DTE Energy Management Discusses Q1 2013 Results - Earnings Call Transcript

Apr.26.13 | About: DTE Energy (DTE)

DTE Energy (NYSE:DTE)

Q1 2013 Earnings Call

April 26, 2013 9:00 am ET

Executives

David E. Meador - Chief Financial Officer, Executive Vice President and Member of Internal Risk Management Committee

Peter B. Oleksiak - Senior Vice President and Member of Internal Risk Management Committee

Daniel G. Brudzynski - Former Vice President

Analysts

Kevin Cole - Crédit Suisse AG, Research Division

Julien Dumoulin-Smith - UBS Investment Bank, Research Division

Paul T. Ridzon - KeyBanc Capital Markets Inc., Research Division

Andrew Levi

Paul Patterson - Glenrock Associates LLC

Kevin Fallon

Operator

Good day, and welcome to the DTE Energy First Quarter 2013 Earnings Release Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. David Meador. You may begin.

David E. Meador

Great. Thank you, and good morning, everybody, and welcome to our First Quarter 2013 Earnings Call. Before we get started, I encourage you to read the Safe Harbor statement on Page 2 including the reference to forward-looking statements.

Turning to Slide 3. With me this morning are Peter Oleksiak, our Senior Vice President of Finance; Dan Brudzynski, our Vice President and Treasurer; and Anastasia Minor, our Director of Investor Relations. I also have members of the management team with me, if needed, during the Q&A session.

Now moving on to Slide 4. As you know, we'll be providing a full business update and outlook at our Analyst Meeting in New York next week on May 1, it's just a couple of days away. We have several hours scheduled with you with what we believe is very interesting material to take you through.

So this morning, if we can, I'd like to keep the call focused on the quarter. But as always, I'd be happy to take any of your questions.

Now turning to Slide 5. This is our investment thesis, and it describes how we will provide value to our shareholders. We believe that our disciplined growth plans will provide a 5% to 6% long-term earnings per share growth along with an attractive dividend yield. A key enabler into this plan is maintaining a strong balance sheet, which allows us to manage our risk and excess capital under favorable terms.

Growth plans at both utilities are robust, and we will lay this out for you next week in more detail. DTE Electric's growth is largely driven by operational investments, mandated environmental controls and renewable energy needed to meet Michigan's 10% RPS standard.

At DTE Gas, the growth was driven by infrastructure investments in cast iron main replacement and relocation in meters out of customers' homes. These important infrastructure investments were the subject of the Infrastructure Recovery Mechanism order that was issued by the Michigan Public Service Commission on April 16, and I'll cover that on an upcoming slide.

The 2008 energy legislation and regulatory structure in Michigan provides a constructive environment for us to work within. However, as you know, we don't take this for granted and it's incumbent upon us during this favorable construct every day. We continue to focus on our system of priorities including highly-engaged employees, distinctive continuous improvement capabilities and top docile [ph] customer satisfaction, and that's another area that we're going to spend a fair amount of time on next week.

In our non-utility businesses provide us with low-risk and diversified growth opportunities to complement our regulated utilities.

Now turning to Slide 6, an overview of the first quarter. I'm pleased to announce earnings of $1.34 per share versus $0.91 in the first quarter of 2012, a substantial amount of that increase year-over-year is related to weather and we'll be talking about that as we go through this. But it's a nice start to the year, especially after thinking about last year first quarter and the start we had last year, given the extreme weather conditions last year.

In the first quarter of 2012, we talked about that and the impact on the entire company, but especially on the DTE Gas segment earnings last year. This year, we had near-normal temperatures. Actually, it was slightly below normal and that explains a significant portion of year-over-year change. But it shouldn't be lost that we also have continued to focus on continuous improvement and making structural changes needed to stay out of rate cases and also to reach our aspiration of being the best-operated energy company in North America.

A couple of the quarter-over-quarter drivers I'd like to point out is, first of all, our continuous improvement efforts have led to reduced benefit expenses and also efficiencies in our gas distribution system; and the rate case settlement at DTE Gas also provided some year-over-year improvements and earnings.

And finally, our P&I segment benefited from the acquisition of a portfolio of on-site energy projects late last year, as well as higher earnings from the reduced emission fuel projects. The balance sheet remains strong, and we generated approximately $600 million in cash from operations in the first quarter. This, along with credit upgrades for Moody's and Fitch that we talked about in our last call, put us on track to meet our balance sheet goals for 2013. And we'll provide a full outlook for the year at the Analyst Meeting next week.

Now turning to Slide 7. Last week, the Public Service Commission approved our proposed Infrastructure Recovery Mechanism for DTE Gas. This mechanism covers a 5-year period beginning in 2013 with the total projected investment of $400 million over that period, or about $77 million annually. This mechanism streamlines the recovery of these costs through the surcharge, which will be reconciled each year to reflect actual spending, and that surcharge will remain in place until the next rate case.

With that overview, I'll now turn it over to Peter, who will take you through the quarter in a little bit more detail.

Peter B. Oleksiak

Thanks, Dave, and good morning, everyone. I'd like to start with Slide 9 in the first quarter earnings results.

For the quarter, DTE Energy's operating earnings are $1.34, consistent with reported earnings. For the 2 utilities, DTE Electric contributed $0.66 and DTE Gas came in at $0.55. The non-utility segments combined to earn $0.21. The drivers for the non-utility first quarter results were Gas Storage & Pipelines at $0.10, Power & Industrial Projects at $0.07 and Energy Trading at $0.04. Finally, Corporate & Other had a loss of $0.08 for the quarter.

Let's move to Slide 10 and a summary of the quarter-over-quarter performance by segment. Operating earnings for consolidated DTE Energy are up $78 million for the quarter. For both our utilities, DTE Electric and DTE Gas, colder weather in 2013 and lower benefit expense contributed to favorable earnings from 2012.

DTE Electric contributed $19 million more year-over-year. More than half of this was weather improvement. Typically, you don't see such a large weather improvement for our electric business in a non-summer quarter. But last year, we had, as Dave mentioned, one of the warmest winters on record.

DTE Gas had an increase of $44 million for the quarter, and given the size of the increase, I'll cover more details on DTE Gas in a moment. Our non-utility segments operating earnings are totaled up to $13 million, improvement driven primarily by the higher earnings at our Power & Industrial Projects and Energy Trading segments. Gas Storage & Pipelines earnings are flat from prior year due to growth and transportation revenues across all of our pipeline platforms, offsetting lower storage earnings for the quarter. Our Power & Industrial Projects segment is up $4 million from 2012. This increase is driven by earnings related to our on-site energy projects occurred in the fourth quarter of 2012, growth in renewable earnings related to our coal and wood waste plants coming online, and increased reduced emission fuel earnings. At Energy Trading, improved market opportunities contributed to the 2013 increase from last year and the quarter's performance is in line with our expectations. Page 21 of the appendix contains our standard energy trading page, which shows both economic and accounting performance.

Finally, our Corporate & Other segment came in favorable by $2 million from last year, primarily to lower interest expense.

Now let's turn to Page 11 and walk through some of the quarterly details for our gas business. The operating earnings for DTE Gas are $96 million, up $44 million from the prior year. The largest driver for this quarter's improvement is the record weather we had in 2012 not returning in 2013. The quarterly weather improvement at $26 million actually can be broken into 2 pieces, the 2012 warmer-than-normal weather is actually -- was $23 million unfavorable last year, an improvement for this year. And then the weather this year was slightly colder than normal and contributed $3 million of earnings.

The rate case settlement we received in the fourth quarter of 2012 drives an additional $7 million of margin improvement for the first quarter this year. Continuous improvement efforts on our gas distribution system helped drive lower cost gas for the quarter by $6 million.

And lastly, changes in our benefit plans drive the additional $5 million of earnings improvement over last year. That concludes an update on our earnings for the quarter. I'd like to turn the discussion over to Dan Brudzynski, who will cover cash flow and capital expenditures.

Daniel G. Brudzynski

Thanks, Peter, and good morning. Now moving on to Slide 13 and the first quarter cash flow results. As Dave mentioned, cash flow remains strong in 2013. Favorable weather impacts, primarily in DTE Gas, were offset by the timing of planned pension contributions in 2013. Cash is comparable in the first quarter to 2012 and is tracking in line with our guidance for the year. Capital spending is roughly the same as 2012, and I'll cover those details on the next slide. In the financing arena, we successfully financed $375 million of long-term bonds at our electric utility in the first quarter of 2013.

Now moving on to Slide 14 and some detail on capital spending. 2013 investments were relatively flat overall. We had lower investments at DTE Electric driven by a refueling outage in 2012, were partially offset by higher gas investments for main renewal and Advanced Metering Infrastructure or AMI, and the Bluestone lateral and gathering capital spending in 2013.

And then finishing up finally on Slide 15 and a look at the balance sheet. As we continue to grow, a strong balance sheet is a key priority to us at DTE and our metrics remain within their targeted ranges. Our financing plan is on track for 2013 with $100 million of equity already issued in the first quarter and the bond financing I mentioned earlier. Our liquidity is sufficient with the successful extension of our facility to 2018.

And with that, now I'll turn it back over to Dave for the wrap-up.

David E. Meador

Thanks, Dan. And I'll wrap up on Slide 17. As we laid out for you, we had a strong first quarter with substantial year-over-year earnings improvements. And as I said earlier, I was thinking about last year when we started out in the first quarter and we're quite deep in the hole because of the extreme weather last year, so it's a great way to start 2013.

The approval of the Infrastructure Recovery Mechanism for DTE Gas as we've outlined is a key component of, not only making the necessary improvements in that business to improve the distribution system, but it gives us a lot of flexibility in terms of staying out of rate cases in the gas business.

Going forward, the combination of operational and mandated utility investments and then also the investments in the low-risk, non-utility growth opportunities combined are expected to provide us a 5% to 6% earnings per share growth. As we mentioned next Wednesday, we're going to be going into much more detail regarding our system of priorities and our growth prospects at the Analyst Meeting. The meeting is at 8:30, breakfast at 7:30, if you would like to join us at the New York Sheraton Times Square. And if you're not attending in person, you're welcome to listen to the webcast, and that webcast will also be archived. And you can find the link to all of that on our Investor Relations website.

And with that, we'd be happy to open up for questions now.

Question-and-Answer Session

Operator

[Operator Instructions] We'll take our first question from Kevin Cole with Crédit Suisse.

Kevin Cole - Crédit Suisse AG, Research Division

I guess Slide 7 is helpful, but I guess if I -- given your comments, given that this is a 5-year tracker, are you expecting that you're going to stay out from filing DTE Gas rate case for the 5-year period while earning your allowed return?

David E. Meador

We will go into multiple year plans next week in more detail. But as you know, one of our north stars has turned our authorized return year in, year out. We're also very focused, as you know, also on cost and customer build. So our goal is to stay out of rate cases as long as possible, while meeting all our objectives, and we've laid that out for the electric business. And now the -- with this tracker, it will allow us to stay out of rate cases for multiple years. So we're evaluating that and certainly we'll talk in more detail next week. But this is going to give us a period of stability, which is joining the electric business. And I'm anticipating we will not be in rate cases for several years at least.

Kevin Cole - Crédit Suisse AG, Research Division

Okay. I guess bring it back to the quarter. I guess with, just for DTE Gas. So with 1Q coming in at $96 million versus full year guidance of $113 million to $118 million, is [indiscernible] flat?

David E. Meador

We lost the last part of your question.

Kevin Cole - Crédit Suisse AG, Research Division

I'm sorry, I'll speak up. So with 1Q DTE Gas operating earnings coming in at $96 million versus full year guidance at $113 million to $118 million, that seems to imply that the fourth quarter would be similar around $17 million to $22 million, but DTE Gas normally earns, or at least should earn between $50 million and $60 million. And so for the rest of the year, do you expect to ramp up your O&M spending and I guess, bank some O&M for the future? Or just kind of come out at the end of the year above your guidance range for DTE?

David E. Meador

Yes. As you're pointing out, this is a great start to the year on many segments of the business and certainly better than last year. Our normal practice is to update our forecast and review that with the board and evaluate what you're pointing out, which is our lien-and-invest scenario. So our goal is to earn our authorized return to the extent that we have favorable conditions, including weather. Our inclination is to pull ahead investments in the business and the opposite's also that. So we're evaluating that right now. We're going to talk to our board and we'll take you through that in more detail next week at the Analyst Meeting.

Operator

We'll go next to Julien Dumoulin-Smith with UBS.

Julien Dumoulin-Smith - UBS Investment Bank, Research Division

I wanted to ask you a very quick question here regarding your O&M. As far as it goes, first quarter seems to have been quite positive. How do you feel now with regards to full year? I mean, should we continue to expect this kind of a trend, a decline year-on-year throughout the balance of the year?

David E. Meador

That's another area, I hate to continue to kind of push questions to next week, but we're going to update you next week on, not only the full year, but we're going to update you on multiple years next week, including our thinking on O&M. One item I'd like to point out that what we said is we're going to continue to work hard on O&M. We need to do that on behalf of our customers. And one of the lens on that is just continuous improvement, but we've also signaled that we are always looking for structural changes in our costs and using that as a lever to stay out of rate proceedings as long as possible. So we were able to achieve a couple of our structural changes and continue to work on continuous improvement and we'll lay that out for you next week in terms of our thinking on O&M and how that all plays through, both in the gas and the electric business in terms of staying out of rate cases as long as possible.

Julien Dumoulin-Smith - UBS Investment Bank, Research Division

Perhaps let me clarify, in the first quarter, how one-time versus sustainable were the cost reductions that we did see here, if you will? Maybe that's a more palatable question. Some of the lost gas improvements, for example.

Peter B. Oleksiak

I'd say probably close to 2/3 of that will stick. We did have some generation outage timing in there, but as Dave mentioned, some of the structural cost changes, and I was mentioning that the benefit expense will continue to flow through. And the lost gas improvements, for now, we did see physical lost gas come down by 40% in the quarter and we're anticipating that will stick as well.

Julien Dumoulin-Smith - UBS Investment Bank, Research Division

Great. And perhaps just broadly speaking again, going back to the notion of staying out. Is there any potential to use some of the amortization of the liability here beyond 2014 on the electric side? And -- or any kind of sense as to how that's going to play out here?

David E. Meador

Yes. Amortization of the liability, are you speaking to the former decoupling play?

Julien Dumoulin-Smith - UBS Investment Bank, Research Division

Yes, exactly. Sorry if I misread that.

David E. Meador

That again is something that we're evaluating. Right now the way that the regulatory proceeding laid out, we don't have an option right now, we have to amortize that into 2014. And as we've indicated, we -- our current thinking is that we would file in '14 for rates in '15. But as we continue to press down hard on costs, we're asking ourselves the question that you're asking, which is, could you ever move that amortization if you didn't need it in that year? And it's something we're evaluating, but right now, we've not made any decision. We're also evaluating the open question, can we stay out even farther and not file in '14 and possibly push that 1 year later. And again, we'll go into more detail next week. But it's just directionally an indication of how we're managing the company and our cost, which was -- right now, if we could file in '14, we'll do that. But if we can push this out farther or eventually we file, make it as small a number as possible, while still hitting our growth targets and maintaining our balance sheet targets, we're going to do that.

Operator

And we'll go next to Paul Ridzon with KeyBanc.

Paul T. Ridzon - KeyBanc Capital Markets Inc., Research Division

I guess I'll ask the question differently. When did you implement these benefits changes? In other words, how long do we have before we lap them?

David E. Meador

Yes. What had happened here was that, based on what we had done in our salary plans plus our union contracts, we actually had to go through a remeasurement process, and I think it's -- it will be laid out when we file our 10-Q for you. So we had to remeasure our benefit plans, and the way the accounting works it amortizes into income over a 4-year period.

Paul T. Ridzon - KeyBanc Capital Markets Inc., Research Division

And when did you do that?

Peter B. Oleksiak

It was the end of last year. So we did the year-end calculations for the benefit expense for 2013, that's really where you're seeing it now. But it was end of last year.

Paul T. Ridzon - KeyBanc Capital Markets Inc., Research Division

So is it reasonable to expect the next 3 quarters we should see something similar on the benefits side?

Peter B. Oleksiak

Yes. That's correct.

Paul T. Ridzon - KeyBanc Capital Markets Inc., Research Division

Okay. I know you'll probably going to punt it for next week, but obviously there's been discussion around MLPs.

David E. Meador

Actually I don't have to punt it to next week, I'd rather just talk about that right now, if we could. Because we're always asked, as you know, every -- it seems like every meeting I'm in with investors, they're asking, are we thinking about this, and what's our view of these? And the answer is, we're constantly looking at all of our financing techniques, and we've been studying MLPs at a detailed level ever since these things started evolving, including watching, in particular, C corps that are -- now have MLPs versus the large MLPs. But that said, we don't believe that we have the scale at this time and that -- to move on an MLP. We also continue to ask investors what they think about DTE proceeding in its way. We honestly are getting mixed feedback on the thoughts about a company that has the mix of businesses that we have. So we're predominantly, as you know, a utility company with 70% to 80% utility having an MLP. Next week, we're going to take you through our midstream growth aspirations. And as part of that, I would just offer that we constantly evaluate MLPs and other alternatives. And at some point, given future scale, we'll give it more serious consideration. So some have asked recently, it sounds like the tone is changing at DTE Energy. And the answer would be, it is, when the segment was earning $30 million a year, we got asked this question. We answered it one way. Now that we're earning $50 million with aspirations well over $100 million, I think we're just signaling that as this business grows, it's something that we will take a look at. But as of today, as you know, we've been able to grow this business organically and create value without an MLP. So nothing is imminent, but as this business segment grows, it's something that's incumbent on us to constantly evaluate.

Operator

We'll go next to Andy Levi with Avon Capital.

Andrew Levi

Most of the questions were asked. Just back on the benefits. So whether it's on the gas side or the electric side, we should just annualize that number, is that kind of the way to look at it in the savings?

Peter B. Oleksiak

Yes.

Andrew Levi

Okay. And then same on the lost gas, or is that kind of seasonal?

Peter B. Oleksiak

Some seasonality in that number.

Andrew Levi

Okay. And on the benefits side, was that contemplated in your forecast that you gave earlier in the year?

Peter B. Oleksiak

So this is part of the strategy around delaying the rate proceeding. Even a few years ago, when we're taking a look at it, we would -- potentially would have needed new rates given the size of our capital spend in '13. We knew that we had a design changer that would give us some headroom to stay out of proceeding.

Andrew Levi

So the forecast that you gave for this year, the $3.85 to $4.15, I believe, contemplated this?

Peter B. Oleksiak

That is correct.

Operator

And we'll take our next question from Paul Patterson with Glenrock Associates.

Paul Patterson - Glenrock Associates LLC

Just -- I hate to circle back on the MLP. But you mentioned that at a certain point, you'd be more likely if you have the economies of scale. Could you give us a sense as to what that would be?

David E. Meador

I'm not sure there's an exact number. As you know, you want to look at, not only what you have today but you want to look at your pipeline on growth. As a company, we've never wanted to be in a situation where, I created a structure and then I found myself wanting to add growth to that structure that was beyond anything that normally would be in scope or strategy for this company. So I don't think there's a magic answer on that. I think right now, and we'll take you through this next week, we're looking at how far we can push this midstream segment and also what are the range of options that we see happening in this whole Marcellus Shale play right now. And obviously, as this business grows, and assuming that MLPs are still allowed down the road, as you know, there's a very attractive cost to capital structure here that we'll, again, continue to take a look at. But what I want to be careful about is just right now, people shouldn't expect that next week there's some announcement around MLPs. What we want to say is that, as this business segment grows, we'll continue to evaluate this. But it's just not -- we don't feel we're at the right level today.

Paul Patterson - Glenrock Associates LLC

Okay. And then on the weather-adjusted sales growth, it looks like it was flat. Is that -- does that include the impact of leap year?

Peter B. Oleksiak

Yes, it does, and that's like one day. So in the quarter, as we go through the year, it becomes less significant, but the load was flat. Actually, at this point, we're expecting our full year to come in close to 2% growth increase.

Paul Patterson - Glenrock Associates LLC

Okay. Now I thought you guys were expecting 1% after the impact of energy efficiency. Has that changed now?

Peter B. Oleksiak

It has. Actually, the industrial in particular, you'll see in the quarter was up 3%. Actually we're anticipating the growth of 5% to 6% by year end.

Paul Patterson - Glenrock Associates LLC

Okay, so it's all driven by industrial.

Peter B. Oleksiak

Predominantly.

David E. Meador

But still our long term is the 1%, net of energy efficiency.

Peter B. Oleksiak

Our long term is 1%.

Paul Patterson - Glenrock Associates LLC

And could you say what the impact of energy efficiency is?

Peter B. Oleksiak

Approximately 1%.

Operator

[Operator Instructions] We'll take our next question from Kevin Fallon with SIR Capital Management.

Kevin Fallon

I just wanted to see if I could get a little bit more color before the meeting next week on the potential opportunities at the utilities. Should we think about the current capital program as kind of a floor, or is that the full assessment of the need as you see it? Or just directionally, which way you're thinking there?

David E. Meador

You want to take that, Peter?

Peter B. Oleksiak

Yes. I know we've laid out in terms of our capital expense for utilities, our base, we have the environmental and the renewable. That's pretty much kind of playing out over the next few years, as we've indicated in the past. And the gas, it really is, with this, with the IRM really, that program is going to drive the incremental growth for our gas utility.

David E. Meador

Yes, normally, at an event like this, we'll give you a 5-year look. We're going to go longer than 5 years because we have been getting questions about, is there a cliff out there after you go through this wave of environmental spending? And the answer is, no, and we'll lay that out in more detail. I think we've been saying that for a while now, but we just haven't given multiple years of an outlook. And then also trying to explain, what are the dynamics. So over time -- over many, many years, what's going to happen with the generation fleet, what do we think is going to happen with renewable energy and then base infrastructure investment in both the gas and electric utility, and we'll lay that out in more detail next week.

Kevin Fallon

Okay. And just one other one. Back to the MLP for a moment. Just a question, on your internal plans, if you achieve your current internal plans, do you achieve the thresholds that would warrant the scale to do an MLP, regardless of whether you would or wouldn't do it?

David E. Meador

I think that's -- no, I think that's just one criteria around scale. I think there's other questions that, as you know, that have to be asked and answered including, is a company that's 70% to 80% utility and going to remain a C corp, what are the challenges and complexities around us having an MLP for our investors, and will our long-term investors like that or not. And one of the criteria is continuing to get feedback from our investors around that. And as we've said, there's not been a project yet that I couldn't take on in terms of our organic growth because I didn't have an MLP. So we've been able to grow this business, and we'll continue to grow it without one.

Operator

And we'll take our next question from Kevin Cole with Crédit Suisse.

Kevin Cole - Crédit Suisse AG, Research Division

I guess, since you opened the can of MLP worms, I'll follow up on that. I guess given that you are in a growth phase of the business today and you will need significant amount of capital to grow the business, doesn't it make more sense to MLP it today, that way you can get the benefit of the cheaper cost of capital when you're funding that growth?

David E. Meador

I understand the math in this, Kevin, as well as you do, that using an MLP for a lower cost of capital. You could lay that out. I've laid that out. I think just there's other criteria to this than other -- other than just saying, I'm going to bring a source of lower cost of capital to a company like DTE. So again, I'm not saying that this is imminent because it's not, and I'm not saying that we won't avail -- we won't take this more seriously down the road. I just don't know that there's a triggered threshold that we're going to do this. So we're evaluating it. We're constantly doing this and evaluating it with our outside advisors and our board, and at the same time, we're not there right now. So I just wanted to be careful that if someone thought that we were coming to New York to announce an MLP next week, it's not next week.

Kevin Cole - Crédit Suisse AG, Research Division

Okay. I guess when you're doing the math, too, are you expecting to, I mean, run your MLP synergies. Are you spinning it out completely, that way you can get the full benefit of an MLP? Or is your math, you're dropping it down and you're still keeping it underneath DTE Corporation?

David E. Meador

I'd rather not get into those specifics, because as you know there's a lot of alternative ways, even when you say someone could do an MLP there's different alternatives, including whether the parents keeping some of the limited partnership holdings. And then, is it some of your assets, all of your assets and so on? So I think over time, it's something we'll continue to dialogue with you and others on, including getting feedback from people about how they feel about this company doing something like that.

Operator

And it appears there are no further questions at this time.

David E. Meador

Okay. Thank you, again, everybody, and we look forward to seeing you next week, and the meeting starts at 8:30. Take care.

Operator

And that does conclude today's conference. Thank you for your participation.

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