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After Vowing to Cut Carbon, Utility Makes $2 Billion Gas Bet

Gerson Freitas Jr. and Brian Eckhouse

(Bloomberg) -- DTE Energy Co. vowed last month to eliminate all its emissions from generating electricity. Now it’s betting big on natural gas.

The Detroit-based utility agreed to buy a gas-gathering system and pipeline in Louisiana for $2.25 billion in cash, according to a statement Friday. The acquisition, from Momentum Midstream and Indigo Natural Resources, will deepen DTE’s existing gas network and boost its capacity to supply the Gulf Coast. Closely-held Indigo Natural Resources is the primary supplier of gas to the assets being sold to DTE.

The fact that DTE is pushing to cut emissions on one side of its business while doubling down on fossil fuel with the other underscores how utilities continue to see gas as core to their business even as they pledge to fight climate change. While wind and solar have become cheap enough to compete with fossil fuels, utilities say they will need gas to heat homes and keep power grids stable for years to come.

“The U.S. is undergoing a fundamental shift toward clean energy, and natural gas will play a large role in that,” DTE President and Chief Executive Officer Jerry Norcia said on a conference call. “Large investments in renewable resources and natural gas infrastructure enable the shift to a cleaner energy future.”

Investors were less than enthusiastic about the acquisition, with shares falling as much as 2.9%, the most since February on an intraday basis. The deal raised concerns about DTE’s exposure to Indigo, a primary supplier of natural gas on the system, and investors are taking a cautious approach, Guggenheim Securities LLC analyst Shahriar Pourreza said in a note to clients. Fitch Ratings placed DTE’s credit rating on watch negative due to the Indigo exposure.

Last month, one of America’s biggest renewable-energy companies, NextEra Energy Partners LP, made its own big gas bet, agreeing to buy Meade Pipeline Co. in a deal valued at about $1.37 billion. NextEra’s chairman and chief executive officer, Jim Robo, told analysts after announcing the deal that “I view gas pipelines as clean energy.”

DTE serves 2.2 million electric customers and 1.3 million gas customers in Michigan. It also owns 1,900 miles of pipelines across the Midwest to the Northeast through its DTE Midstream unit. The Louisiana deal comes eight months after a DTE joint venture agreed to buy Generation Pipeline, a natural gas conduit in Ohio. DTE plans to invest $4 billion to $5 billion in DTE Midstream through 2023.

The acquisition announced Friday is expected to close this quarter. It includes an additional $400 million payment when a 150-mile (240-kilometer) gathering pipeline that’s under construction is finished in the second half of 2020.

Read More: All These Climate Promises Ignore a Big Source of Emissions

Gas has played a significant role in cutting U.S. power-plant emissions, generating about half as much carbon-dioxide as coal. As hydraulic fracturing, or fracking, has made gas cheap and plentiful, scores of coal plants have closed, and power-sector emissions have declined about 25% in a decade.

Environmentalists, however, say stopping global warming means cutting fossil fuels almost entirely.

Momentum is closely held and backed by investors including Yorktown Energy Partners.

Barclays Plc advised DTE on the deal. Momentum was advised by Jefferies Financial Group Inc. and Credit Suisse Group AG.

(Adds investor reaction in fifth paragraph)

--With assistance from James Herron.

To contact the reporters on this story: Gerson Freitas Jr. in São Paulo at gfreitasjr@bloomberg.net;Brian Eckhouse in New York at beckhouse@bloomberg.net

To contact the editors responsible for this story: James Herron at jherron9@bloomberg.net;Lynn Doan at ldoan6@bloomberg.net

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