DTE Energy Company

Ladies and gentlemen, thank you for standing by and welcome to the DTE Energy First Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone keypad. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. Thank you. I would now like to turn the conference over to your speaker for today. Barbara Tuckfield, Director of Investor Relations, please go ahead.

Thank you, and good morning, everyone. Before we get started, I would like to remind everyone to read the Safe Harbor Statement on page two of the presentation, including the reference to forward-looking statements. Our presentation also includes references Provided in the appendix of today's presentation. With us this morning are Jerry Norcia, President and CEO. Peter Oleksiak, Senior Vice President and CFO. And Dave Root, Senior Vice President and incoming CFO, effective May 4th. And now I'll turn it over to Jerry to start the call this morning.

Well, thanks Barb and good morning everyone and thanks for joining us today. First off, I just want to say to everyone listening that I hope you and your families are healthy and safe. This is a very difficult time for everyone, and we are doing everything we can to try and help limit the pressures that all of our customers and communities are facing. I also want to thank the tireless efforts of our employees who are out there every day ensuring the community has safe and reliable service. We are holding this earnings call from separate locations as we follow our shelter and home guidelines. This morning, I'm going to provide details on how COVID-19 is affecting our business and what we are doing to respond to the challenges that it has presented. I'll also provide highlights on the progress at each of our business units. Then Peter will provide a review of our financials, and then we'll wrap things up before we take your questions. Now let's start on slide four. At the state level, a group of business leaders, medical experts, and government officials have come together to develop recommendations on how to restart the Michigan economy as quickly and as safely as possible. Our executive chairman, Jerry Anderson, is the co-chair of this group that was set up by the governor. Our expectation is that the first part of May, the construction industry resumes its work, and the autos and the other industrial companies start to resume operations later in May. Here at DTE, we plan to resume our construction and maintenance work the first part of May. I'll provide more detail on these plans a little later in the discussion. We are working very closely with state and local leaders, as well as our regulators, to respond to this crisis in a way that is best for all of Michigan's residents. During these difficult times, regulators and companies can come together or they can come apart, and in Michigan, We have been working with our regulators and state government to come together during this pandemic. Now let's talk about what our company is doing to respond to this crisis. Throughout the COVID-19 crisis, our priority has been the health and safety of our employees and customers. We are working on multiple fronts to ensure that everyone at DP is safe as we continue to deliver safe and reliable energy to our customers. We're also working to address the needs of our community through philanthropy and volunteerism. As far as the impact that this crisis will have on DTE's financial plans, I would just say we are planning for a significant impact. Although no one knows exactly how this will play out over the year, we believe we can mitigate the challenges for our original plan with management actions. I will go into more details on these actions in a few minutes, but I want to reassure you that we have a plan to achieve our financial targets. This plan allows us to reaffirm our original operating EPS cash and capital guidance while maintaining a strong balance sheet and continue to offer a healthy 7% dividend increase this year. I'll provide more color on the assumptions in this plan and the biggest variables as we move deeper into the discussion. DTE has a proud heritage of rallying at the toughest of times. Whether we're dealing with catastrophic storms or economic crisis, in every case, we've merged a better and stronger company. There's no doubt that the work required of us today set us up for another successful decade. Now let's move to slide five as I talk more about our efforts fighting this pandemic. To ensure the safety and well-being of our employees, we implemented work from home in mid-March, and currently we have over half of our employees working from home. This is going well, and our systems are working great in supporting our people. We sequestered key operating personnel in an orderly and prioritized way to ensure we had the right mix of operating personnel to continue with reliable and safe operations. And we have also taken a pause in all non-essential work some of our employees to ensure that we are doing all we can to keep them safe as we gain further understanding of the virus. For our employees who must leave their homes to perform essential service for our customers, a big thank you. They haven't missed a beat in the work they do and have maintained excellent operations. We have equipped these employees with the proper protective equipment, such as masks and protective suits for entering homes. We are performing our tasks with safe social distancing and are regularly sanitizing our facilities, trucks, and pools. Every employee that leaves their home gets their temperature checked every day. We have created detailed return to work plans for our employees and will follow the guidance of our state leaders. As I mentioned, we are deeply involved in developing those practices. We will restart our construction and maintenance activities in early May and ramp up through the month. We expect our office employees to remain at home into the summer as we determine when it is safe to return. We will continue all the safe practices I just mentioned, which have been very successful in mitigating the health impact of this virus for the thousands of VT employees that leave their homes every day to perform their work. Now let's move to the next slide. From our community perspective, our foundation supporting the basic needs such as food and shelter for over 100,000 families, funding more than 1 million meals for those who are in need, and ensuring that families have access to core medical services. We created an emergency stabilization fund to aid nonprofit organizations and small businesses. Today, we distributed more than 4,000 respiratory masks to the Detroit Police Department and over 900,000 respiratory masks area hospitals and plan to deliver more of these critically needed masks. We are assisting faith-based institutions, which are a trusted resource for community members. I also have personally hosted many calls with faith-based leaders and social agencies in order to more deeply understand the needs of the community. We are also partnering with the City of Detroit philanthropic organizations and business leaders to enhance high-speed internet citywide and providing devices to over 50,000 students, ensuring they continue their education during these tough times. We are matching charitable giving of employees, contractors, and DTE alumni to support nonprofit services. Our employees are virtually volunteering at different organizations to assist their communities while ensuring everyone's safety and well-being. Our employees have stepped up during this time to continue to do the work that is so critical for our communities. And that is to deliver reliable power to our customers in the safest way possible. I'm extremely proud of all of our DTE family. This is just another example of our employees coming together when it is most critical to respond to the needs of our communities. Now let's move to slide seven, where I'll start to walk you through the expected impact of this pandemic on our business. We have spent a lot of time over the last few weeks understanding the potential financial impacts of the pandemic, building and implementing a plan to react to these challenges. When we updated our forecast for the balance of the year, we looked at the potential sales impacts and additional costs associated with COVID-19 and also recognized that we were down in the first quarter against our plan due to warmer than normal weather, along with other economic impacts, offset by favorability of the non-utilities. These changes are larger than the contingency that we normally carry in our annual plan. So when we rolled all of this up, we saw $60 million of earnings pressure that we needed to offset. We wanted to work and create a new plan that not only covers this $60 million shortfall, but at least doubles this to build up additional contingency to cover other potential impacts, including a potential slower return to work in Michigan, causing even higher COVID-19 impacts, a potential cool summer and warm fall, and our non-utilities only hitting their annual plan. Currently, we are ahead of plan at our non-utilities, and our assumption is that this favorability is held as contingency for the balance of the year. We feel it is prudent to plan to cover potential earnings pressures from these items, even though all of them may not occur. This is how we've been able to reliably deliver on our earnings targets in the past. This is a conservative plan. We have over $2.5 billion of O&M to manage through lean times, as well as the benefit of investing incremental O&M ahead of schedule in previous years. We faced recessionary pressures before in 2008 and 2009, and we came through that plan stronger than ever, achieved operating EPS and cost reduction targets, and exceeded cash from operations guidance. We are facing similar pressures, and I am confident that we have built a robust plan to respond to these challenges. On slide eight, I will discuss the sales scenarios we created to understand the potential impacts of COVID-19 on our business. We have been putting together some recessionary scenarios based on assumptions of Michigan's timeframe of returning to work. Our goal with these scenarios is to size the impact and communicate that with you. However, we realize that no one knows for sure how this will evolve. Slide eight lays out some of these assumptions for our two scenarios. One scenario assumes that our return to work begins in May. And the second scenario assumes a slow start case. For our scenarios, we have the advantage of our advanced metering capabilities, which allows us to see sales changes real time. AMI data has given us great information on a daily basis, and it really has been a powerful tool to give us the insight into how this crisis is impacting our sales. I'll go over a few of the details of our May start scenario. Construction, manufacturing, and outdoor businesses will begin to return to work in May and advance throughout the year. Non-essential retail, restaurants, and lodging start returning to work during the summer months. Non-essential office work starts later in the summer, and universities and schools return to normal in the fall. The result of developing these scenarios is an estimated impact on our electric sales by each class. Now I'll go over these sales impacts. As you might expect, our residential load has been stronger with more people at home, and it has increased by 10 to 11 percent in April. However, our commercial load has dropped by 16 to 18 percent and our industrial load has dropped by 40 to 46%. We believe we have seen the bottom for our load at this point. Michigan remains under the stay-at-home order with only essential businesses operating, and our load has been pretty consistent over the last several weeks. AMI data has allowed us to see the load by major customer class and the impacts by subsegment within each of these categories, including groups like auto, hospitals, grocery stores and schools. This gives us some very powerful analytics to be able to understand what is happening with our load. We use these analytics and the insights from the return to work plan at the state level to come up with the forecast scenarios I discussed on a previous slide and the impacts on earnings under each scenario. You can see on the slide the estimated electric sales impact from COVID-19 pandemic is $30 to $50 million. Understanding that none of us know exactly how this will all play out. We estimate a range for each customer class using the parameters of the two scenarios we laid out. For residential, we estimate an increase of 3 to 4% for the year due to folks working from home part of the year. This increase in residential sales translates into an increase in earnings of $40 to $50 million on an annual basis. For commercial sales, we estimate a decline of 6 to 9% which translates to a decrease in earnings of $50 to $75 million. And finally, on the industrial side, an estimated decrease in sales of 18 to 22%. This translates to $20 to $25 million in lower earnings for the year. We put this all together in a focused economic recovery plan to ensure that we can deliver within our guidance range. I'll discuss that plan more in a minute. Obviously, many different scenarios could play out. including ones that are more favorable or those that are less favorable. Under a less favorable scenario, we would have to reassess our economic recovery plans to ensure it can address all of the challenges. The pace at which load returns is one of the largest variables in our economic recovery plan. Let's turn to slide nine. Our management team typically conducts weekly reviews of our plan, and in this time of economic stress, we have been reviewing it daily. As we have discussed before, we have robust planning that includes starting every year with contingency across all business lines. We also have lean plans that we can pull off the shelf. While this year, we needed to add additional steps to our process, including a daily executive management review of the current year financials and additional one-time actions to achieve our goals. Since much of the annual contingency will be used for weather this year, we will now work from our deeper, lean playbook, which includes a list of one-time items to reduce costs in the near term that are not sustainable over the long term. Some of the triggers that we will pull include pausing on any new hires, minimizing overtime, reducing contract and consultant spend, and deploying our people into those required activities and deferring bank maintenance work that we accrued during the last three years. We are also able to reduce materials and support expenses, decrease travel expense, accelerate automation, work from home projects, and postpone non-essential work, always with maintaining safety as our highest priority. With all of these lean actions, I am confident we will achieve our financial goals for the year. without sacrificing safety or customer service. Now I will turn it over to Peter to share our financial results for the quarter, provide a snapshot of the financials for the remainder of the year. But before I do, I'd like to take this opportunity to thank him for his dedication to DTE over all these years. I'm sure you all know that Peter has decided to retire this year. I'm happy to see him get to pursue his life outside of DTE. We've had many good years together, and we'll miss him as a trusted leader. The good news is that he has agreed to stay on as an advisor as Dave Rude transitions into the CFO role. With that, I'll turn it over to Peter.