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DTE will spin off midstream unit, focus on regulated power and gas utilities

Highlights

Spin-off expected to be completed by mid-2021

Midstream business has 91 Bcf of gas storage

Utilities will work with $17 billion, five-year capex plan

Houston — DTE Energy will spin-off its midstream natural gas pipeline, storage and gathering business and will "transform" its electric and gas utilities into "pure-play" regulated businesses, the Detroit, Michigan-based company said Oct. 27.

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DTE's midstream business unit has 900 miles of gas transmission lines rated by the Federal Energy Regulatory Commission, as well as 1,450 miles of gathering lines. It also owns and operates 91 Bcf of regulated gas storage capacity in Michigan that serves local distribution companies as well as power generators in areas across the Midwest, the Northeast and Canada.

In December 2019, DTE Midstream bought a gathering system and a gathering pipeline in the Haynesville shale formation in Louisiana from Momentum Midstream and Indigo Natural Resources for $2.25 billion in cash.

Company executives said Oct 27 that they want to position the spun-off midstream operation as a "premier independent, natural gas midstream company with assets in premium basins connected to major demand markets."

Midstream's 2020 adjusted EBITDA is "estimated to be approximately $700 million," DTE said in its Q3 2020 earnings report, and added that the business has generated "over $3 billion of cash since 2008."

DTE said that the percentage of revenue from demand-based contracts was 100% for DTE Midstream's regulated pipelines and storage, with those contracts spanning an average of 10 years. Its gathering pipelines receive 92% of their revenue from contracts with 9-year average terms, while gathering gets 93% of its revenue from contracts with an average of 10-year terms.

When the spin-off is completed by mid-year 2021, the midstream unit is to become "an independent, publicly traded company."

Asked by an analyst why the company did not choose to sell its midstream operations, DTE CEO Jerry Norcia said it was the company's opinion "that the spin-off would create better value for shareholders."

DTE Energy shareholders will retain their current shares of DTE Energy stock and receive a pro-rata dividend of shares of the new midstream company stock in a transaction that is expected to be tax-free to DTE Energy and its shareholders for US federal income tax purposes.

The actual number of midstream shares to be distributed to DTE Energy shareholders will be determined prior to closing, the company said.

Norcia told analysts the announcement of the spin-off was the result of a series of strategic discussions that began in the summer of 2019 to identify opportunities. However, it was discussions between management and the DTE board that "culminated in the last few days" in the decision to spin off the business.

David Slater, the president and CEO of DTE Midstream, said that "nothing has changed in the midstream business that prompted the decision."

Slater is expected to be promoted to president and CEO of the new midstream company.

Pursuing net-zero targets

With the completion of the separation, DTE Energy's utility operating earnings "would be in-line with its pure-play peers," the company said.

"Approximately 90% of DTE Energy's operating earnings would be generated by its regulated utility business compared to 70% today. Approximately 92% of capital investments would be devoted to DTE Energy's utility operations."

Nocera said that DTE's electricity and gas utility companies will be the beneficiary of a $17 billion, 2021-2025 capital investment plan, with $14 billion to be directed toward the electric utility, including $2 billion that will go toward renewable generation.

The company will pursue a 2050 net-zero carbon target, with an 80% carbon reduction goal set for 2040. Its gas utility will pursue a 2050 net-zero GHG emission target, the company said.

On July 9, DTE filed with Michigan regulators a request to buy 350 MW of renewables, of which 225 MW is to be wind generation and 125 MW solar. On Aug. 31, the company made an additional request for 420 MW of solar.

DTE currently has 15 wind parks and 31 solar farms in its generation portfolio, and expects to add three additional wind parks by the end of the year, including the 385-MW Isabella 1 and 2 projects it bought from Apex Clean Energy in July 2019.

DTE Electric reported operating earnings in Q3 of $398 million, an increase of $91 million compared to Q3 2019. The company said that higher residential sales and warmer weather was offset somewhat by rate base growth costs in Q3.

Year to date, the company said, weather normal electricity sales were down 6%. It said that commercial sales were down 8%, while industrial sales were down 19%. Residential sales, however, were up 8%.

The company told analysts it was raising its guidance from $6.75/share to $7.10/share.