DTE Energy Explores Spin Of Non-Utility Units
On October 8, 2020, Bloomberg reported that DTE Energy (NYSE: DTE, $119.07, Market Cap: $22.87 billion) is exploring options to either sell or spin-off its natural gas pipelines and other Non-Utility business operations. The company operates into two major business units, Utility operations and Non-Utility operations. Utility operations include DTE Electric and DTE Gas DTE while Non-Utility operations include Gas Storage and Pipelines, Power and Industrial projects and Energy trading. Post separation, the spin-off entity would operate the Non-Utility business, while the stub unit would operate the regulated Utility business comprised of Electric Utility and Gas distribution business.
According to people familiar with the matter, the company is working with its advisors and evaluating various options for divesting the unit including outright sale or spin-off. However, there is no clarity from management and nothing has been finalized yet.
In October 2019, DTE Energy announced acquisition of gathering system and gathering pipeline in the Haynesville shale formation, Louisiana from Momentum Midstream LLC for ~$2.25 billion in cash and $400 million milestone payment. The target M5 Midstream LLC which was developed by Momentum Midstream, operates pipelines across Haynesville shale formation for transportation of gas and water used in shale exploration. In 2016, DTE acquired 100% of the Appalachia Gathering System (AGS) located in Pennsylvania and 55% of the Stonewall Gas Gathering (SGG) located in West Virginia, respectively from Momentum Midstream for $1.3 billion. Last year, the company purchased an additional 30% stake in SGG for $275 million. In 2018, the company also invested at least $1 billion in the NEXUS pipeline, a 50-50 joint venture with Enbridge ENB . This was followed by acquisition of Blue Union in November and LEAP in December 2019.
Separately, in February 2020, DTE Energy acquired an 8 MW heat and power generating facility from South Jersey Industries SJI .
In July 2020, Dominion Energy D and Duke Energy DUK cancelled their $8 billion Atlantic Coast natural gas pipeline. Williams Energy WMB also had to put on hold its natural gas pipeline expansion plan after it could not get necessary regulatory approvals.
Recently, several Utility companies were in the news for their announcement of exploring different options to hive-off their Non-Utility businesses. In December 2019, CenterPoint Energy CNP announced that it was considering option of selling two service units that could fetch more than $1 billion. In August 2020, PPL Corporation PPL announced that the company is considering sale of its business in the United Kingdom, Western Power Distribution and wants to focus on its domestic operations in Pennsylvania and Kentucky. In July 2020, Public Service Enterprise Group PEG (PEG) announced that it is checking different strategic alternatives for PSEG Power’s non nuclear generating fleet. The company intends to speed-up PSEG’s transformation into a regulated electric and gas utility.
DTE is a diversified energy company comprising of regulated Utility business and Non-Utility business. In the recent past, DTE’s peers such as CenterPoint Energy, PPL Corporation, Public Services Enterprise Group and Exelon Corporation EXC were in the news for exploring options to divest their Non-Utility business. DTE is also reportedly considering divesting the unregulated parts of its business to focus on the regulated operations, which offer more stable revenue streams and profit visibility.
The reduced economic activity in the wake of the COVID-19 pandemic led to a sharp fall in crude oil and natural gas prices, which impacted the financial performance of energy companies. The priority to maintain a strong balance sheet is likely prompting utility companies to consider divesting risky assets, which could narrow their discount to peers. Generally, utilities comprising of less risky, profitable assets attract higher valuations compared to diversified utilities. If the company decides to sell the non-core assets, DTE could deploy the funds for future growth initiatives.
Some utility companies which had expanded into mid-stream space in the past to drive growth, have started reversing course. Over the years, DTE has made acquisitions in the mid-stream space including a gas gathering system and pipeline in the Haynesville shale formation. The mid-stream business generates ~85% of revenue from fixed price contracts, while the remaining is exposed to counterparty credit risks. In April 2020, Fitch Ratings had downgraded DTE’s long-term issuer default rating on risks associated with Haynesville acquisition. We opine that this could potentially contribute to the management’s divestment decision.
In 2019, DTE generated ~50% of its revenue (including inter-segment) from Utility operations (DTE Electric and DTE Gas) and ~50% from Non-Utility business. Moreover, DTE generated ~70% of its net income (excluding net losses on ‘Corporate and Other’) from Utility operations, reflecting its regulated nature and low volatility in profitability. On the other hand, DTE’s Non-Utility business remains volatile and prone to fluctuations in commodity prices. Hence, near-term concerns remain, although the long-term growth prospects of the Non-Utility business remain largely intact. A potential separation of DTE’s Non- Utility operations would transform DTE into a pure-play Utility company and insulate it from such risks, thereby giving investors a choice to invest according to their risk appetite.
Incorporated in 1995, DTE Energy operates Utility business and Non-Utility business. Utility business operations consists of DTE Electric and DTE Gas. DTE Energy’s Non Utility businesses are involved in natural gas pipelines, gathering, and storage; power and industrial projects; and energy marketing and trading operations.
DTE Electric is a wholly-owned subsidiary of DTE Energy, which is engaged in the generation, purchase, distribution, and sale of electricity to ~2.2 million residential, commercial, and industrial customers in southeastern Michigan. The company owns generating facilities located in the State of Michigan. DTE Electric owns and operates 700 distribution substations with a capacity of ~37,025,000 kilovolt-amperes (kVA) and ~445,200 line transformers with a capacity of ~32,392,000 kVA.
DTE Gas is a wholly-owned subsidiary of DTE Energy, which is engaged in the purchase, storage, transportation, distribution, and sale of natural gas to ~1.3 million residential, commercial, and industrial customers throughout Michigan and the sale of storage and transportation capacity. The company owns distribution, storage, and transportation properties located in the State of Michigan. The distribution system includes ~20,000 miles of distribution mains, ~1,305,000 service pipelines, and ~1,285,000 active meters. DTE Gas owns ~2,000 miles of transmission pipelines that deliver natural gas to the distribution districts and interconnect DTE Gas storage fields with the sources of supply and the market areas.
• Gas Storage and Pipelines (GSP) owns natural gas storage fields, lateral and gathering pipeline systems, compression and surface facilities, and has ownership interests in interstate pipelines serving the Gulf Coast, Midwest, Ontario, and Northeast markets.
• Power and Industrial Projects (P&I) primarily involves projects that deliver energy and utility-type products and services to industrial, commercial, and institutional customers, produce reduced emissions fuel, and sell electricity and pipeline-quality gas from renewable energy projects.
• Energy Trading consists of energy marketing and trading operations. Energy Trading includes physical and financial power, natural gas and environmental marketing and trading, structured transactions, enhancement of returns from its asset portfolio, and optimization of contracted natural gas pipeline transportation and storage positions. Energy Trading also provides natural gas, power, environmental and related services, which may include the management of associated storage and transportation contracts on the customers’ behalf and the supply or purchase of environmental attributes to various customers
For FY19, Total Operating revenue declined 10.9% YOY to $12.7 billion (-8.5% vs. consensus), primarily driven by 20.0% decline in Non-Utility Operation revenue to $6.0 billion while revenue from Utility Operations declined 0.5% marginally to $6.7 billion. Operating Income was up 7.1% to $1,707 million (-4.3% vs. consensus) on account of decline of 23.8% and 9.2% in Non-Utility and Utility expenses respectively. Corresponding margin jumped ~220 bps to 13.5%. Net Income grew 4.4% to $1,169 million (+1.6% vs. consensus) and corresponding margin expanded ~130 bps to 9.2%. Diluted EPS rose 2.3% to $6.31 (FY18: $6.17).
For 1H20, Total revenue was $5.6 billion, down 12.4% YOY. Revenue from Non-Utility Operation was down 25.3% to $2.3 billion, while revenue from Utility Operations was flat at $3.3 billion. Operating income rose 8.4% to $913 million from decline in Non Utility and Utility expenses of 33.5% and 10.7% respectively. Corresponding margin expanded ~310 bps to 16.3%. Net Income grew 5.8% to $617 million and corresponding margin expanded ~190 bps to 11.0%. Diluted EPS rose 0.6% to $3.2 (1H19: $3.18).
For FY20, DTE Energy expects consolidated Operating Earnings in range of $1.25-$1.3 billion reflecting a growth of 6.7% – 11.2%. EPS is expected to be at higher end of estimates of $6.47-$6.75 (FY19: $6.31) and company confirmed operating EPS growth target of 5% – 7% through 2024. Dividend growth of ~7% in 2020 and targeting 7% growth 2021. For Electric Segment, Operating Earnings is expected to be $759-$773 million (+6.3% – 8.3%) on account of warm weather and offsetting COVID-19 economic downturn with the company’s response plan. For Gas segment, Operating Earnings are expected to be $185-$193 million. For Gas Storage & Pipelines (GSP) Operating Earnings to be $277-$293 million (+35.8% – 43.6%) on account of strong 1H20 performance. Power & Industrial Projects and Energy Trading to be $133-$148 million and $15-$25 million respectively.
DTE Energy (Parent)
Incorporated in 1995 in the State of Michigan, DTE Energy is an energy company that develops and manages energy related business and services. It has two operating units, Utility and Non-Utility. The Utility unit (forms 70-75% of total company) operates under two subsidiaries, DTE Electric and DTE Gas. Through DTE Electric, it generates, purchases, distributes and sells electricity to ~2.2 million customers in southeastern Michigan. DTE Gas is involved in the purchase, storage, transportation, distribution and sale of natural gas to ~1.3 million customers. DTE’s Non-Utility portfolio (forms 25-30% of total company) operates other businesses such as Gas Storage and Pipeline (GSP), Power and Industrial Projects (P&I) and Energy Trading.
Non-Utility Operation (Spin-Off)
Non-Utility operations comprise of natural gas storage and pipelines (GSP); power and industrial projects (P&I); and energy marketing and trading operations. Gas Storage and Pipelines (GSP) comprises of natural gas pipeline, gathering, transportation, and storage businesses. The Power and Industrial Projects (P&I) involves delivery of energy and utility-type products and services to industries, commercial and institutional customers. It is also involved in the selling of electricity and pipeline quality gas from renewable energy projects. Energy Trading operations involves marketing and trading of energy.