DTE Energy Company 2009 Third-Quarter Form 10-Q Summary
Business Context and Reporting Period
DTE Energy is a diversified energy company headquartered in Detroit, Michigan. Its principal regulated businesses are Detroit Edison, serving approximately 2.2 million electric customers, and MichCon, serving approximately 1.2 million gas customers. Non-utility operations include gas midstream, unconventional gas production, power and industrial projects, and energy trading.
The filing covers the quarter and nine months ended September 30, 2009. Financial statements are unaudited and should be read with the 2008 Form 10-K.
Key Financial Metrics
| Metric | Three Months Ended September 30, 2009 | Three Months Ended September 30, 2008 | Nine Months Ended September 30, 2009 | Nine Months Ended September 30, 2008 |
|---|---|---|---|---|
| Operating revenues | $1.961 billion | $2.338 billion | $5.904 billion | $7.159 billion |
| Operating income | $343 million | $375 million | $953 million | $961 million |
| Net income attributable to DTE | $158 million | $177 million | $419 million | $417 million |
| Diluted EPS | $0.96 | $1.08 | $2.55 | $2.55 |
| Operating margin | 17.5% | 16.0% | 16.1% | 13.4% |
| Dividends declared per share | $0.53 | $0.53 | $1.59 | $1.59 |
- Net cash from operating activities was $1.674 billion for the first nine months of 2009, compared with $1.018 billion in 2008.
- Capital expenditures were $819 million, consisting of $772 million for utility projects and $47 million for non-utility projects.
- Net cash used in investing activities was $795 million; net cash used in financing activities was $882 million.
- Cash and cash equivalents were $83 million at September 30, 2009, compared with $86 million at December 31, 2008 and $223 million at September 30, 2008.
- Total assets were $23.959 billion and total equity was $6.272 billion at September 30, 2009.
- Current liabilities were $1.976 billion. Short-term borrowings were $205 million, and current maturities of long-term debt were $170 million.
- Long-term debt, excluding current maturities, was $7.874 billion. Total debt including current maturities and short-term borrowings was approximately $8.25 billion.
- Available credit facilities totaled $2.075 billion, with net availability of $1.642 billion after outstanding commercial paper and letters of credit. The company was in compliance with its 0.65-to-1 debt-to-total-capitalization covenant.
- The effective tax rate from continuing operations was 32% in both the quarter and nine-month period, down from 36% and 37%, respectively, in the comparable 2008 periods, primarily because of tax-audit settlement benefits.
Material Changes Versus the Prior Comparable Period
- Third-quarter revenue declined 16%, primarily because of lower demand, weaker non-utility activity, and lower commodity prices. Nine-month revenue declined 18%.
- Third-quarter net income attributable to DTE declined 11%, while nine-month net income increased slightly. The nine-month comparison benefited from stronger electric utility and energy trading results and was adversely affected by the absence of an $80 million after-tax gain from a 2008 Barnett shale property sale.
- Electric Utility nine-month earnings increased to $313 million from $251 million. Gross margin improved by $51 million, supported by rate actions and surcharges, partially offset by weather, lower demand, and customer conservation.
- Gas Utility nine-month earnings declined to $23 million from $33 million. Results reflected lower revenues from customer conservation, lost and stolen gas, and reduced uncollectible recovery benefits.
- Gas Midstream earnings increased to $37 million from $27 million, supported by higher capacity sales, storage-contract renewals, and pipeline earnings.
- Unconventional Gas Production reported a $6 million loss for the first nine months, compared with $89 million of earnings in 2008, primarily because the prior-year period included the Barnett shale sale gain.
- Power and Industrial Projects earnings declined to $8 million from $30 million for the nine-month period as lower coal, emissions, coke, and structured-transaction activity outweighed cost reductions.
- Energy Trading earnings increased to $73 million from $36 million for the nine-month period, mainly because of higher unrealized mark-to-market margins, although third-quarter earnings declined to $6 million from $19 million.
- Customer electric deliveries declined 10% for the nine-month period, with industrial deliveries down materially. Utility uncollectible expense was approximately $151 million, compared with $168 million in the 2008 period.
Guidance, Outlook, Risks and Unusual Items
- Management expects 2009 capital expenditures of approximately $1.1 billion, including approximately $20 million to $25 million for Barnett shale development. Utility capital investment is expected to remain substantial, with planned electric utility investment of approximately $6 billion from 2009 through 2013 and gas utility investment of approximately $850 million over the same period.
- Management plans to focus on regulatory stability, recovery of utility investments, cost reductions, liquidity management, customer satisfaction, and disciplined growth.
- Detroit Edison self-implemented approximately $280 million of annual rate increases, producing approximately $40 million of third-quarter revenue. A final MPSC order was expected in January 2010; the company stated that a refund of some or all of the increase was reasonably possible but not probable and recorded no refund liability.
- MichCon requested a $193 million annual rate increase and anticipated self-implementing a rate increase on January 1, 2010. The outcome remained subject to regulatory proceedings.
- DTE received an EPA Notice of Violation/Finding of Violation concerning five Detroit Edison power plants. Potential consequences include additional pollution controls, supplemental environmental programs, fines, and litigation; the financial impact was not determinable.
- Energy Trading and other derivative activities create earnings volatility because derivatives are marked to market while related non-derivative assets and contracts may not be revalued simultaneously. Reported derivative assets were $434 million and derivative liabilities were $509 million after netting at September 30, 2009.
- A downgrade below investment grade could require collateral postings under commodity contracts and reduce access to commercial paper markets. DTE remained investment grade, but Standard & Poor’s revised its outlook to negative and lowered short-term ratings to A-3; Moody’s affirmed P-2 short-term ratings.
- Potential collateral exposure under ratings-triggered contracts was approximately $230 million as of September 30, 2009.
- The company estimated approximately $5.9 billion of purchase commitments from 2009 through 2051 and up to $2.3 billion of additional environmental capital expenditures through 2019 under current regulations.
- Guarantees and contingencies included a maximum potential liability of approximately $2.9 billion related to tax and other guarantees associated with prior synthetic-fuel transactions, a potential $210 million guarantee of Millennium Pipeline debt, and approximately $17 million of exposure under related interest-rate swaps.
- The company expected to contribute up to $250 million to pension plans and up to $170 million to postretirement benefit plans during 2009.
Most Important Facts for Investors to Verify
- Review the final outcomes of the Detroit Edison and MichCon rate cases, including any required refunds or changes to self-implemented rates.
- Monitor EPA enforcement related to the five Detroit Edison plants and the potential cost and timing of environmental compliance.
- Assess liquidity relative to debt maturities, commercial paper access, credit ratings, collateral requirements, and the company’s debt-to-capitalization covenant.
- Evaluate the sustainability of operating cash flow after utility capital expenditures, pension and postretirement contributions, and dividend payments.
- Track Michigan economic conditions, automotive customer bankruptcies or facility closures, customer demand, theft, and uncollectible accounts.
- Assess sensitivity to energy prices, weather, regulatory recovery mechanisms, and mark-to-market volatility in Energy Trading and derivative portfolios.
- Review potential impairment risk in the Gas Utility and non-utility reporting units, particularly if market multiples, regulatory outcomes, or projected cash flows deteriorate.