DTE Energy Co. 2020 Q2 Form 10-Q Summary
Business context and reporting period
This combined, unaudited Form 10-Q covers DTE Energy Company and its indirect subsidiary DTE Electric Company for the three and six months ended June 30, 2020, compared with the corresponding 2019 periods. DTE Energy operates regulated electric and gas utilities in Michigan and non-utility businesses in gas storage and pipelines, power and industrial projects, and energy trading. DTE Electric serves approximately 2.2 million customers in southeastern Michigan.
Key financial metrics
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| DTE Energy operating revenues | $2,583 million | $2,888 million | $5,605 million | $6,402 million |
| DTE Energy operating income | $367 million | $300 million | $913 million | $842 million |
| Net income attributable to DTE Energy | $277 million | $182 million | $617 million | $583 million |
| Diluted EPS | $1.44 | $0.99 | $3.20 | $3.18 |
| DTE Electric revenue | $1,309 million | $1,190 million | $2,521 million | $2,425 million |
| DTE Electric net income | $183 million | $133 million | $277 million | $280 million |
- DTE Energy operating cash flow was $1.681 billion for the first six months, up from $1.367 billion in 2019. Investing cash flow was an outflow of $2.185 billion, primarily for capital expenditures, while financing cash flow was an inflow of $1.032 billion.
- Cash, cash equivalents, and restricted cash increased to $621 million at June 30, 2020, from $93 million at December 31, 2019.
- DTE Energy reported $17.341 billion of long-term debt, $670 million of current maturities, and $914 million of short-term borrowings at June 30, 2020. DTE Electric reported $7.953 billion of long-term debt, $619 million of current maturities, and $307 million of short-term borrowings.
- Available liquidity was approximately $3.4 billion according to management, including cash, available revolving credit, and undrawn term loans. Facility availability reported in Note 11 was $2.693 billion, excluding cash.
- Electric utility margin increased to $969 million in the quarter and $1.887 billion year to date, compared with $868 million and $1.757 billion, respectively. Gas utility margin was $209 million in the quarter and $571 million year to date, versus $200 million and $604 million.
- Gas Storage and Pipelines net income attributable to DTE Energy increased to $70 million in the quarter and $142 million year to date, primarily reflecting the 2019 Blue Union and LEAP acquisition. Energy Trading net income was a $1 million loss in the quarter and $33 million of income year to date.
Material changes versus the prior comparable period
- Quarterly net income attributable to DTE Energy rose $95 million, primarily from stronger Electric, Gas Storage and Pipelines, and Corporate and Other results. Six-month net income rose $34 million, with the increase concentrated in Gas Storage and Pipelines and Corporate and Other.
- Revenue declined because of lower non-utility revenue, particularly Energy Trading and Power and Industrial Projects. Energy Trading revenue fell to $740 million from $1.113 billion in the quarter, while its margin increased to $21 million from $13 million.
- Power and Industrial Projects revenue decreased to $219 million from $402 million in the quarter, reflecting lower REF production and sale of membership interests and lower steel demand. Net income attributable to DTE Energy declined to $25 million from $29 million.
- DTE Electric utility margin benefited from new rates, favorable weather, and base sales, but sales volumes declined overall as commercial and industrial demand fell while residential demand increased. DTE Electric recorded $29 million of COVID-19-related operating and maintenance costs in the second quarter.
- DTE Energy completed a $95 million acquisition of an 8 MW combined heat and power facility in February 2020 and continued development of the previously acquired Blue Union and LEAP assets. The $385 million contingent consideration payment for LEAP was made on July 27, 2020, after the reporting date.
- DTE Energy issued $1.685 billion of long-term debt net of issuance costs during the first six months. DTE Electric issued $1.7 billion of mortgage bonds and redeemed $300 million of senior notes.
Guidance, outlook, risks, and unusual items
- Management expected approximately $3.0 billion of 2020 operating cash flow and approximately $4.5 billion of 2020 capital investments and equity-method-investee contributions for DTE Energy. DTE Electric and DTE Gas planned significant infrastructure, generation, renewable, and system-renewal investments.
- DTE Energy targets electric utility carbon reductions of 32% by the early 2020s, 50% by 2030, and 80% by 2040 from 2005 levels, with a net-zero goal for electric and gas utility operations by 2050.
- The MPSC approved a $188 million annual DTE Electric revenue increase effective May 15, 2020, with a 9.9% authorized return on equity. The order disallowed $41 million of incentive-compensation-related capital expenditures, recorded as an asset write-off.
- DTE Gas reached a settlement providing a $110 million annual base-rate increase, or a $51 million net customer increase after incorporating an existing surcharge, subject to MPSC approval. Implementation was expected October 1, 2020. DTE Gas recorded a $14 million adjustment for probable incentive-compensation disallowances.
- The CARES Act generated a $34 million reduction in income tax expense and a $220 million receivable for expected federal tax refunds, including $153 million of AMT credits and $67 million from an NOL carryback.
- COVID-19 created risks to customer demand, collections, supply chains, operating costs, capital markets, counterparties, and non-utility production. DTE increased doubtful-account allowances by $8 million at DTE Electric and $3 million at DTE Gas, while certain excess uncollectible costs were deferred as regulatory assets.
- In April 2020, Fitch downgraded DTE Energy’s unsecured debt rating from BBB+ to BBB, citing higher leverage and business risk following the midstream acquisition. Management stated that liquidity and capital-market access were not expected to be adversely affected.
- Energy Trading remains exposed to commodity-price, counterparty, and mark-to-market volatility. DTE Energy’s contractual collateral requirement upon a below-investment-grade downgrade was $368 million at June 30, 2020.
- Environmental, coal-ash, emissions, remediation, nuclear decommissioning, regulatory, and litigation obligations remain material. Approximately $7 million was accrued for an EPA/Sierra Club settlement pending final court determination, which management did not expect to be material.
Most important facts for an investor to verify
- Whether COVID-19-related customer demand, collection trends, regulatory deferrals, and operating costs materially changed after June 30, 2020.
- The final MPSC approval and implementation of the DTE Gas rate settlement and the effect of accelerated TCJA regulatory-liability amortization at DTE Electric.
- Completion, operating performance, and cash economics of the LEAP and Blue Union midstream assets, including the July 2020 contingent payment.
- Debt maturities, refinancing requirements, covenant compliance, credit ratings, and the availability of committed liquidity.
- Future commodity-price and mark-to-market effects in Energy Trading and the potential collateral requirement under ratings-trigger provisions.
- Final outcomes and costs associated with environmental proceedings, coal-ash and effluent rules, remediation sites, and other regulatory contingencies.