Detroit Edison Going Green - Analyst Blog

Detroit Edison, the utility subsidiary of DTE Energy Company (DTE) received regulatory approval for a 20-year renewable energy purchase contract. The Michigan Public Service Commission ("MPSC") gave approval for the company to purchase 200 megawatts (MW) of wind energy from Invenergy Wind.

 

Invenergy Wind will supply the wind power from a 30,000-acre wind farm it would install and operate near Breckenridge in Gratiot County, Michigan. The wind farm is touted to be the largest in the state of Michigan. The new wind farm will host 125 1.6-MW wind turbines from General Electric Company (GE). The wind turbines are expected to be operational by late 2011 after a year of construction and will have the capacity to power nearly 54,000 homes. The contract also provides Detroit Edison with an option to buy a portion of the project after construction is completed. If Detroit Edison exercises the option, the remaining capacity will remain as purchased power for the utility.

 

Detroit Edison expects to add more than 1,200MW of renewable energy to its portfolio by 2015 to meet the state of Michigan's renewable energy goals. The expansion will come through the addition of captive sources and contract with third-party producers. The utility plans to own renewable energy projects to generate about half of 1,200 MW and contract with third-party producers such as Invenergy Wind for the rest. The Invenergy contract will boost Detroit Edison's renewable energy capacity to nearly 4% of its total generation.

 

Detroit Edison expects the majority of its renewable energy to come from wind resources. The company has acquired land rights to nearly 80,000 acres of land in Huron County in Michigan's Thumb region for development of large-scale wind projects. Recent approval by the Midwest Independent System Operator to expand the transmission system in the Thumb region will provide the necessary infrastructure for wind projects. The company also has two solar energy pilot programs that could produce about 20 MW of electricity.

 

Invenergy Wind and its affiliated companies develop, own and operate large-scale renewable and other clean energy generation facilities in North America and Europe. Invenergy is the sixth-largest wind generating company in the U.S.

 

DTE Energy is a Detroit-based diversified energy company involved in the development and management of energy-related businesses and services nationwide. Detroit Edison is the company's principal operating subsidiary, providing electricity to 2.2 million customers in Southeastern Michigan.

 

DTE Energy's regulated electric and gas utilities in Michigan generate a relatively stable and growing earnings stream. Also a constructive regulatory environment in Michigan coupled with an 11% allowed ROE will aid in earnings growth. The Michigan Public Service Commission ("MPSC") has accepted the company's rate case request to base it on a forward test year in contrast to a historical test year as in other parts of the country. The company also has a regulatory provision to self-implement its requested rate hike for 6 months after filing. The regulatory body also has to decide the rate case within one year of the filing, failing which the proposed rates become permanent.

 

DTE Energy is focused on improving its cost structure and directing capital investments toward renewable generation, utility infrastructure and environmental control assets. At the same time it is scouting for projects for its unregulated businesses which would generate premium returns in the long run.

 

The company is scaling up its Advanced Metering Infrastructure ("AMI") program and installation of its scrubbers program to improve its operational efficiency. A focus on cost structure and operational improvements will help the utility attain its 5%-6% long-term EPS growth target coupled with an attractive dividend yield. Improvement in the cost structure will also stand in good stead as it will reduce the hike in customer bills. Since the economy of Michigan is going through a lean phase, any minimization in rate hikes will reduce political backlash over rising rates.

 

Our bullish outlook for DTE Energy Company is supported by its stable and growing utilities business and complementary non-utility businesses. Going forward, the growth momentum will be maintained by beneficial regulatory policies in Michigan, higher rates, approved 11% ROE for its regulated assets, a strong balance sheet, and an industry-high dividend yield.

 

However, we believe these are already priced in the current valuation, leaving little room for any upside. However, the present unfavorable macro backdrop, lower demand for electricity, the dismal Michigan economy and pending regulatory cases continue to restrain valuation.

 

DTE Energy currently retains a Zacks #4 Rank (short-term Sell rating). We also maintain a Neutral rating on the stock.