DTE ENERGY CO quarterly report, Q2 FY2017

DTE Energy Company 10-Q Summary

Business Context and Reporting Period

Combined unaudited Form 10-Q for DTE Energy Company and wholly owned DTE Electric Company for the quarter and six months ended June 30, 2017. DTE Energy operates regulated electric and gas utilities serving approximately 2.2 million and 1.3 million customers, respectively, plus gas storage and pipelines, power and industrial projects, and energy trading businesses. DTE Electric is a separate registrant; its debt and financial resources are not obligations of DTE Energy.

Key Financial Metrics

Metric	Q2 2017	Q2 2016	Six months 2017	Six months 2016
DTE Energy operating revenues	$2.855 billion	$2.262 billion	$6.091 billion	$4.828 billion
Operating income	$303 million	$256 million	$872 million	$637 million
Net income attributable to DTE Energy	$177 million	$152 million	$577 million	$399 million
Diluted EPS	$0.99	$0.84	$3.21	$2.22
Dividends declared per share	$0.825	$0.73	$1.65	$1.46
Net cash from operating activities	Not separately provided	Not separately provided	$1.183 billion	$1.276 billion

DTE Energy's reported operating margin was approximately 10.6% in the second quarter and 14.3% for the six-month period, compared with approximately 11.3% and 13.2%, respectively, in the prior comparable periods. Revenue growth was concentrated in non-utility operations, particularly Energy Trading and Power and Industrial Projects.

• DTE Energy cash and cash equivalents were $62 million at June 30, 2017, versus $92 million at December 31, 2016.
• Total assets were $32.582 billion and total equity was $9.571 billion at June 30, 2017.
• Long-term debt, including current maturities, was approximately $11.77 billion based on the balance sheet debt categories; fair-value carrying debt was $11.762 billion.
• Short-term borrowings were $420 million, and current maturities of long-term debt were $412 million.
• Available liquidity under revolving credit and letter-of-credit facilities was $1.598 billion; management described total available liquidity, including cash, as approximately $1.7 billion.
• DTE Energy's funded debt-to-capitalization ratio was 0.54 to 1, within the 0.65 to 1 covenant limit. DTE Electric's ratio was 0.51 to 1.
• Capital expenditures and contributions to equity-method investees totaled $1.211 billion in the first six months, including $1.036 billion of utility and non-utility plant expenditures and $175 million of equity-method contributions.

DTE Electric Metrics

• Q2 operating revenue was $1.218 billion, compared with $1.215 billion; net income was $138 million, compared with $135 million.
• Six-month operating revenue was $2.393 billion, compared with $2.368 billion; net income was $244 million, compared with $262 million.
• Six-month operating income was $489 million, compared with $510 million, reflecting higher operation and maintenance and tax expenses despite higher utility margin.
• Cash from operating activities was $714 million for the first six months, compared with $825 million; capital expenditures were $737 million.

Material Changes Versus Prior Comparable Period

• DTE Energy second-quarter net income increased 16% and six-month net income increased 45%. Management attributed the quarterly improvement mainly to Power and Industrial Projects and Energy Trading, partly offset by lower Gas earnings.
• Energy Trading shifted from a $23 million loss in Q2 2016 to break-even in Q2 2017, and from a $30 million loss to $96 million of earnings for the six-month period. The improvement included significant unrealized mark-to-market gains and timing effects that may reverse.
• Gas Storage and Pipelines earnings attributable to DTE Energy increased to $40 million from $35 million in Q2 and to $85 million from $65 million for six months, primarily due to the October 2016 acquisition of AGS and SGG and higher Susquehanna gathering volumes.
• Power and Industrial Projects earnings increased to $30 million from $15 million in Q2 and to $60 million from $32 million for six months, supported by improved steel-market conditions, new reduced-emissions-fuel projects, and production tax credits.
• DTE Electric utility margin increased $9 million in Q2 and $52 million for six months, principally from new rates, but was reduced by weather, a $13 million PSCR disallowance, and other regulatory items.
• DTE Gas utility margin increased $2 million in Q2 and $51 million for six months, primarily from new rates, but higher operating costs limited earnings growth in the quarter.
• Operating cash flow declined $93 million year over year for the first six months, while investing cash use increased $311 million, mainly from higher capital spending, equity-method contributions, and landfill-gas acquisitions.

Guidance, Outlook, Risks, and Unusual Items

• Management expects approximately $1.9 billion of 2017 operating cash flow and approximately $3.0 billion of 2017 capital expenditures and equity-method contributions.
• DTE Energy expects approximately $410 million of long-term debt, including capital leases, to mature within the following 12 months and expects repayment through internal funds or refinancing.
• DTE Electric filed for a $231 million base-rate increase and a proposed return on equity increase from 10.1% to 10.5%. It anticipated self-implementing a rate increase in November 2017, with an MPSC order expected by April 2018.
• DTE Electric recorded a $37 million estimated customer refund liability related to its prior self-implemented rate surcharge. The MPSC also disallowed approximately $16 million, including interest, of a 2015 PSCR billing-adjustment recovery; DTE Electric recorded the impact in Q2.
• Planned 2017-2021 investments include approximately $8.4 billion for DTE Electric, $1.8 billion for DTE Gas, $2.2 billion to $2.8 billion for Gas Storage and Pipelines, and $600 million to $1.0 billion for Power and Industrial Projects.
• DTE Energy is targeting a 2018 in-service date for the NEXUS Pipeline, subject to FERC approval and restoration of a sufficient FERC quorum. The company owns a 50% interest, with an investment balance of $510 million at June 30, 2017.
• Energy Trading results remain exposed to commodity-price volatility and mark-to-market timing. Q2 included $48 million of timing-related unrealized gains in gas strategies that are expected to reverse in future periods.
• DTE Energy could be required to post approximately $484 million of collateral if its credit rating falls below investment grade under ratings-trigger provisions.
• Environmental and regulatory risks include Clean Air Act litigation, potential pollution-control and coal-ash or wastewater compliance costs, cooling-water intake requirements, and uncertain ozone and sulfur-dioxide compliance obligations. Estimated ELG and CCR compliance costs were approximately $313 million over six years, although requirements and timing remained uncertain.
• DTE Energy's carbon-reduction plan targets reductions of 30% by the early 2020s, 45% by 2030, 75% by 2040, and more than 80% by 2050, supported by coal retirements, renewables, efficiency, demand response, and natural-gas generation.
• The company reached a settlement of approximately $4 million regarding a California biomass-facility investigation and a $165,000 EPA settlement involving an EES Coke facility.
• Management reported effective disclosure controls. A new customer billing system was implemented in April 2017, with related controls updated and monitored.

Important Facts for Investors to Verify

• Whether the DTE Electric rate case produces the requested revenue increase and higher authorized return on equity, and the timing and amount of the related self-implemented rates.
• The final outcome and potential cost of the Clean Air Act New Source Review litigation and related EPA notices of violation.
• The timing, regulatory approval, construction progress, and funding requirements for NEXUS, Birdsboro, generation replacements, and other major capital projects.
• Whether Energy Trading's mark-to-market gains reverse and how commodity-price movements affect future earnings and liquidity.
• Future regulatory recovery of the PSCR disallowance, customer refund liability, environmental costs, and other deferred balances.
• Debt refinancing needs, credit ratings, covenant compliance, and potential collateral requirements under ratings-trigger provisions.
• The final purchase-price allocation and any remaining escrow or indemnification adjustments related to the AGS and SGG acquisition.