Owing to the steady decline in natural gas prices, DTE Energy Company DTE slashed the cost of natural gas for customers by almost 9%. Notably, the company has lowered its gas rate by 8.8% effective Apr 1, from $3.54 per thousand cubic feet to $3.23.

This reduction will result in substantial savings for both of its business and residential customers.  

Factors Driving the Rate Reduction

A steady decline in natural gas prices over the past decade, thanks to increased domestic production from newfound sources, has been the primary reason for the recent rate reduction by DTE Energy.  As per management, the company does not profit from natural gas and thus its customers pay the same price that it shells out.

And even in the case of a sudden price hike, DTE Energy’s pricing is regulated by the Michigan Public Service Commission (MPSC), which again is in the favor of the customers.

Moreover, management believes that the company’s successful natural gas storage during lower price periods have allowed it to keep competitive rates even during high usage months in winter.

Over the last 10 years, the natural gas bills for DTE Energy’s residential customers have dropped 27% or about $300 annually, in line with the decline in natural gas price.

In fact, gas energy costs in the winter of 2016-2017 increased slightly from the previous season for the company owing to bad weather. However, gas bills for consumers were lower compared to typical winter levels.

Our View

With the increase in demand for pollution free renewable energy resources, DTE Energy has been steadily investing in renewable assets. Over the next 15 years, DTE Electric – a subsidiary of DTE – plans to shut down a few of its coal-fired generating units and ramp up natural gas-fired generation and renewables mix. In this context, during the third quarter, the company announced plans to retire eight coal-fired generating units through 2023 and replace them with natural gas-fired generation and renewables. Moreover, DTE Energy intends to build natural gas turbine plants to provide approximately 1,000 megawatts of energy between 2021 and 2023.

In fact, DTE Energy boasts substantial opportunities in the Midwest to Northeast region which will help it make up for the low supply in parts of North America. Much of the rise in natural gas demand is expected in eastern Canada and the northeast U.S. regions.

To cash in on these opportunities, DTE Energy closed the purchase of midstream natural gas assets last year in order to build its natural gas assets. Currently, the company caters to nearly 1.3 million customers in the state of Michigan. We expect such rate reductions to help the company gain more customers.

At the Gas Storage and Pipelines business, the company plans to invest around $2.5 billion over the next five years for expansion of assets and construction of the NEXUS pipeline.

However, as per the U.S. Energy Information Administration’s weekly report, total U.S. consumption of natural gas fell 7% from the previous week, according to data from PointLogic. Although this decline is typical for the "shoulder season" that falls between high heating demand in winter and large power burn in summer, if this continues, the rate reduction implemented by DTE Energy might hurt revenue growth.

Price Performance

DTE Energy gained 16% in the last one year, outperforming the Zacks categorized Utility - Electric Power industry’s decline of 0.7%. The outperformance might have been driven by its steady focus on improving cost structure and making capital investments in renewable generation, utility infrastructure, environmental compliance assets and electric utility systems. Furthermore, the company poses solid competition to peers like CMS Energy Corp. CMS, Ameren Corporation AEE and Entergy Corporation ETR.

Zacks Rank

DTE Energy currently has a Zacks Rank #3 (Hold). You can seethe complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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Ameren Corporation (AEE): Free Stock Analysis Report
 
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