DTE Energy cut operations to meet profits months before power outages

• DTE Energy’s financial statements show the state’s largest utility is asking for higher customer rates while also seeking to raise dividends
• It paid out $700 million to investors in 2022, then paused hiring and maintenance to hit revenue targets — and pay dividends — early this year
• But it faces multiple inquiries as lawmakers question why outages lasted so long

DTE Energy cut its operations budget to meet earnings projections months before a historic ice storm on Feb. 22 left more than 450,000 of its customers without power, company officials said recently as they released year-end earnings.

Job openings went unfilled. Contractors were eliminated, and overtime limited, Maintenance work was postponed, though a DTE representative says its tree trimming program is not a part of recent cuts.

The mid-November budget cuts helped keep DTE’s 100-year-old dividend payout streak to investors alive: Three weeks before the ice storm, the Detroit-based utility announced a 95-cent per-share dividend for shareholders, bringing the full-year cash payout for investors to $710 million.

Related:

• DTE seeks another rate increase citing inflation, material costs
• Utilities gave big to Michigan lawmakers now weighing reforms, records show
• Michigan has far more power outages this week than other Midwest states

The day after the storm, DTE CEO Gerardo Norcia hosted a conference call with Wall Street analysts, telling them the company delivered “strong financial results, continuing our excellent track record of creating shareholder value.”  

Operating earnings increased to $1.2 billion in 2022, up by $35 million from a year earlier, the company told Wall Street analysts on the call. Two weeks earlier, DTE asked the state for the second time within a year  to raise electrical rates, this time by $622 million.

Financial moves at DTE [NYSE:DTE]  show the utility plans to increase investor payouts over the next five years, according to a Bridge Michigan review of DTE’s recent public filings and comments. (Editor’s note: The DTE Energy Foundation is one of numerous funders of Bridge Michigan and its nonprofit publisher, The Center for Michigan, Donations do not impact editorial coverage.)

Over the same period, the utility forecasts billions of dollars in capital expenses and a 2 percent drop in revenue from residential electrical use. Its projections call for higher consumer rates to close the gap — and maintain annual growth for shareholders.

“We delivered another solid year for all our stakeholders in 2022,” DTE CEO Gerardo Norcia said as he started the Feb. 23 call.

That analyst call took place as DTE recorded 400,000 power outages from the storm — a number that grew to 450,000 as branches and wires dropped across the region. Another 250,000 Consumers Energy customers lost power in Michigan. 

The outages left many Michigan residents and businesses waiting days for repairs, a situation that led to consumer outrage and legislative calls for more scrutiny into utility accountability.

There is no indication the duration of the outages — which were widespread in the Midwest — would have been any shorter without DTE’s cuts.

But the investigations come at a crucial time for the investor-owned company. DTE plans to increase capital spending by 20 percent as it closes aging power plants  — like the coal-fired Monroe Power Plant, scheduled to shutter in 2028— for greener solutions.

“The focus of these investments continues to be infrastructure renewal and cleaner generation at DTE Electric,” Norcia said. 

Over the next 10 years, the company plans to invest $45 billion. At the same time, efficiencies are resulting in decreased energy use, which can hurt revenues.

So along with the $622 million in rate hikes, DTE wants the Michigan Public Service Commission to approve a customer surcharge that will fund at least $143 million to change its power capacity mix, adding solar and wind and retiring two coal-fired power plants. 

The rate change would increase bills by 9.45 percent to 14.49 percent per month. DTE says that could mean another $12.46 per month, or $149.52 per year for the utility’s 2.3 million residential customers.

On the investor side, gains are expected: long-term, the earnings per share growth is targeted for 6 percent to 8 percent per year. That level would maintain DTE Energy among typical utility stocks, which investors seek for stable and predictable dividends.

The next dividend payment will be 95 cents per share payable on April 15. The full-year cash payouts for 2022 totaled $3.61 per share, about 3 percent of the stock’s value.

DTE Energy stock traded at $109 per share on Thursday, giving it a market cap of $22 billion. This week’s price is down about 6 percent from this year’s starting price of $116.37. 

DTE officials would not make officials available for this story. However, corporate communications manager Pete Ternes told Bridge in a statement that the utility is focused on system-wide improvements.

“We have invested more than $5.4 billion in rebuilding our grid over the last five years and have plans to ramp that investment to $9 billion over the next five years,” Ternes said.

Yet the financial structure of the investor-owned utility leaves DTE customers paying “above average rates for below average service,” said Amy Bandyk, executive director of the Citizens Utility Board of Michigan(CUB), which represents the interests of utility customers in the state.

“The company is motivated to make big capital investments that qualify for a rate of return that goes to DTE shareholders,” Bandyk said. “That return is paid for by DTE ratepayers on their bills.”

Michigan residents pay the 11th highest rate for electricity in the U.S. And reliability has been an issue for years, Bandyk said.

The numbers

The April dividend payment is the first since DTE’s setback in November, when the Public Service Commission denied DTE’s request for a $388 million rate increase. 

Instead, the MPSC allowed a $30.5 million rate hike, about 8 percent of the requested amount, a move that Norcia said prompted the recent cost-cutting. The utility turned to a “lean” spending plan to trim a $120 million budget shortfall, he added. 

All cuts were one-time reductions and “not sustainable over the long-term,” said CFO David Ruud, who joined Norcia on the call with internal relations director Barbara Tuckfield. 

The cuts included reducing the frequency of janitorial services and deferring projects that don’t directly impact customers, like resurfacing an employee parking lot, Ternes said.

Ternes did not provide other details on the operations cuts ahead of the February storm, though he did say that contractors were reduced across business units. 

Details also were not provided to Bridge on the expected depth and duration of the cuts for the rest of the year. Ternes said in an email that tree trimming and pole-top maintenance programs are continuing as planned. 

“When we have years where we experienced favorable outcomes, like last year, we start to invest heavily in our maintenance practices,” Norcia said. “And so, this year, we’ll be drawing on those banks, if you will.” 

Total costs for the recent storms are not yet available, Ternes said. More spending cuts could come, Norcia told analysts, if DTE exceeds its storm budget and contingency funding, which in prior years was about $100 million.

The decline in residential use is projected to require $102 million from higher rates, DTE said in its filing with the MPSC. Operations and maintenance will be $124 million under budget in 2023, while return on equity ($42 million) and cost of debt ($29 million) also are a part of the $622 million request. The largest revenue deficiency, according to the filing, is $292 million budgeted for “rate base,” or all of the facilities that provide service.

DTE said $30 million in other expenses  — but not bonuses for top executives — also will be covered by the increase. The bonuses totaled over $25 million 2022. 

Norcia made $11,128,277 in overall compensation in 2021, while the top five combined earned $22.2 million. The board of directors, who earned a combined $2.8 million for their roles in 2021, will meet with shareholders to vote on this year’s pay on May 4. 

Ice storm, then firestorm

During the investor call, Norcia praised his staff for their response to the power outages. Over 2,000 employees were in the field, a number that doubled by the weekend. 

“If you look at the ice storm that rolled through our territory today, I would say it certainly further reinforces the need to invest in our grid as we see these climate change patterns start to take shape,” Norcia told investors. 

So far, Gov. Gretchen Whitmer’s administration and legislators support DTE’s planned capital investments, Norcia said. In part, the changes will boost reliability, he said, while also allowing the growth in electrical use that DTE anticipates from increases in electric vehicles.

Lawmakers have been far less complimentary of DTE’s response to the storm.

Some Democrats have called for an investigation pledged to hold utilities accountable. Republicans have pushed for $200 million in grants to residents who lost power for more than 48 hours.

State Rep. Helena Scott, D-Detroit, chair of the House Energy, Communications, and Technology Committee, plans a hearing Wednesday to “address who and what institutions are accountable and how we can avoid these large-scale power outages.” 

Power company leaders and Dan Scripps, chair of the MPSC, are expected to testify.

The MPSC plans its own public meetings, in Jackson and Dearborn and another online, about the storm.

Bandyk, the consumer advocate, said reliability is a problem and DTE can improve service with less expensive changes — like more flexible tree-trimming schedules and automated technology that flags grid weakness. 

“The utilities did a bad job of maintaining the grid in the first place because they get a bigger financial return for their shareholders from doing other things, like building power plants,” Bandyk said. “At the same time, they don’t suffer consequences when reliability is poor. They can still charge their customers for their costs plus a return even if outages keep getting longer.”

Ternes said the returns to investors are important, along meeting financial targets, because upgrades and cleaner energy require massive investments. Lower interest rates are available to companies that are rated highly by investors, he said. 

But Bandyk argued the solution needs to be a new system of checks on the utilities where they have to hit reliability targets, “and if they don’t, they can't charge customers for as much of a return for their shareholders. 

“If that structure was in place, you would see the utilities working both harder and smarter to get the grid as reliable as possible at the lowest cost.”