DTE Energy Company — Q2 2011 Form 10-Q Summary
Business context and reporting period
DTE Energy is a diversified energy company operating regulated electric and gas utilities in Michigan and non-utility businesses in gas storage and pipelines, unconventional gas production, power and industrial projects, and energy trading. Detroit Edison serves approximately 2.1 million electric customers; MichCon serves approximately 1.2 million gas customers. The filing covers the three and six months ended June 30, 2011, with unaudited results compared with the corresponding 2010 periods.
Key financial metrics
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Operating revenues | $2,028 million | $1,792 million | $4,459 million | $4,245 million |
| Operating income | $288 million | $256 million | $678 million | $728 million |
| Net income attributable to DTE | $202 million | $86 million | $378 million | $315 million |
| Diluted EPS | $1.19 | $0.51 | $2.23 | $1.88 |
| Operating margin | 14.2% | 14.3% | 15.2% | 17.2% |
| Net margin | 10.0% | 4.8% | 8.5% | 7.4% |
| Dividends declared per share | $0.59 | $0.53 | $1.15 | $1.06 |
Six-month operating cash flow was $1,159 million, compared with $1,151 million in 2010. Investing cash usage increased to $767 million from $492 million, primarily because utility capital expenditures rose to $684 million from $463 million. Financing cash usage was $396 million versus $587 million in 2010. Cash and cash equivalents declined $4 million to $61 million at June 30, 2011.
At June 30, 2011, total assets were $24.6 billion and total equity was $6.8 billion. Long-term debt had a $7.8 billion carrying value and an $8.4 billion fair value; current debt included $151 million of short-term borrowings and $326 million of current long-term debt. Available credit facilities totaled approximately $1.7 billion net of outstanding commercial paper and letters of credit. DTE Energy's funded debt-to-capitalization ratio was 49%, below its 65% covenant limit.
Material changes versus the prior comparable period
- Q2 net income increased $116 million, or 135%, while six-month net income increased $63 million, or 20%. The primary driver was an $88 million non-cash income tax benefit from enactment of Michigan's Corporate Income Tax, which reduced the effective tax rate to negative 14% in Q2 and 17% for the six months, versus 34% in both 2010 periods.
- Revenue increased 13% in Q2 and 5% year to date, but six-month operating income decreased 7% because of higher fuel, purchased power and gas costs and operating expenses.
- Electric Utility net income increased to $103 million in Q2 from $87 million and to $188 million year to date from $178 million. Electric sales declined, particularly industrial and interconnection sales, but gross margin improved modestly.
- Gas Utility Q2 net income declined to a $3 million loss from $19 million of income; six-month income declined to $80 million from $98 million. The principal pressures were higher operation and maintenance expense, including the reversal of a prior-year restructuring cost deferral, and lower gross margin.
- Energy Trading generated $12 million of Q2 net income versus a $26 million loss, driven by timing-related and market-related trading gains. Six-month income was $14 million versus $12 million, with continued unrealized-margin volatility.
- Power and Industrial Projects net income declined to $5 million in Q2 from $22 million and to $15 million year to date from $40 million. Results reflected expiration of a long-term rail transportation contract and lower production tax credits; approximately $29 million of 2010 tax credits expired at year-end.
- Utility capital expenditures rose materially, and management expects approximately $1.7 billion of total 2011 capital investment. Detroit Edison expects more than $205 million of 2011 environmental capital spending and up to $2.0 billion through 2020 under current regulations.
Guidance, outlook, risks and unusual items
- Management expects 2011 operating cash flow to be comparable with 2010 and believes internal cash generation, credit facilities and capital-market access will fund anticipated requirements. Management targets leverage of approximately 50% to 52% and expects $150 million to $250 million of cash benefits in 2011–2012 from bonus depreciation.
- Detroit Edison self-implemented a $107 million annual rate increase on April 28, 2011, subject to refund. The pending rate case requested a $443 million base-rate increase, offset by proposed adjustments of approximately $190 million. A final MPSC order was expected by October 2011; an unfavorable order could require refunds with interest.
- Detroit Edison filed for continued recovery of approximately $100 million under its renewable energy plan and requested a refund of approximately $55.8 million under its revenue decoupling mechanism. Pending PSCR and GCR proceedings include a $52.6 million PSCR under-recovery and approximately $1 million of GCR over-recovery.
- DTE issued or remarketed approximately $581 million of long-term debt and retired $626 million, including $600 million of 7.05% senior notes. An additional $225 million of Detroit Edison mortgage bonds was expected to fund in September 2011.
- Fermi 1 decommissioning estimates produced a $19 million first-quarter 2011 accrual and a second-quarter reduction of approximately $5.7 million related to asbestos-removal obligations. The company intends, subject to NRC notification, to suspend decommissioning activity and place Fermi 1 into safe storage.
- Key risks include nuclear operations and decommissioning, environmental compliance and potential EPA enforcement, coal-ash and cooling-water rules, rate-case outcomes, commodity and derivative volatility, credit-counterparty performance, customer affordability and collectability, access to capital, construction execution, and pension and postretirement obligations.
- Environmental and legal exposures remain uncertain. The EPA civil action concerning Monroe Power Plant Unit 2 could require additional controls, facility retirements, environmental programs or fines. The filing does not provide a clear estimate of the potential financial impact.
- Energy Trading had approximately $675 million of net counterparty credit exposure at June 30, 2011. Contracts with rating triggers could have required approximately $236 million of collateral if DTE's rating had been below investment grade.
Important facts for investors to verify
- Determine how much of the Q2 and year-to-date earnings increase is attributable to the one-time $88 million MCIT tax benefit versus recurring operations.
- Track the final Detroit Edison rate-case order and any refund obligation related to the $107 million self-implemented increase.
- Assess whether elevated capital spending, environmental requirements and regulatory recovery mechanisms support targeted leverage and liquidity levels.
- Review the maturity and refinancing plan for approximately $320 million of long-term debt due within the next 12 months and the planned $225 million bond issuance.
- Monitor Energy Trading's mark-to-market volatility, Level 3 valuations, collateral requirements and counterparty exposure.
- Evaluate potential costs and timing associated with EPA litigation, air and water regulations, coal-ash rules, nuclear obligations and other environmental contingencies.
- Confirm the sustainability of the dividend increase and the adequacy of pension and postretirement funding, including a possible additional $90 million postretirement contribution in 2011.