DTE Energy Co. expects to deploy a large inventory of capital to sustain the utility operator's earnings growth after spinning off its midstream business into a separately traded company.
The midstream gas storage and pipelines business has been an earnings driver and cash flow engine for DTE. Its separation raised questions among investors and analysts on the call about DTE's growth drivers following the transaction.
The company on Feb. 19 reported a 5% year-over-year jump in fourth-quarter operating earnings to $271 million, as improved performance at DTE Gas and non-utility operations — including gas storage and pipelines — offset a drop in DTE Electric earnings. For the full year, operating earnings improved across business lines, with strong performance at DTE Electric and midstream driving a $224 million increase in the bottom line to $1.39 billion.
Once the spin-off is complete, the regulated Michigan electric and gas utility expects to deliver more operating earnings growth than it averaged over the last five years, according to DTE Senior Vice President and CFO David Ruud. The business is poised to grow pro forma operating EPS by 7.4% from the company's previous midpoint guidance, excluding the midstream impacts, he said on the company's Feb. 19 quarterly earnings conference call.
Electric business growth will remain rooted in grid modernization and clean power generation investments, DTE President and CEO Jerry Norcia said. He noted that DTE's five-year capital plan, unveiled at November's Edison Electric Institute conference, included a 17% increase in capital investment at its electric utility over its prior plan. That will include new substations for current and future load growth, with expectations that the plan will drive 7-8% operating earnings growth.
To support the company's net-zero carbon emissions target, Norcia said DTE is considering ways to accelerate the retirement of coal-fired power plants, including the Belle River facility slated for retirement in 2030 and the nearly Monroe Power station scheduled to go offline in 2040.
At DTE Gas, main renewal, integrity management and deploying enhanced technology will underpin the five-year plan, Norcia said.
Within the non-utility power and industrial business, the company is expecting a strong pipeline of growth opportunities for renewable natural gas and cogeneration projects. Asked whether the entry of new players into the RNG space — particularly California's Low-Carbon Fuel Standard market — would impact project returns, Norcia said DTE has not seen impacts on unlevered internal rates of return.
"We're still able to originate and find really strong-returning RNG projects," Norcia said. "And I would say that simple cash feedbacks are still on the order of three to five years."
While California's Low-Carbon Fuel Standard market has remained stable and attractive, the biofuel credits market tied to the federal Renewable Fuel Standard program has been volatile over the last several years, Norcia said. He expected the market to continue to stabilize under the Biden administration, following uncertainty over biofuel volume requirements during the Trump years.
"It makes our RNG projects quite attractive to have a strong, stable LCFS market as well a stabilizing federal market," he said.
DTE earlier reported that the midstream spin-off remains on track to wrap up by mid-year. DT Midstream President and CEO David Slater said executives will meet with ratings agencies and initiate a debt raise in the second quarter. DTE plans to hold a roadshow in June, at which point the company will offer more specifics on the dividend, he said. To date, executives have said DT Midstream's dividend will have a coverage ratio of approximately two times its distributable cash flow.
