This Utility Has a Secret Weapon

DTE isn't your run of the mill electric utility, and natural gas will be a key driver of its utility and non-utility efforts over the near and long term.

Jul 24, 2014 at 3:50PM

Utilities come in different flavors, some are regulated and some not. However, some add a little spice to the mix by getting into additional businesses. That's something that sets DTE Energy (NYSE:DTE) apart from its peers. However, it's natural gas, utility and non-utility alike, that may be the most exciting part of DTE Energy's future.

Regulated, non-regulated
DTE Energy is something of a throwback. Years ago, utilities used their regulated businesses to invest in other areas. Too often, though, those investments proved more trouble then they were worth. A good example is Vectren (NYSE:VVC), which is now exiting its commodity investments. The most recent move was to jettison its coal mining operations.

(Source: ReubenGBrewer, via Wikimedia Commons)

That $300 million sale will get Vectren out from under a struggling business. Even though Vectren's coal mines have been producing record amounts of coal they are still only breakeven—at best. Clearly, such non-utility businesses can become more of a distraction than they're worth.

DTE Energy's non utility businesses make up roughly 20% of revenues with a goal of taking that to 30%. These businesses operate in the energy trading, construction, and midstream arenas. Energy trading is volatile and the company currently expects it to contribute nothing to the bottom line this year. The benefits of having this business are arguable.

The construction business' present and future are tied to the utility industry; it builds power related assets from industrial systems to renewable generation. That's likely to be a solid opportunity as new environmental regulations lead to big changes in the energy space.

The other arm of the non-utility side, however, is the midstream business, DTE Energy's crown jewel right now. In the first quarter it contributed 50% more to earnings than the construction segment. And it has key expansion projects planned over the next three years. If the past is any indication, the future for this segment looks pretty good, too. According to CFO Peter Oleksiak, they "put the pipe into service [in] late 2012, so a little less than a year [and a] half later and we're doubling the capacity of the pipe northward." Clearly, there's demand for the pipelines DTE Energy owns.

But wait, there's more gas
That's exciting but it's only half of DTE Energy's natural gas story. For starters, the regulated side of the company's business, which is far larger than the non-regulated business, is made of electricity and natural gas. And while DTE Energy is investing on the electric side, it expects its projects on the gas side to last several decades.

Over the next three to four years DTE Energy is expecting to spend about $1.2 billion on projects such as upgrading gas infrastructure and replacing meters. Since the regulated side of the business grows earnings by spending on such projects, DTE Energy is looking at decades of potential, and notable growth ahead in this segment.

To be sure, DTE Energy isn't alone in this. For example Consolidated Edison (NYSE:ED) has been talking about its natural gas efforts too. One of the most exciting aspects for Consolidated Edison is the potential for converting oil heat users to natural gas. And it's a big opportunity to add customers, since Consolidated Edison has only completed around 15% of the potential conversions it identified in 2010.

However, underneath this is the core of replacing old and decaying gas pipelines. While this won't add customers, like DTE Energy, Consolidated Edison's spending here will likely be viewed constructively by regulators and lead to rate hikes. The deadly explosion of a 127-year-old Consolidated Edison gas main last year shows why. The natural gas infrastructure underneath our streets and homes is old and decaying, and doing nothing about it would have deadly consequences. But replacing it is a slow process.

DTE Energy is complex 
DTE Energy has a lot of moving parts and is far from your run of the mill utility. However, it's well worth a deep dive, taking particular note of its regulated and unregulated natural gas opportunities. They help underpin DTE Energy's projected earnings and dividend growth of around 5% to 6% over the next four to five years.

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Reuben Brewer has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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