INVESMENT THESIS
DTE Energy Co. (NYSE: DTE). We look for strength in the industrial LOB to continue, helped by GM’s investments in electric vehicle production.
RECENT DEVELOPMENTS
The beta on DTE is 0.63.
Revenue rose 11% to $1.7 billion. Revenue and earnings benefited from higher rates following a favorable rate case decision in May 2020.
Along with 3Q earnings, management announced plans to spin off the company’s midstream operations. The midstream business has roughly 900 miles of gas transmission lines, 91 Bcf of regulated storage capacity, and a gathering platform with almost 1,500 miles of gathering lines.
Along with 3Q earnings, management raised its 2020 operating EPS guidance range to $6.90-$7.10 from $6.47-$6.75. It also set a preliminary 2021 operating EPS guidance range of $6.88-$7.26. It continues to project 2020 infrastructure spending of approximately $3.1 billion.
The company also expects to spend $19.0 billion on capital projects through 2024, including $4.4-$4.6 billion in 2020, down from $6.0 billion in 2019.
On the regulatory side, on August 20, the Michigan Public Service Commission (MSPC) approved a $110 million rate increase for DTE Gas Co. The rate increase reflects a ROE of 9.9%. The higher rates will go toward infrastructure investments. DTE had filed a rate case in July 2019, requesting a $351 million increase in rates and a return on equity of 10.0%-10.5%.
EARNINGS & GROWTH ANALYSIS
DTE’s regulated utilities include DTE Electric (39% of 2019 revenue) and DTE Gas (11%). Nonutility nonregulated businesses include Gas Storage & Pipelines (4%), Power & Industrial Projects (12%), and Energy Trading (34%). Corporate & Other (less than 1%) encompasses holding company activities and invests in debt and energy-related businesses.
In the regulated businesses, DTE Electric’s operating earnings increased 34% during the third quarter, driven by higher rates and favorable weather, partially offset by costs related to growth in the rate base.
In the company’s nonutility segment, earnings rose 11%, driven by contributions from acquired gas storage and pipeline businesses. During the 3Q conference call, management announced plans to divest the Gas Storage & Pipelines segment.
Companywide operating and maintenance expenses have fallen over the last several years, and are now at levels last seen in 2008. This is an impressive achievement and places DTE in the top tier of similar regulated utilities. Cost controls have enabled the company to keep rates affordable for customers and have improved DTE’s relationship with Michigan regulators.
FINANCIAL STRENGTH & DIVIDEND
The company’s bond ratings are investment grade.
DTE’s debt/capital ratio was 63% at the end of 3Q20, roughly in line with peers. EBIT covered interest expense by a factor of 3.0, above the peer average of 2.4.
DTE is targeting annual increases of 7% through 2021.
The DTE Electric segment is expected to spend $2.6 billion on capital projects in 2020. Based on the company’s guidance, we expect 31% of this amount to be allocated to maintenance and other projects, 34% to distribution infrastructure, and 35% to new generation. In addition, over the same period, DTE Gas projects capital spending of $570 million. Management also projects nonutility capital spending of $1.2-$1.4 billion.
MANAGEMENT & RISKS
Formerly the COO, he has been with the company since 2002. Gerard M. Anderson is the executive chairman; he served as CEO from 2010 until 2019. David Ruud is the CFO.
DTE Energy is targeting net zero carbon emissions at its electric utility by 2050.
Investors in DTE shares face risks, including the company’s exposure to the Michigan economy. However, the state has above-average wage and population growth and business conditions are stable. We expect the shares to outperform peers when the industrial economy is healthy and growing, but to underperform during cyclical downturns.
While utility regulation in Michigan is generally balanced, it is always possible that regulators could lower DTE’s allowed return on common equity if they decide that the company is ‘earning too much’ or if, for example, the commission removes a portion of a newly constructed generating plant from the rate base.
With regard to the company’s core utility operations, the attitudes and policies of any state regulatory commission significantly affect a utility’s operating, financial and investment prospects. That said, over the last few years, Argus has viewed the regulatory climate in Michigan as ‘improving’ in terms of decisions favorable to utilities.
COMPANY DESCRIPTION
The company has 10,700 employees.
VALUATION
We think this well-managed utility should trade closer to industry-average multiples. Michigan is proving to have accommodative regulators (based on recent rate case decisions) and resurging auto production should help the company’s industrial electric sales recover faster than peers. Our revised target price of $140 implies a P/E of 19.8-times projected 2021 EPS.
