DTE Energy Company

Ladies and gentlemen, thank you for standing by and welcome to the DTE Energy third quarter 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 put a star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star zero. I would now like to hand 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 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 Jerry Norcia, President and CEO, who will discuss the transaction we announced this morning that transitions DTE into a predominantly pure play utility. We also have David Slater, President and COO of DTE Midstream, and President and CEO-elect of the new Midstream Company, who will take you through the benefits of an independent Midstream Company. Bob Skaggs, a member of our Board of Directors and Executive Chairman-elect of the new Midstream Company, will say a few words on the transaction. And finally, Dave Rude, Senior Vice President and CFO, will provide an update on the quarter, our increased 2020 earnings guidance, and our 2021 early outlook. 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. I hope everyone is staying healthy and safe. So I'll start on slide four. This morning, DTE announced that our Board of Directors has authorized management to pursue a plan for the spin-off of Midstream from DTE Energy. On this call, we'll discuss the spin-off and demonstrate how it will unlock significant shareholder value. By positioning DTE as a predominantly pure-play utility with visible and superior growth, and creating an independent, well-positioned midstream company with excellent growth potential. Then we will provide you with an update on our 2020 results, which continue to be very strong, giving us confidence to increase operating EPS guidance for the year. This positions us to exceed original guidance for the 12th year in a row. I want to thank all the leaders and our 10,000 employees at DTE for creating this tremendous success in a year of great turmoil and uncertainty. We are firing on all cylinders, keeping our people safe and delivering for our customers, communities, and investors. it is truly remarkable and certainly a reflection of the grit and determination of the great people of bte a big thank you we're also providing an early outlook for 2021 and announcing that our board approved a seven percent dividend increase for 2021 continuing our history of providing strong dividend growth now on to slide six for an overview of the spin transaction This decision to separate the two companies follows a thorough review with our board to identify opportunities to optimize our portfolio and maximize shareholder value. And in the end, after the evaluation of various alternatives, we determined that a strategic spin of the midstream business was the best way to create value. We recognize that this decision comes not long after our significant acquisition of assets in the Hainesville basin. Our decision to spend midstream is a result of a series of discussions with our board that began in the summer of 2019, prior to the acquisition, when we started talking about a portfolio pivot to a predominantly pure play regulated utility. Through 2019, while business mix discussions were still ongoing, we continued to pursue an aggressive value creation agenda for midstream, which yielded the Hainesville acquisition. This was a great acquisition that pulled forward growth and value. Because this acquisition and the balance of the midstream portfolio continues to perform exceedingly well, provide better than expected growth opportunities, and has scale to thrive on its own, it crystallized our path to pivot to a high-growth, pure-play utility with the spin of a well-run midstream company. We believe this strategy will unlock significant value for our shareholders. The spin is expected to unlock the full potential of our premier regulated utilities and premium natural gas midstream assets, align DTE's business mix with investor preferences and overall market trends, and create two entities, each with experienced leadership and proven track records. We expect the entities to pay combined dividends higher than the current dividend with an 8% to 10% full spin increase from 21 to 22 versus 6% we had planned pre-spin. For well over a decade, our midstream business has created significant growth through greenfield development and strategic acquisitions. and has become an industry leader with solid cash flows and tremendous opportunities for continued growth. We believe this separation positions DT Midstream with enhanced flexibility and provides shareholders an opportunity for investment in a high-quality midstream company with assets strategically located in premium basins and connected to major demand markets. As most of you know, my background includes a substantial amount of time in the gas industry, including my involvement in the development of our midstream business. The team and I have dedicated a significant amount of time and energy creating a midstream business at DTE that is recognized as one of the best in the country. So you can imagine how important this decision is to our team and me. After careful consideration and review with our board, I am confident that this separation is the best way to allow the midstream business and its team to achieve their full potential and to enhance overall value for our shareholders. As I said, This positions DTE into a nearly fully regulated utility with 90% of our operating earnings and an even higher percentage of future capital investments going into our two premium utilities. Our five-year plan will hold this 90-10 mix. About 10% of DTE's operating earnings will be from our remaining non-utility businesses. The separation of DTE and the midstream company is truly beneficial for both entities, positioning them well for the future. In slide seven, I'll provide details on the structure of the transaction. DTE and the new midstream company will have distinct corporate structures. DTE shareholders will retain their shares of DTE stock and receive pro-rad shares of the new midstream company. We expect to complete the spin by mid-year 2021, subject to final board approval, the Form 10 registration statement being declared effective by the SEC, and other regulatory approvals. I will remain the CEO of DT Energy, with Jerry Anderson continuing as Executive Chairman and Bruce Shaw as Lead Independent Board Director. David Slater, current President and COO of GSP, is the CEO-elect of the new midstream company. Most of you are familiar with David, who is well-respected in the industry. Bob Skaggs is the executive chairman elect of the new midstream company and will continue to serve on DT's board. As many of you know, Bob served as chairman and CEO of NYSource, where he executed the company's successful spin of the Columbia Pipeline Group and went on to become its CEO. David and Bob each have 30 years of experience in the energy industry. The midstream company is extremely fortunate to have these two seasoned leaders along with a really strong team to support them. Let's move on and discuss the strong growth profile of DTE on slide nine. This transaction positions DTE in a predominantly pure play electric and gas utility. About 90% of DTE will be regulated by the Michigan Public Service Commission. We will invest significant capital over the next five years to support utility growth. We are substantially growing our utility rate base with a five-year capital investment plan of $17 billion and an increase of $2 billion over our previous five-year plan. This capital plan is strategically aligned with our aggressive ESG targets. DTE's EPS growth rate has been among the best in the industry over the past decade and is maintaining its long-term 5% to 7% growth target. DT Electric, we anticipate long-term operating earnest growth of 7% to 8% and about 9% at DT Gas. Our post-separation profile will better align DT with investors' preferences for high-performing regulated utilities. We will continue our strong record of providing clean, safe, reliable, and affordable energy to our customers and being a force for growth in the communities where we live and serve. DP will continue to offer competitive dividends our investors expect. We have paid a dividend for more than 100 consecutive years and have increased our dividend each year since 2010. We will target dividend growth in a payout ratio that remains consistent with our pure play utility peers. All in all, this transaction offers greater appeal to investor focus on the strategic and financial characteristics of a pure play utility. Let's move on to slide 10. Separation will highlight the strengths of our core electric and gas utility businesses. Michigan has one of the best regulatory environments in the nation. We continue to work very closely with the Michigan Public Service Commission to support the people of Michigan, particularly this year during the pandemic. DTE continues to have a distinctive continuous improvement culture, enabling us to continue our superior track record of cost management. We also have a strong commitment to service excellence. DTE Energy ranks in the top 10 of energy companies with energy efficiency programs, and I'm proud to say both utilities are in the top quartile for residential customer satisfaction, with DTE Gas recently earning a top ranking in the Midwest by J.D. Power. Moving on to the next slide, I'll discuss our capital plan, beginning with DTE Electric. We expect to invest about $14 billion in the electric company over the next five years. This is 17% higher than our previous plan. About $2 billion of the total electric investment will be in renewables. That will support our plan to reduce 80% of our carbon emissions by 2040 and be net zero by 2050. We are also focusing our investment on modernizing an aging distribution system with significant investments in hardening, automation, and technology in our distribution business. We are building a flawless grid of the future for our customers. Our capital plan supports a robust near-term outlook for DT Electric and a 78% long-term operating earnings growth rate. On the next slide, I will discuss capital investment opportunities at DT Gas. Over the next five years, DT Gas plans to invest over $3 billion to upgrade and replace aging infrastructure, a potential upside to the five-year plan. Along with our pipeline integrity and main replacement investment, we're investing in innovative technology and products that will reduce methane emissions and reduce the carbon footprint of our gas company. Overall, our capital plan supports a strong near-term outlook for DT gas and a 9% long-term operating earnings growth rate. On the next slide, I'll discuss our plans to achieve net-zero greenhouse gas emissions to further strengthen our ESG stewardship. As I mentioned, at DTElectric, we are committed to achieving net zero carbon emissions by 2050 with a 50% reduction by 2030. To meet these targets, we plan to double our renewable energy by 2024 and quadruple it by 2040. We are also progressing on our voluntary renewables program. This program enables customers to invest in renewable energy and drive Michigan to a cleaner energy future. We have more than 17,000 business and residential customers enrolled with large industrial customers, including GM, Ford, and University of Michigan. We have one of the largest voluntary renewable programs in the country with 750 megawatts of demand commitment from our customers. DTE Gas announced its unique and comprehensive plan to achieve net zero greenhouse gas emissions by 2050. This plan includes working with our suppliers and customers to enable further reductions across the value chain. So as you can see, our strong utility investment profile positions DTE for continued growth and a strong environmental leadership role. Now I'll turn it over to David Slater to discuss the new and exciting opportunity with the midstream company. David, over to you.

Thanks, Jerry, and good morning, everyone. I know I've met most of you over the past few years, and we've had many discussions on our midstream business. Let me just say that I'm excited about the opportunity this transaction provides. We have achieved solid growth for over a decade, and establishing our business as an independent midstream company will really benefit shareholders by unlocking significant value. We will also continue our commitment to provide excellent service to our customers, develop growth opportunities, and reaffirm our strong relationships with our partners. As you know, we have been expanding the midstream business through greenfield projects, and strategic acquisitions to become the premier company we are today. This culmination of success has enabled the creation of an independent, gas-focused midstream company in the most prolific natural gas basins connected to key demand centers. The midstream company has an experienced leadership team that will continue to focus on organic growth and value creation from our well-positioned platforms. We have a strong long-term contracted asset portfolio with a diverse customer base. including electric and gas utilities, power generators, industrials, national marketers, and producers. This portfolio generates significant cash flow and is well positioned to create value and growth for our shareholders. The new midstream company will enable better investor alignment and offer the only independent mid-cap gas-focused C-Corp investment in the Marcellus, Utica, and Hainesville basins. We will have a strong capital structure and attractive dividend policy associated with high-quality midstream companies. With an initial balance sheet target of four times the debt to EBITDA and two times dividend coverage ratio, our balance sheet will support the ability to make value-accretive investments and pay a competitive dividend. And let's turn to slide 16 and talk about midstream's platforms. As many of you know, the midstream business is comprised of three platforms, regulated pipelines, regulated storage, and gathering. Our footprint is extensive and has been developed through highly accretive organic growth and strategic acquisitions. Also, our assets connect the most economic basins with key demand centers in the US. Along with our footprint, the business is underpinned by the strength of our contracts and our counterparties, which I'll go over in more detail in the next few slides. Future growth is driven by platforms in the early development phase, which include Blue Union, Leap, Nexus, Link, and Generation Pipeline. Additional opportunities include economic compression expansions of pipeline systems, additional market laterals, and continued gathering build-outs. Our other platforms like Bluestone, Millennium, Vector, and Gas Storage are in a more advanced development phase. but still provide a stable and high-quality stream of cash flows. So Midstream's platforms position us nicely going forward to deploy organic development capital and pay a competitive and growing dividend, together adding value for shareholders focused on gas Midstream businesses. Now let's turn to slide 17 and discuss Midstream's track record. The Midstream business has consistently achieved strong financial results, delivering 18% average annual operating earnings growth since 2008 and 20% annual growth in adjusted EBITDA over that same time period. The business has contributed significant cash flow, over $3 billion since 2008. Midstream is producing strong adjusted EBITDA in 2020, which is expected to be about $700 million. You can see that these are a unique set of assets for investors who are looking for superior value creation from the Midstream company. Now let's move to slide 18. As we have highlighted, Midstream's assets are located in the most attractive dry gas basins, Arcelis, Utica, and the Hainesville, and are connected to key demand centers, which provide a great opportunity to continue DT's history of success. Midstream's counterparties continue to perform according to the plans they have shared with us earlier in the year. Our pipeline and storage portfolios are well-contracted, on average for 10 years. Our major producers are in solid positions, hedged over 70% in 2021 at $2.70, connected to premium markets and have minimal near-term maturities. Over 90% of our revenue is from demand-based contracts, MVCs, and flowing gas. With the position of our assets and the strength of our counterparties and contracts, the company has highly visible cash flows and a solid long-term growth outlook. The creation of an independent midstream company provides the opportunity to continue our record of success and create value for our shareholders. Before I turn it over to Dave Rude, who will discuss DG's financial performance. Bob Skaggs would like to say a few words.

Thanks, David. I'm grateful and honored to be working with you and the team. Also, thanks to everyone for joining us today. I'm glad to reconnect with the investment community. To say the least, we are very excited about this morning's announcement. As Jerry and David mentioned, this spin creates a compelling opportunity for both DTE Energy, and the new midstream company to unlock their full potential, benefiting customers and employees of both companies and delivering immediate and long-term value for investors. As I said, I'm thrilled to be part of this new independent midstream company and excited to partner with David Slater and his great team. With that, I'll now turn it over to Dave Rude, who will discuss DTE's financial performance for the quarter.

Thanks, Bob, and good morning, everyone. In the third quarter, DTE delivered solid performances across all of our businesses. As you remember, at the end of the second quarter, we expected to be at the higher end of our earnings guidance at DTElectric, GSP, and Energy Trading. We've accomplished that and more, so we are now raising our 2020 Operating EPS Guidance Midpoint from $6.61 per share to $7 per share. We are confident in this increase based on the strong progress we are making on our economic response plan and the solid performance we are seeing this year in our utility businesses and at our non-utilities, which are continuing to perform ahead of plan. We have made great progress at our utilities, working with the Michigan Public Service Commission to continue supporting our customers. Earlier this year, DT Electric received approval on a rate plan that would delay the effective date of our next rate case until 2022, which would keep rates steady during this challenging economic time for our customers. Yesterday, DT Electric also filed an innovative one-time plan with the NPSC to refund our non-weather-related sales increases. This increase was a result of the unprecedented residential electricity usage patterns driven by the COVID-19 pandemic. If approved, the one-time accounting treatment will not impact customer rates and it will position DT Electric to further defer its next rate case filing and keep customer rates steady even longer. In the third quarter, we also received approval for our amended renewable energy plan and we recently filed for the approval of additional voluntary renewables. At DT Gas, we received NPSC approval for our rate case settlement in August. The rate increase of $110 million supports our capital investment plan and includes an ROE of 9.9%. And as Jerry mentioned, DT Gas ranked first in the Midwest for residential gas customer satisfaction. It's one of the few times in our recent history where we have no major regulatory outcomes in our forward year. And these regulatory successes have helped solidify our 2021 plan. Our GSP team placed leap into service in the quarter ahead of schedule and under budget. With the favorability that we are experiencing this year, we are also positioning 2021 for a strong year by pulling some O&M work forward. This increases our confidence in achieving our results next year. For 2021, we are providing an operating EPS early outlook midpoint of $7.07 per share that delivers 7% growth from the 2020 original guidance midpoint. And as we mentioned, we are increasing our 2021 dividend by 7%. This outlook is supported by strong growth at each segment, which I'll explain in more detail in a few minutes. But first, let's move to our third quarter financial results in slide 21. Overall, DT had a great third quarter. Again, this was supported by our economic response plan savings and strong performance across our businesses. Total operating earnings for the quarter were $504 million. This translates into $2.61 per share for the quarter. You can find a detailed breakdown of EPS by segment, including a reconciliation to GAAP-reported earnings to the appendix. I will start the review at the top of the page with our utilities. BT Electric earnings were $91 million higher than 2019, primarily due to higher residential sales, the implementation of new rates, and warmer weather in the quarter. Moving on to DT Gas, operating earnings were $18 million higher than last year. The earnings increase is driven primarily by the infrastructure recovery mechanism and lower O&M costs. Let's keep moving down the page to our gas storage and pipelines business on the third row. Operating earnings were up $29 million versus the third quarter of 2019, driven primarily by the first year of operation of the Blue Union System and the LEAP pipeline, which went into service on August 1st. On the next row, you can see our power and industrial business segment operating earnings were $2 million lower than the third quarter of 2019. This decrease is due to lower steel-related sales, partially offset by new R&G and on-site energy projects. On the next row, you can see our operating earnings at our energy trading business were $3 million lower compared to last year, mainly due to the power portfolio performance. Finally, Corp Another was favorable by $20 million quarter over quarter, primarily due to timing of taxes. Overall, DTE earned $2.61 per share in the third quarter of 2020, which is 70 cents higher than the third quarter of 2019. Now let's move to slide 22 to review our 2020 operating earnings guidance. As we said, DT is having a very strong 2020 so far, and we are raising our operating EPS guidance midpoint from $6.61 per share to $7 per share. We are very proud of how our DT team is working through the pandemic this year and how we continue to deliver for our customers. We created and very effectively executed an economic response plan, and our team has consistently achieved against that plan. We've also had favorability from warm summer weather And finally, our non-utilities continue to perform ahead of plan. All of these factors have led us to increase 2020 operating EPS guidance. The favorability we are seeing this year is also allowing us to pull ahead future O&M work from 2021 into 2020, which positions us well to achieve our future plans. Let's move on to slide 23 to discuss our 2021 early outlook. For 2021, operating EPS early outlook midpoint, $7.07 per share, provides 7% growth from 2020 original guidance. This outlook does not reflect the strategic separation impacts, and any post-transaction guidance will be provided later in the process. In 2021, we are expecting growth in each of our businesses. At DT Electric, growth will be driven by distribution and cleaner generation investments. DT Gas will see continued main renewal and other infrastructure improvement investments. GSP will continue growth across its pipeline and gathering platforms. And continued R&G and cogeneration project development will drive growth at P&I. We anticipate a portion of our economic response plan savings will continue through 2021 in each of our business areas. Additionally, We expect DTE's equity needs to remain consistent with our previous plan, even with the spinoff of Midstream. Now I will wrap things up before we take your questions. With the transaction we described today, DTE becomes a predominantly pure play utility company with over 90% of our operating earnings coming from our two utilities. Our company will continue a solid track record of providing safe and reliable energy and excellent customer service, while also being a force for growth in the communities where we live and serve. Michigan has one of the best regulatory environments in the nation, and we are committed to continuing to deliver for our customers, communities, and investors. Additionally, we believe today's announcement puts Midstream and its talented team in a position to grow with enhanced flexibility and provide shareholders an opportunity for investment in a premier gas-focused Midstream company. The new Midstream company will be building on its history of success with the leadership of an experienced and respected management team. In 2020, BP is on track to exceed our original guidance midpoint for the 12th consecutive year and is positioned for a strong 2021, as evidenced by our 7% dividend increase for next year. With that, I thank you for joining us today, and we can open up the line for questions.

Thank you. As a reminder, to ask a question, you will need to press star 1 on your telephone. To withdraw your question, please press the pound or hash key Our first question this morning comes from Shara Perez from Guggenheim Partners. Please go ahead.

Hey, good morning, guys. Good morning, Shara. So congrats, obviously, on the quarter and the news coming out of GSP today. A couple questions here. Can you comment on sort of that forward growth expectations post the spin of 5 to 7 consolidated versus the 7 to 8 electric? 9% for gas. Is that kind of explained by some dilution from equity issuances, especially in light of the higher CapEx outlook? Alternatively, you know, there's some disenergies in splitting the GSP segment that could put some near-term pressure. And just the 5% to 7%, it's off the original guidance range. Can you just remind us how you're reiterating and replacing sort of midstream earnings? What's the key drivers there?

I'll start, Char, and then I'll ask Dave Rude to add, but the 5% to 7% EPS growth is off our 2020 base, and it's pretty consistent with our growth pattern that we've described to our investors over many years. And certainly, we always end up on the high end of that, as you've seen this year and other years. But it's driven post-spin. It'll be driven by our capital programs of both our utilities, which are quite robust and very visible. You know, we see five-plus years of really strong investment opportunities in our two utilities. So that's fundamentally what's driving the 5% to 7% EPS growth for the company post-spin. David, do you want to add to that? Absolutely.

Hi, Jerry, and hi, Shard. I think you actually explained it very well. The difference between what you see at utilities to the 5% to 7% is due to some of the equity coming in, but we are very confident in the 5% to 7% growth going forward.

Is there any charges to be cleared?

Sorry. Yeah, sorry, Jerry. I was going to say, Shard, in addition to that, we're not seeing any incremental equity needs as part of the SPIN program. So it'll be equity as we had forecasted prior.

Got it. And then any disenergies from the split?

Dave, Rube? There will be some initial costs at the corporate that we will have to work through, but there's no long-term disenergies after the first year or two.

Okay, perfect. And so when we're thinking about the spin, as you contemplated, the four times debt to EBITDA sort of implies about a $3 billion of debt attributed to GSP in the spin. How should we sort of think about post-spin leverage on the holdco? It seems like there could be a sizable amount of debt that remains. Are the credit metrics going to stay intact? What's sort of been the feedback with the agencies? And any sort of guidance on pro forma credit metrics for DTE and UCO that you can kind of guide to today?

Dave? Sure. Yeah, we're committed to maintaining a strong balance sheet at DTE and committed to maintaining our ratings. We do expect that this separation will be credit enhancing for us. And so that's going to allow some flexibility for our metrics while still maintaining our solid investment grade rating. We had initial conversations with the agencies yesterday, and those were positive. We'll be providing them more detail in the coming months. But you were right, Char, the way it will work is that as we spin midstream and they develop their own capital structure at that four times debt to EBITDA, That will require them raising debt, and the proceeds will come to DTE. Our plan at DTE will be to use those proceeds to pay down our parent debt in the same amount.

Okay, perfect. And then just lastly for me is, you know, given today's announcements, Curious, maybe, Jared, to get your thoughts on sort of the remaining non-regulated businesses, really just P&Is. Is there sort of any value to having that segment now that majority of the non-reg is slated for a spin? Just curious on your thoughts here on the remaining mix. Sure.

Sharon, the way we're doing P&I is that it's actually complementary to our ESG agenda as we invest in R&G projects and also invest on behalf of some of our industrial customers to reduce their carbon footprints with cogeneration projects. So we view it as a small part of our business overall. It will be 90% utility, 10% non-utility, but complementary. Terrific. Congrats, guys. Thank you.

Our next question comes from Andrew Wiesel from Scotiabank. Please go ahead.

Hey, good morning, everyone. Congrats.

Morning, Andrew. Thank you.

First question, I want to go about the long-term EPS guidance a little bit differently. So you're continuing the guide to 5 to 7. That's where you pointed in the past that you've consistently delivered better than that, more like 7 or 8%. Now, it seems like a lot of that upside came from midstream. So looking forward, should we think about an actual EPS growth rate of 6% or might there be some good old-fashioned DTE conservatism still in there that could take it more toward the higher end?

Andrew, my sense is that you'll continue to see the DTE pattern of under-promising and over-delivering. So our 5 to 7 is the target, but, you know, of course we target the midstream. But we've always done better than that because we have significant contingencies built for each year. And as I look at 2021, it's looking really strong. And we're also starting to work on 2022, and that's looking really good. So I'm confident that you'll continue to see BT's better than you've seen in the past.

Terrific. That's great to hear. Next, on dividends, you mentioned a lot of comments about peer growth – sorry, peer average growth rates and payout ratios. Can you maybe put some numbers on that? I mean, we've all got our own comp sheets, but what do you consider to be a utility peer average dividend payout ratio or growth rate? Okay, Rude, do you want to take that?

Sure, yeah. We'll remain about where we are with our payout ratio, which is right around in that 60% range, which is kind of consistent with the best pure play peers, and then dividend growth that's going to be consistent with our earnings growth going forward.

Okay, great, helpful. My last question is you've invested a ton of capital into midstream in recent years, including the Hainesville acquisition for over $3 billion about a year ago. My question is, how do you think about regulated utility M&A now? That hasn't really been much of your focus historically, but might you see yourselves as being potentially acquisitive in the regulated world? And if so, what kind of targets might look the most appealing to you?

You know, Andrew, we have a $17 billion utility capital plan right now, which is a very large organic capital program that will create tremendous value for our investors, for our utility investors. And I'll mention again that that's $2 billion higher than our prior five-year plan. So we're going to remain highly focused on our organic growth opportunities. So we really have no thoughts or intentions at this point in time in terms of M&A.

Okay. And can you comment at all about the potential for a sale of the utility business if one were to – if you were to be approached given the pure play look?

We've got a great growth agenda, an organic platform for growth in our utilities, and we're happy to pursue that.

Sounds good. Thank you very much, and congrats again. Thanks, Andrew.

Our next question comes from Julian Jim Nolan-Smith from Bank of America. Please go ahead.

Hey, good morning, team. Thank you for the time. And once again, once more, congratulations. Appreciate the opportunity. Hey, howdy. Perhaps just to follow up a little bit more on the cleanup on the credit side, I think a lot of folks asked me here. Just to be extra clear about this, you said, I think, to quote you, credit-enhancing. Do you know what your new thoughts would be around minimum episode debt targets specifically here? You might have been indirectly asked this earlier, but I just wanted to try to come back on that because you're at 18% now. Should we think about this being closer to some of your peers and call it 15%?

Babe Ruth?

Yeah, we're working through that, and we're in discussions, obviously, with the agency. We do think it is credit enhancing, and so we do think we can have the opportunity to move our FFO debt down to something that's more in line with peers, but that's yet to be defined as we work through the details here.

Got it. And when do you think you'll provide an updated view? And maybe this is a leading question into the 5 to 7 as well. When do you think you'll be in a position to provide an updated view on the credit as well as how you're thinking about that baseline moving off of your current base, right? When do you think you'll roll that forward? Once you close or more on a pro forma sort of 22 basis? And I ask this specifically because you obviously have the P&I segments perhaps holding back that 5-7, at least given the rough step-downs coming up here.

Okay, thank you. You want to take that? Yeah, our plan is to roll things forward sometime in the beginning of 2021 is when we'll give some more detail on how this will all play out. But it will be before, you know, on a pro-forma level before this thing.

Got it. So that wouldn't yet include the step-down in the graph for the baseline, right, when you think about it?

Well, our 2022 projections, when we put those forward, and our 5% to 7% EPS growth rate, Julian, does include the step-down in our EF and the replacement that we've been working on at P&I. So we will, our 5% to 7%, yes.

Sure, absolutely. I only stress it because the earlier question had been fixated on the discrepancy between your utility and your consolidated growth. So that's why I'm fixated on when you could potentially move beyond that big item there. Okay, excellent. Well, thank you all very much. I think I'll leave it there.

Our next question comes from Michael Weinstein from Credit Suisse. Please go ahead.

Hi, guys. Good morning. Good morning, Michael. Could you talk a little bit about why not sell the midstream business to another buyer like Berkshire Hathaway, similar to the way Dominion went about it? Go ahead, please. Yeah, why spend? Yeah, that's the question.

We examined a series of alternatives as we were looking to make this pivot to more of a peer-play utility model. And when we looked at all those alternatives, we found that the spin, in our opinion, created the greatest amount of shareholder value for our investors going forward.

Are there any tax consequences? And also, is a four-times debt-to-EBITDA level, is that low enough to compete with a publicly traded midstream sector that's already kind of under stress?

Well, there are no tax consequences. This is designed to be a tax-free spin, and certainly the debt level at the new midstream company will be very competitive and provide tremendous flexibility to provide a strong dividend, a strong dividend growth, as well as pursue their capital growth programs.

And on that dividend issue, just to follow up on Shor's questions, are – How would equity needs remain unchanged at DTE Energy after you've lost the cash flow from this business? I know you said it's credit enhancing, but I'm just wondering is that enough to not change any equity needs going forward? Babe Rude, do you want to take that?

Yeah, the piece you mentioned there, the credit enhancing, does help support the additional or the lack of additional equity that we'll need. And we still do have the equity converts that come in in 2022, but we see our plan, our equity plan, being very consistent with our previous plan.

And one last question. When do you think you'll file the next electric rate case? I think that's coming up probably early next year.

We are looking at first quarter next year, but we're going to remain flexible on that. We're going to try to obviously delay as much as possible, but that's our base plan right now.

All right, thank you very much.

Our next question comes from Angie Storizynski from Seaport Global. Please go ahead.

Hi. Thank you. I have actually just a couple of questions. First, I remember the previous EI conference, you guys talked about how the affordability issue sort of impedes your ability to grow utility capex. Now you're showing us this very sizable growth on the electric side and this potential increase on the gas side. So what's changed since last year?

Well, Angie, good question. You know, the pandemic revealed some significant opportunities for us from a cost structure perspective at both our utilities. And as I mentioned in earlier calls, you know, we had this $2 billion sitting on the sidelines looking to get in, but we needed to create affordability room. Well, we have, in fact, done that and created affordability room. And the pandemic was very revealing as to what we could do in addition to what we have been doing for many, many years. And so that's how we found the affordability room to bring in that capital into our plant for our two utilities.

Okay. And this additional half a billion of COPEX on the gas side, I understand that this hasn't been approved. So what are we waiting for with that incremental spending?

The $2 billion is something that's in our plan at the electric company. The half a billion at the gas company is sort of in the same position that the $2 billion was in, which is we're looking for affordability initiatives to bring that into the plan. We're trying to display that we've got Very strong inventory of investment opportunity at both utilities.

Great. The 5% to 7% growth that you're reiterating, what's the – I understand this is off of 2020. What's the basis? What's the starting point? So is it like $5.47 from basically stripping out the other GSP earnings from 2020?

David, do you want to take that?

Yes. What we're showing there now is the 7% for next year is based as if we didn't spend, but 5% to 7% will be based on us having GSP removed from the baseline.

Okay. And there's not going to be any type of reallocation of parent level expenses or something like that that would weigh on that 2020 number?

We will have to work through the parent-level expenses and how we manage those internally, but they're not expected to be materialized away on that.

Okay, and my last question about the midstream spin-off. So we have this debate among investors about what is the multiple that the several businesses will be trading at, and we see this big disparity between pipeline multiples versus gathering multiples. Can you give us a sense from that EBITDA perspective, what percentage of the 2020 EBITDA is associated with gathering assets, which seem to trade at meaningfully lower EBITDA multiples?

David Slater, you want to take that?

Sure can, Jerry. Angie, good to talk to you. And yeah, that's a good question. And What we've disclosed previously is we have about 10% in our storage business, about 40% gathering, and 50% in the pipeline segment. And those percentages are income percentages. So that's a good proxy for your question.

Okay. Well, so with that in mind, just like a simple map would indicate that a business would have a relatively low market cap, right, coming around, what, three, three and a half billion dollars with seemingly strong technical pressure because you have utility investors that based on how your stock has performed are not particular fans of the stream. So why are you so convinced that this is going to actually create value given the relatively potential small market cap and technical pressures that it's going to face?

Well, we think that, first of all, the spin creates, you know, a premier regulated utility, 90-10 sort of structure inside our utilities that investors will have the opportunity to invest in with a strong capital growth program for five plus years. Our midstream company is going to be well capitalized when we compare it to its peers and have strong dividend growth. And we think it's going to be a very attractive investment for the stream investors. and also current investors, NBPE.

Jerry, if I could add to that maybe?

Sure.

Yeah, Angie, I think it's going to be a very unique investment opportunity in the midstream space with predominantly natural gas, and its portfolio is really laying over the best dry gas basins in the country. And fundamentally, there's a lot of fundamental support and growth in those areas. So I think this investment opportunity for those investors that are looking for a really high-quality midstream investment, I think it will be very attractive.

Great. Thank you.

Our next question comes from Steve Flashman from Wolf Research. Please go ahead.

Hey, congrats. Just, I don't know if you, hey, Jerry. So I'm not sure you're positioned to answer this, but as this call was going on, Elliot came out and said something about kind of being happy with this. So could you just comment on any involvement they might have had with this or how to characterize that?

So I'll start by saying, Steve, that, you know, we started to talk about this pivot in the summer of 2019. And, you know, we started looking at a pivot towards a pure play utility model. And, you know, it was a series of discussions between management and the board that really, you know, culminated just in the last few days. We talked to lots of investors and lots of potential investors and analysts and get feedback. But I'm not going to comment specifically on we talk to you and don't talk to you.

Okay. And then just to kind of get a sense of the kind of thought on the new company financial. So obviously the cash flow from the gas business will be separated, but you should have more. It's 18% FFO to debt target that you've had. for a largely pure regulated utility i would assume that you'll be able to fund it with somewhat meaningfully lower ffo to debt and what is a if you look at the peers for a largely regulated utility at your credit like what what would that range be versus the you know the 18 plus that you've been at hey bro do you want to take that Yeah, when we look at our peers, we see them down in the 14% to 16% actually in that range. We are still committed to maintaining our ratings, and so we're going to be really careful with that. But we do expect that this will be credit enhancing for us. Okay. And then lastly, just on the midstream business, so you had kind of growth targets out there. uh, together for the midstream business. I think it was like nine and a half percent net income growth, uh, type of thing. Could you just comment on how that business is tracking versus the prior growth target? And was it, is it on track with what you'd said before for midstream through 20? I think this was through 22 or 24.

So, Steve, I'll start and then I'll turn it over to David Slater. But I would say that nothing's changed fundamentally from a growth perspective in our mainstream business. All of the organic opportunities that we were pursuing continue to play out. But, David Slater, why don't you add some more color to that?

Sure thing, Jerry. And, Steve, that's a great question. And I'd just reiterate that absolutely nothing's changed in this business between yesterday and today. We've got a great team, a great management team that's going to be leading the new company, an excellent operating team that's coming along. As we progress through this standing up of a new C-Corp, we'll be putting out details for guidance, kind of best-in-class guidance, as expected in the midstream sector. and certainly be able to answer the question you're asking in a lot more granularity and detail as we move forward in the process here. But suffice it to say, absolutely nothing's changed in the business. If anything, the fundamentals in the basins I described earlier are just strengthening right now. So we feel really positive about this new company, and we're It's going to provide an investment vehicle for some of the midstream investors that really doesn't exist in the sector today. There's not another company, a C-Corp, in the midstream space that's positioned like this company will be positioned around those particular basins in the country. You know, it really attaches to some really strong market centers. Great.

Thank you.

Our next question comes from Dirkash Chopra from Intercore ISI. Please go ahead.

Hey, Tim. Good morning. Good morning. Good morning. Just a real quick follow-up on the tax implications of the spin. Just can you remind us when are you expected to be a taxpayer? I believe it's mid-2020s. And if the spin impacts that at all.

David Reed? Yeah, you're right. Currently it is mid-2020s, 2024, and this will be a tax-free spin. We don't expect it to influence that, but we'll get back to you for sure on that.

Okay, perfect. And then maybe just one quick one on 2021 guidance. What are you assuming in terms of, if anything, on COVID impacts? And then obviously strong execution in the O&M front this year. Should we expect Uh, that to sort of continue into, into 2021 as well.

I would say, uh, 2021 is positioned extremely well. Uh, we've, uh, as you know, we plan very conservatively for our forward years. Uh, so we've, uh, model have significant contingency, uh, to accommodate any sort of, um, changes in load patterns, uh, or potentially, uh, incremental expenses. So I, uh, I feel really good about our position in 2021.

Okay, perfect. Thanks, guys.

Our next question comes from Steven Berg from Morgan Stanley. Please go ahead.

Hey, good morning and congratulations.

Morning. Thank you.

I wanted to talk about the midstream business. Would you be able to give us a sense of the maintenance capex? And I'm thinking not just about physical maintenance, but the capex needed to keep the cash flows going. flat, especially for the gathering business. How do you think about just the sort of base capital need to keep the business running flat on EBITDA?

Well, I'll start just by saying it's a relatively new system, so those maintenance capex dollars will be modest at best. But, David Slater, you want to add some color to that?

Sure, Gary. You're exactly right, and, Steve, that's a great question. And we're definitely going to be providing more color around that as we approach spin date. But the systems are all generally new, so very modest maintenance capital required for the foreseeable future. And that will be a very small number, especially as you compare this midstream company with some of the other midstream companies that have more mature, larger networks that they're having to maintain.

Understood. Yeah, as you all think through that, I'd love to get a sense, not just the physical, which I assume is low, but the economic maintenance for gathering, just given the nature of the business. But I guess moving on to just thinking about the gathering business and credit quality, could you give us a little more information on the credit quality for that particular segment in terms of sort of range of customer ratings, any customer notices to modify or terminate agreements and just sort of other credit protections you have. That's a pretty common question that comes up on the gathering side, especially just curious how you think about the credit quality there.

David? Sure. Yeah, that's another excellent question, Steve. So as we've disclosed in the past, and we provide a lot of detail on this when we did the Hainesville transaction last year, you know, in most of our agreements, we put credit enhancement clauses in there to really protect, you know, not only the receivables but the forward obligations that those customers have. So that would be sort of my first statement, and that's sort of hard-coded into our DNA to always do that. So it has the effect of enhancing the credit profile of the counterparty. But as I kind of step back, and I know we've shared this in the past, but some of our bigger Customers on the gathering side of our business would be names like Southwestern, Cabot, obviously Indigo, Antero. So those are some of the names that are in our portfolio. And, again, we look very closely at their credit and monitor that with a lot of detail. have a lot of information that they share with us, you know, quarter by quarter. So we're monitoring that closely. And all of those customers are in good positions. They have no significant maturities before them. And their cash flows are strengthening in the current environment with the fundamental strengthening in dry natural gas. It's benefiting all these companies. And so we actually see their credit profile strengthening significantly. it's easy to see when you look at their long-term debt and how it's trading. You can clearly see a strengthening credit profile across our gathering customers.

That's really helpful. And just last one for me, just for the midstream business overall, are there any additional cash flow metrics beyond the EBITDA that you laid out, whether you think about distributed cash flow, free cash flow, some definition of cash flow, or is that something that you all are going to provide at a later date?

Yeah, you're exactly right, Stephen. Those are, you know, what I would call best-in-class midstream metrics. And with the opportunity of staying this company up new, we're going to make it best-in-class. So we're going to work through those details and look forward to spending time with you, you know, down the road when we get closer to spin date and share all that.

Understood. That's all I had. Thank you so much.

Our next question comes from James Fallicker from BMO Capital Markets. Please go ahead.

Thank you very much and good morning. Good morning. Most of my questions have obviously been answered, but just two real quick questions. I guess the first is, as you were looking at becoming a pure play, did you explore potentially divesting or winding down both the P&I and or the energy marketing business and What was the determination to retain those businesses?

So, James, I'll start by saying that when we looked at all our alternatives to unlock shareholder value and create incremental value for our shareholders, the biggest mover that we saw was to really create the spin for GSB. We saw P&I as complementary to our ESG agenda with our remaining utility platform, which will be 90% of our business. And so we've decided to pursue this path at this point in time.

Okay, great. And just, I guess, could you also just remind us also, you know, the, what was the outlook, I guess, for equity on a going forward basis? You know, the question's been asked a bunch of times, but You know, I know that you're targeting 18%, but with a pure play utility, you probably should be down sort of in the mid-teens. And then on top of it, you have the conversion, I think, in 22 of the convertible that was done to finance the midstream business. Seems like you have a lot more flexibility either not to issue equity or maybe to use incremental debt. So could you provide some guidance, I guess, how you're thinking about how much equity was in your plan now for the five-year period?

David, do you want to take that?

Sure. Yeah. And in the deck, in the appendix on slide 28, it showed our previous planned equity issuances. And you can see in next year, there was $100 million to $400 million. And then in 22 was the $1.3 billion of convertible equity units that come into the plan. So that is and was consistent with what we're seeing going forward.

But as you move, I guess, beyond 2022, you know, should we expect any material equity or is this going to be something that's just going to be more sort of, you know, 100, 150 million soil and drip ETOB type of issuances?

Like in our plan going forward, there are no. no major and no equity issuances that we see in those years.

Okay, great. Thank you very much.

Our next question comes from Jeremy from J.P. Morgan. Please go ahead.

Hi, Morgan. Let's start off and talk about 1.5% earnings growth through 2024. Just trying to see Is there any reason to think that EBITDA growth is that different than that different trajectory you see on the earnings growth to remind us as far as how much of this growth is contractually underpinned with MECs? Just trying to get a feeling for that. Thanks.

David, do you want to take that?

Sure, Ken. Jeremy, I had a little hard time hearing the beginning of your question. I'm just going to repeat it. I think you were asking about EBITDA growth versus earnings growth. And and how much of that is kind of in hand. So that's the question I'm going to answer, and you can change it if I got it wrong. So first off, just to reiterate, nothing's changed in the business from what we previously disclosed. So business is strong. It's performed incredibly well this year, been incredibly resilient to a difficult year in the sector and a difficult year with respect to the pandemic So that gives me lots of confidence of the durability of the business. In terms of the growth and would EBITDA growth be moving in tandem with income growth, I think that's generally a true statement. And, again, I think as I answered earlier, we'll be providing a lot more granular details, sort of best-in-class guidance as we progress and get closer to spend date. So I trust that answered the question.

Yeah, that's helpful. And just wanted to see, it sounds like contracts really underpin that quote. And with over 90% demand contracts, it seems like that's pretty unique in the midstream universe. It's just one confirmation that moves up in line with earnings there, and it sounds like it does. That's really helpful to hear. And then just putting maybe towards the midstream entity itself, I don't know what you can say looking forward as far as the strategic outlook. Is there anything that you can comment on that? Good organic growth, that's kind of unique in this space right now. I don't know anyone else talking about growth. and then four times leverage is surely near the low end of peers out there, so it seems like you have some really strong flexibility there that maybe you could do. So I just wanted to get a sense of these things. Are you guys going to stick to your base into what you're doing there, or is anything going to change strategically?

Yeah, that's a great question. So, yeah, you know, first off, the – the assets are great assets and they're positioned across, you know, when you look at the resources in the country right now, these are the resources that, you know, all the analysts expect are going to get attention in the next year or two. And, you know, the company's positioned from an investor perspective to provide an investment vehicle for people that want to have exposure to the midstream around, you know, the best natural gas basins in the country. and attached to literally the best market centers in the country. So I think you alluded to it. It's a very unique investment vehicle that we believe is going to be distinctive in the sector. And we're setting it up to have a very healthy balance sheet with a healthy dividend and a lot of flexibility going forward to continue what I'll call the strategic intent that we've had which is continue to make highly accreted value-generating investments on and around that portfolio of assets where we have competitive advantage and asymmetrical information. I don't think there's no significant strategic shift that's expected here in the near term. But, again, as we approach spend date, I'm looking forward to laying the plan out in more detail and having good conversations with the investor base going forward. So thanks. Thanks, Jeremy, for the question. Thank you.

Our next question comes from Jonathan Arnold from Vertical Research. Please go ahead.

Yeah, good morning, guys. Morning. Just a couple, Jerry, in the question about RAS, you mentioned, you know, the outlook off of the, I guess, adjusted 2020 original base includes the replacement that you've been working on. Are you just referring to the $15 million a year origination pathway that you've talked about, or is that something more significant you're maybe alluding to there?

No, it's essentially the $15 million a year that we've been originating in new income, so you're correct.

Okay. So I just want to make sure there wasn't something else that you're hinting at. And then secondly, there was a comment made about potentially delaying the next rate case in a filing you'd recently made. There was a lot of material. I just wonder if you could clarify what you were saying there and maybe put it in context of your comment about the base case timing, I think of, you know, early 21.

Sure. Great question. So, you know, we've had a really strong year in electric company this year. And some portion of that has been driven by incremental sales due to COVID and the pandemic as it relates to our residential markets. So what we're doing, Jonathan, is essentially deferring a portion of those earnings in 2022 to offset a potential rate increase in 2022. What that does is it gives us the opportunity to reconsider timing of filing the rate case. So that's really what that's about.

Okay. And just any suggestion as to how far would it defer roughly a year? Is that a good assumption?

It's probably too early to say, Jonathan, but we'll continue to update you as we move forward.

Great.

Thank you. We'd like to see a portion of 2021 start to play out before we make that decision.

Okay. Thank you very much.

Our next question comes from David Fishman from Goldman Sachs. Please go ahead.

Good morning. Just a few questions from me. I know the SPIN itself is tax free, but is there any impact on your ongoing cash tax position for the SPIN? Does this pull forward when you might become a cash taxpayer at the regulated Remainco in the five-year plan, or is there not much of a material impact there either?

Hey, Bruce.

Yeah, we'll look more into that and see what the impact is there, and we'll have to get back to you and let you know on that. But you're right, we weren't cash taxpayers until 2024. Okay. We don't think this will have much of a material impact, though.

Okay. Good to know. And then back on the post-Ref P&I, I know you pretty much just mentioned that you're still shooting for, I guess, the $15 million or so a year. But could you guys maybe comment on what you kind of broadly see as the opportunity set there for R&G and cogeneration? And do you expect P&I really to be growing enough to maintain a 90-10 regulated versus unregulated mix longer term, especially given the elevated regulated growth rates?

Well, that's what we see now, David, is P&I being able to grow in the sectors that we described, which is really to R&G and co-gen. And we're still seeing good opportunities there. We have one that's in late stages right now on the R&G front that we're feeling really good about. And so we're continuing to see activity and really nice returns there. But it will be a very small part of our portfolio going forward. But we do see it at that 90-10 mix over the next five years.

Okay. Okay. And then I guess still on the clean energy, on the voluntary renewables, initially you guys had talked about a 1.4 gigawatt target by 2030. Your updated filings look like nearly that amount by 2025. Okay. How have your conversations kind of gone for maybe the second half of 2020, if you even went out that long? Because it seems that clearly over the next five years you've had a big pull forward. Just if you could maybe give us a little bit more color on kind of how the whole decade is kind of shaping out a little bit there.

Well, I have to tell you, this voluntary renewables program that we have has been very exciting. You know, it's a product that we have a hard time keeping on the shelf. You know, we are selling it quite a bit to our residential customers and also our large industrial customers and even smaller industrial customers want this product to really green up their power portfolios, power usage portfolios. So, as you've said, we've been able to pull forward our projections as to when we will hit the 1.4 gigawatts. But, you know, we'll continue to sell into this market and continue to update as we go forward. But we're doing much better than we had ever anticipated in that market.

Got it. And I imagine this is something we'll get a little bit more color on at EI or?

Yeah, we'll provide an update at EEI, but what we can tell you now is that we have 750 megawatts sold, and we're going to build for that. We've got some filings in front of the commission to pursue those builds. And as we learn more and develop more market, we'll continue to update you.

Got it. And then just the last one from me. I know you briefly touched upon this, but the energy trading business – what would you say is kind of the strategic rationale as keeping the energy trading business as a part of the ongoing kind of DTE entity?

David, it's a very small part of our company and certainly not a business that we look to grow. And what we use it for is to really be a market maker. So, for example, with our RNG projects and even in our co-gen facilities, we use it to manage risk, with those investments, either for ourselves or on behalf of our customers. And that's really the primary purpose of that little business.

Got it. Okay. Congratulations, and thanks for taking my call. Questions?

Thank you.

The final question we have time for today comes from Ryan Levine from Citi. Please go ahead.

Good morning. So what is DT's tax basis in the midstream portfolio today, and how long would DT midstream need to remain a public company to avoid triggering a tax event for current DT shareholders?

David? Well, I don't think we haven't released our tax basis or said what our tax basis is in DT midstream yet. What was the second half of that question?

Would you be willing to disclose that? And then also, how long would DT Midstream need to remain a public company to avoid triggering a taxable event for current DT shareholders?

I think we'll have to get back to you on that one at EIT.

Okay. Okay. And then how are you thinking about setting a new DT midstream dividend policy, and how are you defining the dividend coverage ratio in the press release of two times for 21 for this pro forma company? David?

Yeah, that's still to be totally nailed down as we establish the midstream company. But we do plan to establish one that's competitive with peers, and we talked about that being the two times dividend coverage ratio, and that's the distributable cash flow over the dividend is how that will be defined consistent with other midstream companies.

Okay. Thank you.

This concludes the Q&A portion of today's call, and I would like to turn it back to Mr. Jerry Narcia for final comments.

Thank you. Well, thank you, everyone, for joining us today. I'll close by saying we had a very solid quarter and are well positioned for a strong finish to 2020 and a really great start to 2021. I believe the spin of DP Midstream will unlock significant value for our shareholders and drive future growth. I look forward to talking to all of you in a few weeks at EEI. I hope everyone has a great morning and stay healthy and safe.

Ladies and gentlemen, this concludes today's conference call. Thank you once more for participating. You may now disconnect.