Dive Brief:

• DTE Energy's Board of Directors authorized management to pursue a plan to spin off DTE Midstream, the company’s non-utility natural gas pipeline, storage and gathering business, into an independent, publicly-traded company, DTE announced Tuesday. 
• "The transaction would transform DTE Energy into a predominantly pure-play regulated electric and natural gas utility," DTE said. DTE's decision follows similar moves by other investor-owned utilities to shed non-utility assets.
• The announcement comes about two weeks after DTE denied reports it was looking to sell or spin off such assets. DTE intends to complete the Midstream spinoff by mid-2021.

Dive Insight:

DTE's decision follows similar moves by Dominion, PSE&G and other utilities.

In July, Dominion Energy announced it was selling its gas transmission and storage assets to an affiliate of Berkshire Hathaway for $9.7 billion following its cancellation of a major pipeline development project, the Atlantic Coast Pipeline.

The move "reflects Dominion Energy's focus on its premier state-regulated, sustainability-focused utilities that operate in some of the most attractive regions in the country," the company said at the time of the sale.

In July, during PSEG's Q2 earnings call, Chairman, President and CEO Ralph Izzo said the company's "intent is to accelerate the transformation of PSEG into a primarily regulated electric and gas utility, a plan we have been executing successfully for over a decade." The company is selling 6,750 MW of its unregulated fossil fuel generation.

DTE on Tuesday similarly highlighted its focus on increasing the regulated nature of its portfolio.

"Our full separation profile will better align DTE with investor's preferences for high-performing regulated utilities," DTE Energy President and CEO Gerardo Norcia said during the company's Q3 earnings call.

Analysts pointed to potential clean energy drivers behind DTE's move.

"DTE’s move may be part of a wider trend, at least for a while, as many utility holding companies align evolving clean energy brands, earnings expectations and public policy. More utilities are adopting corporate [environmental, social and governance] goals that in some cases can make certain mid-stream businesses look less attractive, especially for a more pure play utility holding company," said Wayne Lafferty and Matt Mooren, energy market and utility advisors at PA Consulting.

"A more pure play utility business model may also provide more stable earnings growth. These trends may lead to increased separation of midstream businesses into separately publicly-traded or private entities," they continued.

Elliott Management, which oversees about $41 billion in assets and says it has a significant interest in DTE, issued a statement Tuesday supporting DTE's move.

"[T]he transaction will highlight the value of DTE Electric and DTE Gas as two of the best regulated utilities in the U.S. with industry-leading system capital investment and growth, a strong management execution track record and a top-tier regulatory jurisdiction," Elliott Management said in a statement.

"Both companies are now poised to deliver results and value that exceed what they could otherwise achieve on a combined basis," the statement continued.

Following DTE's announcement, Fitch Ratings affirmed its Long-Term Issuer Default Rating for DTE Energy as well as its subsidiaries DTE Electric and DTE Gas.

"The announced transaction will result in a positive shift in DTE's risk profile with state-regulated operations expected to comprise around 90% of the company's [earnings before interest, taxes, depreciation and amortization] compared to 75%-80% prior to the transaction," Fitch said.

Norcia alluded to the same numbers during Tuesday's call, saying the spinoff "positions DTE into a nearly fully regulated utility with 90% of our operating earnings and an even higher percentage of future capital investments going into our two premium utilities. A five-year plan will hold this 90/10 mix," Norcia added.

When asked by an analyst on the call why DTE didn't just sell its midstream gas unit, Norcia said, "we examined a series of alternatives as we were looking to make this pivot through more of a pure-play utility model. And when we looked at all those alternatives, we found that the spin[off]... created the greatest amount of shareholder value for our investors going forward."

Operating earnings for the third quarter 2020 were $504 million, a 43.6% increase over the $351 million in operating earnings during the year-ago quarter.

The company said it "is targeting a long-term operating [earnings per share] growth rate of 5% to 7% off its 2020 original guidance ... [which will be] supported by $17 billion of planned utility capital investments over the next five years — a $2 billion, or 13%, increase, over DTE Energy’s prior plan."