall enterprise in terms of earnings and EPS.
But what I do see it with high ours is greater contributions.
Two.
More efficient capital deployment, if you will as we see higher IRR. So very juicy projects that means we will invest less capital in it.
I get the same ABS.
Okay.
And given the large changes to <unk> prices are you looking to evolve your hedging strategy.
With these projects.
We've had a pretty strong hedging program without CFS and also how we place.
Some of our federal products and we've got a combination of what I would call financial hedges against the sales as well as.
Fixed long term.
<unk> price sales price, but our price.
That's helping to balance any sort of fluctuations that we made yet as well as we build contingency into that plan to accommodate any any positions that might remain open.
Okay.
So given your constraint or youre, saying, a constraint around 10% of your portfolio contribution to this to these assets.
Do you view <unk> as a long term holder in this portfolio.
As that suggests that the growth prospects may be higher for somebody else.
Well look at it if we saw an opportunity to harvest and get more value than we see we're always open to that and I think we've got a long track record of doing that and non utility businesses.
I appreciate the color. Thank you. Thank.
Thank you.
Well. Thank you everyone for joining us today I'll close by saying that <unk> has had a very successful third quarter and were feeling great about the remainder of the year as well as our position for future years I'll look forward to seeing many of you at EI and a couple of weeks have a great morning stay healthy and stay safe.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation you may now disconnect.
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