Project Description

DTE Energy (DTE) Spin-off Notes

  • 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.