Good morning, ladies and gentlemen, thank you for standing by, and welcome to the DTE Energy Second Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to turn the conference over to your speaker today Barbara Tuckfield, Director, Investor Relations. Please go ahead.

Thank you, and good morning, everyone. Before we get started, I would like to remind everyone 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 of today's presentation. With us this morning are Jerry Norcia, President and CEO; and Dave Ruud, Senior Vice President and CFO. And now I will turn it over to Jerry to start the call this morning.

Well, thanks, Barb, and good morning, everyone, and thanks for joining us today. I hope you and your families have been healthy and safe during this pandemic. I want to begin this update by saying how very proud I am of the DTE team because of the way we are working together to ensure each others safety and continue to serve our customers, support our communities, and deliver for our investors. It is great to be part of such an amazing team that have responded so well and achieved so much in this crisis. This morning I'm going to provide an update on the successful implementation of our COVID-19 response plan that we discussed on our first quarter earnings call, which puts us on track to achieve our 2020 financial targets and positions us to achieve our long term goals; I will also provide highlight on the strong progress at each of our business units. Dave Ruud will then provide a review of our financials, and we'll wrap it up before we take your questions. Before we start, I'd like to take the opportunity to congratulate commissioner Dan Scripps on the recent announcement appointing him to be the new Commission Chair. Since joining the MPSC, he has taken a balanced approach, and we look forward to continuing to work with him. I'd also like to thank former Chair, Sally Talberg for her tireless work and positive contribution on energy policy and regulatory matters for the State of Michigan. So let's start on Slide 4. At the end of the first quarter, we shared our plans and respond to the pandemic. We also talk about what we were doing for our employees, customers, communities and investors, and how we will achieve our financial targets. We have progressed really well across each…

Thanks, Jerry, and good morning, everyone. First of all, I want to thank everyone for the well-wishes I've received since taking on my new role as CFO. It's been a pleasure meeting many of you over the past few months at least virtually, and I look forward to having more conversations and hopefully meeting in person at some point. Let's move on to our financial update on Slide 11. Total operating earnings for the quarter were $295 million. This translates into $1.53 per share for the quarter, and you can find a detailed breakdown of EPS by segment including our 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 $219 million for the quarter, which was $85 million higher than 2019, largely due to the implementation of new rates, warmer weather, non-qualified benefit plan, investment gains and a one-time tax item offset by rate base growth costs. As you remember from the first quarter call, we had incurred investment losses related to our non-qualified benefit plans, which are recognized immediately rather than smooth overtime. Now in Q2, we saw gains from those investments as the plant experienced the same positive results as the overall market in the quarter. We've now taken steps to reduce the volatility of the investments going forward, so we won't experience these market-driven movements in the future. Moving on to DTE Gas, operating earnings were $11 million for the quarter, $7 million higher than last year. The earnings increase is driven primarily by cooler weather at the beginning of the quarter and infrastructure recovery mechanism, partially offset by rate base growth costs. Let's keep moving down the page to our Gas Storage & Pipelines business on the third row. Operating…

[Operator Instructions] Your first question comes from the line of Shar Pourreza with Guggenheim Partners. Please go ahead.

Couple of questions here. First on the first quarter call, you rolled out the leaner actions to offset headwinds, and you reestablished a contingency plan measures were around 120 versus the 60 million in corporate cost. You're tracking well versus your 1Q plan, COVID is better, sales are better, do you envision still meeting the full amount to achieve the '20 targets, obviously, you're planning to keep electric rates flat in '21. So trying to kind of figure out how much of the lean initiatives or the incremental cost cuts you need given some of the moving pieces? Or should we just assume you'll utilize the full extent to help overachieve the yet to be determined 2021 guidance maybe when you launch on '21, we could assume you have enough contingencies or levers to initiate on a range that could maybe point to the top end of 5% to 7%. So just curious on sort of those moving pieces?

Sure. Great question, Shar. So at this point in time we're continuing with the full size of the economic response plan of $120 million that we talked about in Q1, and we're doing that for several reasons. One is the - how this pandemic will play out for the balance of the year still is not a certainty. So we want to hold on the contingencies to accommodate any possible eventualities there. So that's one. And two, as you mentioned we are deep into the planning process for 2021 and feeling pretty good about 2021 with the results we're seeing now, and our abilities to pull forward expenses and create contingencies in 2021 across all of our business units.

So we'll look for that. And then just on the equity needs, prior language seem to allude to equity needs coming maybe a little bit closer to the bottom end of your ranges and that language may have been removed. Is there any change there or is the prior language still kind of applicable to you? And I've just one follow-up.

This is Dave. Yes, we are consistent with our '20 to '22 equity plan still and look to balance issuances over that period. This year we've already issued about $70 million through some internal mechanisms and were range for the year now.

And then just Jerry, just maybe strategically, just wanted to maybe get a little bit more reinforcement on your commitment to the midstream assets. Obviously, we saw with the very similar peer essentially exit the business, you call Gas Midstream. Thoughts on these trends and how you're thinking about the overall non-utility portfolio. I mean do you see these assets more in the hands of private ownership at some point especially as we get closer and deep into sort of this ESG and decarbonization trends in the sector, which is I guess, one of the reasons, why one of your peers exited that business. So I'm kind of curious on how you're thinking about this in light of your - the move around ESG and decarbonization trend as you clearly highlighted?

Sure. Well, thanks for the question. Sure. We - let me start by the distinctive features that this business offers to us and our investors. We like the business. It's created a lot of value for us over many years. We have some high value organic growth locked in for the next three years at approximately 10% earnings growth per year. We're positioned in two basins that will experience significant supply growth. And for the 10th year in a row, this business is exceeding our expectations. So we have really top notch commercial and operations team there. In terms of selling, the market valuation is really at an all-time low, when you look back even before the shale revolution. So it really doesn't feel like the right time to sell to us, although we're always looking for ways optimize the portfolio and create value for our investors. And if another investor put significantly greater value on this business than our current investors that we would definitely consider it. In terms of ESG, Shar, we have initiatives that drive towards net zero for a lot of these businesses and they continue to add value to our investors in that way both in our gas LDC business, as well as our - our pipes business.

Your next question comes from the line of Michael Weinstein with Credit Suisse. Please go ahead.

I'm not sure, did you answer this question, for Shar. I was just wondering why DTE Gas is also not at the high end of the range. I think you said DTE Electric and GS&P would be there, but I noticed DTE Gas is not part of that?

Dave, you want to start?

Sure. Yes, DTE Gas, we experienced some, some really warm weather in the first quarter that we're still trying to overcome. So we did have some cooler weather in the second quarter, but started to offset that. But we're - we're really working on the - our ERP plan there to try to make that come in as good as it came this year.

That the ERP is our - cost reduction plans that will - will bring us back in line there.

Right. And also, how has the cancellation of the Atlantic Coast Pipeline affected demand for NEXUS and Link, and your other assets directly, as there been noticable shift?

It's certainly creating a positive environment, Michael for both LINK and for Nexus, if you recall the Atlantic Coast Pipeline kind of draped over our LINK assets and some of our shippers were counting on ACP to move their volumes East, while I think that LINK certainly becomes a fundamental outlet for some of those customers in that region. And also getting that gas to market positions Nexus quite well for that. So we're starting to see - continue to see more and more activity on Nexus, which is positive.

You think the remaining one-third to be contracted long term. Do you think that could be happening sooner rather than later, as a result of the cancellation?

Well, it certainly will help. There is no question about that. I think we mentioned in our last quarterly call that we're starting to see some of our customers transition from seasonal contracts, that contracts that push beyond one year, and we're seeing more and more of that activity. We've actually seen some favorability in pricing as well in the first and second quarter and lock that in. So the asset is performing right on top of our pro forma at this point in time. And all of these positive developments will only help that going forward.

Right. And also - just one final question. Could you describe what you're seeing in terms of demand in the Haynesville and Marcellus versus other basins?

So as supply has come off fundamentally in some other basins, like for example, the Permian Basin, which is an oil driven basin with associated gas, the - the replacement of those suppliers, as we start to see temperature, normal weather in the winter will have to come from two basins that can grow, which is the Appalachia Basin, which we're well positioned there with our assets, as well as the Haynesville. They are the two most attractive basins to increase dry gas supplies. So I think we're really well positioned for those assets. Now, as you know, we are contracted long term. So as those basins continue to grow, it should create some nice upside for us in the plan going forward.

And your next question comes from the line of Julien Dumoulin-Smith with Bank of America. Please go ahead

So I wanted to follow up on some of commentary [technical difficulty] highest level. Can you comment on sales are trending better than you thought, but it sounds like COVID costs net-net are still in line. What's the discrepancy there, if there is any, if you see one right i.e. bad debt costs or whatever - whatever that is, isn't quite keeping up with an improvement trend? And then the second related would be, how do you think about sales trajectory now in light of the better than forecast trend in just the last few months. How does that position [technical difficulty] if you think about that sales sort of initially into '21 if I can - If I dare ask?

Sure. So let's start with the expenses. Those are very much in line with what we expected, and just give you example of couple of those are DTE protective - protection equipment for our employees that was significant incremental expense that - that we had forecasted would be there for the balance of the year. That's tracking on plan. Of course, significant cleaning operations that are required for both vehicles and facilities. That's tracking on plan. So those are two examples as to why COVID expenses are tracking to plan. And as you mentioned, sales are tracking better than plan, especially in the residential sector, where we see a significant amount of margin generation compared to industrials. But even our industrial load and commercial load is slight - tracking slightly better than plan. So all of those are the fact that we're on plan with our cost and ahead of plan with our sales as - on essentially normal basis, just creates strong tailwinds for our financials this year.

But '21 any specific commentary, as far as you see it?

'21, as I mentioned we're deep into the planning process for 2021, and using the strength that we're seeing in our utilities and our non-utility businesses that contingencies for 2021. So I would say, we're very well along in our planning for 2021 and feeling very good of the long term guidance that we provided as it relates to 2021.

And to clarify that even further. It sounds as if in your response to the prior question that you're largely still contemplating realizing the cost savings articulated from the last call in this current year, such that if I can draw this conclusion, your confidence in '21 does not include rolling forward these cost benefits, is that right?

I would say first of all, we're on track with the cost reduction plans that we talked about in the first quarter, the $120 million of net income that we're seeking, well on plan, tracking every month, every week. We track the plan on that. We're in fact using some of the strength that we're seeing in sales both due to weather and some of our residential load to help build contingencies for 2021. So I would summarize by saying this way, we're shaping up to have a really strong 2020 and more to come on that in the third quarter, as we start to see this pandemic unfold a little more and also shaping up to build a strong 2021.

And your next question comes from the line of Jeremy Tonet with JPMorgan. Please go ahead.

Just want to follow up with GSP a little bit here. And it seems year-to-date you guys, as you sort of tracking quite well versus guidance and this is even before LEAP comes into service, which seems very imminent here. Just wondering, is there anything kind of in the back half of the year that we should be thinking about seasonality or any type of offsets or headwinds because it seems like you're positioned to do well within the guide or even kind of beat the guide here. So just trying to figure out gives and takes with - with the business?

2021 feels like it's going to come in strong for GSP. The LEAP pipeline that was built into our original planning to come into service in the third quarter. So it's come in a little early, which is - which is - well in August, 1st of August, start of the third quarter. So that feels good. So we feel very confident in 2020 plans and are actually working to use some of that strength to build a successful 2021.

And just kind of curious with the slack in the oil and gas industry right now, if you guys see much of an ability to kind of cut costs or as far as the budget for building LEAP expansion or other pieces that you're able to kind of get better efficiencies across there, just given where the industry is right now?

Certainly, we've used the - the pandemic as a reason to pursue cost reductions in the pipeline business as well. And all of those cost reductions are benefiting 2020 certainly, and we'll look at what of that we can roll into 2021 as well, so that we can create greater strength for contingencies for 2021. So feeling really good about the two years, 2020 and '21 in that - in that business line. We've also seen some incremental activity both volumes and price in our first pipelines, as well as our storage assets. So that's been very good as well for 2020.

And then one last one, if I could sneak it in. Just with your net zero emission goal, do you see hydrogen playing a role for DTE over the next several decades, as you - you work to achieve that?

We're starting. We are really starting to probe into hydrogen as a possibility. With our very large network of pipelines and storage assets, hydrogen could become a very interesting way to store renewable energy in our pipeline system, the storage assets, as we - as you can blend so that's amounts of hydrogen into the natural gas stream. But it's something we're starting - we're starting to think seriously about and also thinking about some early opportunities to commercialize our potential.

And your next question comes from the line of Jonathan Arnold with Vertical Research. Please go ahead.

Quick question. Dave, you mentioned some of the drivers in DTE Electric. Any chance you could quantify the benefit you had on the non-qualified plans and maybe the tax item?

Yes the non - the non-qualified plan, again that was we made up most of what we lost in the first quarter there. And so when you look at that versus 2019, it was - it was around a $10 million difference upside for us. And then the one-time item that was related to our property tax settlement for prior years with the local municipality and that was around 15 million after tax net benefit and some of that benefit will continue for us into the future as well.

And then just, I noticed that you guys pulled out like 15 million or so of sequestration costs from your operating earnings, which has - I got a little surprised, given how well you're doing on bringing in the savings and the top line has been coming in ahead. So just is that - are you - is that because you're expecting eventual deferral treatment or some other - what's the thinking there?

Our goal there is really just to give investors a clear view of the quarter. And so we - we do have some COVID costs that are ongoing, and we know that, that will continue and Jerry talked about those things like PPE, enhanced cleaning. However, we did have some costs that were very one-time and non-recurring. So in the very early stages of the breakout in Southeast Michigan, we're really trying to ensure that we kept our employees fit and safe, as we were trying to learn more, so list of things like hotel stays to keep our team safe. So we - we realize those would be things that wouldn't be recurring. So we wanted to break those out separately. And they were - they are just not - not cost either that we were discussing as deferrals with commission on those - on those costs either.

Okay. So that just was a Q2 discrete items?

Yes, very, very discrete.

And on the subject of deferrals, I know the commission approved fast debt deferral. Where do you stand on deferral of other items? And just how you treated that at this point?

I am - there is an order from the MPSC ,the other day, they left it open that we could look at tracking some of these costs. And I think that was a great example of how the MPSC is willing to collaborate with us and ensure just a constructive environment here. So they haven't approved the deferral of any additional cost for COVID, but they left that opportunity open for us to make informational filing, if that's necessary. I think as you're hearing with the warm weather and the tailwinds from economic response plan, I think they realize we may be able to avoid these additional deferral costs as well.

Okay. And can I just got one - I know you're getting to defer the bad debt, but can you - is there any data points you can share with us on non-payment, yes, just sort of relative to I guess same time of prior year to ex-out seasonality? And just any thoughts about whether - to what extent that's been mitigated by some of this enhanced unemployment benefit and just what your thoughts are about those trends going forward as well?

Sure. So Jonathan, I'll take that one. At the highest level, we're watching bad debt expense and arrears on a daily basis. And interestingly, we're preparing for a much more significant impact year-to-date but that has not happened. We're just not seeing a significant movement in bad debt expense and arrears right now. We're seeing modest movements even on a seasonal basis. And we attribute that much to what you described, which is there has been some significant amount of government stimulus that's been brought into people's hands to - in order so that they can pay their bills and continue with their business operations even. So that's been quite helpful. And that's been very different than the last time we went through an economic crisis, where we saw our residential customers and small businesses deeply impacted and that turn into bad debt expense and arrears. Now going forward, we obviously remain in a conservative posture, as well as we have a deferral account that will help accommodate the protections for our customers to enforce, if that was to change in the future.

And your next question comes from the line of Durgesh Chopra with Evercore. Please go ahead.

So, I have two, just quickly on the quarter and sorry if I missed this, but can you quantify for us, one, how much benefit the weather was versus the plan? And then what of the $120 million target did you achieve in Q2?

Sure, I can take the weather part. Yes, we do break out weather impact in the deck. So if you - on Slide 21, so you can see Electric, we saw $18 million of operating earnings favorability in the quarter and got a pretty much to flat on weather for the year. And relative to 2019, that was about $31 million favorable. We also saw some favorability at gas because it was cooler, the first part of the quarter and that was about $10 million, but for gas we're still down for the year on whether overall because we had a really warm first quarter.

And I am sorry, I missed that. Any sort of color in terms of what of the 120 million do we get in the Q2?

We're tracking right on plan with each and every week. It's something that we track. So we're delivering the 120 on a ratable basis for the whole year at this point in time.

And just one quick follow up. In terms of upstream bankruptcies, I'm not sure if Chesapeake is actually a customer of yours or not, but any implications on existing pipeline contracts or any implications on just future growth plans, as a result of those?

So, Chesapeake is not a customer of ours, so that will have no impact on our plans, as far as our other counterparties, they all appear to be in really good shape and are delivering on our commitments to us contractually. So we feel pretty good about the posture that our shippers are in at this point in time.

And your next question comes from the line of Sophie Karp with KeyBanc. Please go ahead.

A couple of questions actually. First, correct me if I'm wrong, but I think in the past your strategy has been that when you had gains due to weather, you would buy a lot your O&M, a little bit and vice versa to kind of shape your O&M spend with weather, a little bit. Is that different now because all of the contingencies due to COVID, are you effectively banking the weather benefits to kind of protect the earnings against the COVID? And who is that create greater O&M needs down the road? Just I guess that's a long way of asking that.

So I think it's a great question. We have not walked away from our investment lean plans, as you described. So in times of favorability, we move to an invest mode, where we start to invest in maintenance that what otherwise have been done in subsequent years or we go lean. So initially here we went lean in a significant way sort of a deep lean if you'll of $120 million target that we have, and we're holding on to that right now. And also starting to think about how we can use some of the weather favorability to create pull forwards for 2021 and create contingencies for 2021. So there is a lot of pieces here that are coming together sort of our current lean actions that are tracking to plan, as well as weather favorability that we're seeing that we'll likely use to create headroom and contingencies in 2021.

And my other question is, could you maybe walk us a little bit through the cash flow impact of the alternative rate strategy in the Electric, when you skipping the rate case and you have some account - you had an accounting order that allowed you to protect or in future [technical difficulty] but how you support in your cash flows? What are the mitigating factors there during that time?

Sure. I can - I can take that. You're right. As we accelerate the amortization of ADIT regulatory liability about 108 million, that will give us the earnings without the cash. But part of the offset of that was our notification that we're going to file for securitization filing early in 2021 that would include some of the securitization for our tree trimming surge and the net book balance in our River Rouge. So that will help us remain roughly in the same cash position overall, as we get that securitization.

The same cash position versus 2020?

As we would have been in '21 with equivalent increase in rates.

And your next question comes from the line of James Thalacker with BMO Capital Markets. Please go ahead.

Don't want to beat the dead horse here because I think Shar and Julien asked the question, but just as you are talking about the $120 million contingency, Jerry, I thought you said that, you are looking at that sort of on a ratable basis even though you probably started putting that really into full mode probably starting in March, is that correct?

We started in March, that’s correct. We started to deploy in March, billed at $120 million.

So as we think about through the rest of the year, you still think that that $120 million is going to be sort of ratable from that point through the end of the year. In terms of how we are thinking about O&M offset, I guess, partially by probably some advanced spending as long as the weather stay sort of favorable as it has been so far.

That's the right way to think about it. Yes.

Okay. And then just the last question on that. I mean obviously adapting to COVID created a lot of different ways for work processes and people working at home, and I know that you're feeling comfortable, I guess into '21 on the O&M side. But if we think about that 120 outside of any sort of pull forward from weather from a sort of a new practice or COVID adaptation, how much of the 120 do you think is kind of ongoing as we look out to '21, '22 just from changing the way that you sort of run your business?

James we put our team sort of dedicated to the exact profit and we’re in the middle of trying to understand how much of that 120, I can tell you into '21 and beyond in a long term basis. So we're definitely going to try and capture as much of that as possible. I don't have a definitive answer for you today. But I think as the year goes on, we'll have more and more answers on that as to how much that we build in to our future plans that will help customer affordability, as well as help advance some of our capital plans there that are necessary for our customers.

And do you think you have a little more around, I guess, I know - the early look at EEI tends to be a little bit higher level, but do you think at EEI or - you'll have a little bit more on that or this going to be more of 4Q when you sort of roll out to full plan?

I would say EEI we will have more information on this.

And your next question comes from the line of David Fishman with Goldman Sachs. Please go ahead.

Just a question on the functionality of the 30 million to 40 million bill relief during June, July. Is that primarily a one-time kind of margin decrease in 2020 and then they kind of reverts back in 2021 or is that mostly just a pass-through of lower fuel costs?

That was a pass through David - fundamentally that's what it was for July and August. We were seeing favorability in our power supply recovery factor. And so we tried - decided to pass that on to our customers during the peak usage months and we - that was very well received by the commission as well as our customers.

And then regarding LEAP. Could you just remind us the initial expectation for the commercial operation date was that the end of the third quarter versus kind of August 1st now. And then just also if you're able to disclose about how much under budget did it come - come in?

We're expecting that to come in online sometime in September, so middle to late September, and we've been able to pull that toward to August 1st, and you know the benefits of that will flow through our financial plans. Capital was under budget. We haven’t disclosed that just yet as we work through with our partners to make that understood and address all of that.

So is that then factored into the final payments that occurs. And is that due on kind of COD?

It is. There is some benefits that are accrued to both parties depending on the final cost results. So we're working through all of that. But I can say this, it's certainly beneficial to us and beneficial to our customer.

And then - well, just the last thing from me. I just want to clarify a prior comment that I think I heard. So just talking about clean hydrogen, I know obviously it's extremely early, but is it fair to say that or are you indicating that GSP and maybe P&I's existing infrastructure might have a logical transition to using some clean hydrogen versus all natural gas at some point in the future?

I would say all of our pipes business both the utility pipes, the utility has significant transmission and storage asset, as does GSP or non-utility and the Internet business. And I think, clean hydrogen, like you said, it is quite some time away, but we're starting to look at ways that perhaps we could start introducing products and services in both those entities. And then, as it relates to P&I, we're already in the renewable natural gas business. So we're developing a great understanding of that product, as we move forward with projects, as well as we're looking at potential opportunities for carbon sequestration. So I would say, the last two hydrogen and sequestration are early. But we're certain to work more deeply to understand what potential market opportunities there could be in the near term and medium term.

And your next question comes from the line of Andrew Weisel with Scotiabank. Please go ahead.

Appreciate all the details you've given so far. I've only got one quick one here. What are your latest thoughts on wind versus solar in Michigan. I think you said the increment of 350 megawatt includes both in the past, you've been talking more about solar being where you'd see the majority of additional megawatts added. So how do you think is generally speaking about the opportunity for wind going forward?

Well, we see our opportunities, Andrew going forward. I think you'll see in our later filings this summer, as it relates to our voluntary renewables program, you'll see that will be dominated by solar. We don't see much wind in the future at this point in time just for economic reasons. Solar costs have come down significantly. The tax credits associated with that business also provide significant competitive advantage, as it relates to wind. So we see most of our renewable development in the future being solar. We sold about 7 higher megawatts of voluntary renewables which is well above what we were forecasting. So you'll see our next filing later this summer try to address some of those supply needs that we've, which will be approximately 400 megawatts.

And I'm sorry, that's in addition to the - to the 350 megawatts, which got approved?

That's correct. We'll be seeking approvals for another 400 megawatts of renewables later this summer.

Thank you. And this concludes our Q&A session for today. I will turn the call back over to Jerry Norcia for closing remarks.

Well, thank you everyone for attending this morning. As you can see, we've had a great first six months of the year and setting up quite nicely for our results in 2020, and starting to build for our 2021 plan. So thank you again. And I hope to see you soon.

This concludes today's conference call. You may now disconnect.