Project Description

DTE Energy (DTE) Spin-off Notes

February 22, 2021 Update

  • DTE announced Q4 2020 earnings recently and noted that the spin-off is on track to be completed mid year.
  • Midstream Spin-off Update:

 

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January 8, 2021 Update

  • DTE Energy: Steady Growth And Spin-Off Could Make This Utility An Appealing Play
    • One of the things that we have seen in the utilities sector over the past few years is an increasing focus on “going green” and developing renewable sources of energy. This is partly being driven by the government as regulators in some areas have issued mandates that a certain percentage of the energy in their state needs to come from renewable sources. It is also being partly driven by consumers, who have been increasingly demanding that the power for their homes and businesses come from renewable sources.
    • In 2005, the company only generated about 1% of its electricity from renewable sources. That figure is expected to be nearly 30% by 2030. These new renewable facilities are largely supplanting coal in the firm’s energy generation mix.
    • This is part of the company’s goal to achieve net zero carbon emissions by 2050.
    • Naturally, the company’s plan will require a great deal of investment on the part of the company. To this end, the company has increased its planned spending by $2 billion over the next five years to support this new infrastructure. At the beginning of 2020, DTE Energy was planning on spending $12 billion on its electrical infrastructure over the 2020-2024 period. The company has recently announced that it will actually be spending $14 billion over the 2021-2025 period on electrical system upgrades.
    • Spin-0ff:
      • One of the first things that we notice is that the majority of the company’s operations are overseen by the Federal Energy Regulatory Commission instead of by the authorities in any individual state. This is due to the fact that the pipelines and accompanying storage is interstate so the commerce clause of the U.S. Constitution applies. This is actually an advantage because midstream operations overseen at the Federal level are much like utilities in their cash flow stability. I pointed this out in an article posted early in the pandemic. As a result, they tend to boast much more stable revenues and cash flows than even other midstream companies.
    • Valuation:
      • According to Zacks Investment Research, DTE Energy will grow its earnings per share at a 5.67% rate over the next three to five years. This gives the company a price-to-earnings growth ratio of 3.06 at the current stock price.

      • As we can see here, DTE Energy appears to be reasonably valued compared to many of its peers. Thus, the company does not appear to be offering investors an especially bad deal when we consider the 3.57% dividend yield and the potential catalyst with the upcoming spin-off of the midstream operation.

October 27, 2020 Update

  • In conjunction with Q3 2020 earnings, DTE Energy announced that it intends to spin off the DTE Midstream business. It had been reported in the press that in early October that the company was considering a split.
  • The spin-off announcement is the result of a series of strategic discussions about unlocking value that began in the summer of 2019.
  • The spin-off is expected to be tax free.
  • The transaction is expected to be completed by mid 2021.
  • Bloomberg article with background info.
  • Here is the spin-off slide deck.
  • DTE Morningstar Report.
  • DTE Credit Suisse Report.
  • The Midstream business (spin-off) is the Company’s non-utility natural gas pipeline, storage, and gathering business.
    • Several power companies had expanded aggressively into the energy pipeline business, but have become less enthusiastic on the space given its harder to build new pipelines due to ESG concerns (This doesn’t seem all negative to me. Less growth, but less competition too).

    • The assets to be spun off have generated significant growth although it is mainly due to acquisitions.
      • In October 2019, bought gathering system and pipeline in the Haynesville formation (Louisiana) for $2.25BN in cash and $400MM in milestone payments.
      • In 2018, invested ~$1BN in the NEXUS pipeline (50/50) joint venture with Enbridge.
      • In 2016, DTE bought 100% of the Appalachia Gathering System and 55% of the Stonewall Gas Gathering (West Virginia) from Momentum Midstream for $1.3BN. Bought an additional stake of 30% for $275MM in 2019.

    • The spin-off seems like its going to be an interesting asset.
    • The management team will be the same team that ran it as a part of DTE.
    • Credit Suisse values it at 8x EBITDA. This would imply a $5.6BN enterprise value, versus DTE’s current enterprise value of $42.4BN.
    • Credit Suisse noted that there is some risk to the spin off related to recontracting and expansion on Nexus as well as a reduction of revenue in the Haynesville once the 13-year above-market contract expires.
  • The remaining company would be a pure play regulated electric and gas utility in Michigan. The benefit of being a regulated utility is that you get to earn a fair and stable return on equity.

    • Credit Suisse argues the remainco deserves to trade at a premium valuation to its regulated utility peer group due to “the constructive regulatory environment in the state along with a strong legislative backdrop.”
  • Other power companies following a similar path (spinning or selling non utility businesses):
    • Dominion Energy agreed to sell the majority of its gas pipeline and storage assets to Berkshire Hathaway.
    • Exelon is rumored to be considering spinning off its non-regulated utility business.
  • Activist Investor:
    • Elliott Management disclosed that it had built a significant stake in the company and agreed with the split.
  • Preliminary thoughts:
    • I think the spin-off could be interesting as its being spun off at a cyclical low in the industry.
    • Need to do additional work to identify best comps for spin and parent.