DTE Energy Company — Form 10-Q Summary
Business context and reporting period
DTE Energy is a diversified energy company headquartered in Detroit, Michigan. Its principal businesses are regulated electric utility operations serving approximately 2.1 million customers, regulated natural gas operations serving approximately 1.2 million customers, and non-utility gas infrastructure, power and industrial projects, and energy trading.
This unaudited report covers the three and six months ended June 30, 2013, compared with the corresponding 2012 periods. The filing was dated July 26, 2013.
Financial performance and key metrics
| Metric | Three months ended June 30 | Six months ended June 30 | ||
|---|---|---|---|---|
| 2013 | 2012 | 2013 | 2012 | |
| Operating revenues | $2,225 million | $2,013 million | $4,741 million | $4,252 million |
| Operating income | $223 million | $294 million | $633 million | $606 million |
| Net income attributable to DTE | $105 million | $146 million | $339 million | $302 million |
| Diluted EPS | $0.60 | $0.86 | $1.94 | $1.77 |
| Dividends declared per share | $0.66 | $0.59 | $1.28 | $1.18 |
Second-quarter operating margin was approximately 10.0%, compared with 14.6% in the prior-year quarter. Six-month operating margin was approximately 13.4%, compared with 14.3%. Net margin attributable to DTE was approximately 4.7% for the quarter and 7.1% year to date.
- Revenue increased 10.5% in the quarter and 11.5% year to date, while operating income declined 24.1% in the quarter and increased 4.5% year to date.
- Fuel, purchased power and gas expense increased to $940 million from $697 million in the quarter and to $1.964 billion from $1.586 billion year to date.
- The effective tax rate declined to 29% from 32% in the quarter and to 30% from 32% year to date, primarily because of higher production tax credits.
- Cash flow from operating activities was $1.267 billion, up from $1.161 billion in the first six months of 2012.
- Capital expenditures were $905 million year to date, consisting of $708 million for utility projects and $197 million for non-utility projects.
- Net cash used in financing activities was $375 million; the company issued $371 million of long-term debt, redeemed $515 million, and paid $215 million in common-stock dividends.
Balance sheet, debt and liquidity
- At June 30, 2013, total assets were $25.944 billion and total equity was $7.587 billion, compared with $26.339 billion and $7.411 billion, respectively, at December 31, 2012.
- Cash and cash equivalents were $46 million, down from $65 million at year-end. Restricted cash was $112 million.
- Reported current borrowings included $216 million of short-term borrowings and $879 million of current long-term debt. Long-term debt, net of current maturities, was $6.806 billion.
- Credit facilities totaled $1.975 billion, with $400 million outstanding and $1.575 billion available at June 30, 2013. Management reported approximately $1.6 billion of total liquidity including cash.
- Debt-to-capitalization ratios were 48% for DTE Energy, 53% for DTE Electric and 44% for DTE Gas, within the applicable covenant limit of 65%.
- Approximately $900 million of long-term debt was expected to mature during the following twelve months.
Material changes versus the prior comparable period
- Quarterly earnings declined primarily because Electric segment earnings fell to $89 million from $127 million. Electric gross margin decreased $32 million, largely due to unfavorable weather, lower sales and customer-related surcharge effects; depreciation and amortization also increased.
- Year-to-date earnings increased because Gas segment earnings rose to $104 million from $56 million, more than offsetting the Electric segment decline to $204 million from $223 million.
- Gas gross margin increased $16 million in the quarter and $88 million year to date, reflecting weather, the 2012 rate order, lost and stolen gas, energy optimization revenue and tracking mechanisms.
- Energy Trading generated a $2 million loss in the quarter versus $4 million of income, although year-to-date earnings increased to $5 million from $2 million. Quarterly gross margin was pressured by lower gains in the power full-requirements strategy.
- Postretirement benefit changes associated with new labor agreements reduced the accumulated postretirement benefit obligation by $258 million. The company expected 2013 postretirement benefit costs to decrease by approximately $69 million, resulting in an annual net benefit of approximately $40 million.
- The company contributed $150 million to pension plans during the first six months, including $100 million of common stock, and contributed $145 million to other postretirement benefit plans.
- The 2012 Unconventional Gas Production business was sold in December 2012; the 2012 comparative results include a $1 million loss from discontinued operations.
Guidance, outlook, risks and unusual items
- Management expected approximately $1.8 billion of 2013 operating cash flow and approximately $2.2 billion of 2013 capital expenditures. It expected to issue approximately $300 million of equity through dividend reinvestment and employee benefit plans.
- Estimated 2013-2017 capital investments include $5.0 billion for DTE Electric base infrastructure, $900 million for mandated environmental compliance, $500 million for renewable energy and energy efficiency, and $1.08 billion for DTE Gas base infrastructure and renewal programs.
- Major risks include regulatory decisions and cost recovery, weather, customer demand and collections, commodity prices, energy-trading volatility, interest rates, access to capital markets, environmental compliance, nuclear operations, unplanned outages, litigation and cyber or terrorism-related events.
- Environmental compliance expenditures were approximately $1.9 billion through 2012; DTE Electric estimated approximately $335 million in 2013 and up to $1.8 billion through 2021 under then-current regulations. Potential additional costs from Clean Air Act, coal ash, water and greenhouse-gas requirements could not be quantified.
- EPA-related Clean Air Act proceedings concerning DTE power plants, including Monroe Power Plant Unit 2, had been remanded to the District Court. Potential outcomes include additional pollution controls, early retirements, supplemental environmental programs or fines; the company could not predict the financial impact.
- Fermi 2 was operating at approximately 68% of full capacity following a 2012 feed-water pump failure. Repair completion was expected in the fourth quarter of 2013, with related purchased-power costs subject to insurance and potential PSCR recovery.
- Ratings-triggered contracts could require approximately $313 million of cash or letters of credit if DTE were downgraded below investment grade.
- Detroit filed for Chapter 9 bankruptcy protection on July 18, 2013, after the reporting date. DTE estimated approximately $18 million of pre-petition receivables and did not expect a material financial impact.
Facts an investor should verify
- Whether Electric segment earnings and margins recover as environmental, renewable and infrastructure investments enter rate base and as weather and customer demand normalize.
- The status and recoverability of regulatory assets, PSCR and other tracking mechanisms, including the transition of Detroit Public Lighting customers.
- Progress, cost and insurance recovery associated with the Fermi 2 repair and the timing of return to full operating capacity.
- Final outcomes and potential capital requirements from EPA, Clean Air Act, coal ash, water and greenhouse-gas proceedings.
- Refinancing plans for approximately $900 million of debt maturing within twelve months and continued compliance with debt covenants.
- Exposure to energy-trading mark-to-market volatility, commodity prices and the approximately $313 million ratings-trigger collateral requirement.
- Actual 2013 capital spending, operating cash flow, pension and postretirement contributions, and the sustainability of the stated dividend strategy.