DTE Energy on Tuesday announced a major restructuring of its nonutility operations that includes the sale of about $1 billion in power plants and oil and gas production assets. The move will simplify its earnings structure and redeploy cash to its utility and growing midstream operations.
DTE's announcement comes just days after Dominion announced it would sell most of its North American exploration and production assets to reduce its risk profile and focus on its utility operations (see Daily GPI, Nov. 2).
Among other things, DTE plans to sell or redeploy its four nonutility generation assets, which are located in Michigan, Illinois and Indiana. It also plans to put up for sale a portion of its unconventional natural gas production assets in the Antrim and Barnett shale basins in Michigan and Texas, respectively. In addition, it plans to sell an equity stake in its power and industrial business, and it is exploring "alternative structures and strategic options" for its energy trading arm.
CEO Anthony F. Earley Jr. and COO Gerard Anderson laid out their vision for DTE at the Edison Electric Institute Financial Conference in Las Vegas on Tuesday.
"This is a repositioning of the company," said Earley. "It is a strategic shift not from the basic framework, but a rebalancing of our portfolio. We want to reiterate a commitment to a strong utility core...We still strongly believe we can enhance shareholder value to grow the portfolio of our nonutility businesses. This strategy has led to a very solid record of success. But it has made DTE a more complicated investment for those of you who follow us."
Anderson noted the nonutility investments "have done very well for the company." Since DTE began investing in nonutility businesses, returns on capital have ranged between 15-20% unlevered after tax.
"The financial performance has been good," said Anderson. "I can also say that in recent years we have tried a number of different approaches in communicating about the businesses with the goal to make them more transparent, more visible to our shareholders. I have to say, we have not always been successful."
Even though the nonutility investments are performing well, "it makes it difficult for some investors to value them efficiently," said Anderson. "It's a range of businesses, and the breadth of them makes that more challenging...The bottom line is we think there's a lot of value here, and clearly not all of the value has shown up in the share price. We need to make that happen, to let shareholders realize the value we've created in the portfolio."
DTE's gas and coal midstream businesses, housed within its fuel transportation and marketing segment, are showing "solid performance and steady growth," and the energy trading business, also within this segment, "is on track to have its best year ever." But the volatile earnings from trading and the potential growth in midstream "often gets lost in accounting's up and downs," said Anderson.
DTE plans to move the gas and coal midstream into a separate reporting segment and "explore alternative structures and strategic options for energy trading."
"We see our strongest opportunities [in nonutility operations] in midstream and storage," Anderson said. "We're seeing very strong demand for gas storage between Chicago and New York...the highest gas storage prices ever. We're sitting in a good position to capitalize on those assets," which include the Vector pipeline, the Washington gas storage field and the Millennium pipeline.
DTE also wants to sell a portion of its unconventional gas assets, which could fetch $250 million to $1 billion. These assets include acreage positions in both the Barnett Shale in North Central Texas, and the northern Michigan Antrim Shale formations, which hold a combined 382,000 acres and 552 Bcf of proved and probable reserves.
"Our unconventional gas assets hold great promise," said Anderson. "Our team has done a great job of putting us in a position to create value...But we realize there are challenges when combine E&P business of significant scale with a utility business. That said, many of the best performers in the sector have exposure to E&P. It's a good return sector, but as those businesses scale up, real tension builds between E&P and the utility."
To efficiently develop E&P, said Anderson, "you need to deploy a lot of capital. But down the road, our utilities will need more capital too." He said the "sensible thing to do is to take the mature assets and monetize them. We have some significant positions in the Antrim and the Barnett that fit that description. And we have others in the Barnett that aren't mature enough. Those assets make more sense to hold and monetize down the road."
DTE has more than 2,000 active wells on its combined shale assets. Current production in the Barnett and Antrim is about 12 MMcf/d, and DTE has forecast net production of 4.1 Bcf this year, a 500% increase over 2005 production.
At least three of DTE's four nonutility generation peakers will be sold in the restructuring: River Rouge, MI (240 MW); Crete, IL (160 MW); and Georgetown, IN (80 MW). The peaker in East China, MI (320 MW), may be redeployed or sold; DTE will make that decision in the future, Anderson said. The four peakers have a market value of $100-150 million. Most important, however, is the $13 million "earnings drag" on DTE earnings, which would be eliminated with the sale.
Within its power and industrial business segment, DTE is exploring the combination of a sale of a partnership interest in, and a recapitalization of, some of the portfolio that supplies energy services to large industrial end-users.
"This is a really good portfolio, but at times, this business line gets caught up in our synfuel business, or is mixed with our peaker returns. We often get questions about what this portfolio is worth, and how to value it," said Anderson.
By selling a 50% equity interest in selected assets and recapitalize them, DTE would have capital for future investments and gain after-tax proceeds of $400-600 million.
In its synthetic fuel business, DTE now expects to receive a minimum of $1.2 billion of cash between now and 2009, up from the $1 billion previously forecast. In addition, the company entered into a series of options that could result in an additional $200 million of cash if oil prices in 2007 average below the start of the expected phase-out range of $62/bbl.
As the restructuring begins and asset sales are completed, the company plans to use the expected proceeds to repurchase equity and debt. Beginning this month, DTE plans to repurchase one million shares of stock "as an indication of the company's commitment" to the initiative. Additional share purchases are planned as sales are completed.
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