DTE Energy Company and DTE Electric Company — First-Quarter 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015. The combined filing covers DTE Energy Company, the diversified energy parent, and its wholly owned subsidiary DTE Electric Company. DTE Energy serves approximately 2.1 million electric customers and, through DTE Gas, approximately 1.2 million natural-gas customers in Michigan. The financial statements are unaudited.
Key Financial Metrics
| Metric | DTE Energy 2015 | DTE Energy 2014 | Change |
|---|---|---|---|
| Operating revenues | $2,984 million | $3,930 million | Down $946 million |
| Operating income | $461 million | $560 million | Down $99 million |
| Income before taxes | $396 million | $485 million | Down $89 million |
| Net income attributable to DTE Energy | $273 million | $326 million | Down $53 million |
| Diluted EPS | $1.53 | $1.84 | Down $0.31 |
| Operating cash flow | $747 million | $532 million | Up $215 million |
| Dividends declared per share | $0.69 | $0.66 | Up $0.03 |
DTE Energy’s operating margin was approximately 15.4% in 2015 versus 14.2% in 2014. Net margin attributable to DTE Energy was approximately 9.1% versus 8.3%. The filing does not present a consolidated adjusted or non-GAAP margin.
| Metric | DTE Electric 2015 | DTE Electric 2014 | Change |
|---|---|---|---|
| Operating revenues | $1,203 million | $1,410 million | Down $207 million |
| Operating income | $268 million | $271 million | Down $3 million |
| Income before taxes | $211 million | $214 million | Down $3 million |
| Net income | $137 million | $137 million | Flat |
| Operating cash flow | $173 million | $312 million | Down $139 million |
DTE Energy reported cash and cash equivalents of $99 million at March 31, 2015, compared with $48 million at December 31, 2014. Total assets were $28.1 billion, total equity was $8.7 billion, and long-term debt, including junior subordinated debentures and capital leases, was approximately $8.8 billion. Short-term borrowings were zero at quarter-end versus $398 million at year-end 2014.
DTE Electric reported cash and cash equivalents of $54 million at March 31, 2015, compared with $14 million at December 31, 2014. Total assets were $18.8 billion, shareholder’s equity was $5.3 billion, and long-term debt, including capital leases, was approximately $5.6 billion.
Material Changes Versus the Prior Comparable Period
- DTE Energy net income declined primarily because of lower earnings in the Gas and Energy Trading segments, partly offset by stronger Gas Storage and Pipelines and Power and Industrial Projects results.
- Energy Trading net income fell to a $9 million loss from $42 million of income. Gross margin declined to $4 million from $88 million because of unfavorable realized and unrealized results, particularly in gas strategies.
- Gas segment net income declined to $111 million from $129 million. Gross margin decreased $25 million, reflecting weather, lower midstream storage and transportation revenues, and other factors.
- Electric segment net income attributable to DTE Energy was unchanged at $136 million, despite a $101 million decrease in segment gross margin. The decline was largely related to the expiration or reduction of securitization bond and tax surcharge revenues, lower base sales, and other regulatory mechanisms. Lower operating and amortization expenses substantially offset the margin decline.
- Power and Industrial Projects net income increased to $33 million from $15 million, aided by lower operating costs, a landfill-gas project gain, and higher production tax credits.
- Gas Storage and Pipelines net income increased to $27 million from $21 million, primarily due to higher pipeline and gathering volumes and investment earnings.
- Operating cash flow increased despite lower earnings, principally because of more favorable working-capital changes. Investing cash use increased to $556 million from $442 million, including the $240 million acquisition of a 732-MW natural-gas facility.
- DTE Electric issued $500 million of 3.70% mortgage bonds due 2045 and redeemed $105 million of securitization bonds and $10 million of mortgage bonds. DTE Energy’s consolidated long-term debt increased to $8.8 billion from $8.3 billion at year-end.
Liquidity, Capital Investment, and Outlook
- DTE Energy reported approximately $1.9 billion of available liquidity at March 31, 2015, including cash and unused capacity under unsecured revolving credit agreements. Net availability under specified facilities was $1.17 billion for DTE Energy, $300 million for DTE Electric, and $300 million for DTE Gas.
- Funded debt-to-total-capitalization ratios were 0.50-to-1 for DTE Energy, 0.52-to-1 for DTE Electric, and 0.47-to-1 for DTE Gas, versus a covenant maximum of 0.65-to-1.
- Management expected 2015 operating cash flow of approximately $1.7 billion, about $100 million below 2014, primarily because of lower surcharge collections. Planned 2015 capital investments and contributions to equity-method investees were approximately $2.6 billion.
- DTE Energy had approximately $170 million of long-term debt maturing in the following twelve months and expected to fund maturities with internally generated cash or new long-term debt.
- DTE Electric estimated 2015–2019 capital investments of approximately $7.5 billion, including $5.7 billion for base infrastructure, $1.4 billion for new generation, and $400 million for environmental compliance. DTE Gas estimated approximately $1.6 billion over the same period for infrastructure and renewal programs.
- DTE Electric filed a rate case requesting a $370 million base-rate increase. New rates could be self-implemented in July 2015, with a final MPSC order expected in December 2015.
Risks, Contingencies, and Unusual Items
- Energy Trading earnings are subject to significant commodity-price and mark-to-market timing volatility. The segment reported $75 million of derivative losses in operating results for the quarter, compared with a $21 million gain in the prior-year quarter.
- DTE Energy could be required to post approximately $416 million of collateral if its credit rating fell below investment grade under ratings-trigger provisions. Net derivative credit exposure to trading counterparties was $777 million after $2 million of cash collateral.
- DTE Electric faces regulatory uncertainty involving recovery of Fermi 2 replacement-power costs. An MPSC proposal challenged recovery of approximately $50 million; resolution was expected in 2016.
- Environmental regulations, including CSAPR, MATS, ozone standards, greenhouse-gas rules, cooling-water requirements, wastewater rules, and coal-ash requirements, could require additional capital spending, emissions purchases, facility retirements, or higher purchased-power costs. The filing does not provide a clear estimate of the ultimate financial impact of several pending rules.
- DTE Electric and DTE Energy remain subject to EPA and Department of Justice proceedings concerning alleged Clean Air Act and New Source Review violations at several power plants. Potential outcomes could include pollution-control investments, early retirements, supplemental environmental projects, or fines; the financial impact cannot currently be predicted.
- DTE Energy estimated maximum potential liabilities of approximately $850 million under synthetic-fuel guarantees and $192 million under reduced-emissions-fuel guarantees, although payment was considered remote. Other guarantees totaled approximately $63 million, also considered remote.
- Long-term purchase commitments were estimated at approximately $8.2 billion for DTE Energy through 2051 and $2.4 billion for DTE Electric through 2033.
- DTE Energy contributed $117 million of common stock to its Master VEBA Trust on behalf of DTE Electric. Management could make up to $150 million of additional pension contributions and up to $80 million of additional other-postretirement contributions in 2015, subject to conditions described in the filing.
Investor Verification Checklist
- Verify the outcome and timing of DTE Electric’s $370 million rate case and the treatment of the remaining revenue-decoupling liability.
- Monitor Energy Trading’s realized and unrealized commodity results, derivative valuations, and potential collateral requirements.
- Assess whether environmental rules or Clean Air Act proceedings could materially increase capital expenditures, operating costs, fines, or generation-retirement requirements.
- Reconcile planned 2015 capital spending and pension/postretirement contributions with operating cash flow, debt issuance, and leverage targets.
- Review the $240 million gas-generation acquisition and the planned additional gas-facility acquisition for returns, regulatory treatment, and integration effects.
- Track DTE Energy’s debt maturities, refinancing activity, credit ratings, and available revolving-credit capacity.
- Consider the sensitivity of utility earnings and cash flow to weather, customer demand, regulatory recovery mechanisms, interest rates, investment returns, and commodity prices.