Good day, welcome to the DTE Energy 2018 Q1 earnings call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Barbara Tuckfield. Please go ahead, ma'am.
Thank you, Mindy, 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 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 Gerry Anderson, Chairman and CEO, Jerry Norcia, President and COO, and Peter Oleksiak, Senior Vice President and CFO. We also have members of the management team to call upon during the Q&A session. Now I'll turn it over to Gerry to start the call.
All right. Well, thank you, Barb, good morning, everyone. Thanks for joining us today. This morning, I'm going to give you a recap of our performance for the first quarter of 2018, including an update on a couple of key developments and initiatives at the company. I'll hand it over to Peter, who will provide a detailed financial review of the quarter. Jerry Norcia then will provide some more in-depth business updates. Let me turn you to slide five. Top line, we are off to a very good start to 2018. With one quarter behind us, I am very confident that we will deliver on our financial plans this year. Longer term, we continue to target the 5% to 7% operating earnings per share growth rate through 2022 that we have discussed with you in recent years.
Just as a reminder, 2018 guidance is the base for this growth rate. On the renewable energy front, we recently filed a plan with the Michigan Public Service Commission to significantly increase our renewable energy capacity over the next few years. If approved, this will drive increased investment in new wind and solar projects and will double our current renewable energy capacity. I'll provide you with some more details on that plan in a few minutes. DTE Electric received its final rate order last week, and that order set our ROE at 10% versus 10.1% previously, and it maintained our debt equity mix at 50/50 versus our request, which was at 49/51.
Those two items, combined with the O&M increase defined in the case, mean that we're going to maintain our earnings guidance range for DTE Electric of $648 million to $662 million, but we'll be biased to the lower end of that range given the changes. That said, we continue to work very constructively with the Michigan Public Service Commission on a number of important issues. After months of collaborative work with the MPSC staff, in January, we filed a comprehensive five-year plan for our distribution system. Additionally, we recently submitted our updated renewable energy plan for the next five years, and I feel we're well-aligned with the MPSC in this area. Then third, our Certificate of Necessity, or CON filing, for our gas combined cycle plant will be finalized later this week, on Friday, actually, and we expect a constructive outcome in that proceeding.
We also have a rate case in motion for our gas utility. In this filing, we requested that the MPSC approve an increase to the number of miles of main that we renew on an annual basis, and we've had productive discussions with the staff on that issue. We expect to receive a final order in that case in September. Moving to the non-utility businesses, our gas storage and pipeline business is off to a very strong start to 2018. Our earnings in this business line are running hot, and we expect to be biased to the high end of our earnings projections here. We're making significant progress on the NEXUS pipeline, with several construction milestones achieved, and we do remain on track for in-service late in the third quarter of the year.
Construction on both our Millennium CPV lateral and the East Side Expansion Project are also going well, and we're still focused on in-service dates for those projects in the second half of the year. We also continue to be encouraged by the financial performance of our 2016 Link acquisition, and we can talk a bit more about that later. In our power and industrial business, earnings are also running hot this year. As at GSP, we expect to be biased to the high end of our earnings range in that business. P&I also continues to make really encouraging progress on its growth plan. We have several very promising development initiatives underway that Jerry Norcia will describe in greater detail a little later. Moving on now to slide six.
I think you'll recall that just about a year ago, we laid out our plan to transition to cleaner energy sources and to reduce our carbon emissions by over 80% by 2050. As I briefly mentioned earlier, we recently submitted our 2018 renewable energy plan to the Michigan Public Service Commission. This plan proposes 1,000 megawatts of carbon-free electricity from new wind and solar projects in Michigan that would be completed by 2022. A portion of that capital investment is a pull ahead of capital that we had later in our long-term or 10-year plan. Michigan, as you know, is in the process of implementing the bipartisan legislation that was passed in 2016, to address the state's energy transition. This renewable plan that we've submitted enables us to achieve the 15% renewable standard by 2021 that is laid out in that legislation.
This plan is another significant step toward our carbon emission reduction goals. Those goals can be met in a way that continue to deliver reliable and affordable power for our customers as well. If approved, these renewable energy projects would drive an investment of more than $1.7 billion in Michigan and would double DTE Energy's renewable energy capacity. To give you some specifics, we plan to bring the Pine River Wind Park online later this year, and the Polaris Wind Park online in 2020. Together, these two parks will total 330 MW of new capacity and will be DTE's largest and most efficient wind parks to date. We'll also be adding an additional 300 MW of new wind capacity in 2020 to supply a new voluntary renewable energy program targeted at our large business customers who are seeking to reduce carbon emissions.
In 2021 and 2022, we will be adding two additional wind parks that will provide a combined 375 MW of capacity. Along with the increased wind capacity, we're also planning on adding 15 MW of solar power. Wind today is clearly lower cost than solar in Michigan, and thus we're really concentrated on wind capacity in the near term. Solar costs are improving, and we expect that by the mid-2020s, solar will be ready to play a more prominent role in our mix. Of course, we will continue to add more renewable energy, beyond the dates defined in the plan that we've submitted. DTE has already reduced its carbon emissions by over 25% over the last 10 years. In the process has driven investments of about $ two and a half billion in Michigan's renewable sector and has added 1,000 MW of wind and solar capacity.
By 2023, when we play out the plan I just described, we expect our carbon emissions to be down 30%-35%. It's interesting that that was the range that was laid out for us for 2030 in the Clean Power Plan. We're going to be down significantly by the early 2020s. We plan to be down 45% by 2030 and 75% by 2040 as we continue to play out our transformation. As I've said before, these goals are achievable and achievable in a way that'll maintain both reliability and customer affordability. The 2050 timeframe and the 80% reduction that we're targeting align with what scientists broadly have identified as necessary to address climate change.
Reducing our company's carbon emissions and developing cleaner sources of energy, as I think you can pick up, is a key strategic focus for us, and it will continue to be an important area of investment as we transition our generation fleet. With that, I'm going to turn things over to Peter Oleksiak to talk a bit more about our financial results.
Hey, thanks, Gerry, and good morning, everyone. First, I'd like to give a quick update on my rebuilding Detroit Tigers as we are finalizing the first full month of the season. My Tigers are off to a slow start as anticipated, but are still within striking distance of first place. Actually, there are some pretty young prospects that look promising. Unlike our Detroit Tigers, actually, we got off to a really strong first quarter, as you can see on slide eight. We got operating earnings of $342 million or $1.91 per share. For reference, our reported earnings were $361 million or $2 per share. You can find a breakdown of the EPS by segment, including our reconciliation to GAAP reported earnings in the appendix. Let's touch on each segment in detail, starting at the top with our electric utility.
DTE Electric earnings for the quarter, $142 million or $36 million higher than the first quarter of last year. This was driven by lower storm expense, a return to normal weather, and the implementation of new rates. There is a more detailed year-over-year earnings variance for DTE Electric, which can be found in the appendix. For our DTE Gas segment, operating earnings were $111 million and were $4 million higher than last year. This increase was driven primarily by a return to normal weather offset by higher O&M. For our gas storage and pipeline business, operating earnings were $62 million for the first quarter or $17 million higher than last year. This increase was due to the lower tax rate as well as increased gathering and transport volumes, mainly in the Bluestone area.
Operating earnings for the power and industrial businesses were $42 million or $12 million higher than 2017. This is primarily due to higher REF volumes and higher steel-related earnings, as well as the lower tax rate. As you know, on our year-end call, we increased our EPS guide by $0.10 per share due to tax reform, which is wholly tied to the non-utility businesses. You are starting to see that play out here in the first quarter. Rounding out our growth segments in the first quarter is corporate and other, which was $32 million unfavorable compared to last year due to a smaller benefit of a stock compensation, lower tax rate as well as timing of taxes.
Remember last year, the first quarter was impacted favorably due to an accounting change related to the simplifying GAAP accounting for taxes on stock-based compensation, which is why we saw that large positive earnings number in the first quarter last year. We still have a benefit this year for accounting change, but it is much lower than last year. For the first quarter results, our core corporate and other are more in line with historical results. Energy trading had operating earnings of $1 million in the first quarter, which is down $17 million from last year, driven by lower performance and accounting flow-through in our power portfolio. During the quarter, we disclosed that earnings for energy trading were coming in lower than the first quarter last year, and we mentioned the potential for a modest accounting loss in the quarter.
After a solid performance in the power and gas portfolio in March, we finished the quarter strong with slightly positive earnings. For the quarter, energy trading contributed $8 million of economic income, so a good quarter economically. The appendix contains our standard energy trading reconciliation, showing both economic and accounting performance. Overall, DTE earned $1.91 per share in the first quarter of 2018, or $0.12 more than last year. Let's move to our 2018 guidance slide, which is on page nine. I'll start with this top of the slide with DTE Electric. As Gerry mentioned, we did receive a rate order at our electric company, and earnings for this segment will be biased at the lower end of the range, based on the factors he described earlier.
We still have a lot of the year to play out, including the summer weather, and we'll continue to update you on electric earnings as the year progresses. For DTE Gas, we feel comfortable that we're on plan this year. We'll receive a decision on our current rate case at the end of the third quarter, and we feel good about the earnings projections for this segment. For GSP and P&I segments, we increased the earnings guidance on our year-end call, and as mentioned earlier, these segments are seeing positive impacts of volume favorability. As you can see by the indicating arrows, we expect to land at the higher end of guidance for both these segments, primarily due to these increased volumes. Energy trading had $1 million of earnings in the first quarter, and we are comfortable with the $5 million-$20 million guidance range we have for this business.
Overall, we feel confident about achieving our operating EPS guidance of $5.57-$5.99 this year. Now I'd like to turn over to Jerry Norcia to discuss our long-term growth.
Thank you, Peter. I'll begin on slide 11. We continue to see growth in our utilities fueled by our investment in infrastructure and generation. As Jerry mentioned, we received our electric rate order. This rate increase is more than offset by future rate reductions driven by tax reform. This order allows DTE Electric to recover necessary investments to continue to increase reliability and improve customer satisfaction. Early this month, we had one of the worst ice storms the company has experienced in the last decade. The ice storm unfortunately left over 400,000 of our customers without power. That's nearly 20% of our electric customers, which tells you how significant this ice storm was. The utility community came together with 1,600 workers from DTE and five other states, and we worked around the clock to restore service to our customers.
Restoration crews put up approximately 250 miles of new power lines, enough wire to reach from Detroit to Traverse City. This storm reinforced the need to harden our aging infrastructure. We're facing the same aging infrastructure challenges that many other utilities are experiencing. In that regard, in January, we filed an updated five-year distribution plan. This plan provides a comprehensive description of our distribution investment and maintenance programs for the five-year period from 2018 to 2022. It includes details on the condition of the distribution system, cost-benefit analysis considering both capital and O&M, system maintenance and investment strategies that improve resiliency, mitigate the costs associated with inclement weather, and of course, all the associated performance metrics that come with those investments. We have focused on maintaining the existing distribution assets in a cost-effective manner for decades and only expanding the system when it was needed to meet demand.
Many of these assets are reaching an age and condition that require them to be replaced in the coming years. The rebound in Michigan's economy and the revitalization of many of its businesses require that the infrastructure be upgraded and to serve customers in a reliable manner. In addition, as new technologies come to the energy sector, the grid must be upgraded and automated in a way that will enable us to operate more efficiently and reliably. Our distribution plan lays out the strategy for investing in a grid that will serve Michigan's residents and businesses for years to come. Let's move on to our generation system. We filed our certificate of necessity last year to build a natural gas-fired power plant. We expect an order from the Michigan Public Service Commission at the end of this week, on Friday, as a matter of fact.
The almost $1 billion project is scheduled to break ground in 2019, creating hundreds of Michigan jobs during construction. In this filing, DTE determined that building a natural gas-fired plant is the best solution for our customers due to many factors, including the environment, reliability, and affordability. The new plant will be a highly efficient plant, consuming less than 50% of the fuel per megawatt hour produced in coal plants we are retiring and emitting nearly 70% less carbon, which is the equivalent of taking 1 million cars off the road. It also enables the build-out of renewables, providing 24 by seven power where renewable energy is not available. Natural gas-fired plants will be a critical part of our power generation capacity in the decades ahead. Long term, DTE plants produce over three-quarters of its power from renewable energy and highly efficient natural gas-fired plants.
New plant is scheduled to begin operation in 2022, offsetting some of the capacity that falls off when three of our coal-fired plants retire from service in 2020 to 2023 timeframe. Let me turn to DTE Gas. Our system has held up well with the cold snap here in April, but similar to the electric system, we continue to need system hardening. As many of you know, we filed a general rate case in November of 2017, which included a proposal to increase the annual number of miles of main replacement. This proposal will allow the system to be hardened at a quicker pace and will significantly decrease O&M costs. As always, when considering the investment in system hardening, we are very focused on rate affordability for our customers.
With the reduced rates from tax reform, we filed a plan with the MPSC to return the tax benefit to our customers. This will go a long way in mitigating the effects of the rate case and allows us to continue our focus on achieving our affordability goals. Now let's move on to slide 12, where I'll talk about our non-utility businesses. Our non-utility businesses continue to focus on growth projects. At GSP, we're making significant progress on Nexus and are continuing to work with producers and end-use customers on contracting the open capacity on the pipe. We have invested over $700 million through March. Much of the grading at the compressor stations work is done, and we've started grading on the right of way as well at all four spreads.
Main line of facilities construction is underway in Michigan and Ohio, and our goal remains to be at full capacity as the pipe goes in service later this year. Negotiations are continuing with large industrial customers, producers, and LDCs, and as we finalize these deals, we will announce them. Along with Nexus, Link has continued to progress with its plan. In other areas of the GSP business, Millennium CPV Lateral and East Side Expansion are under construction, and as Jerry mentioned, they'll come online the second half of the year. On the year-end call, we told you that our non-utility businesses are clear winners with tax reform, and that we would update the 2022 targets for these businesses. We are increasing the 2022 operating earnings at GSP by $35 million, for a range of $280 million to $290 million.
Our capital investment has not changed and remains at $2.8 billion to $3.4 billion for the 2018 to 2022 time period. Now, switching over to our P&I business. Since our year-end call, things have heated up in our discussions with one of the CHP deals, combined heat and power deals, that we are working on. We are in the beginning stages of construction for the combined heat power plant at the Ford Motor Company complex. We're also finalizing one of the RNG project agreements we mentioned on the year-end call. These projects are progressing, but due to competitive reasons, we will not be sharing details on these until the ink is dry on these agreements. These longer-term agreements will replace a portion of the REF earnings that roll off in 2020 and 2022. Our 2022 plan calls for P&I to produce earnings of $70 million.
To achieve that, they need to originate $45 million of new growth by 2022. $15 million or one-third of that growth was originated last year. We feel like we have a very strong line of sight on the next $15 million this year with the projects that I mentioned that are in late-stage discussions. We could be at two-thirds done by year-end with four years to go. We're also making meaningful progress on additional combined heat and power and RNG projects we mentioned. We have an experienced business development group focused on driving these projects to completion, as well as pursuing additional projects that we see as good opportunities for us. Like GSP, P&I will also benefit from tax reform. We are increasing the operating earnings by $5 million, with a target of $65 million to $75 million by 2022.
Capital investment in 2018 to 2022 will remain unchanged at a range of $0.8 billion-$1.2 billion. I'll wrap up on slide 13. We delivered solid first-quarter results and remain confident we will achieve our 2018 operating EPS guidance. Our utilities continue to focus on necessary infrastructure investments that improve reliability and the customer experience. With additional expansions in business development, we continue sustainable growth at the non-utilities. I'm confident that we are on track to deliver strong EPS and dividend growth that drive premium total shareholder return. With that, I'd like to thank everyone for joining us this morning. Mindy, can you open the line for questions?
Thank you. If you'd like to ask a question today, please signal by pressing *1 on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, press *1 to ask a question. We'll go first to Michael Weinstein with Credit Suisse.
Hi, good morning.
Morning, Michael.
Hey, could you discuss the contracting for the remaining one-third of Nexus? Specifically, I understand it's going to be mostly producer push at this point, and I'm wondering what is the demand from producers that you're seeing out there, and for capacity, and also what your expectations are for length of term and that kind of thing?
We're targeting producers. The discussions are underway, negotiations with producers, LDCs, and industrial customers. We are targeting long-term agreements, 15-year agreements.
Are you seeing adequate demand out there to fill the pipe by the completion of construction?
Yes, we are. We just need to get ink on paper at this point.
Got you. How are those negotiations progressing? Is there any constraint around them?
They're progressing well. Of course, lots of negotiations back and forth, as you can imagine, but we are positioned as one of the pipes that does have capacity to bring to the market quickly. We feel confident that we'll start closing deals here.
Great. What kind of a timeline do you see for maybe introducing solar into the mix at the utility?
We already have introduced solar. In fact, last year, we brought online a 50 MW, 250 acres solar project, so that was a relatively big one for us. We did it to push ourself down that path. When we do the numbers, it's pretty clear that wind today is a superior resource in terms of pricing. As I said on the call, we're going to lean on wind, as long as that difference is there. We continue, like a lot of people, to see solar costs trend down, and I do think probably by the mid-2020s or so, it's going to be ready for a larger share of our renewable mix. As we think about renewable energy plans beyond the one we just filed, we'll probably see some of that mix begin to shift. Did that hit the answer on that one?
Yeah, I was just wondering what kind of timing you're seeing on when those prices actually cross the threshold and become competitive with the wind that you already have in there.
Mid-2020s is what it looks like.
Okay.
By that time, we will have a pretty large installed base of wind in Michigan, so I think some diversification will be helpful as well.
And one-
We want a diverse mix of renewables, but we also want to strike where the price is right. We're going to wait a bit on large-scale investments in solar. We'll continue to add at sites like the one we described earlier, the 15 MW and the 50-MW site that we did, but we're investing in wind in the 1,000 MW sort of scale. That'll come for solar a bit later.
Just one last question on this. Could you maybe break out the percentage of how much you expect to add through with the C&I offerings that you're giving, and then how much will be utility scale going forward?
You're talking about the voluntary offering?
Right.
We've set aside 300 MW for that. I'd say that's hopefully a starting investment because we are seeing some of our large customers come to us and request the ability to increase the renewable mix in their portfolio. You've seen customers like GM, for example, say that they want to be 100% renewables by 2050. Well, they're getting started on those sorts of things, as are other large industrial and commercial customers. We're going to set aside 300. That would be 300 out of a total of 2,000 by the time we're done with this round. You can get a sense for how much that is. Our expectation would be that we'll continue to see demand for that, and as we do, we'll push that into our mix.
All right. Thank you.
Thank you.
We'll go next to Julien Dumoulin-Smith with Bank of America Merrill Lynch.
Hey, good morning.
Hey.
Hi, Julien.
I was wondering, can we get a little bit more clarity on the tax reform benefits of the two segments here, just the 35 and the 5 at GSP and P&I? I suppose maybe naively, how has tax reform discussion evolved such that you get such material benefit from these two in 2022? I've got a follow-up.
We disclosed on the year-end call that the existing contracts, we will get the benefit. What you're seeing there in the increase are the existing contracts we have in place today. What we've assumed is that new contracts, we will pass that on, but we may potentially share in that, and that could potentially help both of the white space gap. Mainly it's the new contracts that you're seeing the increase from.
Got it. Actually that plays right into the follow-up here. With respect to NEXUS, not to harp on that too much, but does this reflect higher kind of structural expectations on that project? I presume that's probably the bulk of the new contracts that you're contemplating in GSP.
On NEXUS, the tax reform doesn't have any impact on our ability to capture the value that we forecasted because our recourse rates will be well above our negotiated rates.
Right. Okay, that's not impacting those negotiations at all. Right. Again, just to say it even more bluntly, the impact from the FERC ruling altogether is very immaterial.
Very modest, because most of our pipes are operating with negotiated rates, on our last call, we said the impact's about $1 million-$2 million from the FERC actions.
Right. Exactly. If I can go back to this producer push subject, if you could elaborate a little bit about the incremental investment, maybe on the gathering side and the other midstream investments to bring the product to NEXUS. How do you think about that in the context of the statement about continuing to add investments in Link? Are there other pipe systems that you're looking at, whether organically or inorganically, to complement the NEXUS expansion?
Where we're seeing most of our action right now is on Bluestone and Link, the two gathering assets that we own today. As it relates to NEXUS I would say late-stage discussions about continuing to expand that system with our producers on that system. It's a very attractive system, and it's got a very attractive resource. More to come there, but we're feeling really confident right now about meeting and exceeding our pro forma on that asset. As you know, that asset is pointed right at NEXUS. We expect that in the future, it'll help support the fill and expansion of NEXUS.
When you say that asset, he's talking about Link.
Yes.
Which the activity around Link has been really encouraging. We bought that, I guess, late 2016, so we're a year and a half in. A year and a half in, we continue to be very encouraged by the economics therein by our investment opportunities. It's been a good asset.
Are you still on track with the targets you laid out for Link at the time of the acquisition, though?
Yes, indeed. Yep.
Excellent. All right, guys, I'll leave it there. Thank you.
Thanks, Jullien.
We'll go next to Shar Pourreza with Guggenheim Partners.
Good morning, guys.
Morning.
Morning.
Let me just follow up real quick one more time on Michael's question on Nexus. Thought we would have an update on this call with at least one of the two industrial customers that you were working with. I thought one was nearly finalized. What's the status on those two customers that you flagged before in the past? Then just curious, can these two customers provide enough end-market demand to finally fill this pipe with E&P signing on to these supposedly two markets, new markets?
Well, the one industrial customer is essentially done. The second we're still negotiating with to complete. Producer agreements, again, we're continuing to exchange proposals. Those discussions continue, and we also have several LDC discussions well underway. That's the current status.
I'm curious why you're not disclosing the one industrial customer that's been finalized.
I don't think we have the ability at this point to disclose.
No, it gets under a confidentiality agreement.
Okay. That's helpful.
We can't disclose that.
Okay, that's helpful. Just looking at additional Link-type investments and sticking with midstream here. The recent sort of what quote-unquote "the meltdown" you've seen with MLPs. I know you guys vetted Links for a long time before purchasing that investment. Have you seen additional Link-type opportunities, especially given the recent, I guess, for a quarter and what you've seen in the MLP markets? Are you seeing more willing sellers of assets that you would, I guess, want to vet?
I think the short answer is yes, we are seeing more of those. Like Link, we'll take a long, hard look. I think the more we hear, the more we believe that this isn't going to be a short-term phenomenon, that some of these companies are going to need to work through this over the foreseeable future. We will look at and evaluate opportunities analogous to Link, and if we think we find one that's a good strategic fit, makes sense economically, we'd be open to that.
Okay. Got it. Just lastly on distribution. So far, can you maybe just update how the dialogue's going? Just more importantly, with the tracker or rider request, how should we sort of think about what the podium would be for that ask?
I can tell you that the engagement level between our team and the Michigan Public Service Commission team, staff team is very high. We've got multiple discussions that are scheduled and happening between now and the time of our next rate case filing. The goal is to get alignment on investment and distribution, as well as other items in our capital plan that could result in a capital tracker. Lots of interest in that from both parties, both from the commission staff and our team. We're hopeful that we can get to a strong alignment that we can file in our next rate case.
Excellent. Thanks much, guys.
Thank you.
We'll go next to Praful Mehta with Citigroup.
Hi. Thanks much. The first question, just on the utility side. It was helpful to get your tax reform impact for the GSP and P&I. On the utility side, wanted to understand from a tax reform perspective, especially given post the rate case, how do you see the growth rates that those two businesses individually lay out through that 2021, 2022, and how does that fit with the overall growth rates for the business?
Yeah, this is Peter. The growth rate we will be funding at the end of the year, we're going to have a case around a deferred tax. It's approximately $1.7 billion. We're going to be giving that over 25 years, about $70 million a year. As we're refunding that piece in particular, we're going to be replacing the half of that with equity. We are going to be seeing equity levels increase in both utilities, and it's worth about a 1% over and above rate base. We are anticipating earnings growth happening on utilities from tax reform.
Got you. Just to be clear, that should be over and above just the rate base impact because the deferred tax refund effectively flows through as higher equity-
That is-
in your calculation.
That is correct. It's about a 1% adder on the rate base growth.
Got you. Perfect. Secondly, just strategically, given most of tax reform impacts are now kind of built in You're looking at, I guess, enough questions on the NEXUS and the midstream side, but just strategically for your business, is there more discussion ongoing in the industry in general now on M&A, corporate M&A, both on the buy and sell side? How do you see that playing out, and is that dialogue increasing given tax reform's now kind of in the rear view?
We, like everybody, have investment bankers who come through, and I don't know that I've had too many times when I haven't been told that the interest in the industry in M&A was high. I do think there are parties out there looking around. We saw one play out just the other day with Vectren. I think there's ongoing interest. I don't sense that tax reform has unleashed a wave that's fundamentally different, if that's what you're asking. I think we continue to see the sort of ongoing interest that the consolidation of this industry has witnessed for a long time now.
Fair enough. I totally get the investment banker point. Just to clarify, it's not like credit weakness for some companies would be an opportunity for others in terms of M&A as you see it?
Well, actually, one of the folks I talked to recently, I think, stated it well. It was an investor, not a banker. He said, "Look, strength in your balance sheet is really option value. It gives you the opportunity, when good opportunities arise, to strike. When you spend that balance sheet flexibility, you've lost your option value." I think there were companies who spent their option value on what we view as some not so accretive transactions. So I think there are companies who didn't do that, who probably have greater flexibility if they see something come along that they really like. We continue to look to the earlier question at potential GSP sorts of acquisitions. We've always said, if the right corporate transaction came along that we really thought added value, we'd be open to it.
We aren't going to be involved in a high premium sort of transaction. We just don't see the value in super high premium deals. That don't make sense to us. Open, but we'd do them at the right price with the right counterparty.
Got you. Super helpful, guys. Thanks.
Thank you.
Thank you.
We'll go next to Jonathan Arnold with Deutsche Bank.
Yeah. Hello, good morning, guys.
Good morning.
Good morning.
Just one on the wind projects. Could you give us a flavor of the nature of the projects you have in the plan? Are they sites that you've been developing yourselves? Are they coming early or late stage from developers? Are you going to do BOT or build them yourselves? Just a little more sense of kind of how that plays out.
They're a mix of both, Julien. In some cases, people have lined up lease rights, and we have entered the build, own, transfer. In other cases, we did that ourselves, and we'll simply sign a construction agreement and do the build-out by DTE.
Would you say it's sort of an even split or?
I probably ought to go back and get the numbers before I answer, Jonathan, to give you a split. Maybe Barb could do that with you after.
Yeah. Okay, that's fine. Looking further out in the utility, you obviously, you're close to the decision on the gas plant. How far out would you see your next gas plant being, given some of the comments around renewables and gas in the longer-term future?
We don't see a need for another gas plant until the end of the 2020s. We'd have our next major coal retirement in the late 2020s. That's when we'd evaluate the need for the next gas plant. I think one of the things we'll watch over the next decade is how the overall system around us evolves. As we add more and more renewables and our neighboring companies do the same, we have to watch how the MISO grid evolves, and we may find we need the new gas plant out in the 2030 timeframe. We may find that investments in renewables will cover us and provide the reliability. I think the answer is we will see. In the meantime, between now and the late 2020s, the real focus will be on renewable additions.
Great. Thank you, Gerry. Could I just on your comments about the rate case order and skewing you towards the lower end. Do you see that as a 2018 guidance factor and you'd hope to sort of get back on trajectory given that's your largest segment beyond?
I think the easy way to say it is that we're not modifying our 5% to 7% tag growth target for the company. I think in that sense that, yes, we expect our plan to be on track.
Okay. Said enough, Gerry. Thank you.
Thank you.
We'll go next to Paul Ridzon with KeyBank.
Thank you. Gerry, could you I think there might be some confusion based on some things I've seen. You did not lower consolidated guidance to the lower end of the range, just the electric segment.
Yeah.
Would you comment, Gerry, on the other segment?
Yeah, exactly. The electric segment, we biased toward the low end of the guidance range. The gas utility is doing fine. I think in a lot of places, the weather started a little mixed but has actually finished strong here in April. The gas utility from a weather perspective is in good shape. As I said, the two large non-utility segments are running hot to their plans. The year looks in really good shape.
Thanks for the clarification.
Unless we get surprised by something we don't see, it should be a good year. I think we're in good shape.
Thanks again.
Yep.
We'll go next to Steve Fleishman with Wolfe Research.
Hi, good morning. Just on the rate order, as you mentioned, you'll be back on track after this year, maybe. Just what are the types of costs being disallowed, and just is this something that we need to worry about in future cases?
Yes, Steve, this is Peter. One of the costs that was disallowed was a part of our incentive plans with some financial measures. We've had this in the past, that wasn't completely unanticipated. The other was inflation. We had some inflation in the plan, they modified the level of inflation that we had in the plan.
Basically, the reason you might be at the lower end is just that inflation may end up being higher than what they allowed.
We had a little bit more of that. We had the 10.1% and more inflation-
A little on the ROE. Okay.
The ROE and that were built into our numbers for the year, so it backed us up a bit. As we said, the overall plan looks fine.
Okay. The renewables program that you announced more specifics, how much of that is additive to your capital plan, if at all, or is it all already in there?
The 300 megawatts that I mentioned pulling, that was the pull forward. That's a nice investment, but I guess I'd say that we aren't modifying our 2022 guidance due to that pull ahead. It's additional investment, but when you look at it in the total scheme of the company, I think the guidance we put out there for 2022 we will just stand with.
Okay. Just on the midstream side, more high level again. Someone asked before about just the unrest in the sector and maybe creating more opportunities. Could you talk a little bit about how size-wise you're willing to kind of make this business as a mix of the whole company? We assume if you do acquisitions, they'd be more kind of asset by asset as opposed to larger kind of company-sized acquisitions.
Yeah, I think that's a fair characterization, Steve, that they'd be asset by asset. We often find that we're able to get a better strategic fit and therefore create economics we like when we do it that way. I'd also say that we stay in very active discussions with our investors on mix and the mix that they like. I think the feel we have from our investors is that this GSP segment provides the company a nice earnings growth profile. We also know that it could become too large if we pursued investments too fast. We're trying to walk the mix line in a way that really works well for investors and for rating agencies, by the way. We're well within the boundaries for them, too.
I think if you did a large corporate acquisition, it could shift that equation for our investors and potentially for the agency. Does that get at it, Steve, or give you a sense of things?
No, that's very helpful. One last very quick clarification. The 2022 guidance updates for the GSP and REF, is that just for the tax change? There's no other changes in the outlook out there?
Yeah. That's what that was for. Yep.
Okay. Thank you.
Thank you. Appreciate it, Steve.
We'll go next to Charles Fishman with Morningstar .
Just one question I had. On the doubling of the renewable, and specifically the wind, I would assume there may be some transmission involved in that. I realize you sold your transmission, gosh, a long time ago. Is there a significant amount of transmission involved or are you depending on somebody else to build that? Is there any risk to that 2022 target date or a non-issue?
No. We had a significant transmission build-out in what they call the thumb part of Michigan, where most of our early wind investments came. In Central Michigan, where we are moving now with many of these investments, there doesn't appear to need to be material transmission build-out. We don't see that as a factor in timing.
Okay. That's all I had, Gerry. Thank you.
All right. Thank you.
As a reminder, if you'd like to ask a question today, it is star one on your telephone keypad. We'll go next to Andy Levy with Avon Capital Advisors.
Hi. Good morning, guys.
Morning, Andy.
Morning, Andy.
Just a couple of quick questions. Just on the electric side, was there a refund in the first quarter? Just the true-up for the rate case, because you were collecting, I guess, since November 1st.
Yeah, there was not a refund. How we're going to get this back to customers will come in three parts. The current rates will be adjusted most likely for both utilities by early fall.
Stuck in the rate case refund, I think.
Yeah, the rate case. Yes, that's right.
The rate case refund.
Yeah.
The rate case refund, there will be a self-implementation proceeding, which is normal course. We'll be probably having that over the next probably few months.
Was that in the first quarter? Did you adjust the first quarter for the refund?
Yes, we did.
No? Okay. How was that?
We adjusted for the level of the rate case, the rate order.
Is that what, like $0.11 a share or something like that?
We did have a certain amount of the self-implementation plus a little bit of a reserve on top of that. It wasn't that material.
Oh. Can you tell us what the number was?
The total impact or the reserve?
No, just the total impact. In the first quarter, the total impact of the rate refunds. It's kind of like a one-time item, right?
Yeah.
It's part of your operating earnings, I understand that, but I'm just also guessing that's maybe part of the reason why you're at.
The full first quarter was trued up. There really wasn't a refund in the first quarter. The full refund was trued up to the level of the rate case. We did have some supplementation late last year that was trued up as well in the first quarter, which was very immaterial.
Just to put a number on it.
Okay. I understand.
Just put a number on it. Net of reserve was $10 million after tax is a rate case impact.
Yes. Positive.
Okay. I guess, yeah, maybe the $0.11 is versus the $1.25 if you had it. Okay. Is that part of the reason why you're at the low end because of the refund, or is it just the lower revenue amount from the rate case in general?
Look, it's all taken together, all impacts. We have the earnings range for DTE Electric that we had communicated, not unexpectedly, if our ROE gets pushed down a tenth and a couple of the other things that were pushed back in the range a little bit.
Okay.
So-
Oh, I'm sorry. Go ahead.
No. I say I don't want to overblow it. We had rate cases play out over time, through the years, and we got a lot of other things in the mix. That is as described, and that said, we're going to play out in the earnings range that we laid out there. For the company, I think it's going to be a very positive year.
Yep. As it is always for you guys. Just on NEXUS, can you give us, on an annual basis, once it's in service, any type of guidance or high-level thinking on what coming the first year out, what the annual earnings may be from NEXUS? Also whether you project financed it at all?
No, we haven't project financed it. That's always an option down the road if we wanted to do that and our partners wanted to. I think you know we generally concluded it's not in our interest to break out earnings kind of line by line, project by project, just because we have lots of counterparties to each project and lots of interest in when a deal is signed, what did that do to your profitability on this project? We try to balance our need to interact with counterparties with our need to give you good information. That's led us to give you guidance at the segment level, but not do it in detail pipe by pipe.
Okay. It's $1.3 billion is the investment, and I guess maybe at the very least, we can assume kind of a utility return and then kind of go from there once it's full?
I think our history with these sorts of pipes is at minimum, we want to get in at our cost to capital, right?
Right.
Then we push from there, and our history has been that the pipes end up with returns well above utility returns as you expand them and add compression and so on and so forth, which is why we like these investments. They've proven to be really good value creators.
Okay, I assume NEXUS will be similar.
I think NEXUS has that same feel. Let me I'll just go to Link. Link's a little further along because it was constructed when we bought it, but it was still a young pipe. We went to it fundamentally because the geology that it accessed was superb. That's playing out. We've had a couple of the producers, and to be honest, it's always hard when you're dealing with really good geography to figure out who it is that's going to be pushing it hard. We've got a couple producers there that are just going after it, and it is accruing to our benefit. Somebody asked earlier, how are you feeling about Link? We're feeling really good there. And we're at and beyond pro forma, and they've got that firming up now years out ahead of us. That's been a real positive.
NEXUS is earlier, but it also accesses superb geology, and I think we're going to see drillers go after that hard. In a gas environment that's long generally in the country, meaning we aren't going to be short gas, as far as anybody can tell. Drillers double down on their best geology, and that's what we're seeing at Link, that's what we're seeing at Bluestone, and I think it's what we're going to see around NEXUS. They're going to concentrate their drilling in those really good geologies. That's happening around NEXUS, but obviously it's earlier. We are hearing chatter now that you get out a few years, and the drillers are worried about pipe takeaway in the region that NEXUS access being constrained because their own drill plan's there and what they perceive other people's drill plans to be.
It feels like the dynamics are set up in a similar way. We're just earlier with NEXUS than we are with certainly with Bluestone and also with Link.
Okay. No MLP, right, Jerry?
Not at this time.
I'm teasing.
Yeah, I think we'll hold on that one.
Yeah. See, that was a good decision years ago. Anyway, thank you very much. Have a great rest of your day.
Thank you. Appreciate it.
Yep.
That is all the time we have for questions today. I'll turn the conference back to Jerry Anderson for any additional or closing remarks.
I'll just wrap up by thanking you all for being on the call. I do feel that, as I said at the outset, we're off one quarter into a really good start on the year, and we look forward to being able to update you again down the road here. Appreciate it. We'll talk soon.
This does conclude today's call. Thank you for your participation. You may now disconnect.