school of business investment program

School of BusinessInvestment Program

Will McEwen Fixed Income Manager

Brian Jacobs Political Analyst

November 7, 2019


Table of Contents

Investment Thesis

Company Overview and History

Leadership Ratio Analysis

Competitive Landscape

Recent News

Recommendation

Valuation/Models

Financial Statements

SWOT Analysis

School of BusinessInvestment ProgramInvestment Thesis

Source: Yahoo Finance, DTE

● Impressive 2019 share price performance● Recent pullback stemming from bullish

market sentiment and shifts toward risk● Resilient financial history with dependable

revenue streams & profitability● Entirely separate, but necessary, utility

investment compared to other holdings

School of BusinessInvestment ProgramDTE Electric

● The Electric segment generates, transmits and distributes electricity to 2.2 million customers in southeastern Michigan.

● 11,700 MW system capacity powered through diversified portfolio.

● Plan to be net-zero carbon by 2050.

School of BusinessInvestment ProgramDTE Gas

● DTE Gas purchases, stores, transports, distributes and sells natural gas to residential, commercial, and industrial customers.

● Michigan has more gas storage capacity than any other state.

School of BusinessInvestment ProgramDTE Energy Trading

● DTE’s energy trading segment provides energy sourcing and management solutions for a broad range of customers.

● Markets and trades power and gas commodities.

School of BusinessInvestment ProgramIntegrated Resource Planning (IRP)

● An IRP is a roadmap to meet forecasted energy demand using both supply and demand side resources to ensure reliable service to customers in the most cost-effective way.

● Currently 33 states require utilities to file publicly available IRP’s

School of BusinessInvestment ProgramLeadership

Gerard Anderson

Executive Chairman

Trevor Lauer

President and COO - DTE Electric

Jerry Norcia

President & CEO

Peter Oleksiak

Senior Vice President & CFO

School of BusinessInvestment ProgramRecent News

Aug 2019

UGI and AmeriGas complete merger transaction

July 2019

UGI increased annual dividend for 32nd consecutive year

April 2019

May 2018DTE announced a 30% ownership increase of Stonewall Gas Gathering.

Agreed to acquire a gathering system and pipeline from Momentum Midstream and Indigo Natural Resources.

Announced plan to be net-zero carbon emissions by 2050.

May OctoberOctober

School of BusinessInvestment ProgramCompetitors

Black Hills Corp● Gas and electricity

provider in South Dakota and Wyoming.

● Only two major lines of business.

● Less diversified energy portfolio.

Allete● Electric, gas, and water

utility company located in northeastern Minnesota and northwestern Wisconsin.

CMS Energy● Based in Jackson,

Michigan.● It’s main subsidiary,

Consumers Energy provides electricity and natural gas to 3.6 million customers.


Competitive Landscape

Metric

DTE

CMS

BKH

ALE

Current Price

123.71

$61.21

$74.90

$82.65

Market Cap(B)

23.8

17.4

4.7

4.5

P/E

20.63

24.80

22.70

23.70

EPS

$6.17

$2.32

$3.47

$3.38

Div. Yield

3.27%

2.52%

2.89%

2.80%

Debt/Equity

1.28

2.43

1.26

0.68

ROE

10.9%

13.8%

8.8%

8.1%


SWOT Analysis

Strengths● Easily projected future revenue and expenses due to

the regulator-approved nature of the industry● Stable cash flows with considerable top-line revenue

growth● Vertical integration and R&D capacity

Weaknesses● Geographically concentrated gas & electric

distribution in southeastern Michigan● Inflexible relationship with regulators ● Further concentration within energy portfolio

Opportunities● Wind power generation● Mission of having net-zero carbon emission by 2050● Continued growth in midstream segment

Threats● Volatile input costs and headwinds related to

changing energy generation costs● Consolidation; environmental regulation that may

outpace self-imposed emission ambitions

School of BusinessInvestment ProgramIncome Statement Analysis

● Top-Line Revenue has climbed significantly from $8.01 billion to $14.21 billion since 2009.

● 77.34% revenue growth over the last decade, 7.73% annual average.

● Yet, noticeable variability in growth rates 𝞂Growth = 11.57%


Long Term Segment Trends

● Gas Midstream is the fastest growing segment from 2014-2018, as well as expected 2019E-2023E

● Electric, the generation, purchase, distribution, and sale of electricity, is most significant of DTE’s segments

● Energy Trading Revenue has increased by 115.81% from 2016-2018


Long Term Segment Trends

● Energy Trading growth rate immensely improved since 2015

● Gas Midstream < 4% total revenue, but consistent growth

● Electric & Gas are slower growing, but have the least variability with 𝞂Electric = 3.99% and 𝞂Gas = 6.31%


Income Statement Analysis

● 2014-2018 Electric Expenses declined (1.63%) yet Electric Net Income increased 25.25%● Overall Segment Expenses grew 15.52% from 2014-2018, yet Net Income increased 29.55%● Energy trading has largest 2018 revenue ($5.6B), yet it makes smallest contribution to net income with lowest net margin


Balance Sheet Analysis

● Total Debt increased 58% from 2014-2018. This has financed acquisitions and growth in the company’s midstream business.● Though total debt increased, change in interest expense as a percentage of net income varied by segment.● 5Yr decreases in Gas Midstream and Power and Industrial Project, with projected increases moving forward.● Energy Trading Interest Expense / Net Income large expected increase; Gas & Electric largely unchanged.


Doubtful Accounts Proportion

Source: FactSet

● Indicator of revenue stream’s risk profile

● The Percentage of DTE’s Short-Term Receivables made up of poor & doubtful credit has fallen since Financial Crisis.

● Less than 4% since 2012


Valuation


Valuation

Sensitivity Analysis Monte Carlo Simulation

School of BusinessInvestment ProgramProposed Allocation

We are proposing 100 shares at a current price of $123.90.


Thank You! Any Questions?

school of business investment program

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