DTE Energy Co

NYSE:DTE

Earnings Call Analysis

Strong Q2 Performance and Positive Outlook

In the second quarter of 2024, DTE Energy reported operating earnings of $296 million, translating to $1.43 per share. DTE Electric saw a significant increase of $101 million from the same period last year, while DTE Gas experienced a decrease of $12 million. The company maintains confidence in its full-year guidance and expects robust performance in the second half of the year. DTE is also focusing on substantial investments to improve grid reliability and transition to cleaner energy, with long-term operating EPS growth targeted at 6%-8%, supported by robust cash flows and a strong balance sheet.

Strong Performance in the First Half

DTE Energy had a robust first half of 2024, marked by strong financial results and strategic advancements. The company's commitment to delivering for customers and communities has started to pay off, and this momentum is expected to continue through the rest of the year.

Employee Engagement and Community Support

DTE's efforts were recognized by the Gallup Great Workplace Award for the 12th consecutive year and the Best Employers award for health and well-being. These accolades reflect the dedication of DTE's employees, whose engagement contributes significantly to the company's success. Additionally, DTE's community initiatives, such as distributing fans and water during heatwaves and providing rides to cooling centers, underscore their commitment to customer care and community support.

Operational Highlights

DTE made notable strides in improving storm restoration and maintaining system reliability. The company achieved some of its fastest restorations following storms and managed to keep their system stable during a significant heatwave. Enhanced reliability measures included deploying hundreds of fans, delivering thousands of water bottles, and supporting vulnerable customers.

Financial Performance

In the second quarter, DTE reported operating earnings of $296 million, translating to $1.43 per share. Key segments contributed as follows: DTE Electric increased earnings by $101 million year-over-year, driven by base rate implementation and warmer weather, while DTE Gas saw a decline of $12 million due to weather and higher costs. DTE Vantage's earnings were $14 million, down by $12 million compared to the previous year.

Revenue and EPS Guidance

DTE reaffirmed its full-year earnings guidance for Vantage, anticipating stronger performance in the second half of 2024 due to project uptakes. For the overall operations, DTE maintained a conservative outlook for its Energy Trading segment but expects some upside from stronger contracted margins. The 2024 operating EPS guidance midpoint forecasts a 7% growth over the 2023 midpoint, with a long-term EPS growth target of 6% to 8%.

Capital Investment and Financial Health

DTE is committed to investing heavily in its utilities to improve reliability and transition to cleaner energy. This investment is bolstered by strong cash flows and minimal equity issuances, targeting annual equity issuances of zero to $100 million through 2026. The company aims to maintain its strong investment-grade credit rating, targeting an FFO to debt ratio of 15% to 16%.

Grid Modernization and Reliability

DTE is heavily focused on transitioning to a smarter grid by installing 10,000 smart devices by 2029. These devices will improve reliability by automatically pinpointing and isolating issues, rerouting power, and de-energizing lines during faults. The company is also upgrading infrastructure and implementing an aggressive tree-trimming program to reduce outages caused by overgrown vegetation.

Future Growth and Development

DTE is well-positioned for future growth, supported by ongoing economic developments in its service areas. Recent efforts include a significant battery storage project and advancements in the My Green Power renewable program. These projects are anticipated to enhance reliability and align with state and federal energy mandates.

Regulatory Environment and Rate Cases

DTE presented a constructive rate case for DTE Electric and DTE Gas, highlighting essential investments for grid modernization and cleaner energy transition. The rate cases are progressing towards favorable outcomes, with final orders expected in early 2025. The recent audit supports DTE's extensive investment plans aimed at improving reliability.

Challenges and Strategic Outlook

Despite facing challenges from weather conditions and environmental interests, DTE remains confident in achieving its targets. The company is strategically positioned to handle future demands, emphasizing affordability and holistic customer satisfaction. With a balanced approach to PPAs and self-build projects, DTE continues to ensure cost-effective solutions for its customers.

Earnings Call Transcript 2024-Q2

[Operator]

Good morning. My name is Eric, and I will be your conference operator today. At this time, I would like to welcome everyone to the DTE Energy Second Quarter 2024 Earnings Conference Call. [Operator Instructions]

I would now like to turn the call over to Matt Krupinski, Director of Investor Relations. Please go ahead.

[Unknown Executive]

Thank you, and good morning, everyone. Before we get started, I'd like to remind you to read the safe harbor statement [Audio Gap], 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.

With us this morning are Jerry Norcia, Chairman and CEO; Joi Harris, President and COO; and Dave Ruud, Executive Vice President and CFO. And now I'll turn it over to Jerry to start the call this morning.

[Gerardo Norcia, executive]

Thanks, Matt, and good morning, everyone, and thanks for joining us. I hope everyone is enjoying the summer as staying healthy and safe. This morning, I will discuss how DTE is on track to achieve our targets this year and highlight achievements we have made through the first half of the year, as we continue to deliver for all of our key stakeholders. Joi will provide you with an update on our capital investment agenda and the great work we are doing, hence reliability as we continue to build the grid of the future while continuing to focus on customer affordability. And Dave will provide a financial update and wrap things up before we take your questions. Let me start on Slide 4. We had a very strong first half of 2024. And we are in a great position to deliver on our targets across the company this year. Our success is a result of our commitment to deliver for customers and our communities. And as I've said many times, that starts with the efforts of our highly engaged employees.

As I mentioned earlier this year, the engagement of our team was recognized by receiving the Gallup Great Workplace Award for the 12th year in a row. We were also recognized with the Best Employers award for excellence in health and well-being. This award companies for their commitment to advancing employee well-being through innovative initiatives identifying the importance of health equity and an effective culture of employee engagement. I am proud of our team for receiving these awards and being recognized for our outstanding engagement. This engagement is why I am confident that we continue to work for our customers and our communities. Our team has done great work to support our customers through the fronts we face this year, providing our customers with safe and reliable service is paramount to our company's success, which is why one of our key focus areas in 2024 is improving our storm restoration process. We made great progress on that front as evidence achieving some of our fastest restorations for the storms that we have had this year as we work towards restoring all customers within 48 hours after a storm. We also had a period of extreme heat, where temperatures in our service territory hit 90 degrees for 6 consecutive days last month.

This was one of the longest key ways that we have had DTE in the last 20 years. I'm very proud that our system held up extremely well under these conditions, but I'm even more proud of our team's efforts to take care of our customers in a number of ways in time. We distributed hundreds of fans to nonprofit agencies to keep customers cool and deliver nearly 1,000 bottles of water to 30 community partner agencies across Southeast Michigan. In addition, the VP Foundation partnered with the United Way to provide 500 rides to cooling centers to help keep customers [indiscernible] and to complete nearly 3,000 wallet checks for our most vulnerable customers as the heat intensified. We take pride in supporting the communities where we live and serve, and we are recognized for our service. As DTE was honored to be named to the Civic [ 50 ] for the seventh consecutive year. This award presented by points of light, recognized as the most community-minded companies in the nation. And it is a testament to our team to receive this award. I'd also like to highlight the [indiscernible] of our Energy Efficiency Academy, which is DTE's workforce development program that supports the growing demand for [indiscernible] home repairs in Detroit, while also building a local works at further benefits building on the academy's successful first year, we are expanding with more partners in Detroit, as well as planning an advanced training program in the Grand Rapids area.

This has been a great program to help those interested in working in the energy industry and a majority of the participants have secured full-time employment. Financially, we are in great position to deliver on our earnings targets this year. Our long-term operating EPS rate remained strong at 6% to 8%, with 2023 original guidance as the base for this growth. And we will continue to have a strong balance sheet and credit ratings to support our customer-focused capital investment plan. We remain committed to deliver premium shareholder returns that our investors have come to expect. And importantly, strong financial health, along with the constructive regulatory environment in which we operate, supports the significant investments we are making for our customers. And it allows us to invest more than the cash we generate from our operations to further improve reliability and transition to cleaner generation. Again, the ability to invest above our cash flows is only made possible by constructive regulatory outcomes. Let's turn to Slide 5 to highlight some of the achievements across our portfolio. As I mentioned, we are on track to achieve our full year guidance in 2024, and we are positioning ourselves [Audio Gap] we continue to deliver strong results in 2025 as well as throughout our long term [Audio Gap].

On the regulatory front, we continue to progress to constructive rate case outcomes for both DTE Electric and DTE Gas. Our electric rate case outlines the focused investments we need to make to build a smarter, stronger, more resilient electric grid of the future customers and to further our transition to cleaner generation. This filing underpins the next important step in our long-term investment plan to achieve grid reliability and transform the cleaner generation while maintaining affordability for our customers. We expect intervention [indiscernible] in the electric case tomorrow, and we look forward to working together with all the parties of the scheduled final order in January. At DTE Gas, our rate case filing supports the important investments necessary to continue to renew our gas infrastructure, which will further minimize leaks and reduce costs. We are in discussions with intervening parties prior to a file order scheduled in November. We continue to make significant strides in our reliability efforts this year [indiscernible] and we are seeing the benefits of this work. Joi will provide some detail on our progress in this area, but I'll just mention the efforts we are making in automating our electric system. We installed a couple of hundred automated reclosers last year, and we are ramping up the effort this year.

We'll move from the hundreds to the thousands in a very short time as we work to automate [indiscernible] the impact of the closures in the perspective, the operation of the devices already installed have saved over 250,000 customer minutes of outages this year alone. This demonstrates the significant impact these can make in improving reliability for our customers. To support our advancements in cleaner generation, last month, we broke ground on the battery energy storage system that we highlighted on the first quarter call. This project is a 200-megawatt system at the site of the former Trenton Channel power plant. It is good to be operational in 2026 and will be the largest stand-alone battery energy storage project in the Great Lakes region. The project supports our integrated resource plan and Michigan's new statewide energy storage target, both of which align with DTE's net zero carbon reduction goals. We continue to see strong growth in our voluntary renewables program at DTE Electric. Our My Green Power program curly has nearly 2,500 megawatts subscribed and nearly 100,000 residential customer subscriptions. And at DTE Gas, we are progressing on our gas main renewal program as we continue to modernize the gas transmission system. At DTE Vantage, we continue to advance custom energy solutions, R&G and carbon capture and sequestration projects.

We highlighted the Ford Motor Company Custom Energy Solutions project earlier this year to support Ford's new plant in Tennessee. The project is underpinned by a long-term fixed fee contract and is scheduled to go into operation later this year. We also began construction on an RNG project that is expected to go into service in the second half of the year. Let's move to Slide 6 to highlight how DTE is well positioned for growth. Southeastern and [indiscernible] continues to be a great region for economic development attracting many large companies that contribute to the progress of our state and its residents. General Motors, Henry Ford Health and University of Michigan are among the large companies putting major investments into our service territory, providing significant economic development, including provided thousands of jobs. We continue to collaborate with partners throughout the state to target key business segments to drive further economic growth, particularly in the areas of battery manufacturing, hydrogen and data centers. As you all know, data center development and the impact of the potential [indiscernible] centers has been an important focus over the last year. DTE is very well positioned to serve data centers. We are in discussions with a number of potential customers on development opportunities and ensuring that these projects are good for all of our customers.

[indiscernible] sales and use tax exemption legislation in Michigan would lower the cost of operating data centers, and the governor has indicated a great willingness to sign these bills as they come to our desk, which we expect in the fall or subsequent periods. So to wrap up my comments, I'll just say I continue to be very excited about it in 2024 and how we are well positioned to continue to deliver now and into the future for our customers, our communities and our investors. Now I'll turn it over to Joi to give some highlights on our investment agenda and reliability improvements. Joi, over to you.

[Joi Harris, executive]

Thanks, Jerry, and good morning, everyone. I'm happy to be here with all of you today and excited for the opportunities that we have in front of us as we continue to make significant investments in our systems, investments that are really making a difference for our customers in improving reliability and continuing our transition to cleaner generation. I'll start on Slide 7 to review our long-term capital plan.

Then I'll provide you with some examples of how our commitment to strengthen our grid is really having an impact on our customers' experience. Over the next 5 years, we are on track to make significant [indiscernible] capital investments across our businesses with about [ $95 million ] of our $25 billion investment slated for our utilities. We are focused on modernizing our grid to ensure we can continue to provide safe, reliable and affordable energy. We are also making significant investments to transform the way we produce power as we shift towards renewables and natural gas and away from coal generation. An important part of our clean energy transition is our voluntary renewable program, My Green Power, continues to be the largest green program in the country. Additionally, at our gas utility, we continue our important main renewal work, which strengthens and improves our natural gas infrastructure and further reduces greenhouse gas emissions. DTE makes all of these investments with a sharp focus on customer affordability, using our distinctive continous culture to drive cost management and savings for our customers. The shift from coal to cleaner energy sources also helps to reduce O&M costs and our diverse energy mix helps to reduce fuel costs as well, and allows us to maintain flexibility to future technology advancements.

And finally, our transition to renewable energy is supported by IRA, helping us to continue to achieve customer affordability goals and further enhance opportunities for growth at DTE Vantage. Let's move to Slide 8, our reliability improvement work and how it's making an impact in improving the customer experience. We are making a lot of progress on building the grid of the future. We are progressing in 4 major areas as we work on improving reliability for our customers. First, we are quickly transitioning to a smarter grid. As Jerry mentioned, we are adding significantly more technology to our system by installing 10,000 smart devices, effectively automating our entire system by 2029. These devices or automated reclosers allowed us to pinpoint and isolate issues during an outage. And reroute power so we can restore many of our customers within minutes while crews make repairs. And perhaps most important, these devices will automatically deenergize the line when it senses a fault such as a wire on the ground, helping to keep our customers safe. Secondly, we are aggressively updating our exiting infrastructure. We are replacing and upgrading poles, cross-arms, transformers and other pull-top and substation equipment.

We are making great progress in this area. Last year alone, we [indiscernible] aided our pole top equipment across more than 1,700 miles. Our hardening program Detroit is a great example of this work. On average, customers experienced an 80% improvement in reliability in the first year [indiscernible]. The third focus is to rebuild significant portions of our grid. While updating equipment is certainly important, we are also completely rebuilding the oldest portions of our grid. I'll give you a few examples of where this work is happening, significant impact it's having. We are investing over $100 million in 2 projects on Detroit seaside. These projects involve constructing 2 substations and replacing approximately 300 miles of overhead infrastructure with new and more durable equipment. We also have an [indiscernible] in Detroit that can move forward. These pilots are critical as we gain on ways to improve our processes and bring down the cost of undergrounding. In this pilot, we're doing both gas upgrades and electric undergrounding at the same time to achieve meaningful cost savings and reduce inconvenience for our customers. We also have a number of projects outside of Detroit across our service territory. This work on rebuilding these areas is having a significant impact. Customers [indiscernible] a 90% increase in reliability where we've executed on this rebuilding work.

And finally, we remain heavily focused on our true terming efforts as this remains one of the most effective methods to improve reliability. Trees account for half of the time our customers are without power and in areas where tree trimming is up to date, some of them experienced significant improvements in reliability. We have trimmed nearly 40,000 miles of trees since 2015, and we expect to have our entire system on a 5-year tree trim cycle by the end of next year. So as you can see, we are doing intense focus to improve our service to our customers, and our distributed plan lays out our journey to building the grid of the future through our necessary customer [indiscernible] investments. With that, I'll turn it over to Dave, to give you our finance data.

[David Ruud, executive]

Thanks, Jui, and good morning, everyone. Let me start on Slide 9 to review our second quarter financial results. Operating earnings for the quarter were $296 million. This translates into $1.43 per share. You can find a detailed breakdown of EPS by segment, including a reconciliation to GAAP reported earnings in the appendix. I will start the review at the top of the page with our utilities. DTE Electric earnings were $279 million for the quarter. This is $101 million higher than the second quarter of '23. The main drivers of the earnings variance were implementation of base rates and warmer actually offset by higher rate base costs.

Moving on to DTE Gas. Operating earnings were $12 million lower than the second quarter of 2023, driven by warmer weather and higher rate base costs, partially offset by increased revenue from the IRM. Let's move to DTE Vantage on the third row. Operating earnings were $14 million for [indiscernible] of 2024. This is a $12 million decrease from 2023 due to a combination of timing and onetime items primarily in our custom energy solutions and steel-related businesses. We continue to be highly confident in our full year guidance for Vantage. Compared to the first half of 2024, earnings in the second half will be notably higher. This is driven by the shape of earnings for projects at our custom energy solutions and R&D portfolios and some new projects that come online in the second half of the year. On the next row, you can see Energy Trading finished the quarter with earnings of $31 million. This is a $5 million decrease from last year, primarily due to lower performance of the physical gas portfolio. We are continuing to experience really strong results through the first half of the year as we realized strong contracted margins in our physical power portfolio and stronger performance in our gas portfolio.

With these stronger contracted margins, we should experience some upside at Energy Trading for the year. However, for now, we are maintaining our conservative guidance for this business. Finally, Corporate and Other was favorable by $18 million quarter-over-quarter due to the timing of taxes, which will reverse through the balance of the year, bringing us within the current full year guidance range for our Corporate and Other segment. Overall, DTE earned $1.43 per share in the second quarter. As Jerry said, we had a great first half of the year, and we are well positioned to achieve our targets in 2024. Additionally, we are continuing to work to position ourselves to deliver strong results in 2025 and through our long-term plan. Let's move to Slide 10 to highlight our strong balance sheet and credit profile. As Joi discussed, we need to continue to invest heavily into our utilities to improve reliability and move toward cleaner generation. This customer-focused investment is supported by our robust cash from operations, which is shown on our cash and capital guidance slide in the appendix. Due to these strong cash flows, we still have minimal equity issuances in our plan as we are targeting annual issuances of zero to $100 million through 2026.

Our long-term financial plan incorporates debt refinancing and new issuances to fund our capital investment plan and is consistent with our 6% to 8% long-term operating EPS growth target. We've eliminated the interest rate risk of our 2024 debt issuances at all-in rates that are better than what we had in our plan. And we continue to manage future issuances beyond 2024 through an active hedging program and other opportunities that mitigate interest rate variability. So for example, we have eliminated interest rate risk on nearly half of the debt refinancing needs at the parent company in 2025. We continue to focus on maintaining our strong investment-grade credit rating and solid balance sheet metrics as we target an FFO to debt ratio of 15% to 16%. Let me wrap up on Slide 11, and then we'll open the line for questions. Our team continues our commitment to deliver for all of our stakeholders. Our robust capital plan supports our customers as we execute on the critical investments we need to make to improve reliability and transition to cleaner generation while focusing on customer affordability. DTE is well positioned to serve increased load as opportunities for development continue in our service territory. The 2024 operating EPS guidance midpoint provides 7% growth over the 2023 original guidance midpoint.

And we continue to target long-term operating EPS growth of 6% to 8%. We are well positioned to deliver the premium total shareholder returns that our investors have come to expect, with a strong balance sheet that supports our future capital investment plan. With that, I thank you for joining us today, and we can open the line for questions.

[Operator]

[Operator Instructions] Your first question comes from the line of Jeremy Tonet with JPMorgan.

[Jeremy Tonet, analyst]

I just want to pick up, I guess, on prior conversations with regards to any updates you might be able to share with conversations with hyperscale or negotiations and how you see, I guess, the time line of these negotiations developing given the background of the Michigan sales and use tax legislation and I guess, lack of clarity on coming to fruition at this point.

[Gerardo Norcia, executive]

Jeremy, I would say the conversations and engagement with the hyperscalers continue. And I would say that there's still very strong interest by multiple parties. And they are awaiting the results of the legislative effort. We -- we're targeting -- there was a target for the legislature to get that done in the spring, but I think the budget deliberations kind of overtook that process, but there's still very strong bipartisan support, both in the House and the Senate and the governor still is indicating strong willingness to sign it if it comes to a desk, which we expect to happen sometime this fall and -- or the balance of this year. So I think as soon as that happens, I think we'll start to get a little more serious traction on landing some data centers.

[Jeremy Tonet, analyst]

Got it. That's very helpful there. And then just turning to the quarter and some of the results there. I was curious in the corporate and other, the timing of taxes that you might be able to, I guess, quantify a bit more of the impact there? And should we expect that to kind of reverse in future quarters?

[David Ruud, executive]

Jeremy, this is Dave. Yes, that -- the timing of taxes will reverse as we go. This is really an effective tax rate adjustment. So it adjusts the consolidated year-to-date income tax expense for what we think will be the annual tax rate at the end of the year, and it does come to zero at the end. So we did see some favorability from that of about $0.10 in the quarter. that will adjust again as we go through the year.

[Jeremy Tonet, analyst]

Got it. That's very helpful. Just 1 last quick 1 for me. If you might be able to share any color for the second quarter earnings, how much came from tax equity advantage and how we should think about that, I guess, trajectory here?

[David Ruud, executive]

Yes, there was -- there really wasn't anything that was tax-related ITC or PTC advantage in the second quarter. We -- I will say we're -- you can see that we have a lot back-loaded advantage through the year. We're really confident in our full year guidance there. A lot of it is project related that comes through the second half and a little bit will be tax as well in the second half as we go through the year. But we're really confident in our guidance of $125 million to $135 millionthere.

[Jeremy Tonet, analyst]

Got it. That's really helpful. And just actually 1 last 1 for good. Energy Trading, is there any other incremental color you can provide with regards to the type of activities happening there on the outside and how kind of model or think about how that will ebb and flow over time.

[David Ruud, executive]

Yes. You saw in the quarter and for the year so far, we're off to a really strong start there. And that's driven by really 2 areas. One is our Power FRS portfolio. So these are contracted and hedged positions that we do. And there is a shape to those through the year, and we expect that, that shape will it should increase through the end of the year. And then our gas portfolio, we have some structured contracts there as well, and we're able to take advantage of some of those that are contracted and hedged also. So -- we had a good first half. We're really about on our guidance for the year right now. But we want to go through the summer, see how that plays out with the weather and see how it works for the rest of the year. But as you saw, we did have a very good first half of the year in Energy Trading.

[Gerardo Norcia, executive]

And these are multiyear contracts, so we expect some of that -- some of those high-margin -- high margins at our contract and continue to provide benefit sometime into the future beyond this year as well.

[Operator]

Your next question comes from the line of Shahriar Pourreza with Guggenheim Partners.

[Shahriar Pourreza, analyst]

Just real quick on the rate case filing. Obviously, it's in early innings, testimonies tomorrow. The provisions and kind of the mechanisms remain unchanged. Do you feel, I guess there will be an opportunity for a settlement after testimony. What are the parties once again, kind of want to litigate a path? I guess how are you overall thinking about a settlement at this juncture, whether it's partial or nonunanimous to help take issues off the table.

[Joi Harris, executive]

Yes. So we are anticipating testimony tomorrow. If we can get to a contested settlement, our chances of settlement increase. But if not, there are a lot of interveners in this case, obviously, we'd like to settle. But if we don't settle, we feel pretty confident in our ability to receive a constructive outcome regardless. So it's a pretty straightforward case. It's all about the capital we need to invest to improve the reliability for our customers. And we hope that the commission is seeing that in our testimony and it's pretty strong testimony in that regard.

[Shahriar Pourreza, analyst]

Got it. Any of the rate design proposals in the case, cause any kind of contention as we're thinking about that settlement half?

[Joi Harris, executive]

Not really. Most of the intervenors are picking up on at least we've seen in the past. There's some interest in just our path forward on our retirement of our plant and then also some another environmental pieces. But generally speaking, there isn't much rate design that is contested in the case.

[Shahriar Pourreza, analyst]

Got it. Okay. Great. And then maybe just a question on Vantage. I mean, obviously, the business mix has changed over the years. Do you kind of anticipate growing the existing platform for services in RNG? Would you lean on one or the other? And as the opportunity sort of for carbon capture, potentially load services for industrial data centers increases, I guess how do you find Vantage repositioning? Is there even a need to look for some optimization there?

[Gerardo Norcia, executive]

They are the 2 most significant opportunities that we continue to pursue our greenfield RNG, and we've got a good backlog of those projects. And then secondly, our custom energy solutions, which is sort of behind the fence, industrial installation, where we're providing cogen services, water services, compressed air services. Those are nice long-term contracts, fixed fee without commodity risk. Those are the 2 primary areas of focus. CCS still is an emerging opportunity for us. We've got a number of parties that have committed to working with us contractually to test the feasibility of carbon capture and storage, and we're in the middle of a handful of those opportunities right now. So more to come on that before it becomes a business line that starts to create value. But we feel good about it, but we're also very focused on the first 2 business lines that I mentioned.

[Shahriar Pourreza, analyst]

Okay. Got it. And sorry, Jerry, just the optimization? Is there any need to do some portfolio optimization there?

[Gerardo Norcia, executive]

If we see 2 things. One is the business growing beyond our 10%. We're very committed to the 90-10 mix between utility and non-utility. That would be 1 potential trigger. And secondly, after were significant equity needs at DTE, that would be a second trigger to perhaps look at asset optimization and rotation. Right now, we don't -- in our current forecast, we don't see that need. But -- so it doesn't really create incremental value for us to rotate assets.

[Operator]

The next question comes from the line of Durgesh Chopra with Evercore ISI.

[Durgesh Chopra, analyst]

I just want to start off on '24, expectations for '24. Maybe just can you remind us -- where do you sit year-to-date in terms of weather impacts. I think it was $0.28 to the negative in 1Q. And here, it's slightly positive. So maybe just -- is it the $0.20 -- $0.27 net number that we see in the first half and you have mitigation underway. Maybe just reconcile that for us?

[David Ruud, executive]

Yes. We show the weather impact slide. It's in the deck on Page 14. You can see at year-to-date electric, we're still negative [ $0.04 ] and at gas negative $0.23. But as you know, we build in some contingency for weather throughout the year. And so we're really confident that we're going to be able to meet what we need to do for the second half of the year. And hopefully see some good weather, which will allow us to invest some more for our customers in '24, pull forward some of the investment we need to do for our customers from later years into '24 and help out even more.

[Durgesh Chopra, analyst]

Got it. That's helpful. So basically, a slight offset to 1Q weather and still on track for 2024 with your sort of contingency measures in place. Okay. Jerry, thanks for sharing all the details on the operational things you're doing, vegetation management, et cetera. Just wondering how is the Liberty Consulting review going. And as you made these operational changes, how is that getting factored into the review study and what to expect there as we await a report in fall here?

[Joi Harris, executive]

Yes. Thanks, Durgesh. I'd say that the -- the audit is wrapping up. The auditors have completed their interviews and they've done field visits. We've gotten positive feedback on our interaction with them. It's been a very collaborative process up to now. And we anticipate that will continue as we get the report in September. The initial feedback is very much in line with the agenda that we set forward in our plans. We may see some shifts in programming slightly. But generally speaking, we've seen nothing to indicate that we'll be -- there will be any surprises in September.

[Operator]

Next question comes from the line of David Arcaro with Morgan Stanley.

[David Arcaro, analyst]

Let's see -- I guess wondering if you could give an update on how you're seeing the performance-based rates potentially shape up from here, any progress in the direction of that new structure?

[Gerardo Norcia, executive]

Sure. So there's been a lot of interaction and collaboration with the staff on this PBR process. And I would say we're landing on metrics that we feel are really valuable to our customers. So I think we've got strong alignment on the metrics. And I think the process we're in now David is to make sure that we've got strong consensus on the initial targets and also on making sure that there's symmetry in the targets. So those are the 2 remaining things that we're working with the staff and the commission staff on. So we feel like it's progressing well. The fact that it's lining up quite nicely with things that we think are very important to move for our customers.

[David Arcaro, analyst]

Got it. That's helpful. And then maybe on the data center side, wondering if you could just provide any color or context in terms of how much demand that you're seeing in terms of the data center pipeline, any quantification that you might be able to offer? And do you think there are characteristics of your service territory of Michigan that could attract those customers even without the legislation.

[Gerardo Norcia, executive]

Yes. I would say that 2 things, several things that make Michigan attractive. One is natural disasters are not part of the Michigan repertoire. So I think that makes it attractive. The access to water, fresh water, cool water and also our climate being cooler are all attractive. And of course, our energy rates and the fact that we've got capacity available that we could offer immediately, I think, makes us attractive. So those are the attractive features. I think what will make us even more attractive is the sales and use tax exemption.

But there are some aggregators that already have a sales use tax exemption that got passed in 2015. So I think we're seeing some -- we will see some action from that regardless of the sales and use tax that's really targeting the hyperscalers, if you will. So more to come on this. You're asked about how much demand are we seeing? Obviously, there are a lot of big numbers floating around in the industry. We're seeing demand numbers in the thousands of megawatts. So that seems encouraging, and we want to work the landing the very first one. Hopefully, that will -- I believe that the sales and use tax exemption is kind of holding some of that momentum back. But once that gets passed, I think that will break loose a bit.

[Operator]

The next question comes from the line of Michael Sullivan with Wolfe Research.

[Michael Sullivan, analyst]

Just picking up on some of these earlier questions. So it sounds like the trading business is tracking better than expected, but maybe just being conservative for now. But -- is there any offset year-to-date at the other segments? Like is that weather at the utilities? Or has that been offset and it's really kind of net-net the entire range is biased higher because of trading? Or is there an offset somewhere?

[David Ruud, executive]

I'd say we're in a good place across our businesses right now. We did see some challenging weather and gas. We had really cool winter so far -- or very warm winter so far gas. So we saw some challenge there, but we're working through that. But overall, we feel good about all of our businesses right now. And we feel good about the opportunity that's going to give us to invest for our customers here in 2024 as we can pull forward some expenses and do some additional maintenance on our projects or in our lines for our customers.

[Gerardo Norcia, executive]

Yes, Michael, just to add to that, I would say that we're feeling we're going to have a really strong year, and we deferred a lot of noncritical maintenance last year that we'd like to pull back into the plan for the benefit of our customers. And also for the benefit of creating success in 2025. So I would say, in this moment, we're back to our traditional planning process, where we feel really good about 2024. And we're looking at what opportunities do we have to eliminate some of the sort of noncritical maintenance backlog that eventually becomes critical if you don't get it done. So we're looking to pull that forward, which will not only benefit this year but -- and benefit our customers, but it will also benefit our planning for 2025, which we are deep into at this point in time.

[Michael Sullivan, analyst]

That makes a lot of sense. I appreciate the color. I think also in the quarter, this was adjusted out of earnings, but the gain on sale equity investment at Vantage. Can you give any more color on what that was?

[David Ruud, executive]

Yes, there was a sale of one of our landfill gas projects, and we got a gain on that sale as we were exiting one of those projects.

[Gerardo Norcia, executive]

Yes, we saw value in exiting. It was a partnership that we were exiting, and we saw a good value there. So we took advantage of it.

[Michael Sullivan, analyst]

Great. Just last one for me is just how you're thinking about the election and what that means for your future planning, mainly with respect to resource planning and maybe some of the tax credits that you're realizing, if anything, could change on the margin there in a trunk Republic and sweet area.

[Gerardo Norcia, executive]

Sure. So great question. You all are aware that last year, we had some mandates as it relates to clean energy standards and also an RPS standard that was passed by the state. Any type of federal change in politics, I don't think will affect that. We will be mandated and required to achieve the RPS standard as well as the clean energy standard, which drives a significant amount of investment for us. The other fact also is that will require an act of Congress to change the IRA and it would have to be a very significant majority in order to overcome the fact that a lot of these investments are going into -- in our service territory, Republican-dominated territories, there'll be significant interest -- we see significant interest from those legislators to economic development, get the property taxes and the jobs that come with dollars of investment.

So we're seeing at a local level, really strong support for our solar developments are getting permitting is moving quite nicely for us, a lot of community support. So even though the politics could change, you would have to the political landscape would have to change drastically and make a difference. Just to summarize, the RPS standard and the state mandates will drive the investment. And if the IRA was to change, it would make it perhaps less affordable, but we'll be looking for assets, but we view that as a low probability event.

[Operator]

Your next question comes from the line of Andrew Weisel with Scotiabank.

[Andrew Weisel, analyst]

Two operational questions for you. First, on the tree trimming side, you're targeting a 5-year cycle by the end of 2025. Where do you currently stand -- where have you or -- and is there any challenge to getting to that target? Or should it be pretty straightforward to get there?

[Joi Harris, executive]

It should be pretty straight to get there. We may have some trailing areas that you may have to revisit. We are -- right now, we've got about 80% on that 5-year cycle. So we're cleaning up some of the areas. We've revised our true term standard. We found that we had to go back to certain areas because the tree growth happened a lot quicker than we anticipated. So I think, Andrew, we can anticipate that the 5-year cycle will get us back on track and then we'll go back and revisit again and make sure that those areas that we did trim that the true growth stays as we anticipate, we may even expand it even further because we're seeing certain areas, the growth is much higher and more quickly returning than what we had initially anticipated.

[Gerardo Norcia, executive]

Andrew, you'll recall that we got a tree trim surge approved by the commission, where we took our investment in tree trim from [indiscernible] to $200 million a year, about a handful of years ago. Actually 6 years ago.

[Joi Harris, executive]

Six years.

[Gerardo Norcia, executive]

And that excess tree trim surge is being securitized, which is helping us move the impact for our customers while it provides that benefit to customers over a longer period of time. So we do have the financial resources to complete the search. And as Joi said, we're actually fine-tuning it and probably we'll keep it going for a while as we go back and take down even more vegetation. But it's having really a positive impact on reliability where we've done it.

[Andrew Weisel, analyst]

Great to hear. Then more broadly, Joi, on Slide 8, you outlined a lot of those reliability efforts in the 4 categories. Are all of those efforts and the related spending fully embedded in the 5-year CapEx plan? Or would achieving some of those require incremental spending above and beyond the $25 billion 5-year plan? And how much of that relies on the rate case outcome, both the current one and obviously, future cases between now and then?

[Joi Harris, executive]

Andrew, it's all embedded in the plan, and it is contingent on the rate case outcome -- and we'll hear tomorrow staff position. We also have the audit, and we hope that just based on the feedback that we've gotten from the audit that the auditors were supportive of at least the way we laid out the plan. Now there may be some movement between the programs based on their feedback, but generally speaking, the feedback we've gotten from the auditors supports our agenda.

[Operator]

Next question comes from the line of Juliane [indiscernible] with Jefferies.

[Unknown Analyst]

Just to come back to the nexus of affordability and growing tension between accelerating loan growth and obviously the need to prioritize reliability and affordability. How do you think about -- as you look at the expanding pie of opportunities, this balance between PPA and self-build, especially in light of the latitude afforded under the energy law. And even in light of what you know today, how do you think about that balance just as you try to ensure ongoing affordability and a palatable CapEx budget?

[Gerardo Norcia, executive]

So I'll start and Dave can add. So when we self-build, we find that we're more competitive, which means we end up being more affordable for our customers. PPAs with the financial compensation mechanism makes our product more expensive to our customers.

So it chews up affordability room. So that's thought number one. Thought number two, from an investor set from a customer perspective, self-build is much more compelling than PPAs with an adder. Now secondly, for investors, owning assets provides more value. And I think the EPS value is 2 to 3x for owning versus PPA. And that's fundamentally driven by the fact that these intermittent resources, the FCM only applies to the output of the product. So that's what fundamentally reduces the value of an SEM for investors. So that -- I'm not sure if that answers your question, Julien, but those are the 2 thoughts I can offer. Dave, did you want to add to that?

[David Ruud, executive]

We do have PPAs built into our plan. We do have some PPAs built into our plan. But when it comes to our balance sheet can handle the amount of capital that we're investing, and as Jerry says, is better for our customers and better for our shareholders to do that.

[Unknown Analyst]

Excellent. Yes, it sounds like self-build remains the priority here for sure. And then related, you're just a small nuance. Can you talk a little bit more about the custom Energy Solutions and steel-related business? Just -- any dynamics there on an ongoing basis as it pertains to advantage? I know you've talked a little bit about it, but just to go back on that comment.

[David Ruud, executive]

Well, we see good opportunities across the custom Energy Solutions business, in particular, as we're doing the central plant services for some more projects within the country. So we have a good pipeline of projects there that we feel we can continue to grow and continue to drive. We have the project we talked about last quarter with Ford that is coming online in 2 stages this year. Some has come online and more will come online. The second half will come in line at the end of the year. So we feel really good about that business. And then our steel-related business is just a solid performer for us.

[Operator]

Your next question comes from the line of Anthony Crowdell with Mizuho.

[Anthony Crowdell, analyst]

I have 2 questions. One of them for Dave previously told me it gets upset without a lot of questions. Just Dave, I'm just curious when you think about levels of spending have been maybe at all-time highs, not just DTE, across the industry, more severe spending more severe storms. Do you ever think about -- the company has a very healthy credit cushion right now, probably 200, 300 basis points on your FFO to debt metrics? Do you have a wonder if that's enough given where we are right now in this cycle of spend?

[David Ruud, executive]

It's a good question, Andrew, yes, we do target the 15% to 16% FFO to debt. We think it gives us some -- it does give us some good headroom to the downgrade thresholds. And -- we met with all the rating agencies over the last quarter, and I think they're pretty confident in the level that we're at, too. So we feel good about where we are with our balance sheet and our balance sheet metrics on that.

[Anthony Crowdell, analyst]

Great. And then just 1 follow-up. I think it was kind of to an earlier question. You mentioned a lot of the economic growth on Slide 6, a lot of opportunity. And then when I look at Slide 14, as you highlighted earlier, when you look at the demand growth or the customer growth or low growth for the year, it's trending about 1%. When you get all those economic activities in service, what are you seeing as long-term sales growth?

[David Ruud, executive]

You see it about in that range for, I think, our base economic sales growth. What data centers and how that comes in, could play in a little different than when we look out a little bit further. EV load is another thing that could drive some of our residential load up a little more kind of in the long term as well. But kind of it's pretty consistent what we're seeing right now is what our longer-term forecast is.

[Operator]

Next question comes from the line of Travis Miller with Morningstar.

[Travis Miller, analyst]

You answered most of my questions, but just go a couple of little things here. With respect to the rate case, interveners that either you're seeing file or you expect to file here versus the last rate case or rate cases?

[Joi Harris, executive]

Yes. There are new intervenors in the gas case for sure and new interveners in the electric case. But as I said before, even with the level of intervention we're seeing now, the MPSC would have to move to likely a contested settlement, and that increases our chances of settlement. Aside from that, we still feel confident that we can get a constructive outcome regardless. But yes, a lot of activity in the rate case space more than we see history.

[Travis Miller, analyst]

Sure. Any way to bucket what those new interveners or their agenda contesting or not contesting?

[Joi Harris, executive]

Well, we'll know it's certainty tomorrow for sure. But what we've seen in the gas case is some environmental routes, mental interests in natural gas, they're not only what we're seeing.

[Gerardo Norcia, executive]

What happened in legislation last year, there was an increase in intervenor funding, and that has spurred more intervenors because there's more money. So I think that's part of the challenge that we have and why there's been so much more activity is that the funding allowed by legislation has created much more activity.

[Travis Miller, analyst]

Very interesting how that works. One other question here, all the discussion about reliability, which obviously make it in the rate cases also -- is that more of a positive in terms of giving you support to get more investment, get more spending approved? Or are you seeing more of a negative right now in terms of pushback on potential rate increases, if you could characterize those.

[Joi Harris, executive]

I would say I think we're all aligned in that we want to improve the reliability of the grid. The question becomes how -- what's the best way to do that. And we believe that with the purpose of the audit is to examine and get everybody an aligned on how we go forward in improving the reliability near term and then into the future. So I think the audit results will go a long way in building, I'd say, alignment and consensus on what the path forward should be.

[Gerardo Norcia, executive]

Yes. And I would say that the audit was really came as a result of the commission line to make sure that we were doing all we could to drive reliability improvements, and so I would expect -- I don't believe that the site will say we should spend less on reliability improvements. I think it will like, Joi has said here a few times today. I think it may shift thing buckets. But overall, I think there'll be a strong endorsement to continue to invest heavily in reliability, especially by the age of our system. I think that has become pretty evident in the audited that it requires significant investment as we are proposing to improve the quality of that system over time.

[Travis Miller, analyst]

Great. And will those audit results be able to make it into this rate case? Or will it [indiscernible] rate cases?

[Joi Harris, executive]

Not -- well, the audit comes out in September. It can't be a part of the record necessarily. So it probably won't make it into -- formally into this freight case.

[Gerardo Norcia, executive]

But it may influence.

[Joi Harris, executive]

It may influence, right.

[Gerardo Norcia, executive]

As the buckets of investment perhaps.

[Operator]

I will now turn the call back over to Jerry Norcia for closing remarks. Please go ahead.

[Gerardo Norcia, executive]

Well, thank you, everyone, for joining us today. I'll just close by saying we're feeling really positive about 2024 as well as our position for future years. And I hope you have a great morning and stay healthy and safe.

[Operator]

Ladies and gentlemen, this concludes the call. Thank you all for joining, and you may now disconnect.