DTE Energy Company (NYSE:DTE) Q3 2023 Earnings Call Transcript

DTE Energy Company (NYSE:DTE) Q3 2023 Earnings Call Transcript November 1, 2023

DTE Energy Company misses on earnings expectations. Reported EPS is $1.44 EPS, expectations were $1.72.

Operator: Good morning. My name is Emma and I will be your conference operator today. At this time, I would like to welcome everyone to the DTE Energy Third Quarter Earnings Call. [Operator Instructions] Barbara Tuckfield, Director of Investor Relations. You may begin your conference.

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; and Dave Ruud, Executive Vice President and CFO. And now I’ll turn it over to Jerry to start the call this morning.

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Gerardo Norcia: Thanks, Barb, and good morning, everyone and thanks for joining. I’ll give a brief business update and Dave will provide a financial update before we take your questions. Now let me start by emphasizing a few points, including my confidence in the company and our long-term opportunities. As you know, we have faced unprecedented headwinds this year. And these events have impacted our financial plan by $370 million. However, the combination of these headwinds is truly onetime in nature and the fundamentals of DTE remain strong. We have a solid record of achieving our financial targets and we know how to do so without sacrificing safety or reliability. This year alone, we have offset $270 million of earnings headwinds from the unprecedented combination of storm activity, unfavorable weather and a low rate order driven by a difference in the sales forecast.

The fact that we have been able to offset most of these challenges while maintaining service excellence is a clear proof point of our highly engaged team and commitment to operating excellence. DTE also benefits from strong cash flows and a solid balance sheet that support continued investments that will build the grid of the future and drive the clean energy transition. Our long-term growth plan is robust with numerous opportunities for these investments. And as I said, we have an incredible team of highly engaged employees who are committed to our customers and who know how to execute safely and efficiently. Our team continues to operate a top decile engagement levels as measured by the Gallup organization. I’m proud that our team’s excellence in this area was recognized by earning the Gallup Exceptional Workplace Award for the 11th consecutive year.

My confidence in DTE and our ability to deliver for our customers while being a stabilizing force in our communities and creating significant sustainable value for investors over the long term is unwavering. We remain focused on continuing to invest the strategic capital that further supports improved grid reliability in the face of changing weather patterns and further electrification and the transition the cleaner sources of generation. The heightened storm activity this year also highlights the importance of our investment plan and DTE is delivering on its commitment to automate, harden and rebuild the grid to improve reliability by over 60% over the next 5 years. Our recently filed distribution grid plan provides our road map to improve reliability and automation of our system.

Also supporting our investment agenda is the IRP settlement. This plan outlines our investment in Michigan’s cleaner energy future while remaining very focused on customer affordability. We are progressing toward a constructive outcome on our electric rate case. This case is critical to support the customer-focused investments that are needed for improved reliabililty and cleaner generation. Our customers and political leaders, including the governor, legislators and municipal leaders are demanding better outcomes and reliability during heavy storm periods. This doesn’t happen unless we execute our strategic investment plans to modernize and automate the grid. We also need to resume our maintenance schedule on noncritical work that we deferred on a onetime basis this year.

It is essential to resume this important scheduled work to continue delivering safe and reliable service. We met with the intervenors in the electric rate case and outline the importance of the infrastructure investments we need to make, while also gaining a deep understanding of their priorities. While we were not able to reach a settlement in this case, we have put a compelling case together for the work we need to do for our customers. We are confident that the Michigan Public Service Commission will appropriately support the investment that is needed in the state. The final order is expected in early December. As I mentioned, our company faced $370 million of unprecedented headwinds this year. This represents nearly 30% and of our total earnings forecast.

We said on the second quarter call that we were in a position to deliver at the midpoint of our operating EPS guidance range if normal weather and storm activity occurred through the remainder of the year. However, unfavorable weather and additional severe storm activity did occur in the third quarter and these latest challenges brought over $100 million of additional headwinds to our financial plan. So we are revising our full year EPS guidance midpoint from $6.25 per share to $5.75 per share. This is not the type of result that my team and I like to report to you. In my 10 years as the number 1 and number 2 person in DTE’s leadership team, we have consistently met or exceeded our targets. So you can imagine that we don’t like reporting these results to you today.

As I mentioned, we are continuing to wait for a final order on our electric rate case. Therefore, we will delay providing the forward-looking disclosures that we typically provide on the third quarter call or at the EEI conference until we get a final resolution in the case. We will then provide these disclosures in December, including our 2024 early outlook and dividends, extending the long-term EPS growth rate through 2028, updated 5-year capital plan, updated 3-year equity plan and our long-term operating earnings for DTE Vantage. Let’s turn to Slide 5. As we discussed through the second quarter, the company experienced the impact of the lower-than-expected rate order that we received at the end of last year, driven by a difference in sales forecast of approximately $100 million, followed by $92 million in impact from storms, including the worst ice storm in nearly 50 years and unfavorable weather of $42 million at Electric and $31 million at gas.

On the second quarter call, we said DTE Electric was achieving offsets for over half of its headwinds through focused onetime cost reduction efforts without sacrificing safety, reliability or customer service. And as a result, we noted that electric would likely fall below its full year guidance. However, we had favorability at each of our other business units, helping to overcome the remaining headwinds to achieve our full year EPS guidance. So at the time, we were on track to be at the midpoint of our guidance range if we had normal weather and storm activity and we had already consumed our contingency. In the third quarter, we had additional pressure of $53 million from storms and $53 million from cooler than normal summer weather. So far this year, we have faced 5 catastrophic storms which is double compared to the average number of catastrophic storms over the last 5 years.

We are very proud of our team’s efforts to safely restore power during each of these weather events. That being said, these restoration efforts are costly. And while we do budget for storm costs, the number of catastrophic storms this year, including a historic ice storm significantly impacted DTE Electric earnings. Along with storm activity, we have seen unfavorable weather in our service territory for electric and gas this year. The winter was the fourth warmest winter since 1960. And the summer was one of the coolest in nearly a quarter century. This was very different from the record heat that was experienced across most of the country. Much like for storms, we prepare for unfavorable weather scenarios during our planning process. Our lean and invest plans are structured to cover weather variability.

This year, the winter and summer weather combined was much more unfavorable than we have seen. It has been an unusual year, having both high storm activity at electric and unfavorable weather at both of our utilities. This dynamic has certainly created a significant challenge to our company in addition to the low rate case order. So we faced a combination of 3 major headwinds. And only 2 of these occurred, we would have been able to achieve our original EPS guidance target. Having all 3 factors stack up against us exceeded all reasonable planning scenarios. As a matter of fact, we had our statisticians look at the probability of greater than 1 standard deviation temper [ph] patterns of both utilities and the number of storm customers impacted all occurring in the same year and it is a once in a 50-year probability.

Overall, the team has made excellent progress on onetime management actions across the entire company and finding opportunities within our portfolio. However, with the additional challenges in the third quarter, we are now lowering the operating EPS guidance for 2023. Now let’s move to the opportunities we have in front of us on Slide 6. DTE is on track to make significant customer-focused capital investments across our businesses. 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. We are also making investments to transform the way we produce power as we shift towards renewables and natural gas and away from coal generation.

An important part of our clean energy program is our voluntary renewable program, My Green Power. This program continues to grow with a number of new large customers subscribing this year. We have 2,400 megawatts described, including over 90,000 residential customers. Highlighting our success to National Renewable Energy Laboratory has recognized DTE as having the largest green tariff program in the country, fulfilling more load under contracted subscriptions than any other program. Additionally, at our gas utility, we continue our important main renewal work which further reduces greenhouse gas emissions. DTE makes all of these investments with a sharp focus on customer affordability. Our distinctive continuous improvement culture drives cost management.

The shift from coal to natural gas and renewables also helps to further reduce O&M costs. Our diverse energy mix helps to reduce fuel costs as well and allows us to maintain flexibility to adapt to future technology advancements. The IRA supports this transition to renewable energy while achieving customer affordability goals and further enhances opportunities for growth at DTE Vantage. Before I turn the call over to Dave to read more details on the financials, I want to reiterate what I said at the start of the call. DTE has a strong operating foundation and an excellent team with a proven record of execution, a long runway of investment opportunities and a solid balance sheet to support these investments. So we remain well positioned to deliver premium total returns while providing cleaner, reliable and affordable energy to our customers.

Dave, over to you.

David Ruud: Thanks, Jerry and good morning, everyone. Let me start on Slide 7 to review our third quarter financial results. Operating earnings for the quarter were $298 million. This translates into $1.44 per share. You can find a detailed breakdown of EPS by segment, including our reconciliation to GAAP reported earnings in the appendix. I will start the review at the top of the page with our utilities. DTE Electric earnings were $268 million for the quarter. This is $95 million lower than the third quarter of 2022. The main driver of the earnings variance was the cooler weather and higher storm expenses that Jerry discussed. Other drivers include higher rate base costs and accelerated deferred tax amortization in 2022. This was partially offset by the onetime O&M cost reductions that we implemented in 2023.

Moving on to DTE Gas; operating earnings were $18 million higher than the third quarter last quarter last year. The earnings variance was driven by onetime O&M cost reductions and increased IRM revenue in 2023 and partially offset by higher rate base costs. Let’s move to DT Vantage on the third row. Operating earnings were $56 million in the third quarter of 2023. This is a $30 million increase from the third quarter last year, primarily due to new RNG projects and earnings related to steel projects. On the next row, you can see Energy Trading finished the quarter with earnings of $31 million. We had continued performance favorability this quarter due to robust contracted premiums in our physical power portfolio. This favorability is expected to continue for the remainder of the year.

Finally, Corporate and Other was unfavorable by $17 million quarter-over-quarter primarily due to timing of taxes and higher interest expense. Overall, DTE earned $1.44 per share in the third quarter. Let’s move to Slide 8 to go over our revised 2023 guidance by business unit. The continued unfavorable weather and storm activity is causing us to decrease our operating EPS guidance for the year. As we said on the second quarter call, electric would be below its original guidance range and gas, Vantage and energy trading would be above their guidance ranges. We are now decreasing the guidance range for DTE Electric and we are increasing the guidance range for DTE Gas, Vantage and Energy Trading. Overall, this resulted in a decrease to our DTE operating EPS guidance midpoint.

As we discussed, we faced significant headwinds at DTE Electric throughout the year, starting with a challenging rate case followed by unprecedented unfavorable weather and storm activity. We’ve also continued to see favorability at our other business units. Favorability at DTE Gas is driven by onetime O&M cost reductions. At DTE Vantage, we have seen stronger RNG pricing and new RNG projects placed in service as well as opportunistic contracted sales and additional favorability in the steel business. Energy Trading is seeing favorability in its contracted and highly hedged power portfolio which will continue to provide additional upside. Again, all business units implemented onetime O&M cost reductions and also benefit from onetime corporate O&M cost reductions that cascade all the business units.

As we faced approximately $370 million in total headwinds, the efforts of our team have offset much of this challenge but we are revising our operating EPS guidance from a midpoint of $6.25 per share to a midpoint of $5.75 per share. I just want to stress again what a remarkable achievement is for our team to offset $270 million of challenges this year. We’re proud of what our team has accomplished and we feel this experience makes a stronger as we continue to focus on improving our processes and better serving our customers. It’s also important to reiterate that the combination of these 3 distinct headwinds is truly onetime in nature and doesn’t impact our long-term fundamentals. So we remain solidly positioned for long-term growth. Let’s move to Slide 9 to highlight our strong balance sheet and credit profile.

We continue to focus on maintaining a solid balance sheet with strong metrics and a solid investment-grade credit rating which is supported by continued strong cash flow. This will ensure we remain well positioned for continued growth. Let me wrap up on Slide 10 and then we’ll open the line for questions. Our team continues our commitment to deliver for all our stakeholders. 2023 operating EPS guidance is updated to reflect the additional headwinds experienced in the third quarter. Our team continues to execute the plan to offset the majority of the unprecedented headwinds in 2023, remains highly engaged and focused on delivering for our customers and our communities. The electric rate case continues to advance as we look forward to a constructive order in early December.

Our robust capital plan supports strong long-term operating EPS growth as we execute on the critical investment that we need to make for our customers to improve reliability and cleaner generation while focusing on customer affordability. 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. As Jerry mentioned, we look forward to sharing the details of our long-term plan after the rate case is finalized. 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 Shahriar Pourreza with Guggenheim.

Shahriar Pourreza: So Jerry, just appreciate the tough decisions this quarter. I mean, obviously, you moved the language around the 6% to 8% growth rate but reiterated long-term fundamentals and you stepped a bit outside of the normal cadence as we think about the ’24 early outlook. I guess, can you just maybe elaborate a bit more on your thoughts going into ’24 as we think about the cadence of updates for guidance and CapEx? I mean, obviously, the rate case decision is a gating item for ’24. Would that be the new base for long-term growth? And will you extend the growth rate into ’28? Just a little bit more color would be helpful.

Gerardo Norcia: Yes. You bet Shar. Sure. So certainly, the fundamentals of our business remain really strong in the long term. The opportunity is to make a tremendous amount of investment in our grid and our transition to clean energy. Those — the opportunity remains intact. We are awaiting the commission order and that will happen the first week of December. The next scheduled meeting is December 1 but it has to be essentially dealt with before December 10. So sometime in the first week of December, we expect an order. We feel is prudent at this point in time to post that rate order is when we will basically roll out shortly right after the order. We will roll out our 2024 guidance, our long-term growth rate and also our capital investment profile. And we’ll do that for both utilities and advantage. So that’s the plan going forward, Shar. We don’t want to get ahead of the regulatory process at this point in time.

Shahriar Pourreza: Right. No, that makes sense. But just, I guess, curious like, obviously, this year had some anomalous conditions, right? So when you guide would ’24 be the base and would you extend out? I guess that was in the question.

Gerardo Norcia: Yes. Typically, what we do, Shar and we plan to do the same going forward as we will go back to the original guidance for 2023 that we’ve posted and then we will grow from there. Got it. Does that answer your question?

Shahriar Pourreza: And then, just — it does thank you, Jerry. And then just lastly, the $270 million offset — Yes, sorry, Jerry, go ahead.

Gerardo Norcia: I was going to say the reason for that is because much of what’s happened this year, as you said, we view as anomalous and onetime in nature and that’s why we will go back to the original ’23 guidance and build our growth rates from there.

Shahriar Pourreza: Got it. And then just on — lastly, the $270 million offsets, I mean, that’s obviously a pretty impressive number. And you call the response out as being onetime kind of event. I guess do you anticipate under normal weather, the full amounts to be replenished? Or is there some carryover of savings through ’24. I mean, I guess, is there a deferred maintenance that would need to come back? I’m just trying to get a sense about these cost cuts and also the potential read-through they may have on the GRC as you try to get this case over the finish line with some very tough intervenors.

Gerardo Norcia: Thank you. So what you’ll see is that much of the cost will flow back in. Some will stick. I think when you go through one of these periods of severe challenge, you always learn new things about your company. But much has to flow back in. So maintenance that wasn’t critical this year becomes very critical next year that we can’t continue to postpone. We’ve made that very clear in our final reply brief. And I think we’ll see much of that flow back in. Some of that will stick will help for next year. And — but we plan to plan to return to our normal planning process where we would anticipate certain levels of storm activity and certain levels of weather variation in our planning going forward. So that is our goal at this point in time.

Operator: Your next question comes from the line of David Arcaro with Morgan Stanley.

David Arcaro: Could you elaborate a bit on the settlement discussions that you had in the rate case? Just what challenges may have arisen that prevented from getting across the finish line there. Any kind of learnings and does that potentially continue forward into future challenges and other rate cases in the future? Or are there unique factors here that came into play?

Gerardo Norcia: Certainly. So as you know, we had a very successful integrated resource plan settlement and then we quickly transitioned to rate settlement discussions. I would say this, that the major agencies that would be involved significantly and representing the economic interest of our customers, we’re at the table and we are moving towards settlement. But that was a handful of parties, key parties, very important parties but there was another 25 or so parties that were interveners in the rate case that essentially did not want to engage in rate case settlement discussions. That was unfortunate. But I think the practice of Michigan so far is not to pursue contested rate settlements. When you say what learnings are there, that might be something we have to explore in the future is the ability to pursue contested great settlements when you have the bulk of the economic interest represented at the table.

Not a common practice in Michigan but a common practice in other jurisdictions.

David Arcaro: Got it. That’s helpful context. Were there specific aspects within the case, whether it was the undergrounding, the IRM or specific requests here that led to the sticking points with those other intervenors?

Gerardo Norcia: I would say not. I think simply said, it was a reluctance to engage. I would say that the handful of parties that did engage, we were moving towards what I would call a productive outcome. So we are feeling positive until, I would say, the last moments of the discussions where there was a reluctance to engage by some of the other parties.

David Arcaro: Okay, understood. And thinking about the go-forward earnings power. Looking at the 2023 Vantage and trading results, quite a bit stronger than the original guidance on 2023. I was wondering if those could be considered new baselines for growth? Or if you could give us a sense for how much onetime or non-repeatable strength we saw in those 2 businesses? Do those also kind of revert to the original 2023 midpoint as you think about the growth going forward?