DTE Energy Company 2010 Third-Quarter Form 10-Q Summary
Business Context and Reporting Period
DTE Energy is a diversified energy company with regulated electric and gas utilities serving approximately 2.1 million and 1.2 million customers, respectively, primarily in Michigan. Its non-utility businesses include gas storage and pipelines, unconventional gas production, power and industrial projects, and energy trading. This unaudited Form 10-Q covers the three and nine months ended September 30, 2010, compared with the corresponding 2009 periods.
Key Financial Metrics
| Metric | Q3 2010 | Q3 2009 | 9M 2010 | 9M 2009 |
|---|---|---|---|---|
| Operating revenues | $2,139 million | $1,950 million | $6,384 million | $5,893 million |
| Operating income | $386 million | $332 million | $1,114 million | $942 million |
| Net income attributable to DTE | $163 million | $151 million | $478 million | $412 million |
| Diluted EPS | $0.96 | $0.92 | $2.84 | $2.51 |
| Net cash from operating activities | Not provided for the quarter | Not provided for the quarter | $1,509 million | $1,674 million |
| Capital expenditures | Not provided for the quarter | Not provided for the quarter | $818 million | $819 million |
- Operating revenue increased 9.7% in the quarter and 8.3% year to date. Operating income increased 16.3% and 18.3%, respectively.
- Net income attributable to DTE increased 7.9% in the quarter and 16.0% year to date. Diluted EPS increased 4.3% and 13.1%, respectively, with higher weighted-average shares outstanding.
- Approximate operating margins were 18.0% in Q3 2010 versus 17.0% in Q3 2009, and 17.5% for the first nine months of 2010 versus 16.0% in the prior-year period.
- The effective tax rate was 36% in Q3 2010 versus 31% in Q3 2009, and 34% for the first nine months versus 32% in 2009. The comparison was affected by tax-audit settlement benefits recognized in 2009.
- Cash flow from operations declined $165 million year to date, primarily because of less favorable working-capital changes.
- September 30, 2010 cash and cash equivalents were $84 million, compared with $52 million at December 31, 2009. Restricted cash was $56 million.
- Total debt, including current and long-term debt, was approximately $8.0 billion at September 30, 2010, compared with approximately $8.4 billion at December 31, 2009. The fair value of long-term debt was $8.8 billion versus a $7.9 billion carrying value.
- Total equity was $6.7 billion at September 30, 2010, compared with $6.3 billion at year-end 2009. Total assets were $24.3 billion.
- The company had $1.975 billion of revolving and letter-of-credit facilities, with net availability of approximately $1.733 billion. Management reported approximately $1.7 billion of available liquidity.
- The funded debt-to-capitalization ratio was 0.50 to 1.00 for DTE Energy, below the 0.65-to-1.00 covenant limit.
- Dividends declared were $0.56 per common share in Q3 and $1.62 per share for the first nine months, versus $0.53 and $1.59, respectively, in 2009.
Material Changes Versus the Prior Comparable Period
- Electric Utility net income increased to $165 million from $149 million in Q3 and to $343 million from $306 million for the first nine months. Improvements reflected favorable weather, the 2010 rate order, restoration and line-clearance tracking, and other surcharges, partly offset by customer-choice effects and higher operating costs.
- Gas Utility reported a Q3 loss of $6 million versus a $23 million loss in 2009, while nine-month earnings increased to $92 million from $23 million. Rate relief, lower uncollectible expense, and a $32 million deferral of previously expensed costs contributed to the improvement.
- Power and Industrial Projects increased Q3 net income to $26 million from $10 million and nine-month net income to $66 million from $8 million, driven primarily by higher coke sales and on-site services.
- Energy Trading declined to a $12 million Q3 loss from $6 million of income and to break-even year to date from $73 million of income. Lower commodity prices, reduced market volatility, weaker trading performance, and the absence of prior-year timing gains reduced margins.
- Energy Trading gross margin fell $32 million in Q3 and $110 million year to date. Reported results remain subject to mark-to-market timing differences between derivatives and related non-derivative assets and contracts.
- Power and Industrial Projects revenue included the consolidation of five previously equity-method entities following adoption of ASU 2009-17. The change increased reported revenue and operating expense but did not affect net income attributable to DTE.
- DTE issued $600 million of Detroit Edison senior notes at 3.45% and 4.89%, both due in 2020, and redeemed $500 million of 6.125% senior notes due in 2010.
Outlook, Risks, Contingencies, and Unusual Items
- Management expects to focus on utility customer satisfaction, regulatory recovery, asset-base growth, cost optimization, liquidity management, and disciplined non-utility investment. No specific consolidated earnings guidance was provided in the filing.
- Expected 2010 capital investments were up to approximately $1.3 billion. Detroit Edison expects up to $2.2 billion of additional environmental capital expenditures through 2019 under current regulations.
- Detroit Edison filed an October 2010 rate case requesting a $443 million base-rate increase, subject to proposed adjustments that could reduce the net request by approximately $190 million.
- MichCon filed a rate case seeking a $51 million revenue increase. It also estimated a customer refund liability of approximately $15 million related to its prior gas-rate order.
- Power and Industrial Projects expects approximately $30 million of production tax credits in 2010. A rail transportation contract expiring in 2011 is expected to reduce annual revenue by approximately $120 million, largely offset by lower variable costs.
- The company faces an EPA and Department of Justice lawsuit concerning alleged Clean Air Act violations at Monroe Power Plant Unit 2. Potential outcomes include additional pollution controls, early facility retirement, supplemental environmental programs, and fines; the financial impact cannot currently be predicted.
- Potential future environmental rules covering air emissions, cooling-water intake structures, coal ash, and greenhouse gases could materially increase capital requirements and operating costs.
- Economic conditions continue to affect customer usage, customer losses, theft, uncollectible accounts, and working capital. Regulatory recovery mechanisms mitigate but do not eliminate these risks.
- DTE had approximately $900 million of debt maturing within the next twelve months, including $600 million of unsecured debt maturing in June 2011.
- Contracts subject to ratings triggers could require approximately $297 million of collateral if DTE were downgraded below investment grade, although the actual amount could vary with commodity prices and contract terms.
- The company contributed $200 million to pension plans in 2010, including $100 million of DTE common stock, and expects approximately $155 million of postretirement benefit contributions for the year. Management expects 2011 pension and postretirement costs to increase due to lower long-term interest rates.
- Management identified commodity prices, interest rates, credit exposure, regulatory proceedings, environmental compliance, nuclear operations, capital-market access, customer credit quality, labor relations, weather, and litigation as significant risks.
- Disclosure controls and procedures were assessed as effective, and no material change in internal control over financial reporting was reported.
Most Important Facts for Investors to Verify
- Progress and regulatory treatment of the Detroit Edison and MichCon rate cases, including the requested $443 million electric increase and $51 million gas increase.
- EPA litigation, potential environmental compliance expenditures, and the final treatment of coal ash, greenhouse-gas, and cooling-water regulations.
- Energy Trading performance and the extent to which future earnings may be affected by derivative mark-to-market volatility.
- Cash generation relative to approximately $1.3 billion of annual capital investment, upcoming debt maturities, and the company’s ability to preserve reported liquidity.
- Customer arrears, theft, uncollectible accounts, and the effectiveness of regulatory tracking and revenue-decoupling mechanisms.
- Pension and postretirement funding requirements, liability sensitivity to discount rates and asset returns, and the effect of healthcare legislation.
- The impact of the 2010 VIE consolidation on reported revenue, expenses, assets, and liabilities when comparing future periods.