Morningstar | DTE Reports Strong 3Q; Nexus Pipeline Goes Into Service
We are increasing our fair value estimate to $107 from $103 per share after DTE Energy reported strong 2018 third-quarter earnings, increased 2018 earnings guidance, and indicated the Nexus pipeline was placed into service.Although Nexus capacity agreements are now mostly short-term, we are confident that current agreements will be replaced with long-term contracts over the next few years based on DTE’s track record at contracting pipeline capacity. DTE owns 50% of the $2 billion, 256-mile pipeline bringing shale gas to Michigan.
DTE provided a 2019 early outlook of $5.97-$6.33 per share, below our earnings estimate of $6.57 per share. However, DTE indicated they are close to finalizing a tax equity transaction that will accelerate cash flows by about $100 million a year for the next three years. Although strongly NPV positive, the transaction will lower earnings by about $0.20 per share. We have reduced our 2019 earnings estimate to $6.30 per share, near the top end of the early outlook, to account for this transaction and made minor changes to other segments to conform with DTE’s early outlook.
The increase in 2018 EPS guidance was mostly due to favorable weather and does not have a material impact on our fair value estimate. The primary driver for the $4 per share increase in our fair value estimate was increasing our annual earnings growth assumption in Stage II of our discounted cash flow model (years six-15) by 50 basis points, to 7%. This management team has grown EPS by 9% annually over the past five years and 8% over the past decade.
Although we estimate annual operating earnings to fall 5%-6% over the next couple years due in large part to the decline in REF earnings, we have a high level of confidence that operating earnings growth will return to the high-single digits through the next decade. Our confidence is based on our outlook for utility investment and management’s track record of capitalizing on existing pipeline platforms.
DTE Energy is a holding company. The company is engaged in the generation, purchase, distribution and sale of electricity to customers in southeastern Michigan through its DTE Electric Company subsidiary, as well as in the purchase, storage, transportation, distribution and sale of natural gas throughout Michigan and the sale of storage and transportation capacity through its DTE Gas Company subsidiary. The company's non-utility operations are: gas storage and pipelines, which consists of natural gas pipeline, gathering, transportation, and storage businesses; power and industrial projects; and energy trading, which consists of energy marketing and trading operations.
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