DTE Energy

DTE Energy filed its triennial 20-year integrated resource plan with the Michigan Public Service Commission on Sept. 24. Regulators have one year to approve or request changes to the plan.

Why it matters: The IRP addresses DTE's challenge of serving 1%-2% annual electricity demand growth while meeting Michigan's 100% clean energy requirement by 2040 without large customer bill increases. DTE's plan includes eliminating coal generation by 2032 and replacing that generation with a mix of gas, renewable energy, and energy storage. This includes two large gas plants totaling 2.1 gigawatts, 15 GW of renewable energy, and 4.5 GW of battery storage. Renewable energy and energy storage together would represent 70% of DTE's system capacity by 2035 based on the IRP. Adding battery storage is critical to maintain reliability as DTE works to meet Michigan's clean energy requirements. 

The bottom line: We are reaffirming our $157 fair value estimate and narrow Morningstar Economic Moat Rating for DTE. DTE's stock trades at a 23% discount to our fair value estimate as of Sept. 28, making it one of the cheapest US utilities we cover. We continue to forecast 8% annual earnings growth, assuming Michigan regulators approve the Google contract. This is at the high end of management's 6%-8% target. Our 2026 EPS estimate aligns with management's $7.59-$7.73 guidance.

Big picture: The IRP supports management's $36.5 billion investment plan for 2026-30, including $30 billion at the electric utility. The Google data center could add $5 billion through 2032, pending regulatory approval. The IRP incorporates DTE's data center contracts with Oracle and Google totaling 2.4 gigawatts. Management said they plan to sign one more large data center contract by year-end.

Coming up: Regulators likely will rule early next year on DTE's $474.3 million electric rate increase request, including a two-year stay-out based on the Oracle data center ramp-up.

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Our fair value estimate is $157 per share after incorporating year-to-date financial results in line with our expectations.

We forecast 8% annual consolidated EPS growth through 2029, at the high end of management's 6% to 8%. The bulk of that growth is based on our assumption that DTE's capital investment rises to more than $7.5 billion annually across its gas and electric utilities, with additional, smaller investments in its non-regulated DTE Vantage business.

Our 2026-30 capital investment forecast is more than management's most recent $36.5 billion capital investment plan, which does not include the Google project. We assume Michigan regulators approve the Google contract and DTE increases its growth investment plan to serve the data center.

We forecast DTE's electric business will continue to generate the bulk of DTE's consolidated earnings and growth. We assume Michigan utility commissioners approve electric rate increases based on a 9.9% allowed return on equity, consistent with their 2026 rate review decision. Additional data center customers could boost investment and earnings growth beyond 2028.

We expect modest but steady growth at the gas utility.

We also expect modest near-term earnings growth at DTE Vantage based on $2 billion of total investment during the next five years in industrial and clean energy projects. Expiring tax credits in 2029 will re-base long-term earnings at DTE Vantage.

We assume a 7% cost of equity, lower than the rate of return we expect investors to demand of a diversified equity portfolio.

Service territory monopolies and efficient-scale advantages are the primary sources of economic moats for DTE's rate-regulated gas and electric utilities.

State and federal regulators grant DTE's utilities exclusive rights to charge customers rates that allow the utilities to earn a fair return on and return of the capital they invest to build, operate, and maintain their distribution networks.

In exchange for regulated utilities' service territory monopolies, state and federal regulators set customer rates based on returns on equity that aim to minimize customer costs while offering fair returns for shareholders.

This implicit contract between regulators and capital providers should, on balance, allow regulated utilities to earn greater than their costs of capital, though observable returns might vary in the short run based on demand trends, investment cycles, operating costs, and access to financing.

Intuitively, utilities like DTE should have an economic moat based on their efficient scale advantages, but in some cases regulation offsets this advantage, preventing excess returns on capital. The risk of adverse regulatory decisions precludes most regulated utilities from earning wide economic moat ratings. However, the threat of material value destruction is low, and normalized returns exceed costs of capital in most cases, leaving us comfortable assigning narrow moats to many regulated utilities like DTE.

We expect DTE's nonutility segments will represent about 10% of earnings in the long run. On balance, we believe the nonutility segments are not large enough to change DTE's overall narrow moat rating.

We expect annual dividend increases to remain 6%-7% for the foreseeable future.

Michigan's energy infrastructure needs investment to attract customers like data centers, which means ample growth opportunities for DTE's gas and electric utilities.

Over the past 10 years, Michigan regulation has been constructive for shareholders and we expect it to remain favorable.

Although changes to Michigan's regulatory framework were signed into law in late 2016, DTE still faces regulatory lag based on its large growth investment plan.

DTE's regulated utilities primarily serve Detroit and the surrounding metropolitan area whereas other utilities have more geographically diverse service territories.

Higher interest rates and inflation could raise DTE's financing and operating costs while making the dividend less attractive.