DTE Energy Company (DTE) Q3 2012 Earnings Report, Transcript and Summary

Good day, and welcome to the DTE Energy Third Quarter 2012 Earnings Release Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Dave Meador. Please go ahead, sir.

Thank you, and good morning, everybody. And thank you for joining us. And just to start off here, welcome to our third quarter call. And as we're getting started, I encourage you to read the Safe Harbor statement on Page 2 of the document, including the reference to our forward-looking statements. Turning to Slide 3. With me this morning are Peter Oleksiak, our Senior Vice President of Finance; and Dan Brudzynski, who is our recently appointed Vice President and Treasurer. And if you recall, Dan was the Vice President of Regulatory Affairs and before that, Controller, and now is back in finance in the treasury role. And then Mark Rolling, our Director of Investor Relations. I also have members of the management team with me if needed during the Q&A session. Now turning to Slide 4. This morning, we're going to cover our third quarter results and give you an update on our outlook for the remainder of this year. We'll also be at EEI, which is a little over 2 weeks away, where we will provide additional details and our growth plans. So let's turn to Slide 5. Our investment thesis summarizes how we think about growing the business and delivering value to our shareholders. We have a disciplined plan that provides 5% to 6% long-term earnings per share growth. And if you combine that with our current annualized dividend of $2.48 per share, we deliver a total shareholder return of 9% to 10%. And as always, this is all underpinned with one of our key priorities of maintaining a strong balance sheet. We have solid growth plans at both of our utilities. At Detroit Edison, that growth is driven primarily by environmental mandates in the form of mission controls and renewable energy. And at MichCon, the growth is…

Thanks, Dave, and good morning, everyone. I'd like to start on Page 10 and third quarter earnings results for the quarter. DTE's operating earnings per share was $1.31. Detroit Edison contributed $1.13 and MichCon, which typically incurs an operating loss this quarter, actually came in $0.02 positive income. And I'll talk about more of that coming up. The nonutility segments combined to earn $0.22. The drivers to the nonutility second quarter results were Power & Industrial at $0.13; Gas Storage & Pipelines at $0.08; Energy Trading at $0.01; and finally, Corporate & Other had a loss of $0.06 in the quarter. Let's move to Slide 11 as summary of the quarter-over-quarter performance by segment. Operating earnings for consolidated DTE Energy were up $44 million in the quarter or $0.24 per share. Detroit Edison's operating earnings was at $194 million, up $37 million from the prior year. The favorable year-over-year performance was driven by warmer-than-normal weather flowing this year through earnings. Last year, a revenue decoupling mechanism was in effect, which temperature-normalized revenues. Now we continue to see stability in underlying load at our electric segment with temperature-normalized sales flat in the quarter net of a 1% impact of energy efficiency program reductions. Service territory industrial sales continued to grow, up 3% year-to-date. As noted earlier, the third quarter is typically a loss for our seasonal gas utility business. However, MichCon had an operating gain of $4 million for the quarter, up $15 million from prior year. The improvement to earnings was driven by higher transportation and storage service revenues along with lower lost gas expense in the quarter and lower O&M. This quarter is a clear demonstration that our continuous improvement efforts are paying off at MichCon. For example, the improvement in lost gas expense this quarter is a direct…

Thank you, Peter, and good morning, everyone. Before I begin, let me say it's good to be back here within finance at DTE. And I look forward to working closer with all of you on this call in the future. As I take over from our prior Treasurer, Nick Khouri, our commitment to cash flow and prudent balance sheet management remains a strong as ever. Now turning to Slide 13 and year-to-date cash flow and capital spending. 2012 cash flows are up, driven by increased cash recovery at the utilities, primarily related to the PSCR and the choice tracker regulatory recovery mechanisms in 2012 and an early 2011 cash pension contribution. This is slightly offset for the year by higher corporate tax payments. Capital spending is slightly higher in 2012 due to our investments in the Bluestone pipeline, as David mentioned, and higher base operating capital at the utilities, slightly offset by some lower renewables investment, a reminder that 2011 includes some large investments in our Gratiot wind park, which has since been placed into service. Then moving onto Slide 14 and the outlook for the year. We are raising our guidance for cash from operations to $2.2 billion, driven by warm summer weather, again we plan for the year at weather-normal levels, and the impact of the RDM court ruling at Detroit Edison. Our original guidance at the beginning of the year assumed the decoupling balances we have begun to be refunded to customers this year. And as Dave mentioned earlier, the RDM amortization will begin in 2014. In addition, cash at our nonutility businesses is also expected to be higher in 2012. Capital spending is projected to be higher also. You'll see that detail to the right on the slide, where nonutility investments are up as a result of the acquisition of the on-site energy project portfolio from Duke Energy within our Power & Industrial group this October. We also anticipate a slight remixing of CapEx at Detroit Edison but still yielding roughly a total of $1.2 billion. And finally, finishing up with a look at the balance sheet and our credit metrics on Slide 15. Leverage and FFO to debt remained well within our targeted ranges. Liquidity is strong and our rating agency outlooks are positive. We've issued $160 million in equity year-to-date into our pension and benefit [indiscernible] program for the year. And now for the third quarter wrap-up, it's back over to you, Dave.

Thanks, Dan. As we laid out for you, the results through the first 3 quarters are very solid. With a benefit of favorable summer weather, we're able to reinvest in our electric generation distribution systems and confidently raise the midpoint of our earnings guidance per share by $0.10. Setting aside the unusual weather this year, which is providing upside at Detroit Edison and pressure at MichCon, on a temperature-normal basis, both utilities are on track to earn their authorized returns. Longer term, the utility growth plans are underpinned by mandated environmental-related investments and we're also seeing nice growth opportunities at the nonutility businesses. When you put this altogether, they combine to provide an overall long-term earnings growth per share of 5% to 6%. And as we indicated, we always do this by maintaining a strong balance sheet and solid cash flows. We'll be at EEI in a little over 2 weeks, as I mentioned, and we hope to get a chance to see many of you there. For those of you not going to EEI, you can tune in to Gerry Anderson's presentation via the webcast, Tuesday morning, which is at 9:45 a.m., Mountain Time. And that's 11:45 a.m. for those of you in the Eastern time zone. And you'll be able to join that webcast through our Investors section on our website. And now we would be happy to take questions.

[Operator Instructions] We'll go first to Mark Barnett with Morningstar.

Just a couple of quick things. With the RDM gone, what's the likelihood that you look to address volumetric changes through some other alternative mechanism?

Well, it's possible down the road. As we've indicated, our approach and strategy right now is to stay out of rate cases for multiple years. So if everything works out, well, we would not be filing a rate case until 2014 for 2015 base rate changes. In the meantime though, and you can certainly check this out with CMS in a couple of days, they have filed a rate case, where they have proposed a mechanism to basically address what you're talking about. So we'll watch that rate case go through. And I think there is some openness to dealing with some of the volume changes, especially that might come through in between rate cases relative to energy efficiency.

And with that, should you propose such a filing that wouldn't require a full base rate case though? Is that correct?

Don, do you want to take that question? Don Stanczak is our Director of Regulatory Affairs.

No. Typically, if you're looking to implement any kind of tracker, it has to happen within a rate case.

Okay. All right. That's helpful. And just one more item. It's a small thing, but can you give a little bit of detail on what was driving your stronger transportation and storage results, given that many of your peers have felt some significant pressure on those businesses so far this year?

Even the combination of the storage was really with the -- a lot of the natural gas here in the region and really finding a home for that storage. And so we were seeing, on a short-term basis, some favorable margins and took advantage of that both in our MichCon and our GSP segment. On the transportation, actually our Millennium Pipeline is benefiting from that Marcellus Shale production, and we're seeing that in the results.

And our next question will come from Caroline Bone with Deutsche Bank.

You had said on the Q2 earnings call that storm expense would offset maybe about 1/2 of the weather benefit in July. Could you quantify what that was for the quarter?

Yes. Quarter overall had a $50 million weather impact. So the storm expense, actually we had that first storm in the July. Actually from then, we didn't really have a lot of catastrophic storms. Actually year-over-year, if you look at it, storm expense is down on a year-over-year basis. So we did see most of that margin favorably flow through.

So that was -- if you'd go back to that second quarter call, we were only into really a month of the quarter. And at that time, we've just come through a pretty bad storm in July. But as the rest of the quarter played out, there was margin favorability way beyond that storm. So the storm offsetting half of the margin improvement is not accurate. It turned out to be a lot less than that for the quarter.

And our next question will come from Naaz Khumawala.

Just a quick question for you all. If you don't mind, what base are you using for the 5% to 6% growth rate?

You should, when you're looking at forward years, use our original guidance of $3.80 per share.

Okay. So not on the new midpoint of the new 2012 range?

No. One way to think about it is what we're seeing in this uptick is primarily weather, which is not normal weather. So after seeing coming through at Detroit Edison and so on a forward-looking basis, the right grounding point is $3.80.

Understood. And then I think you'd said, and sorry if I missed this in the prepared remarks, but that some of the weather was -- you did a reinvestment of O&M?

Yes.

How much is that? And then how much -- so an ongoing basis, kind of what level of O&M should we expect?

Right now, we're looking at investing probably around $20 million to $30 million of O&M back in the businesses. Early on, when we saw the weather impact swing the other way, first quarter, we actually put some continuous improvement in one-time cost actions. So absolute O&M probably will be up around $20 million, but we're targeting probably closer to $30 million from our reinvestment. And it really is one-time type of investments, kind of shoring up our distribution systems, our power plant reliability type of expenditures.

Yes. No, that makes sense. And then if you can talk about kind of over the summer, did you see -- given the hot weather, was all your generation running, assuming there was no differentiation due to gas prices or anything?

No. In Michigan or even in the Midwest, there's very, very little gas switching capability. As a matter of fact, [indiscernible] if you look at it on a capacity basis, it's even 10% of the capacity and [indiscernible] can switch to gas. So the coal plants run predominantly all out because we don't have that capability.

And actually, our coal plants are having a good year from reliability.

[Operator Instructions] We'll go next to Brian Chin with Citi.

On Slide 14 for Detroit Edison, the capital expenditure guidance numbers have moved around a little bit between environmental and renewables. Can you just talk about that a little bit? And then also just a longer-term CapEx story for '13 and '14, is that going to be given out at EEI? Or what's your thought about giving a little bit longer-term view on CapEx?

Right. On the -- first, on the capital of what's playing out in the renewables, as we accelerated some of our renewables spend because we were -- like many, we're looking at the potential for extension of PTCs and trying to watch for unserviced date. And at the same time, we were also getting great opportunities on the procurement side. So there was a conscious decision there to pull ahead some of the spending. And on the environmental, what is playing out there is the success that we're experiencing on the DSI testing. Now if you recall that the DSI testing, we said that it turned out to be much more successful than we thought. And it's causing us to shift some of our capital spending over several years. And we will lay that out at the EEI when we lay out our capital for multiple years. We'll give you that in several weeks. But what you will see is it's going to allow us to make some DSI-related investments over the next couple of years and defer some of what we would've thought we would've been doing on scrubbers on some of our plants. And that will play out in the capital numbers that we'll show you.

And our next question will come from Andrew Weisel with Macquarie Capital.

In terms of weather-adjusted load growth, if I heard correctly, it was about 1% of a negative impact from energy efficiency. So the total number from the supplemental slides here show flat year-over-year load growth. It's a little bit lighter than I was expecting. Can you give a bit more commentary? I mean, we see the macro data on auto sales and things like that. Can you just talk a bit more about what you're seeing and what your expectations are for the next few years?

Yes. This is Peter. First, let's talk about the macro indicators. We look at unemployment. Actually this time last year, unemployment was 1% higher, so we're seeing a 1% decline on employment. Housing starts is another key indicator, up about 50%, so seeing some strong housing starts. And as you mentioned from the auto sales on an annualized basis, they've recently just come up with their numbers and they're at 14.9 million units. So we really haven't seen those levels probably for 5 to 6 years. So all indications are real strong from an economic indicator. On the residentials, on a year-to-date, temperature-normalized were flat. And typically for that segment, we will see about a 1% to 2% estimate on energy efficiency. So one way to think about it, we have growth, organic growth happening there that's offset by energy efficiency. The other thing that we really monitor from an economic perspective is the industrial. And we are seeing a 3% growth there year-over-year. And we are seeing strength in the autos and the steel segments.

Okay. So do you have any thoughts as far as what you're expecting for, say, '13 or the next few years in terms of weather-adjusted load growth?

We are anticipating probably close to about 1% growth, net of energy efficiency.

Okay. So meaning, plus 2, minus 1?

That's correct.

Okay. Great. And then my only other question, the lowered expectation for trading business. How should we think about the sort of longer-term run rate of earnings contribution? I know it's very difficult to predict and it's volatile. But should we be taking down kind of numbers from, I believe the prior guidance was about $40 million as a run rate?

We will give you our early outlook at EEI in a couple of weeks. But what you're seeing in this year, and I think generally, what you're going to see going forward is we want to plan conservatively for that group. We still are not wavering from our 5% to 6% earnings growth projections. But it's a group that whether I do guidance or I'm doing it internally, I don't push them on earnings because I don't want to change the risk profile of that business under any circumstances. So we plan conservatively. And at the same time, we're going to hit our 5% to 6% growth numbers. And we'll outline that by business segment at EEI for you.

And our next question will come from Andy Levi with Avon Capital.

I think most of my questions were answered. So I guess, weather normalized guidance, just to understand it would have been like, $3.65 to $3.85. So we backed out about $0.15 for year-to-date weather. Is that kind of the way to look at it?

No. We don't -- I don't know I have that at our fingertips. But you can take the excess weather and back that out.

It was about like $25 million, right, or something like that? I think it was. Okay.

Right. But the other thing that's happening here, as we talked about, was O&M. We're trying to be very flexible on how we operate the company to work around weather. So the first half of the year, we were pressing hard down on O&M. Now we find ourselves in a situation where we're reinvesting in O&M. And that's directly related to weather. So I wouldn't doing that otherwise, so you have to net that all together.

Okay. And then relative to kind of the Barnett Shale sale and the need or no need for equity -- I mean, again I'm sure it will be something that will be discussed at EEI. But can you kind of give us an idea for '13? Are you not going to need any equity in '13? Is that kind of the way to look at it?

Well, our base plan that we've laid out hasn't changed, that we're going to be spending significant amounts of capital over the next several years. And we are still projecting that on average, it's about $300 million a year of equity that we would do through our benefit plans and through the pension plan. We are working our way through the Barnett sale, it’s all real-time right now. And as you know, we have a placeholder that we've put in our sources and uses for $300 million. And it's reasonable to say that if we got significantly over $300 million that would put less pressure on the need to issue equity. But we'll be able to update you at EEI. I don't know that we'll be far enough through the sale process. But as that plays out, we're going to lay out a base number on equity for next year. And then again whether the Barnett sale comes in very healthy or we find other investment opportunities, we would be wiggling the equity number. But at the end of the day, our goal is not to be doing a public issuance and to do this through the benefit programs.

Okay. And on the gas pipeline segment, I just want to make sure that I heard that correctly. You said you'll be at $100 million by the end of 2015, not '16?

It's '16.

It's '16. Okay. Because I thought you said '15 with the new investment with NEXUS. But okay. So it's '16. I misheard, I apologize.

Right. And NEXUS, just to be clear, that it's a proposed pipeline. And right now, the projection is looking at everything that we'd have to do, including FERC approval and so on, as that pipe would go into service at the beginning of '16. So that would be the first year that you'd actually -- if everything works out according to schedule, that you would actually see earnings impact from NEXUS.

Okay. Which is in line with what you have said in the past. I thought I heard '15, so I thought...

Okay.

And then last question is, and this again may have to wait for EEI, but -- so the only kind of -- blemish is too strong a word. But obviously, the trading segment didn't meet expectations this year, and obviously, is the one part of your business that's not predictable. How should we think about that for '13? Or does that need to wait for EEI?

I think we should just wait. As we've said before, that this is not part of our growth story and we had went through a period where, on average, the earnings of cash flow was about $50 million a year. And we're going through a period right now where it's $20 million to $30 million a year. And we're okay with that and still being able to hit our growth objectives.

And our next question will come from Timothy Yee with KeyBanc Capital Markets.

Just 2 quick questions. Do you think it's still possible to have the remaining 2 REF machines sited and operational by year end? Or might that go into early 2013?

Right now, based on where we are, it's going to slip into the beginning of 2013.

Okay. And then could you just discuss a little more on this 25 x 25 Proposal 3 ballot, and then how that's tracking and how that might play out in Michigan?

Sure. Thanks for the question because we feel pretty strongly about this, that it's a terrible thing from a public policy standpoint that we don't think this is good for the state of Michigan. It's not good for our customers and we certainly don't want out-of-state groups coming into Michigan and hijacking our Constitution. So the business community, if you look at the Michigan Chamber, the Detroit Regional Chamber, the Michigan Manufacturers Association and the state of Michigan, they're all very aligned in the opposition to defeat this proposal. And that's our intent, to defeat the proposal. So we're working hard right now. And the polling data is showing that the more the people learn about this and the vagueness of how it's written, that the support for this continues to go down every day as we speak. So right now, we're focused on defeating it. And obviously, if it passes, we can talk more about the implications of that down the road. But I hope I don't have to talk about it after the election.

[Operator Instructions] Our next question will come from Kevin Fallon with SIR Capital Management.

I had a question for you on the O&M levels at Detroit Edison for this quarter. It looks like they were actually down in 3Q '12 versus 3Q '11. I was wondering why that was.

That really is -- if you look in the quarter, we're talking earlier about the storm cost, where we did see a storm early in the quarter. It was pretty quiet after that. Actually, storm cost this year versus last year, we're about $20 million less this year versus last year.

Okay. And for modeling purposes going forward, should we look at the authorized ROE for Detroit Edison as kind of the target for where you guys should come in? Or it's the floor?

We -- our goal is to consistently earn our authorized. That doesn't mean that we won't slightly under-earn or slightly over-earn. But I think from your standpoint, the way you should view this is it's a company that's objective is to consistently earn its authorized. Because of the way renewable energy works and energy efficiency works here under the law, there's a slight uptick over authorized that we can still earn. So for example, at Detroit Edison, where the authorized is 10.5%, we actually have the ability with those other 2 mechanisms to earn 10.6%, as an example. So there will be slightly over-earning before that. And I also think that we can work within the bandwidth around authorized. But my goal is not to wildly over-earn in any year because we don't think that's the right thing to do in running these businesses.

Okay. And finally, on the MichCon rate case with the self-implementation of the $34 million, do you need to get the commission to vote on that? Or can you guys just do that as planned on November 1?

This is Don Stanczak. We can just self-implement. Now in the past, the commission has issued orders on self-implementation, but they have not thus far on the MichCon case. So if they don't issue an order, we can just self-implement on November 1.

And Mr. Meador, we have no further questions in the queue at this time.

Okay. Thank you, and I appreciate everyone's involvement today and the great questions you have. And we look forward to seeing you at EEI. Thanks again.