DTE Energy Company (NYSE:DTE) Q1 2024 Earnings Call Transcript

DTE Energy Company (NYSE:DTE) Q1 2024 Earnings Call Transcript April 25, 2024

DTE Energy Company misses on earnings expectations. Reported EPS is $1.67 EPS, expectations were $1.72. DTE isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Thank you for standing by. My name is Eric and I will be your conference operator today. At this time, I would like to welcome everyone to the DTE Energy Q1 2024 Earnings Conference Call. [Operator Instructions] Thank you. I would now like to turn the call over to Barbara Tuckfield, Director of Investor Relations. Please go ahead.

Barbara Tuckfield: Thank you and good morning, everyone. Before we get started, I would like to remind you to read the Safe Harbor statement on Page 2 of the presentation, including the reference to forward-looking statements. Our presentation also includes references to operating earnings which is a non-GAAP financial measure. Please refer to the reconciliation of GAAP earnings to operating earnings provided in the appendix. With us this morning are Jerry Norcia, Chairman and CEO; Joi Harris, President and CEO; and Dave Ruud, Executive Vice President and CFO. And now, I’ll turn it over to Jerry to start the call this morning.

Gerardo Norcia: Thanks, Barb and good morning, everyone and thanks for joining us. I hope everyone is having a healthy and safe year so far. This morning, I will discuss the achievements we have made so far this year as we continue to deliver for all of our key stakeholders and we continue to achieve successes across all of our businesses. Given that Joi is in charge of operations, she will highlight our significant customer-focused investment agenda to build the grid of the future, maintain reliability and transition to cleaner generation while continuing to focus on customer affordability. And Dave will provide a financial update and wrap things up before we take your questions. Let me start on Slide 4. We are off to a strong start in 2024 and well positioned to deliver on our targets this year.

The success that DTE has achieved continues to be the result of our focus and engaged team for our customers and communities. Our team continues to achieve improved health and well-being and cultivate deeper employee engagement which results in being able to deliver service excellence for our customers and our communities. The engagement of our team at DTE was recognized with another Gallup Great Workplace Award. I am extremely proud of our team for receiving this award 12 years in a row. We continue to deliver for our customers. In fact, at DTE Gas, we have been delivering for our customers for nearly 2 centuries. Our gas company celebrates its 175th anniversary this year. We have been providing safe, reliable and affordable natural gas to customers in Michigan since 1849, 2 years before gas lights even appeared on Detroit city streets.

We have come a long way over the years but the focus on customers has never wavered. An important part of serving customers is to provide energy efficiency opportunities. DTE was recently awarded the ENERGY STAR Partner of the Year Award by the EPA. The award is the highest level of recognition from the EPA, recognizing programs that demonstrate organization-wide energy savings and best practices. We have demonstrated our commitment to help customers identify options to reduce their energy bills without sacrificing performance. This is the third consecutive year DTE has received this award. And again, I am extremely proud of this recognition. We continue to invest in the communities where we live and serve. DTE invested $2.7 billion with Michigan businesses in 2023, creating and sustaining more than 12,000 jobs across the state.

Last year, DTE also invested nearly $1 billion with diverse suppliers and nearly $900 million with companies based in the city of Detroit. We continue to be a leader in driving Michigan’s economy at all levels. As I said at the start of my remarks, we are having a strong start to the year and we are well positioned to deliver our 2024 targets. Our long-term EPS growth rate remains at 6% to 8%, with 2023 original guidance as the basis for this growth. In our 2024 annualized dividend of $4.08 per share is consistent with our practice of growing dividends in line with operating EPS. Importantly, we will continue to have a strong balance sheet and investment-grade credit ratings to support this focused capital investment plan. We remain committed to deliver premium shareholder returns that our investors have come to expect and that we will deliver.

As DTE Gas celebrates the 175-year milestone, DTE Energy is also celebrating a milestone with 2024, marking the 158th year of continuous listing on the New York Stock Exchange. In fact, DTE’s tenure is the 16th longest of any company on the exchange. So I guess these milestones are just another way of saying we have been doing this successfully for a very long time and I am very excited about the opportunities ahead of us for many years to come. Let’s turn to Slide 5 to highlight some of the achievements across our portfolio. We have made strong progress across the company in the early part of this year. Starting at DTE Electric, we received approval to construct a 220-megawatt battery energy storage system at the site of the former Trenton Channel power plant.

This investment will be approximately $0.5 billion. This project is expected to be operational in 2026 and will be the largest stand-alone battery energy storage project in the Great Lakes region and it initiates an important investment area in our transition to cleaner generation. Last month, we filed an electric rate case that outlines the investments we need to build a smarter, stronger, more resilient electric grid of the future for our customers and further our transition to cleaner generation. Joi will go over the filing in more detail and how it underpins an important step our long-term investment in grid reliability and cleaner generation transformation while remaining focused on customer affordability. At DTE Gas, we are targeting over 200 miles of main renewal in 2024 as we continue to modernize the gas transmission system.

Last year, we hit an important milestone where we completed almost 50% of our main renewal program. In January, we filed a rate case at DTE Gas to support important investments necessary to continue to renew our gas infrastructure which will minimize leaks and reduce costs. At DTE Vantage, we continue to advance custom energy solutions projects, RG projects and carbon capture and sequestration projects. One project to highlight is the Ford Motor Company Custom Energy Solutions project that is scheduled to go into operation later this year and is underpinned by a long-term fixed fee contract with no commodity risk. So to wrap up my comments, I’ll just say, I’m feeling extremely positive about our start in 2024 and how we are well positioned to continue to deliver now and into the future for our customers, communities and investors.

Now, I’ll turn it over to Joi to give some highlights on our investment agenda and reliability improvements. Joi, over to you.

Joi Harris: Thanks, Jerry and good morning, everyone. I’m happy to be here today with all of you. I will provide more detail on our capital investment agenda and our reliability plans to improve our customers’ experience. Our investment plan is focused on building the grid of the future, improving reliability and transitioning to cleaner generation. We have a robust agenda of $25 billion over the next 5 years with about 95% of the investments at our utilities. Our 5-year utility investment plan was increased by $2 billion over the previous plan, driven by investments in cleaner generation that is supported by the IRP, the energy legislation that passed last November and our voluntary renewables program. The distribution plan filed last year outlines our path to building this grid of the future and includes the transition to a smart grid with full automation within 5 years, resulting in less frequent and shorter outages for our customers.

We are investing $9 billion in distribution infrastructure and targeting significant reliability improvements over the next 5 years. As Jerry mentioned, we filed an electric rate case last month that represents an important step in our customer-focused investment agenda. This filing addresses our continued infrastructure investments designed to improve reliability and generation investments to bring cleaner energy faster to the state. We will continue to invest in our infrastructure and are focused on improving reliability for our customers, reducing power outages by 30% and cutting outage time in half in the next 5 years. We have already made significant progress on this front and we can see the work that we’re doing is having tangible results.

For example, an important part of our grid modernization plan is the replacement of our 4.8 kV system. We are making great strides on this front as the work is progressing across our service territory and in communities where DTE has completed the conversion work. Customers are experiencing a 90% improvement in reliability. We are also making great progress on our restoration initiatives. We did experience a large storm in January and our team came together and achieved one of the fastest restorations for such a large store. I’m extremely proud of the team given their effort toward the goal of restoring all customers in 48 hours after a storm. So these investments are working and we have a healthy portfolio of opportunities to invest in our system to greatly improve the customer experience.

We are committed to modernizing our electric infrastructure to be more reliable and resilient given increasingly severe weather while also delivering cleaner energy to meet our aggressive carbon reduction goals and Michigan’s clean energy legislation, consistent with our most recent IRP. Let’s move to Slide 7. The electric rate case represents an important step in achieving our reliability commitment as we continue to build a more resilient and cleaner grid of the future. We are focused on reducing power outages by 30% and outage times by 50% over the next 5 years. We are planning to accelerate the deployment of technology and the transition to a smart grid, upgrade existing infrastructure with equipment like stronger poles and fiberglass cross arms which can better withstand extreme weather rebuild significant portions of the grid and continue to trim trees as they account for 50% of the time customers are without power.

Our goal is to improve liability to surpass the peer average by 2029 and not only does this improve reliability, enhance the customer experience, it has the potential to unlock significant economic value for the state and customers. While we are executing on our efforts to improve reliability, we remain focused on the important transition to cleaner energy while keeping customer impact on bills low. Our current plan involves ceasing coal use at the Belle River power plant in 2026 and converting it to a 1,300 megawatt natural gas peaking resource. At our remaining Monroe coal plant, we are ceasing coal use at 2 units in 2028 and the remaining 2 units in 2032. We are studying a range of possible replacement technologies for the 2 units of this plant.

As Jerry mentioned, we received approval from the MPSC to repurpose the former Trenton Channel power plant into a battery energy storage system project which will come online in 2026. Battery storage will be an important investment area to support our clean energy transition consistent with the recent energy legislation and our integrated resource plan. We have a great plan ahead of us here at DTE as we transition to cleaner energy resources and remain on track to cease the use of coal in 2032. At DTE, we are focused on continuous improvement and finding ways to improve efficiency in our processes to maintain customer affordability. Based on our recent rate case filing, the forecasted average annual growth of our residential electric bill will likely be less than half the national average.

I’m very excited about the opportunities we have in front of us and I’m confident that we will execute on our plan to improve reliability while we continue our clean energy transition and maintain customer affordability. Now, I’ll turn it over to Dave to give you a financial update.

David Ruud: Thanks, Joi and good morning, everyone. Let me start on Slide 8 to review our first quarter financial results. Operating earnings for the quarter were $346 million. This translates into $1.67 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 $194 million for the quarter. This is $93 million higher than the first quarter of 2023. The main drivers of the earnings variance were lower storm costs and rate implementation, partially offset by higher rate base costs and the onetime O&M cost reductions we implemented in 2023. Moving on to DTE Gas. Operating earnings were $160 million, $11 million lower than the first quarter of 2023.

The earnings variance was driven by warmer winter weather, higher rate base costs and the onetime O&M cost reductions we implemented in 2023, partially offset by higher IRM revenue in 2024. If you remember, we had a very warm winter last year and this year was even a little warmer than last year and was the fourth warmest on record. Let’s move to DTE Vantage on the third row. Operating earnings were $8 million for the first quarter of 2024. This is a $19 million decrease from 2023 due to an outage at one of our renewable plants in 2024 as well as the timing of RNG project earnings and steel-related sales. We continue to be confident in our full year guidance for Vantage as the shape of earnings will be notably higher in the back half of the year, driven by the timing of earnings for some key projects in our custom energy solutions and renewable portfolios.

On the next row, you can see Energy Trading finished the quarter with earnings of $5 million. The favorability to 2023 is primarily driven by performance of the physical gas portfolio which was higher in 2024 as well as continued stronger margins in our physical power portfolio. With these stronger contracted margins, we could experience some upside, though maybe not to the same magnitude as last year. Finally, Corporate and Other was unfavorable by $22 million quarter-over-quarter due to the timing of taxes. Overall, DTE earned $1.67 per share in the first quarter of 2024. While we have faced some unfavorable weather through the first quarter, we remain confident in achieving our annual operating EPS guidance range as we continue to plan conservatively and we are not facing the additional $200 million of incremental headwinds that we were facing from a less than optimal regulatory outcome in the large ice storm in the first quarter of 2023.

Our planning for warm weather coming into the year and our efforts to rebuild headroom after experiencing a warm weather this quarter, leave us in a strong position to achieve our EPS goals for this year. Let’s move to Slide 9 to highlight our strong balance sheet and credit profile. Going forward, we will continue to invest heavily into our utilities. This customer-focused investment is supported by our robust cash from operations which is shown on our cash and capital guidance slide in the appendix. Due to these strong cash flows, DTE has minimal equity issuances in our plan, targeting annual issuances of $0 to $100 million through 2026. Our long-term financial plan incorporates debt refinancing and new issuances to fund our capital investment plan and is consistent with our 6% to 8% operating EPS growth target.

As we came into the year, we had parent company debt financing at our plan. To date, we have hedged or issued about 80% of the debt financing and we did it at all-in rates below what we had in our plan, making us confident that our full year 2024 debt financing plan will be completed within our conservative planning assumptions. We continue to manage future issuances through an active hedging program and other opportunities that mitigate interest rate variability consistent with our 5-year plan. We continue to focus on maintaining our strong investment-grade credit rating and solid balance sheet metrics and we target an FFO-to-debt ratio of 15% to 16%. Let me wrap up on Slide 10 and then we will open the line for questions. Our team continues our commitment to deliver for all of our stakeholders.

Our robust capital plan supports our customers as we execute on the critical investments that we need to make to improve reliability and transition to cleaner generation while focusing on customer affordability. The 2024 operating EPS guidance midpoint provides 7% growth over the 2023 original guidance midpoint and we continue to target long-term operating EPS growth of 6% to 8%. DTE continues to be well positioned to deliver the premium total shareholder returns that our investors have come to expect with a strong balance sheet that supports our future capital investment plan. With that, I thank you for joining us today and we can open the line for questions.

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Q&A Session

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

Shar Pourreza: I guess, first off is, I guess, how are you sort of thinking about the cadence of maybe CapEx updates in light of the kind of the new legislation? Could we see some adjustments to generation plant CapEx kind of in the near term to align closer to the new construct? Or is this kind of further out? And is 3Q or maybe EEI kind of the right cadence for any updates as we’re thinking about this new construct?

Gerardo Norcia: So I’ll start and maybe Dave can add to it, Shar but we did update our capital plan that reflected our IRP settlement from last summer and also the legislation that passed in the fall. So when we updated our 5-year plan, much of that capital was included and that created a $2 billion increase that we rolled out. Now I will say that as we get to the last part of that plan and we roll things up for the next 5-year period, we do anticipate that the IRP and legislation will create an incremental investment opportunity. Dave, do you want to add to that?

David Ruud: Actually, I think that’s exactly right. We’ll — our 5-year plan was consistent with the IRP. The legislation, the IRP, we’re really close to each other in this 5-year period but there will give us some additional opportunities as we look beyond that.

Shar Pourreza: Yes. And that was actually more referencing the — as you kind of roll forward, right? Okay. And then just on — I guess on just funding that incremental CapEx as we’re thinking about rolling forward. You have that up to $100 million figure through ’26. I guess, how do we — Dave, how do we think about the incremental equity on every dollar that you could increase, should we be assuming kind of a 50:50 cap structure — or is there still some avenues to monetize assets like maybe DTE Vantage projects, RNG or is that kind of off the table at this point?

David Ruud: Well, I’ll say that our strong cash flow generation and our strong balance sheet allow us to do this capital investment with that minimal equity. And we’ve said that 0 to 100 kind of fits throughout our 5-year plan that you’re at 100 on equity. And a lot of that was because of the IRA and we have a lot of cash coming in from the IRA and the tax credits from the IRA. So we’re confident in the capital we have in the plan that we’re going to be able to stay within in the equity that we’ve talked about as well as keep our FFO to debt at that 15% to 16%.

Gerardo Norcia: I’m sorry, Shar, go ahead.

Shar Pourreza: No, you go, Jerry. Sorry about that.

Gerardo Norcia: I was going to say in terms of Vantage, certainly, we like that business but if the opportunity presented itself where we could deploy some recycling of capital and create incremental shareholder value, then we’re always looking for those opportunities share. So if equity needs were to change and may make it more impactful, if you will — but we don’t see that right now.

Operator: Your next question comes from the line of Nick Campanella with Barclays.

Nick Campanella: So I guess you’re kind of back to your normal course business plan now that we moved past ’23. I know you have some execution items out there on the rate case side but just how do you kind of feel about being able to kind of derisk ’25 and beyond here with O&M and otherwise?

Gerardo Norcia: Maybe I’ll start again and my team can add to it. But we’ve started in a much stronger position this year with the absence of $200 million of headwinds — incremental headwinds that we experienced last year. And we are deep into planning for 2025. And what we’re looking to do is really try to create opportunities to improve the levels of headroom for 2025. I mean this is our typical planning process. When we start to feel really good about the current year, we go deep into the prompt year. And I can tell you, we’re deep into it. We’re starting to feel real good about ’25 and putting that together. As far as key milestones, both the gas rate case and electric rate case that come late this year and early next year, these rate cases are pretty straightforward in the sense that they’re all about capital, capital deployment and really continuing to rebuild and enhance both the gas infrastructure in our electric infrastructure to be more reliable and cleaner.

So much of what we’re requesting from our customers is to support those investments and we’ve seen support for that in the past. So we feel pretty confident about our 2025 year plan coming together nicely.

Nick Campanella: Appreciate that. And then I guess, I know Vantage, you kind of have this $15 million a year growth cadence in the plan but it does seem that there are some tailwinds to that business from tax credits and then just stronger cash returns in general. Can you just any way to isolate how large that strength is relative to that assumption that you had in there? And I guess how would you kind of describe where it puts you overall in the business at the midpoint of that 6% to 8% range. Can you get above that range in these certain years? And how should we kind of think about that?

David Ruud: Yes, Nick, we — as you said, there are some good tailwinds in our Vantage business that we’re seeing from tax credits related to both RNG and to our Custom Energy Solutions business and also, we have some good growth in that area as well. When we get to the end of the year, we’ll talk more about ’25 and beyond and how those tax credits will come into our plan. But what we do see is that it does give us some more flexibility and some additional confidence in the 6% to 8% as we go through these years. And — and then as we get beyond some — still some really good confidence in the long-term 6% to 8%.

Operator: Your next question comes from the line of Jeremy Tonet with JPMorgan.

Jeremy Tonet: Just want to come back to the comments as you laid out with regards to Vantage and the RNG assets and the potential for portfolio rotation there should the opportunity present itself. And just curious, I guess, the driver to these comments, have others approached you on these assets? Or just trying to get a sense for what you see or how that — the market is for those type of assets right now?