DTE is spinning off its gas pipelines. Will rates increase?
The city of Detroit is getting another New York Stock Exchange publicly traded company when DTE Energy Co. spins off its natural gas pipeline business Thursday.
The move to create DT Midstream is focused on creating shareholder value. It’s part of a wider trend in the industry of utilities becoming “pure-play” and, in this case, focused on the 2.2 million electricity customers in southeast Michigan and 1.3 million natural gas customers throughout the state.
Already not regulated by the Michigan Public Service Commission, DT Midstream has had to compete for DTE gas transport contracts in the past and will continue to do so in the future. As a result, customers shouldn’t see changes to their rates because of the spinoff, DTE leaders and experts said.
“For Michigan consumers, there will be no impact,” said Jerry Norcia, DTE’s CEO, who helped start DTE’s pipeline business in 2002. “DTE has a long-term contract both on the natural gas and electric side at a fixed price to provide service from” pipelines that will be owned by DT Midstream.
The spinoff will own 900 miles of interstate pipelines regulated by the Federal Energy Regulatory Commission that connect to multiple pipelines and local distribution companies. It also has 290 miles of pipelines that connect to mainlines, 94 billion cubic feet of gas storage and more than 1,000 miles of gathering pipeline. Most of the pipelines are not in Michigan, but in Louisiana, Ohio, Pennsylvania and other states.
The Nexus Gas Transmission and Vector Pipeline L.P. lines do supply some of the natural gas for DTE customers’ heating and electricity.
“Every interaction has to be kept at an arms-length,” said David Meador, DTE’s vice chairman and chief administrative officer. “There can’t be any benefit to one business or to the other. There’s very little financial interaction between the midstream side and utility.”
When the contracts expire with DT Midstream, DTE will have to rebid them. If costs increase and DTE seeks to recoup those expenses through rates, it would need approval from the Michigan Public Service Commission. This isn’t different from if DT Midstream had remained under DTE.
DT Midstream is predicting earnings before interest, taxes, depreciation and amortization of $710 million to $750 million in 2021 with an operating earnings guidance of $296 million to $312 million. Its operating earnings per share guidance is $3.06 to $3.22.
DT Midstream will have roughly 300 employees with about 60 based in Detroit coming from DTE. For now, the business is headquartered at DTE’s downtown campus near Beacon Park and the MGM Grand Detroit casino. Later this year, it is expected to announce a separate headquarters downtown.
David Slater, DTE’s chief operating officer of the midstream business since 2014 and a more than 30-year veteran of the energy industry, will be CEO of the new company. Robert Skaggs Jr. will work as executive chairman while also continuing as a member of DTE’s board. Skaggs, the former CEO of Indiana utility NiSource Inc., oversaw the spinoff of Columbia Pipeline Group Inc. in 2015.
It has become a trend in the industry to spin off midstream businesses to create pure-play utilities, said Anthony Crowdell, analyst at investment bank Mizuho Financial Group Inc. Pure-play utilities that need approval on rate changes from regulatory bodies often receive better valuations from investors.
“The risk associated with the utility is a lot different than the risk associated with an unregulated midstream company,” Crowdell said. “Typically, utility investors like the very stable earnings and dividend growth. The midstream business is more volatile.”
When there are higher prices for natural gas and oil, the pipeline business is more in-demand than when prices are lower, Crowdell said. DTE has eased fluctuations with long-term contracts lasting seven or eight years.
“DTE has been unique in their midstream business in that they’ve been able to deliver stable earnings,” Crowdell said. “They have really good contracts that didn’t experience these up and downs as other businesses have.”
Still, just having the division can suppress a utility’s share price, he said. DTE’s stock price closed Tuesday up 8.5% year-to-date to $129.49. Splitting will allow shareholders who favor utilities or midstr
eam businesses to stick with one, the other or both.
A higher stock price would provide easier access to capital for a company like DTE. It would be able to sell fewer shares to raise needed funds.
“Fewer shares that have to be issued for the same value is an ongoing benefit to our investors,” Meador said.
Pure-play utilities often also have benefits when working with regulators, said Angus Kelleher-Ferguson, analyst at Argus Research Co.
“It does give the pure-play utility more time to focus on its own goals like to improve their energy mix,” he said. “It allows DTE to turn all of its attention to the utility and coal retirements.”
CMS Energy Co., the parent of Consumers Energy, earlier this month said it’s selling its ownership of Utah-based EnerBank USA to become a pure-play utility. And last week, Consumers Energy shared plans to go coal-free by 2025 — 15 years ahead of schedule.
DTE retired its River Rouge coal-fired power plant earlier this month. Its remaining five coal plants are slated to close by 2040.
The DT Midstream team also has demonstrated its ability to execute, Crowdell said. Pipeline expansions can be complicated tasks wrapped in red tape often with environmental concerns. Particularly out West, pipeline projects have faced years-long delays or had plans scrapped.
“It’s a highly regulated space,” said Sophie Karp, equity research analyst at KeyBanc Capital Markets Inc. “It’s more difficult to operate at this point with how litigious it is.”
DTE faced a slight delay in obtaining regulatory approval for the Nexus pipeline it owns with Enbridge Inc. The pipeline from eastern Ohio to southeast Michigan was supposed to open before the end of 2017, but began operation in 2018. DTE also has made several acquisitions of natural gas gathering systems and pipelines in Louisiana, northeast Ohio, Pennsylvania and West Virginia.
It may also be beneficial for a utility to cut a tie-up with a natural gas transporter from an environmental and regulatory perspective, Karp said.
Despite environmental concerns around natural gas, that should not affect DT Midstream’s growth prospects, Meador said. Natural gas is a needed resource to provide affordable, reliable electricity and heating for homes. DTE is building a new natural gas plant in East China Township that’s expected to begin operations next year.
DT Midstream plans to be carbon neutral by 2050 with a 30% reduction in carbon emissions by the end of this decade. The ultimate goal is expected to be achieved with the help of carbon capture, which stores carbon emissions underground.
“Natural gas is not going away,” Meador said. “There will be less carbon from coal, but there is still going to be natural gas used in the years to come. Down the road, these pipes will be used for other purposes, too. A key purpose could be transporting hydrogen. There are creative ways to reduce our carbon footprint.”