密歇根天然氣 (DTE) 2019 Q1 法說會逐字稿

Good day, and 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, and good morning, everyone. Before we get started, I would like to remind everyone to read the Safe Harbor statement on Page 2 of the presentation, including the reference to forward-looking statements.

Our presentation also includes references to operating earnings, which is a non-GAAP financial measure. Please refer to the reconciliation of GAAP earnings to operating earnings provided in the appendix 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.

Now I'll turn it over to Gerry to start the call.

Thanks, Barb. Good morning, everyone. Thanks for joining us today. So this morning, I will give you a quick recap of our performance in the first quarter, and then I will turn it over to Peter to provide a financial review, and then Jerry Norcia will take you through some of our invest activities on our long-term growth, and then we'll take your questions.

So I'm going to start on Slide 4. So 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, and they added materially to the contingency that we have for the balance of the year. So we came into the year with contingency, and we've added to that in the first quarter. And given that over the 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% to 7% operating EPS growth through 2023. And just as a reminder, our initial guidance for 2019 is the starting point for that growth.

So a big part of consistently reaching our financial growth -- goals is our workforce and our company's culture. And 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. And over that time period, only 10 other companies in their global database have ever gotten 7 of those awards in a row. So 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.

So as we look forward to the next 5 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 to $1.5 billion in equity over the next 3 years, with 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. And 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 5 years and beyond to transform the cleaner generation mix. And we'll do that by adding substantially more renewables, by increasing our energy efficiency investments and by returning our coal plants sooner than we had previously announced.

So for context, in early 2017, so 2 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 2 years has evolved, and we've accelerated that commitment by a decade. So our IRP it lays out that will reduce carbon emissions 80% by 2040. And nearer term, we've committed to a 50% carbon emissions reduction by 2030 and a 1/3 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. So that will have us investing an additional $450 million in capital over the next 5 years, and that will happen within our Infrastructure Recovery Mechanism and that reduces the time frame to complete the main replacement program from 25 years to 18. So 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 Pipelines business, we are moving for the completion of our acquisition of the Generation Pipeline, which should be finalized in the second half of this year. So 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' goals like customers in Ohio, especially in Northern Ohio as well as Michigan, Chicago, Ontario and other markets with Marsalis and Utica gas if those resources continue to grow.

And 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. So we are finalizing agreements for 2 new RNG projects, so be incremental to the progress we've developed in recent years. And 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 so construction is sort of moving ahead of the fast clip on that project. And we're also finalizing the acquisition of a new pro generation project, and Jerry Norcia will describe that in a few minutes.

So moving on to Slide 5. I've mentioned the IRP earlier and we submitted that. And the IRP lays out the plan, you can see on the left-hand side of Slide 30 between now and 2030, and you can see, I mentioned the fundamental transformation in our generation, the next decade alone is a very market shift in the way that we generate power. And I think ensures that Michigan will continue to be a leader in the transition of cleaner energy sources nationally.

So the plan, our IRP provides a very well-defined and specific strategy for powering our homes and businesses over the next 5 years, so between now and 2024, as well as what I call a flexible plan for the 2025 to 2040 period. And we're flexible longer term because as you know, technologies as well as other 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 so we need a flexible plan to take account of that. So we're quite specific for the next 5 years, and 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. And that plan is as we model is not only achievable, it's achievable in a way that works for both affordability and reliability for our customers. Now it will require substantial investments. And so to achieve the will, we will aggressively investing in renewables, and the next 5 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, but we do anticipate a shift to solar in the 2024 timeframe because of solar cost continue to become more competitive here in the state.

We're also expanding our voluntary renewable programming, and this has been a really interesting in recent months. The voluntary program offers homes and businesses the opportunity to buy more clean energy and 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, and we've seen this play out in a significant way in the first quarter of this year when we announced partnerships with 4 General Motors and the University of Michigan for sizable transactions. Together, these 3 customers have side contracts that we will be supplied by investing in over 350 megawatts of additional wind production so that's over and above what we will be investing in to meet our utility goals and we'll be investing over $600 million of capital to pull that off. So big moves on the voluntary front in the first quarter, and 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 fire 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. So we'll have 3 substantial coal plants coming off in just a few years. And 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 [2022] (corrected by the company after the call) to help backfill for those 3 coal plants that will come off-line. 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. But the construction on Bluewater has along very well and so we are able to accelerate the retirement of a couple of those coal plants.

So with that, I am going to turn it things over to Peter to give you a little more detail on financial results. Peter, over to.

Thanks, Jerry. Good morning, everyone. Before I begin with the financials. As you know, I would like to give an update on Tigers, and if you hear a smile on my voice here, that's going to be won both games of a doubleheader yesterday against the Red Sox, we are above 500. Been exciting start this season, I hope on the wings we've had here in April.

Let me turn to your attention now to the financial results for DTE. I will start to review on Slide 6. The first quarter came in strong with earings of $374 million, this translates to $2.05 per share for the quarter. You can find a detailed bacon of EPS by segment, including our reconciliation to GAAP reported earnings in the appendix.

Let me start my review of 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 of result of our electric utility.

DTE Electric earnings were $147 million for the quarter and this is $5 million higher than the first quarter of last year. This increase has driven primarily by colder weather and the impact of new rates implemented last year. Electric business also had higher O&M and increased appreciation and other expense related items to rate these growth.

DTE Gas had first quarter 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 on colder weather. Result approximately $10 million related tax timing item that we reversed in the second quarter of 2019.

As moved on to page to the third row towards Gas, Storage and Pipeline business, our earnings the for the GSP segment were $48 million for the quarter, the quarter results also in line with our 2019 full year guidance. Last year, we had one-time positive earnings related to an AFUDC earnings at NEXUS as well as a return to normal volumes this year and 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 and Industrial business segment. Operating earnings were $26 million, earnings are $16 million lower than the first quarter of 2018. And 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 RTF units and accelerated cash flows of around $100 million per year for the next 3 years to support other growth projects. This lowered of this year around $40 million versus 2018. I also like to note that most of our new projects P&I originated will start 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 the portfolio.

Economic contribution was up significantly quarter-over-quarter. The reconciliation showing both economic and accounting performance.

And 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 7. We expect to issue between $1 billion and $1.5 billion of equity over the next 3 years, including $250 million this year. On this year, year-to-date, we've already issued $150 million, mainly with the contribution of equity into our pension plan for the month of March. Our credit metrics are well within the target range is set by the rating agencies so we continue to maintain a strong balance sheet with supports for capital investment program and growth plans, in position the company the gentle strong investment to create credit rating.

With that, I'll turn it over to Jerry Norcia who will go over our utility and growth projects.

Thanks, Peter. As Jerry 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 (inaudible) I want to highlight several significant achievements in both our utility and nonutility businesses, so I'll start on Slide 8.

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 Gerry mentioned. This program is now available to all DTE customers. In February, we enrolled both Ford Motor Company and General Motors into the program, with Ford Motor committing to 185 MW of renewable energy and General Motors committing to 100 MW. Just recently we announced a similar agreement with the University of Michigan that will expand their purchases of renewable energy from DTE. The university has committed to purchase 70 MW of renewable energy annually - beginning in 2021.

In March, we announced that our Pine River wind park began operations. Pine River is the largest operating wind park in Michigan as well as DTE's most cost-effective wind project to date.

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 we update our goal of producing carbon emissions. During the highlight the fact that Michigan is undergoing on energy transformation in how our recent IRP filings defined how we would be moving our generation fleet to cleaner energy. That plan provides the necessary home grown 24/7 power for renewable resources are available while also aggressively as referred growing our renewable energy portfolio.

So moving on to our gas utility. DTE Gas has begun to implement elements of last (inaudible) rate order, including our accelerated main renewal program, I'm very pleased with the progress the 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 on baseline levels, achieving a 20% reduction through 2018. We are also leading an industry coalition (inaudible) and AGA and that reducing methane emissions and supply chain pipes and producers.

Now let's move on to our nonutility businesses. I'll start with update by growth opportunities at our Gas Storage and Pipelines business. On our year-end call, we announced that NEXUS is acquiring Generation Pipeline on a 50-50 partnership with Enbridge. This is an example of add-on business with (inaudible) within GSP's long-term growth strategies. Our Millennium Pipeline complete our 0.2 BCF per day expansion. 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 has contracted to approximately 900 million a day with long-term contracts. This (inaudible) approximately 1.2 BCF a day in the balance of those contracts are short-term contracts. Link asset is performing very well, I would say, better than planned.

Next, I will walk through our Power and Industrial business. As Gerry mentioned, our P&I business continues to see progress and development of both industrial, energy projects of renewable natural gas. We feel the RNG market is poised to continue its growth trajectory into the future. Addition to the project we secured in 2017 and '18. We are finalizing agreements on 2 new greenfield RNG projects, and we continue to advance discussions to secure an additional RNG -- secure additional RNG projects in 2018.

On the Industrial Energy side, we are focusing our -- on our generation business, along with our Ford Motor project we are in late-stage negotiations on additional cogeneration project. We will provide details as this progresses and moves towards close. Along with these projects, our P&I team continues to be very strong.

Now I'll wrap up on Slide 9, and then we'll open it up for questions. To sum it up, I feel great about our first quarter results, our position to continue our growth in the years to come, our utilities continue to focus on necessary infrastructure investments. The investments of clean generation and investments to improve reliability and the customer experience. Our nonutility 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% to 7% operating EPS growth rate. And 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. And Rachel, you can open it up for questions.

(Operator Instructions) We not take our first question from Shahriar Pourreza from Guggenheim Partners.

It's actually Tom for Shahriar. Congratulations on good earnings. Just one final quick question. You've, Gerry, thanks for going over the business growth at GSP. So one of the things that I wanted to ask was, you mentioned that there is kind of 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 onto 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. And Generation Pipeline as an example of that. As we close at that, and then move to connect to the NEXUS, will be a great market for that pipeline. We also have several of the opportunities across all our platforms that we are pursuing, and we feel really good about, those are organic in nature. Either connectors or expansions. And in addition to that, if you do see opportunities for strategic asset acquisitions, they connect to these platforms, we'll look hard at those.

And magnitude wise, do think it's going to be closer to something like generation or slightly bigger just thinking about the overall kind of $4 billion to $5 billion number over 5 years?

Right. I think we're -- right now, we are focused on building out that opportunity set and I can tell you that we're I would say, we're in line with our guidance for this year in terms of growth capital for both P&I and GSP and feeling really, really good about the opportunity pipeline and we'll continue to secure -- as we secure those, we're securing EPS growth for the future.

What I would say, in addition to that, things we've looked at our acquisitions have ranged anywhere from the scale of Generation Pipeline to the scale of length 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 accretion than we are on our capital number and earnings number. And 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, maybe a larger capital numbers but at least with the outset, a little bit lower accretions. So to continue growing, we need a mix of those things, and we're looking at a, as Jerry said, first at organic, and then say, the range of things we've seen for contingent acquisitions as is all over the map for pretty small bolt-on to the things that are bit larger at the general length.

Okay. And just a quick follow-up on also on the GSP business, you mentioned kind of a mix of shorter-term contract on NEXUS. Is there kind of 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?

So certainly, the answer is yes, we're looking to move the balance of the capacity to longer-term contracts. It feel some of the tailwinds there are the basin we we're operating and continues to grow, we expect a 5% to 6% a year, which is significant in those producing about 28 BCF a day now. And so we view that as a sort of a strong tailwind. In addition to that, we're seeing some other pipelines for strong headwinds, if you will, in terms of going into service. We find ourselves in a pretty good position. We developed a long-term capacity that we could place when we see the prices being right and the term being right, and 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. So we're happy to take that short-term contracts for 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 and in the early 2020s, 2021, 2020 time frame, and 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. And just kind of 1 kind of last on a little bit more of the strategic end. As you kind of mentioned, this 25, 75 nonregulated to regulated business mix, is that kind of the target going forward for the next 5 years?

Yes. As we move forward, that's where we keep landing.

Okay. And kind of the RFP, I guess, support some of the growth of the regulated front?

That's right. IRP, voluntary renewables and as you know, we're in a heavy capital replacement program distribution or operations as well, gas and electric. So yes, that's what keeps the mix even though we're growing the other businesses, keeps the mix a bit 75, 25 roughly.

We will now take our next question from Praful Mehta of Citigroup.

So maybe just touching on the IRP and the whole retirement of coal plants. Wanted to understand from an economic perspective, most utility is almost have a benefit on customer build with these retirements. How are you seeing that lay out in your IRP? Do you see customer bill impacting positive, flat or both going up? How do you see that playing out in your IRP plan?

So what we've talked about in our bills overall is at 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, you get into the Great Plains where wind may come in at $0.02, you can displace fuel costs in a way that they receive benefits to bills. We're trying to get our renewable additions in with modest increases, and that's what we're saying. So there's enough capital here, and we bring say, wind in today at $0.045, so 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. So I'd say, we're bringing it out of the way that works for customers and is going to keep her overall bill to bill increases affordable and workable.

Got you. So it's not a good the benefit, but it is manageable within the current plan?

Yes. I mean, we wouldn't be out saying, we can go down 50 and 80 if we had modeled that this is workable from a pricing reliability perspective. We've spent a lot of time studying that, and absolutely is workable. And generally speaking, I think technology is going to continue to evolve in ways that make this more workable, and then probably make things happen faster than people anticipate today.

Got you. Interesting. And the other interesting point the brought up on the voluntary contract, is that something you expect would push the process of the strong submission sooner? And how does that been trained to bills? Do these people sign up, the voluntary contracts there an incremental burden for the transition for those particular contracts?

Well the contracts are signed up with customers so the balance of the customers and don't pay for those. So GM is being for the renewables for (inaudible) And so what that means is with the utility, we have said that will 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. So the wrecks for these projects are assigned in -- assigned to those specific customers and retired by those customers and in the name of those customers. So we can't use it for us utility compliance, it specifically to GM, Ford and the University of Michigan.

Got it. Okay. Makes sense. And then just finally, just a simple clarification question. When you talk about the gas business, Q1 '19, most of '18, the $14 million uplift that you experienced in '19, only partly 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. So I'm just trying to understand and reconcile how Q1 performance doesn't gone a 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 a one-time foreign nature. We have weather variability this year and we some tax items. Last year, we booked some accruals, whether it's a tax reform we've gained significant to customers, that's about half of that $40 million we 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 different portion amount of that coming into the first quarter just because half of the volumes for the year play out in the first quarter. So we see a lot of variability with the new rates coming in as well as we have taxes-related revenue coming in with NEXUS and service, that's the other half.

So 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. So between the new rate case, which internalize new capital in the rate base and the NEXUS impacts, that's an equivalent impact of what the weather and timing items were.

It's a very strong start and opening remarks, we continue to see this year, we do have some contingency.

We will now take a next question from Julien Dumoulin-Smith from Bank of America Merrill Lynch.

So I 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 and investment on the longer-dated side, how does that reconcile within the updated and accelerated timelines that you proposed in the IRP? And then secondly and related, obviously we've seen some developments on consumer energy's IRP of late and some specifics elements are, how do you think the ability to settle your our IRP? And I know, again, I appreciate that it's early but some of the critical pieces such as recovery on PPA and again, more broadly with respect to, if you can comment at least initially, as you see them?

Yes. So the IRP, as I said, is very specific for the first 5 years, and then after that we actually proposed a range of scenarios that may play out depending on how technology and other factors evolve. And when you look at the first 5 years, they're very consistent with the plan that we laid out at the EEI last year. So 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 megawatts in, but our -- we're all 1 quarter into that plan, and we signed up 350. So we're feeling awfully good being halfway only a quarter into the first year of the 5 years. And I do think though there will be more of that as other companies continue to look hard at what say, they seem to come into their investors and their customers. So that's going well. So I would say, out in the whole, the IRP is fairly 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, and I think you'd probably be better to direct questions at settlement in terms and so forth around that to them. We could settle, although I don't know that I anticipate that. Ours is a pretty early in the process and I think it's a pretty straightforward IRP in the sense that most of the discussion that specific is near term, and it's all things that have been out there for the commission to see for a long time. So we don't think the first 5 years would be controversial. On we actually got staff order in our 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 filed that we had on the capacity need, no need for capacity so any projects would be attached to energy only prices. And if the day does come that we're determined to have the 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. So a new assets that we're bringing on are in the $0.045 range. And so that's roughly where they'd set the price, which is a good evolution from I'd say, the some of the early thinking of how the pricing might be handled. So we feel positive about all that.

Got it. Understood. And then separately, just to clarify as a voluntary I know you mentioned already, but is there a timeline on getting the balance to the 300 to 600 result?

Yes. I mean, within 5 years, it's in our 5-year plan. So we've had a really fast part to the effort. I mean, we've look to bring in 250 megawatts more over the remaining 4 years and 3 quarters.

Excellent. And just lastly, anything quickly on placing the remainder of the midstream acquisition?

I think we answered that earlier with we're looking at it whole range of potential of both organic and sizes on acquisitions if we execute those. So I don't know that there's more to pursue on that.

We will not take our next question from Dave Fishman of Goldman Sachs.

Another follow-up on the IRP. As you guys already mentioned, the filing is a lot more wind capacity upfront far less solar heavy relatives of mothers in Michigan, largely due to competitiveness. But when you think about the mix between DTE Electric the opening verses PPA in this capacity, and how other dockets have progressed, does wind precent a more compelling utility-owned proposition relative to solar over the next 5 years in Michigan? Or are there not really material differences between owning of PPI, wind versus solar?

Well, look, one of the reasons that the legislation in 2016 was passed in '16 evolves to enable companies to own 100% is between 2008 and 2016 when there was a 50-50 split, there just was no compelling evidence of that third parties were bringing in the wind capacity or renewable capacity more cheaply. In fact, we were always -- DTE was always at/or below the third parties. So the legislation in '16 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. And as you said, near term, that means wind but long term, we are convinced we can do the same in solar and that we will be bringing solar on at/or below what third parties can, and that's our plan.

Okay. And then one follow-up on PNI. I know we talked about R&D projects in the past. Acquiring cogeneration projects, are there any kind of incremental insights you can provide on kind of contract duration? And maybe how late in the cycle that cogeneration project is? Is it already developed? Or you just kind of buying the rights?

We are -- the contracts are long term on the cogeneration projects, the cogeneration project that we're looking at that are in the final stages of discussion on. So I can say that.

Okay. But are -- resources are completed kind of Cogen project that you're just acquiring once it's done? Or is it something where you'll be having an organic aspect to it?

Well, the ones that are in final stages on is an existing facility operating facility.

Okay. And at high level, are there much competitive advantages with buying an existing cogeneration project? Are you able to bring gas from the SMT or anything like that?

I can tell and that the returns are favorable and north of typical utility returns with a long-term contract. So we feel good about our position there.

I'd also say that our group who does there, probably does that operating cost advantages over other operators. Like any business, you can do a really good type of running assets or you can mess it up. And they've got 20 years of experience running these projects, so really understand how to do it efficiently.

And the asset is critical to the operation of the facility that it's connected to. And so operating experience and expertise is fundamental and certainly, a competitive advantage.

That one is being finalized. We can't say too much specific about, much more specific about it until perhaps it's done and public. But I will say, the combination of that plus the 2 RNG projects we mentioned, get you a long way down the road toward the $15 million that we got that business targeting this year for incremental earnings growth but there's, as Jerry mentioned though, significant amount more in the queue that's very active behind those 3 projects. So P&I continue to feel like the opportunities set is good.

We will now take our next question from Michael Weinstein of Credit Suisse.

A couple of questions. On the electric rate case, the Infrastructure Recovery Mechanism, is that -- if that isn't approved, what happens with the next filings over the next few years? How does that changed things?

The one proposal they've made is that we set up a workgroup to work out the details on the IRM rather than use the rate case to finalize that, and that would be fine if it's the way to plays out. I think, they're -- Jerry you talked, but my sense is that there continues to be a real interest in the mechanism but a desire to read through the details.

Yes. We spent a lot of times with commission staff, creating an understanding of our investment profile of the next 5 years. And I would say there's been really strong support as we invest in reliability and organization of the group as well as our generation fleet, modernizing and transforming that's fleet. So there's a good visibility into our plan. So there are -- there is the opportunity to have an obstruction renewal mechanism to sort of accommodate well understood capital, but I think, as Jerry said, it's going to take some time to work through the details with staff and the commission. And so our expectation, it is likely not going to happen in this rate case and the consequent of that this we'll be in for all regular rate cases. I think if you can get 1 done, the benefit is it that you can lock in long-term investment plans and drive efficiency into those plans for our customers. So we see the value there as well as reducing the frequency of rate cases that are pretty straightforward.

The staff proposal was to set up a workgroup to continue to work the details.

The working group is better than a rejection. So on the -- on gathering and processing, can you talk about volume growth and what can we expect that to be over the next few years? What has been this year? And specifically on Link, what's the capacity utilization rate on the Link system at this point during Q1?

Well, what I can tell is that we expect the Appalachian basin, which most of our assets, all of our assets it really connected to, to grow 5% to 6% over the next 10 years or so. That's very positive. I mean, it has grown faster in the past, but I think as the basin matures as well as you know, capital discipline has entered into the production capital markets, we see -- we project a 5% to 6% growth, and we think that our assets link, Bluestone, millennium, NEXUS are well positioned to competitively attach that volume growth.

So you asked specifically about Link. Link continues to perform, as Jerry mentioned earlier, have performed we mentioned last year, a new gathering contract we were in the middle the building that out to the drilling that we see around Link is proceeding kind of exactly as we anticipated actually in this year's plan. So there is talk of producers not getting out of their skis with capital they spent to chase resources, but in terms of drilling we are seeing around our gathering assets, it's right in line with what we expected and right in line with our plan for this year. So that, I guess, the main you'd say is the proceeding well for us in 2019.

I think you had last update where that is 80% contracted, is that still the latest you're ready to talk about, or is there an update to that?

I don't think we've...

I don't think we talked about contracting levels. It's certainly rising, we're going into it. And there are various components of the play too. So there's a southern leg and the northern leg and each of that have their own dynamics. So it's not like a point-to-point type like millennium, it's not quite as easy to sum up, that way but...

I think with that in the past that there's an significant amount of expandability that we could secure on the pipe and as a matter of fact, were under construction right now on the significant expansion on that pipe to support a customer need with long-term contracts. So we're on an expansion mode right now and the like.

Great. And on P&I, are you guys ahead of plan for $15 million a year of growth? I mean it sounds like there's -- it sounds like you're doing better than you expected, is that fair?

Yes. Doing better than we expected at this point time in the year. I mean, we have approximately most of our growth locked in, although we expect to be locked in this year and with a very strong queue behind it. So we expect more good news in P&I as we go forward.

And one final question on just the equity share count. You have included the Link conversion, the equity conversion in this year's guidance for share count and also in the quarterly numbers?

We are including that. On the disclosures that I gave on the call, which is the $1 billion to $1.5 billion, the $250,000 this year does not include it (inaudible) I know we still this year kind of does.

So we've got $1 billion to $1.5 billion plus the converts that will come in as equity. And of course, those are all in our EPS forecast to the 5-year plan that we've been forecasting that to convert for years now. But the $1 billion to $1.5 billion would be over and above that.

We will now take our next question from Greg Gordon of Evercore ISI.

The -- when you look at the first quarter results in GSMP and the decline in overall earnings associated with coming back to more normal volumes, I know that the fiscal year guidance was for -- was lower overall, is that sort of in line with your expectations and reflective mainly of the Atlantic sunrise pipeline coming on line, and those volumes be diverted to that pipe?

Greg, this is Peter. The -- first of all, last year, we indicated that we had a really strong year of $62 million first quarter of last year, $48 million this year, so that's the $14 million decline from $62 million last year (inaudible) accounting for NEXUS also had one of our platforms. So the $14 million is a combination of returning from accounting as well as normal volumes. And when you look at the $48 million, you analyze that and also, you take a look at the growth we have for the year during was mentioning the length on the last question, we're feeling really comfortable and that we're not anticipating any other coming in service and lines coming from that is contract that we're really constructing that's going to help us to get more annual guidance.

Put another way, the first quarter results were right in line with our plan for the year, so we're just fine.

Got you. Yes, I know you guys did call out earlier the flip from AFUDC so I didn't recall that so it's a combination of the AFUDC and volumes normalizing but still down the fairway of how you had thought it would play out? The second question I have, a little off to being track, when you look at your IRP, as I recall, I didn't read 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, I was on the public service down in the Southwest has deployed a fairly significant chunk of battery source and recently had a major equipment failure from the large vendor. And 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 existing in the state for a long time known as the Ludington dump storage facility. So the things we've been doing been investing along with the consumers, over $800 million in that facility in recent years, and it takes it up over 2,000 megawatts, that's the fourth biggest storage in the world. A couple in China and 1 here in the U.S. that are larger. So we have actually do some modeling recently and forward needs for storage as we build out our renewable assets in the state, and they just don't so much of a need because a lot of the short-term fluctuations that renewables will introduce in Michigan can be handled by Ludington. So what we see for batteries is more niche investments. For example, at substation 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.

We will now take our next question from Jonathan Arnold from Deutsche Bank.

Just coming back to the new cogen acquisition, I mean previously, you've been talking about a plan and that business that would focus on developing new opportunities. I thought is this -- are you still on the 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 on the way that are raising quite well actually. This was an opportunistic acquisition opportunity.

Do you see...

We have, for example, at Greenfield that, let's say, is an advanced development, quite interesting that would be a new build that would be the next one we're looking at behind this. So if we see these come along as an acquisition opportunity of bolt-on, and it fits our return and skills, we are happy to do it, but we do continue to develop Greenfield activity as well.

Great. And then just on RNG. You'd said you were finalizing these 2 last quarter as well. So I'm just curious, is that -- are they, is there something that's come out that's making this take longer? Is it just a process? What's an update of cutting those over the finish line?

The deals are done on those 2. Really, we're on the due diligence phase from a development perspective, make sure that we're happy with everything that we're closing in on from an economic perspective, but we feel really good about it. We expect them to go forward.

So is that you're just still in due diligence and you were in due diligence a couple of months ago? And then 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 to make sure the assets you're buying fit the description. So we're working our way through that, they're very late in that process.

Okay. So since you last updated us, you've gone to terms and they're moving forward effectively?

Yes. I fully expect we're moving forward through these 2 energy deals.

We will now take our next question from Andrew Weisel of Scotia Howard Weil.

First, just a couple of questions on wind. For the voluntary renewables program, I just want to be clear, would those assets sit in the rate base or outside of, it notwithstanding the dedicated the rents that you mentioned? Are rates negotiated or would it be a cost plus with something like a 10% ROE? And going forward, given the size of forward and GM with most of the growth tend to come from residential and commercial customers or industrial? And does that matter from a rate to margin perspective?

So the contracts are signed with the individual customers and their 5-year term. We expect them to Evergreen because a lot of these companies have long-term commitments they've made. If they -- any individual customer did renew, they do revert into rate base. So they'd behave just like a rate base investment. The essential utility asset that behaves like rate base and 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.

Okay. So the returns will be comparable to the rate base ROE, right, is that what you said?

Yes.

Okay. Perfect. Just one last one on the main stream. You mentioned that you're expecting the tightness in takeaway capacity for Appalachian gas in the next say, 2 years. Others might be less confident in thinking that there could be sufficient availability for a while especially people assume a slower rate of production growth than you do. So 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?

Well, we look to -- I mean, NEXUS is running full from a contractual perspective based on available capacity. What we'd like to see is turning out those revenues and -- at favorable pricing. So I -- we still are pretty confident that we're going to achieve long-term contract despite our -- 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% to 6% going forward, and that's what's built into our 5-year plan.

If 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 5 years from now is what demand 5 years from now is. And the fact that producers are being more disciplined about not getting way out ahead of it and producing a surplus, it makes sense for producers, but it really doesn't affect what the demand is and 2020 or 2023. And all the modeling that we see on fulfilling long-term demand continues to see substantial growth out of the Appalachian basis broadly, but that as you get into some of the stronger submarkets within the Appalachian basis, they grow beyond the pace of that 5% to 6% that Gerry mentioned. So, if you're well exposed to the right geology, you not only see growth, you'll see more than your fair share.

There are no further questions at this time. I would like to hand the call back to our hosts.

All right. Well, look, I just want to thank everybody for joining the call. As I said at the outset, we're off to a really good start to the 2019. We're in a strong position ahead of the year. We have I think increased certainty of outcome through 2019, and so 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, the host of investment opportunities that we've laid out for you as well. Thanks again, and we look forward to talking to you soon.

This concludes today's call. Thank you for your participation. You may now disconnect.