Good day, welcome to the Q1 2019 earnings conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Barbara Tuckfield. Please go ahead, ma'am.
Thank you, Rachel, 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 Gerry Anderson, Chairman and CEO, Jerry Norcia, President and COO, and Peter Oleksiak, Senior Vice President and CFO. We also have members of our management team to call on during the Q&A session. I'll turn it over to Gerry to start the call.
Thanks, Barb. Good morning, everyone. Thanks for joining us today. This morning, I will give you a quick recap of our performance in the first quarter, I will turn it over to Peter to provide a financial review, Jerry Norcia will take you through some of our investment activities that bear on our long-term growth. We'll take your questions. I'm going to start on slide four. We continue to make good progress on several key fronts. First of all, I'll just start by saying that our first quarter financial results were strong, they added materially to the contingency that we have for the balance of the year. We came into the year with contingency, we've added to that in the first quarter.
Given that, with a quarter behind us in 2019, I'm really confident that we're well-positioned to deliver on our financial plans this year and extend our streak of being able to meet our commitments to you. Longer term, as you know, we continue to target 5%-7% operating EPS growth through 2023. Just as a reminder, our initial guidance for 2019 is the starting point for that growth. A big part of consistently reaching our financial goals is our workforce and our company's culture. I'm pleased to say that just about a month ago, we received Gallup's Great Workplace Award for the seventh consecutive year. Gallup has been in this business for a long time, decades, over that time period, only 10 other companies in their global database have ever gotten seven of those awards in a row.
It says a lot about sort of the focus and mindset of our people, and I'm really proud of that accomplishment for our people. As we look forward to the next five years, and we continue to invest heavily in our capital plan, we also remain committed to a strong balance sheet. Our plans call for us to issue $1 billion-$1.5 billion in equity over the next three years, with up to $250 million of that this year. Peter will talk a bit more about that in a few minutes. I think most of you are also aware that the state of Michigan is in the midst of a fundamental transformation in the way we generate electricity. In line with that, last month, we filed an integrated resource plan in which we laid out our thoughts on how we will generate electricity in the future.
The IRP, which was submitted to the Public Service Commission on March 29th, outlined the steps that we will take over the next five years and beyond to transform to a cleaner generation mix. We'll do that by adding substantially more renewables, by increasing our energy efficiency investments, and by retiring our coal plants sooner than we had previously announced. For context, in early 2017, two years ago, we were one of the first energy companies in the industry to voluntarily commit to reducing carbon emissions 80% by 2050. Well, our plan over the last two years has evolved, and we've accelerated that commitment by a decade. Our IRP lays out that we'll reduce carbon emissions 80% by 2040. Nearer term, we've committed to a 50% carbon emissions reduction by 2030 and a one-third reduction by 2023.
I'll talk a little more about our IRP in just a minute. In our gas utility, DTE Gas, we're accelerating the pace of gas main renewal, that'll have us investing an additional $450 million in capital over the next five years. That'll happen within our infrastructure recovery mechanism, and that reduces the timeframe to complete the main replacement program from 25 years to 18. With the weather having broken here, our team is fast at work, beginning to take on a spring and summer and fall of gas main replacement activity.
In our gas storage and pipeline business, we're moving toward the completion of our acquisition of the Generation Pipeline, which should be finalized in the second half of this year. The acquisition of the Generation Pipeline is fully consistent with the strategic growth plans that we have for NEXUS, and fits very well with NEXUS's goal to supply customers in Ohio, especially northern Ohio, as well as Michigan, Chicago, Ontario, and other markets, with Marcellus and Utica gas as those resources continue to grow. In our Power and Industrial business, we continue to see progress in the development of both industrial energy services projects and new renewable natural gas, or RNG projects. We are finalizing agreements for two new RNG projects, this will be incremental to the projects we've developed in recent years. Beyond that, we continue advanced discussions to secure additional RNG projects later this year.
We also expect our Ford Motor Company cogen project to be operational in the fourth quarter of this year, construction is sort of moving ahead at a fast clip on that project. We are also finalizing the acquisition of a new cogeneration project, Jerry Norcia will describe that in a few minutes. Moving on to slide five. I mentioned the IRP earlier, we submitted that. The IRP lays out the plan you can see on the left-hand side of slide 30 between now and 2030. You can see, I mentioned a fundamental transformation in our generation. The next decade alone brings a very marked shift in the way that we generate power. I think ensures that Michigan will continue to be a leader in the transition to cleaner energy sources nationally.
The plan, our IRP, provides a very well-defined and specific strategy for powering our homes and businesses over the next five years, so between now and 2024, as well as what I would call a flexible plan for the 2025 to 2040 period. We are flexible longer term because as you know, technologies as well as the markets we serve and the MISO marketplace more broadly, are all going to continue to evolve in ways that are hard to predict long term. We need a flexible plan to take account of that. We are quite specific for the next five years, then introduce more flexibility longer term. What is a fixed marker, though, is the plan to reduce carbon emissions 50% by 2030 and 80% by 2040.
That plan, as we model it, is not only achievable, it is achievable in a way that works for both affordability and reliability for our customers. It will require substantial investments. To achieve the goal, we will be aggressively investing in renewables, the next five years call for us to invest approximately $2 billion in renewables, to more than double our renewable production capacity by 2024. Those investments are going to target primarily wind over the next few years, because wind is still more cost-effective in Michigan than is solar. We do anticipate a shift to solar in the 2024 timeframe, because solar costs continue to become more competitive here in the state. We are also expanding our voluntary renewable program, this has been really interesting in recent months.
The voluntary program offers homes and businesses the opportunity to buy more clean energy, in the process, accelerate our state's transition to overall carbon reductions and sustainability goals. This also allows individual companies to meet their ESG goals. We have seen this play out in a significant way in the first quarter of this year, when we announced partnerships with Ford, General Motors, and the University of Michigan for sizable transactions. Together, these three customers have signed contracts that we will be supplying by investing in over 350 MW of additional wind production. That is over and above what we will be investing in to meet our utility goals. We will be investing over $600 million of capital to pull that off. Big moves on the voluntary front in the first quarter, we expect more contracts like these down the road.
We're also moving our previously announced retirements of the Trenton Channel Power Plant and the St. Clair Power Plant, both coal-fired power plants. We're moving the closure of those plants up a year to 2022. The River Rouge plant will be coming off in 2022 as well. We'll have three substantial coal plants coming off in just a few years. The key factor that allows us to close those plants in 2022 is the fact that the Blue Water Energy Center, our new natural gas combined cycle plant, is proceeding through construction well, and we're now confident that it will come online in 2023 to help backfill for those three coal plants that'll come offline.
Blue Water is key to our system reliability as we take off about 20% of our peak capacity production with those coal plants, because it will be there when we see the normal fluctuations in renewable power when wind isn't blowing or the sun isn't shining. The construction on Blue Water is coming along very well. We're able to accelerate the retirement of a couple of those coal plants. Well, with that, I am going to turn things over to Peter to give you a little more detail on our financial results. Peter, over to you.
Yeah. Thanks, Jerry. Good morning, everyone. Before I get into financials, as you know, I always like to give an update on the Detroit Tigers. If you hear a smile in my voice here, that's because we won both games of a double header yesterday against the Red Sox. We are above 500. Been an exciting start this season, and hopefully we can build on the wins we've had here in April. Let me turn the attention now to the financial results for DTE, and I'll start the review on slide six. The first quarter came in strong with earnings of $374 million. This translates to $2.05 per share for the quarter. You can find a detailed breakdown of EPS by segment, including our reconciliation to GAAP reported earnings in the appendix.
Let me start my review at the top of the page with our utilities. Both utilities benefited from a cold start of the year versus last year. On the first row are the results of our electric utility. DTE Electric earnings were $147 million for the quarter. This is $5 million higher than the first quarter of last year. This increase was driven primarily by colder weather and the impact of new rates implemented last year. Our electric business also had higher O&M and increased depreciation and other expense-related items to rate base growth. DTE Gas had first quarter 2019 operating earnings of $151 million, and this is a $40 million increase from the first quarter of 2018. The earnings increase is driven primarily by the impact of new rates implemented late last year and colder weather.
There's also approximately a $10 million-related tax timing item that we reversed in the second quarter of 2019. Let's move down the page to the third row to our gas storage and pipeline business. Operating earnings for our GSP segment were $48 million for the quarter. The quarter results are in line with our 2019 full-year guidance. Last year, we had one-time positive earnings related to AFUDC earnings at NEXUS, as well as return to normal gathering volumes this year. Last year, we had a very strong year across all of our platforms. As a result, this quarter is down $14 million versus 2018 first quarter, but in line with this year's annual guidance. On the next row, you can see our Power & Industrial business segment. Operating earnings were $26 million. Earnings are $16 million lower than the first quarter of 2018.
This decrease is due mainly to the REF tax equity transactions that occurred in the fourth quarter of 2018. As we have communicated previously, we entered into equity partnerships in our REF units and accelerated cash flows of around $100 million per year for the next three years to support other growth projects. This lowered earnings this year around $40 million versus 2018. Like to note that most of our new projects P&I originated will start adding to earnings late this year and early next year. Our energy trading business had operating earnings of $5 million, and earnings are up $4 million from last year. Our trading segment had a particularly strong quarter with its power portfolio. Economic contribution was up significantly quarter-over-quarter. The appendix contains our standard energy trading reconciliation, showing both economic and accounting performance.
Finally, corporate and other was $13 million favorable compared to the first quarter last year due to the timing of taxes. Overall, DTE earned $2.05 per share in the first quarter of 2019, and this is $0.14 higher than the first quarter of last year. Let's move to our balance sheet on slide seven. We expect to issue between $1 billion and $1.5 billion of equity over the next three years, including $215 million this year. This year-to-date, we've already issued $150 million, mainly with a contribution of equity into our pension plan in the month of March.
Our credit metrics are well within the targeted ranges set by the rating agencies, we continue to maintain a strong balance sheet, which supports our capital investment program and growth plans and positions the company to continue a strong investment-grade credit rating. With that, I'll turn it over to Jerry Norcia, who will go over our utility and non-utility growth projects.
Thanks, Peter. As Gerry mentioned, DTE had a strong start for the year, and we continue to build on our solid long-term plan that we laid out at EEI last fall. I want to highlight several significant achievements of both our utility and non-utility businesses, so I'll start on slide eight. In January, the Michigan Public Service Commission approved DTE's proposal to expand our MIGreenPower program to businesses and industrial companies. MIGreenPower is the voluntary renewable program that Gerry was describing. This program is now available to all DTE customers, both residential, commercial, and industrial customers. In February, we're happy to say, as Gerry mentioned, we enrolled the full four operating wind park in Michigan, as well as DTE's most cost-effective wind project to date. The 65 turbines will provide enough clean energy to power more than 50,000 homes.
Last summer, we broke ground on our Blue Water Energy Center, our natural gas combined cycle power plant that will help meet our goal of reducing carbon emissions. Gerry highlighted the fact that Michigan is undergoing an energy transformation and how our recent IRP filings define how we will be moving our generation to cleaner energy. That plan provides for the necessary homegrown 24/7 power for times when renewable resources aren't available, while also aggressively, as encouraged, growing our renewable energy portfolio. Moving on to our gas utility. DTE Gas has begun to implement elements of last September's approved rate order, including our accelerated main renewal program. I'm very pleased with the progress of this program, which will ramp up significantly now that the weather has broken. Additionally, we announced plans to reduce methane emissions from our gas utility by more than 80% by 2040.
We have made good progress on this effort so far from our baseline levels, achieving a 20% reduction through 2018. We are also leading an industry coalition through EEI and AGA, aimed at reducing methane emissions in the supply chain of pipes and producers. I'd like to move on to our non-utility businesses. I'll start with an update on growth opportunities at our gas storage and pipeline business. On our year-end call, we announced that Nexus is acquiring Generation Pipeline, owned in a 50/50 partnership with Enbridge. This is an example of an add-on business that fits directly within GS&P's long-term growth strategies. Our Millennium Pipeline completed a 0.2 BCF per day expansion in the first quarter, which now brings the pipe to 1.2 BCF per day. We have numerous additional expansion opportunities within our current gathering and transport platforms. Moving on to Nexus and Link.
They continue to perform well. Nexus is contracted to approximately 900 million a day with long-term contracts. It is flowing approximately 1.2 BCF a day, and the balance of those contracts are short-term contracts. The Link asset has been performing very well, I would say better than planned. I will walk through our power and industrial business. As Gerry mentioned, our P&I business continued to see progress in the development of both industrial energy projects and renewable natural gas. We feel the RNG market is poised to continue its growth trajectory into the future. In addition to the project we secured in 2017 and 2018, we are finalizing agreements on two new greenfield RNG projects, and we continue advanced discussions to secure additional RNG projects in 2018. On the industrial energy side, we are focusing on our cogeneration business.
Along with our Ford Motor project, we are in late-stage negotiations on an additional cogeneration project. We will provide details as this progresses and moves towards close. Along with these projects, our P&I queue continues to be very strong. I'll wrap up on slide nine, and then we'll open it up for questions. To sum it up, I feel great about our first quarter results and our position to continue our growth in the years to come. Our utilities continue to focus on necessary infrastructure investments, specifically investments in clean generation and investments to improve reliability and the customer experience. Our non-utility businesses continue to position us for growth. Our balance sheet is strong, and we have solid credit ratings. I'm confident that we are on track to continue to deliver on our long-term 5%-7% operating EPS growth rate.
I feel very good about our ability to continue to deliver the premium total shareholder returns that we have delivered over the past decade. With that, I'd like to thank everyone for joining us this morning. Rachel, you can open it up for questions.
Thank you. If you would like to ask a question, please signal by pressing star one on your telephone keypad. That's star one on your telephone keypad. We'll now take our first question from Shahriar Pourreza of Guggenheim Partners. Please go ahead. Your line is open.
Hi, good morning, guys. It's actually Constantine for Shar. He had to hop on another call. Congratulations on the good earnings.
Great.
Just one kind of quick question. Gerry, thanks for going over the business growth at GSP. One of the things that I wanted to ask was, you mentioned that there's kind of a mix of kind of greenfield kind of gathering opportunities and some potential strategic acquisitions in the future. In terms of thinking about how you're going to deploy capital into that business, what's the mix there, and how are you thinking about it?
Well, our first order is always organic growth. What we're seeing right now is significant opportunities, organic opportunities in our existing platforms. Generation Pipeline is an example of that. As we close that and then move to connect with the NEXUS Gas Transmission, that'll be a great market sync for that pipeline. We also have several other opportunities across all our platforms that we're pursuing that we feel real good about, and those are organic in nature, either connectors or expansions. In addition to that, if we do see opportunities for strategic asset acquisitions that connect to these platforms, we'll look hard at those.
Magnitude-wise, do you think it's going to be closer to something like Generation Pipeline or slightly bigger? Just thinking about the overall kind of $4 billion-$5 billion number over the five years.
Right. I think right now we're focused on building out that opportunity set, and I can tell you that I would say we're in line with our guidance this year in terms of growth capital for both P&I and GSP, and feeling really good about that opportunity pipeline. We continue to secure. As we secure those, we're securing EPS growth for the future.
I would say in addition to that things we've looked at for acquisitions have ranged anywhere from the scale of generation pipeline to the scale of Link and lots of things in between. The other thing I'd say on our capital numbers is we're a lot more focused on value and accretion than we are a capital number or an earnings number. The organic things tend to come in hotter with better returns, less capital. Some of the acquisitions that set you up for more of that may be larger capital numbers, but at least at the outset, a little bit lower accretion.
To continue growing, we need a mix of those things, and we're looking at, as Jerry said, first at organic and then the range of things we've seen for potential acquisition is all over the map, from pretty small bolt-ons to things that are a bit larger on the scale of Link.
Okay. Just a quick follow-up also on the GSP business. You mentioned kind of a mix of shorter-term contracts on Nexus. Is there a plan to fill that with longer-term contracts, or is the kind of economics working favorably right now on keeping it the way that it is?
Certainly the answer is yes, we're looking to move the balance of the capacity to longer term contracts. We feel some of the tailwinds there are that the basin that we're operating in continues to grow. We expect it 5%-6% a year, which is significant. It's producing about 28 BCF a day now, we view that as a sort of strong tailwind. In addition to that, we're seeing some other pipelines face strong headwinds, if you will, in terms of going into service. We find ourselves in a pretty good position with available long-term capacity that we can place when we see the prices being right and the term being right. That's what we're really working towards, is trying to get the right price and the right term for these contracts, long-term contracts.
We're happy to take the short-term contracts in the meantime.
I would say that we're consistent with what we've really been saying for about a year, which is we see the basin going short takeaway in the early 2020s, 2021, 2020 timeframe. That's what producers will be targeting. Of course, if some of the pipes in the region delay or don't get built, it intensifies that dynamic.
Great. That's really great color. Just one kind of last one on a little bit more of a strategic end is, you kind of mentioned this 25/75 kind of non-regulated to regulated business mix. Is that kind of the target going forward for the next five years?
Yeah. As we model forward, that's where we keep landing.
Okay, kind of the IRP, I guess, supports some of that growth on the regulated front.
Yeah, that's right. IRP, voluntary renewables, as you know, we're in a heavy capital replacement program in both distribution or operations as well, gas and electric. Yeah, that's what keeps the mix, even though we're growing the other businesses, keeps the mix at that 75/25 roughly.
Okay, perfect. Thanks. That's it for me.
Thanks.
We will now take our next question from Praful Mehta of Citigroup. Please go ahead. Your line is open.
Thanks so much. Hi, guys.
Morning.
Morning. Maybe just touching on the IRP and the whole retirement of coal plants. Wanted to understand from an economic perspective, most utilities almost have a benefit on customer bill with these retirements. How are you seeing that play out in your IRP? Do you see customer bill impact being positive, flat, or bills going up? How do you see that playing out in your IRP plan?
What we've talked about on our bills overall is that our goal is to keep, as we invest both in distribution and generation, to keep our rate increases to low single digits, and we think we'll be able to do that. In some regimes, if you get into the Great Plains where wind may come in at $0.02, you can displace fuel costs in a way that you may see benefits to bills. We're trying to get our renewable additions in with modest increases, and that's what we're seeing. There's enough capital here, and we bring, say, wind in today at $0.045. We have a good wind regime in Michigan, but it's not the best in the country. Certainly a long way from the worst, too.
It's a good regime, but not quite as strong as you might see in the Great Plains. I'd say we're bringing it on in a way that works for customers, and it's going to keep our overall bill increases affordable and workable.
Got you. It's not as good a benefit, but it is manageable within the current plan.
Yeah. We wouldn't be out saying we can go down 50 and 80 if we hadn't modeled that this is workable from a price and reliability perspective. We spent a lot of time studying that, it absolutely is workable. Generally speaking, I think technology's going to continue to evolve in ways that make this more workable and probably make things happen faster than people anticipate today.
Got you. Interesting. The other interesting point you brought up on the voluntary contracts, is that something you expect would push the process of this transformation sooner? How does that then play into bills? Do these people who sign up the voluntary contracts bear an incremental burden for the transition for those particular contracts?
Well, the contracts are signed up with customers, the balance of the customers don't pay for those. GM is paying for their renewables, Ford, U of M. What that means is, at the utility, we have said that we'll have at least 25% of our supply from renewables by 2030. This voluntary could push us up to the range of 30% for the state, with some of that being utility commitments and some of it being individual customer commitments. The RECs for these projects are assigned to those specific customers and retired by those customers and in the name of those customers. We can't use it for utility compliance. It accrues specifically to GM, Ford, and the University of Michigan.
Got it. Okay. That makes sense. Thanks for that. Just finally, just a simple clarification question. When you talk about the gas business, Q1 2019 versus 2018, the $14 million uplift that you experienced in 2019 only partly is explained through weather and the one time, I think, the tax impact that Peter also talked about. What else is driving the improvement, and why doesn't that show up on an annual basis in terms of an uplift for the gas side? It seems like the annual number is still the same. Just trying to understand and reconcile how Q1 performance doesn't kind of flow through.
We've had a very strong start to the year. You mentioned some of the items. We have some of them that are kind of one time more in nature. We have weather favorability this year, and we also have some tax items. Last year, we booked some accruals related to tax reform where we gave significant benefits back to customers. That's about half of that $40 million when you look at the weather and tax timing year-over-year. The other is more permanent. We have a new rate case. Last year, we had new orders, new rates coming in. We do see a disproportionate amount of that coming in in the first quarter, just because half the volumes for the year play out in the first quarter.
We see a lot of favorability with the new rates coming in, as well as we have Nexus-related revenue coming in with Nexus and service. That's the other half.
Nexus, we had investments in the utility to enable Nexus. Those actually benefit the utility customers. They see a benefit, but there are earnings tied to that. Between the new rate case, which internalized new capital into rate base and the Nexus impacts, that's an equivalent impact to what the weather and timing items were.
It's a very strong start. Gerry Anderson did mention in his opening remarks around contingency we're billing this year. We do have some contingency we're billing with our gas utility.
Gotcha. Thanks so much, guys. Appreciate the color.
Thank you.
We will now take our next question from Julien Dumoulin-Smith of Bank of America Merrill Lynch. Please go ahead. Your line is open.
Hey, good morning, everyone.
Hey. Morning, Julien.
Just wanted to follow up on the IRP discussion. First, just to be exceptionally clear about what's reflected in your CapEx budget today. Obviously, the gas plant is, but with respect to generation investment on the longer-dated side, how does that reconcile with some of the updated and accelerated timelines that you've proposed in the IRP? Secondly, and related, obviously, we've seen some developments on Consumers Energy's IRP of late and some specific settlement terms. How do you think about the ability to settle your own IRP? I know, again, I appreciate it's early, but some of the critical pieces such as recovery on PPAs and again, more broadly with respect to PURPA, if you can comment at least initially as you see it.
Yeah. The IRP, as I said, is very specific for the first five years. After that, we actually proposed a range of scenarios that may play out depending on how technology and other factors evolve. When you look at the first five years, they're very consistent with the plan that we laid out at EEI last year. Blue Water is in there as expected. The renewables that we need to build to meet the 2021 commitment that we have under the RPS are all in there. We do have voluntary renewables in the plan. We have 600 MW in, but we're only one quarter into that plan, and we signed up 350. We're feeling awfully good about being over halfway only a quarter into the first year of the five years.
I do think there'll be more of that as other companies continue to look hard at what they need to commit to their investors and their customers. That's going well. I would say, on the whole, the IRP is entirely consistent with the plan that we laid out at EEI and makes us feel really good that we're on track to achieve it from that perspective. Concerning CMS and their settlement, I think you'd probably be better to direct questions at settlement and terms and so forth around that to them. We could settle, although I don't know that I anticipate that.
Ours is pretty early in the process. I think it's a pretty straightforward IRP in the sense that most of the discussion that's specific is near term, and it's all things that have been out there for the commission to see for a long time. I wouldn't think the first five years would be controversial. On PURPA, we actually got a staff order on our PURPA case today that I think continues to evolve that policy in the right direction in a positive way. In our case, a couple of specifics were that they found that we had no need for capacity. Any PURPA projects would be attached at energy-only prices.
If the day does come that we're determined to have a capacity need, they set the price at the Blue Water Energy Center price, which is in the $0.045 range, which is pretty consistent with the renewables that we're bringing on, as I mentioned earlier. The new assets that we're bringing on are in the $0.045 range. That's roughly where they've set the price, which is a good evolution from, I'd say, some of the early thinking on how PURPA pricing might be handled. We feel positive about all of that.
Got it. Understood. Separately, just to clarify this, the voluntary renewables, I know you mentioned it already, but is there a timeline on getting the rebalance of the 300-600 resolved?
Yeah, within five years. It's in our five-year plan. We've had a really fast start to the effort, but it would mean we'd be looking to bring in 250 megawatts more over the remaining four years and three quarters.
Excellent. Just lastly, anything quickly on replacing the remainder of the midstream acquisition placeholder?
I think we answered that earlier with, we're looking at a whole range of potential, both organic and sizes on acquisitions if we execute those. I don't know that there's more to say than that.
Okay, fair enough. Just made sure. Wanted to be crystal clear. Thank you very much.
Thank you.
We will now take our next question. Just a moment there. Sorry. From David Fishman of Goldman Sachs. Please go ahead. Your line is open.
Hi. Good morning.
Good day.
Hi. Another follow-up on the IRP. As you guys already mentioned, the filing has a lot more wind capacity up front, far less solar-heavy, relative to some others in Michigan, largely due to cost competitiveness. When you think about the mix between DTE Electric owning versus PPA-ing this capacity and how other dockets have progressed, does wind present a more compelling utility own proposition relative to solar over the next five years in Michigan? Are there not really material differences between owning a PPA if it's wind versus solar?
Well, look, one of the reasons that the legislation in 2016, that was passed in 2016, evolved to enable companies to own it 100% is that between 2008 and 2016, when there was a 50/50 split, there just was no compelling evidence that third parties were bringing in the wind capacity or renewable capacity more cheaply. In fact, DTE was always at or below the third party. The legislation in 2016 enabled utilities to own the renewable capacity, and that's what our plan calls for. We think we can absolutely do that at or below what third parties can. As you said, near term, that means wind. Long term, we're convinced we can do the same on solar, and that we will be bringing solar on at or below what third parties can, and that's our plan.
Okay. Thanks. One follow-up on P&I. I know we've talked about RNG projects in the past. When you announced acquiring a cogeneration project, are there any kind of incremental insights you can provide on kind of returns, contract duration, and maybe how late in the cycle that cogeneration project is? Is it already developed or are you just kind of buying the rights?
The contracts are long-term on the cogeneration project that we're looking at, that we're in the final stages of discussion on. I can say that.
Okay. Is this a completed kind of cogen project that you're just acquiring once it's done, or is this something where you'll be having an organic aspect to it?
The one that we're in final stages on is an existing operating facility.
Okay. High level, are there much competitive advantages with buying an existing cogeneration project? Are you able to bring gas from GS&P or anything like that?
I can tell you that the returns are favorable and north of typical utility returns with a long-term contract. We feel good about our position there.
I'd also say that our group who does that probably does have operating cost advantages over other operators. Like any business, you can do a really good tight job of running assets or you can kind of mess it up. They've got, I don't know, 20 years of experience running these projects, really understand how to do it efficiently.
The asset is critical to the operation of the facility that it's connected to. Operating experience and expertise is fundamental and certainly a competitive advantage.
Okay, great.
That one's being finalized, we can't say too much more specific about it until perhaps it's done in public. I will say the combination of that, plus the two RNG projects we mentioned, gets you a long way down the road toward the $15 million that we got that business targeting this year for incremental earnings growth. There's, as Jerry mentioned, a significant amount more in the queue that's very active behind those three projects. P&I continues to feel like the opportunity set is good.
All right, great. Thank you. Congrats again on a good quarter.
Thank you.
Thank you, Jim.
We will now take our next question from Michael Weinstein of Credit Suisse. Please go ahead. Your line is open.
Hi, guys. How you doing?
Good.
Hi, Michael.
Hey, couple of questions. In the electric rate case, the infrastructure recovery mechanism, if that isn't approved, what happens with the next filings over the next few years? How does that change things?
One proposal they've made is that we set up a work group to work out the details on the IRM rather than use the rate case to finalize that. That would be fine if it's the way it plays out. I think, Jerry, you talk, but my sense is there continues to be a real interest in the mechanism, but a desire to work through the details.
Yeah, we spend a lot of time with commission staff creating an understanding of our investment profile over the next five years. I would say there's been really strong support as we invest in reliability and modernization of the grid, as well as our generation fleet, modernizing and transforming that fleet. There's good visibility into our plan. There is the opportunity to have an infrastructure recovery mechanism to sort of accommodate well-understood capital. I think, like Jerry said, it's going to take some time to work through the details with the staff and the commission. Our expectation, and it's likely not going to happen in this rate case. The consequence of that is that we'll be in for more regular rate cases.
I think if we can get one done, the benefit is that we can lock in long-term investment plans, and drive efficiency into those plans for our customers. We see value there, as well as reducing the frequency of rate cases that are pretty straightforward.
The staff proposal was to set up a work group to continue to work the details. Is that?
Okay. A working group is better than a rejection. On gathering and processing, can you talk about volume growth and what you expect that to be over the next few years, and what it's been this year? Specifically on Link, what's the capacity utilization rate on the Link system at this point during Q1?
What I can tell you is that we expect the Appalachian Basin, which most of our assets, all of our assets are really connected to grow at 5%-6% over the next 10 years or so. That's very positive. It has grown faster in the past. I think as the basin matures, as well as capital discipline has entered into the production capital markets, we project a 5%-6% growth. We think that our assets, Link, Bluestone, Millennium, NEXUS, are well-positioned to competitively attach that volume growth.
You asked specifically about Link. Link continues to perform, as Jerry mentioned earlier, ahead of the pro forma that we had for it. We mentioned last year a new gathering contract. We're in the middle of building that out. The drilling that we see around Link is proceeding kind of exactly as we anticipated, actually, in this year's plan. There is talk of producers not getting out over their skis with capital they spend to chase resources. In terms of the drilling we're seeing around our gathering assets, it's right in line with what we expected and right in line with our plan for this year. That domain, you'd say, is proceeding well for us in 2019.
I think the last update was that it's 80% contracted. Is that still the latest you're willing to talk about, or is there an update to that?
I don't think we've talked about contracting levels. It's certainly rising. We're growing into it, and there are various components of the pipe, too. There's a southern leg and a northern leg, and each of them have their own dynamics. It's not like a point-to-point pipe like Millennium is that's quite as easy to sum up that way.
I think we've said in the past that there's a significant amount of expandability that we could secure on a pipe. As a matter of fact, we're under construction right now with a significant expansion on that pipe to support a customer need with long-term contracts. We are in expansion mode right now on Link.
Great. On P&I, are you guys ahead of plan for $15 million a year of growth? It sounds like you're doing better than you expected. Is that fair?
Currently, yeah, doing better than we expected at this point in time in the year. We have approximately most of our growth locked in that we expected to lock in this year and with a very strong queue behind it. We expect more good news in P&I as we go forward.
Great. One final question on just the equity share count. Are you guys including the Link conversion, the equity conversion, in this year's guidance for share count and also in the quarterly numbers?
We are including that. My disclosures I gave on the call, which is the [1 to 1.5 billion to 250 million] this year does not include it. Although we disclose the share count, it doesn't include it.
Yeah.
it's not Yeah.
we've got one to one point five plus the converts that will come in as equity. of course, those are all in our EPS forecast and the five-year plan. We've been forecasting that convert for years now. the one to one five would be over and above that.
Makes sense. Okay, thank you.
Yep.
We will now take our next question from Greg Gordon of Evercore ISI. Please go ahead, your line is open.
Thanks. Good morning.
Morning.
Morning.
When you look at the first quarter results in GS&P and the decline in overall earnings associated with coming back to more normal volumes, I know that the fiscal year guidance was for lower overall. Is that sort of in line with your expectations and reflective mainly of the Atlantic Sunrise Pipeline coming online and those volumes being diverted to that pipe?
Hey, Greg, this is Peter. First of all, last year we indicated that we had a really strong year, $62 million first quarter of last year, $48 million this year. That's the $14 million decline. The $62 million last year had AFUDC accounting for NEXUS, also had all of our platforms running pretty hot. The $14 million is a combination of the returning from AFUDC accounting as well as normal volumes. When you look at the $48 million, you annualize that, and also when you take a look at the growth we have for the year, Jerry Norcia was mentioning the Link on the last question. We're feeling really comfortable with this year's guidance, we are not anticipating any other pipelines not coming in service and volumes coming from that.
It's really just contracted growth that we're already constructing that's going to help us get to our annual guidance.
Put another way, the first quarter results were right in line with our plan for the year. We're just fine.
Got you. Yeah, no, you guys did call out earlier the flip from AFUDC, so I didn't recall that. It's a combination of the AFUDC and volumes normalizing, but still down the fairway of how you had thought it would play out. That's good.
Right.
The second question I have, a little off the beaten track. When I look at your IRP, as I recall, because I did reread it recently, I didn't see any call-out specifically for a significant commitment to battery storage. Can you talk about that and what type of technology or vendor you might decide to partner with? Because reading recently that, for instance, Arizona Public Service down in the Southwest has deployed a fairly significant chunk of battery storage and recently had a major equipment failure from a large vendor. I was wondering, as you look at that landscape, how you're thinking about that.
One thing that's unique to Michigan is that we have a massive battery that's existed in this state for a long time, known as the Ludington Pumped Storage Plant. We've been investing along with Consumers Energy over $800 million in that facility in recent years, and it takes it up over 2,000 megawatts. That's the fourth biggest pumped storage facility in the world. There are a couple in China and one here in the U.S. that are larger. We had Battelle actually do some modeling recently on forward needs for storage as we build out our renewable assets in the state. They just don't show much of a need because a lot of the short-term fluctuations that renewables will introduce in Michigan can be handled by Ludington. What we see for batteries is more niche investments.
For example, at substations to offset investments on our distribution systems. We will have some, but for the reasons I just described, I think the big dollars will be in the renewable assets themselves versus storage within Michigan.
Excellent. I've been to that facility. It's really an impressive site. Thank you. Take care.
Thank you.
We will now take our next question from Jonathan Arnold of Deutsche Bank. Please go ahead. Your line is open.
Yeah. Good morning, guys.
Morning.
Morning.
Just coming back to the new cogen acquisition. Previously, you'd been talking about a plan in that business that would focus on developing new opportunities. I thought, are you still on that track and this was an opportunistic opportunity that came along, or is this a shift in focus?
I think your assessment is accurate, Jonathan. We are focused on developing greenfield in this space, and we have several of those opportunities underway that are progressing quite well, actually. This was an opportunistic acquisition opportunity.
Do you see others?
We have, for example, a greenfield that I'd say is in advanced development, quite interesting. That would be a new build. That would be the next one we're looking at behind this. If we see these come along that is an acquisition opportunity, a bolt-on that fits our return and skills, we're happy to do it, but we do continue to develop greenfield actively as well.
Great. Just on RNG, you'd said you were finalizing these two last quarter as well. I'm just curious, is there something that's come up You're making this take longer. Is it just a process? What's the update on getting those over the finish line?
Well, the deals are done on those two. Really, we're in the due diligence phase from a development perspective to make sure that we're happy with everything that we're closing in on from an economic perspective. We feel really good about it. We expect them to go forward.
Is that you're just still in due diligence, and you were in due diligence.
Yes
a couple of months ago. Do you think that any of these will close?
Just to be specific, we were in late development a few months ago. The contractual terms are agreed to now, but you always have, once you've agreed on terms, conditions, et cetera, in a definitive way, you always have a period of final due diligence where you make sure the assets you're buying fit the description and so forth. They're working their way through that, but they're very late in that process.
Okay. Since you last updated us, you've gone to terms, and they're moving forward effectively.
Yes. I fully expect we'll move forward on these two RNG deals.
Great. I think that's it. Thank you, guys.
Thank you.
We will now take our next question from Andrew Weisel of Scotiabank Howard Weil. Please go ahead. Your line is open.
Good morning. Thanks for squeezing me in at the end of the hour here. First, just a couple questions on wind. For the voluntary MIGreenPower program, I just want to be clear, would those assets sit in the rate base or outside of it, notwithstanding the dedicated RECs that you mentioned? Are rates negotiated, or would it be a cost plus with something like a 10% ROE? Going forward, given the size of Ford and GM, would most of the growth tend to come from residential and commercial customers or industrial, and does that matter from a rates or margin perspective?
The contracts are signed with individual customers, they're five-year term. We'd expect them to evergreen because a lot of these companies have long-term commitments they've made. If any individual customer didn't renew, they do revert into rate base. They behave just like a rate base investment. They essentially are a utility asset that behaves like rate base. In terms of returns, those are negotiated with individual customers to work for us and work for them. I think you can think of them as very much rate base assets.
The returns would be comparable to the rate base ROE, right? Is that what you said?
Yes.
Perfect. Great. Just one last one on midstream. You mentioned that you're expecting the tightness in takeaway capacity for Appalachian gas in the next, say, two years. Others might be less confident, thinking that there could be sufficient availability for a while, especially if people assume a slower rate of production growth than you do. Just to be clear, would you need to see that market tightness to hit your 2023 operating income targets, or would that represent upside to your plan?
Nexus is running full from a contractual perspective based on available capacity. What we'd like to see is terming out those revenues and at favorable pricing. We still are pretty confident that we're going to achieve long-term contracting on this pipe and move our short-term contracts to long-term. The basin is growing. Last year it grew 18% year-over-year. We're forecasting, we believe, a pretty conservative growth profile of 5%-6% going forward, and that's what's built into our five-year plans.
The discussions that we're having now with producers are very consistent with what we've been telling you for some time. They're active, and we still do see that tightness coming in the early 2020s. I've been telling investors this capital discipline that people talk about, I think it's a short-term phenomenon in the sense that demand five years from now is what demand five years from now is. The fact that producers are being more disciplined about not getting way out ahead of it and producing a surplus, that makes sense for producers, but it really doesn't affect what the demand is in 2022 or 2023. All the modeling that we see on fulfilling long-term demand continues to see substantial growth out of the Appalachian Basin broadly.
As you get into some of the stronger sub-markets within the Appalachian Basin, they grow beyond the pace of that 5%-6% that Jerry mentioned. If you're well exposed to the right geology, you'll not only see growth, you'll see more than your fair share.
All right. Thank you very much.
Thank you.
There are no further questions at this time. I'd like to hand the call back to our host.
All right. Well, look, I want to thank everybody for joining the call. As I said at the outset, we're off to a really good start to 2019. We're in a strong position to have a year. We have, I think, increased certainty of outcome for 2019. We're feeling like we can add 2019 to a decade worth of meeting our forecast and earnings commitments for you. Look forward to giving you further updates mid-year and beyond on the host of investment opportunities that we've laid out for you as well. Thanks again, and I look forward to talking to you soon.