DTE Energy Company (DTE) in view of improving its operational efficiency announced plans to install an additional 350,000 electric meters in Oakland, Michigan. The installation part of the company’s Advanced Metering Infrastructure (AMI) program will start in April 2011 and is expected to be completed by early 2012.
The meters will help the company by providing remote monitoring of the electric distribution system, provide detailed information about their energy usage and recognize power outages without customer input.
Earlier in April 2010, DTE Energy signed an agreement with the U.S. Department of Energy for a grant of approximately $84 million in matching funds on total anticipated spending of approximately $168 million related to the accelerated deployment of smart grid technology in Michigan through 2012.
The smart-grid technology includes the establishment of an advanced metering infrastructure and other technologies that address improved electric distribution service. The company already has installed about 250,000 meters in Michigan towards this purpose.
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 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 filing, failing which the proposed rates take effect.
DTE Energy is focused on improving its cost structure and directing capital investments towards 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 AMI program and installation of its scrubbers program to improve its operational efficiency. A focus on the 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 moderate 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 presently retains a short-term Zacks #4 Rank (Sell). We have a long-term Neutral recommendation on the stock. In the near term, we would advise investors to accumulate its short-term Zacks #2 Rank (Buy rating) peers like EDP-Energias de Portugal, S.A. (EDPFY) and The AES Corporation (AES).
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