DTE Energy Company and DTE Electric Company — 2022 Q3 Form 10-Q
Business context and reporting period
Combined unaudited quarterly report for the three and nine months ended September 30, 2022. DTE Energy is a diversified energy company comprising regulated electric and gas utilities, DTE Vantage renewable and industrial energy businesses, Energy Trading, and corporate activities. DTE Electric serves approximately 2.3 million customers in southeastern Michigan. DTE Gas serves approximately 1.3 million Michigan customers.
Comparisons with 2021 are affected by the July 1, 2021 separation of DT Midstream. DT Midstream results are presented as discontinued operations for the prior period and are excluded from continuing-operations comparisons.
Key financial metrics
| Metric | Q3 2022 | Q3 2021 | 9M 2022 | 9M 2021 |
|---|---|---|---|---|
| DTE Energy operating revenue | $5.251 billion | $3.715 billion | $14.752 billion | $10.317 billion |
| Operating income | $545 million | $405 million | $1.286 billion | $1.080 billion |
| Net income attributable to DTE Energy | $387 million | $25 million | $818 million | $601 million |
| Continuing-operations diluted EPS | $1.99 | $0.30 | $4.21 | $2.55 |
| Operating cash flow | Not separately provided | Not separately provided | $1.412 billion | $2.372 billion |
| Capital expenditures | Not separately provided | Not separately provided | $2.397 billion | $2.700 billion |
Operating margin was approximately 10.4% in Q3 2022 versus 10.9% in Q3 2021, and approximately 8.7% for the first nine months versus 10.5% in the prior-year period. Net margin attributable to DTE Energy was approximately 7.4% in Q3 2022 versus 0.7% in Q3 2021, and 5.5% for the first nine months versus 5.8%.
- DTE Electric reported Q3 net income of $363 million versus $344 million and nine-month net income of $750 million versus $790 million.
- DTE Energy utility revenue increased to $2.053 billion in Q3 and $6.196 billion for nine months, from $1.875 billion and $5.483 billion, respectively.
- Non-utility revenue increased substantially to $3.198 billion in Q3 and $8.556 billion for nine months, primarily reflecting higher Energy Trading activity and commodity prices.
- DTE Energy had cash, cash equivalents, and restricted cash of $51 million at September 30, 2022, compared with $35 million at December 31, 2021.
- Total DTE Energy debt included $994 million of short-term borrowings, $1.425 billion of current long-term debt, and $17.442 billion of long-term debt excluding current maturities.
- Net availability under disclosed credit facilities was $1.622 billion at September 30, 2022, including $1.411 billion for DTE Energy, $41 million for DTE Electric, and $170 million for DTE Gas.
Material changes versus the prior comparable period
- Q3 net income attributable to DTE Energy rose by $362 million, primarily because the 2021 period included a significant loss on extinguishment of debt. The 2022 period also benefited from higher Electric and Energy Trading earnings.
- For the first nine months, continuing-operations net income increased by $323 million. Corporate and Other losses declined materially, and Gas and Energy Trading results improved; Electric and DTE Vantage earnings decreased.
- Energy Trading moved from a $52 million Q3 2021 loss to $56 million of income in Q3 2022. Its nine-month loss narrowed from $173 million to $80 million. Results included material mark-to-market and timing effects.
- DTE Vantage earnings attributable to DTE Energy declined to $26 million in Q3 and $68 million for nine months, compared with $73 million and $115 million. The reduced-emissions-fuel business closed as facilities exhausted production tax credit eligibility.
- DTE Electric utility margin increased $13 million in Q3 and $63 million for nine months, supported by regulatory mechanisms, securitization, energy waste reduction, and renewable portfolio standard recovery, partly offset by weather and base sales/rate mix.
- Operating cash flow declined $960 million year over year, primarily due to working-capital changes, including regulatory assets and liabilities, receivables, and derivative balances.
- DTE Electric retired five coal-fired generating units during Q3 2022. The company stated that all eleven units at Trenton Channel, River Rouge, and St. Clair had been retired, with remaining coal units planned for retirement or conversion.
Guidance, outlook, commentary, risks, and unusual items
- Management expected approximately $2.1 billion of DTE Energy operating cash flow and approximately $3.5 billion of 2022 capital investment. DTE Electric expected approximately $2.6 billion of 2022 capital expenditures.
- DTE Electric estimated 2022–2026 capital investments of approximately $15 billion, while DTE Gas estimated approximately $3.1 billion. DTE Vantage expected approximately $1 billion to $1.5 billion of investment over the same period in renewable energy and industrial energy services.
- DTE Electric filed a rate case requesting a $388 million base-rate increase and an increase in authorized return on equity from 9.9% to 10.25%. A final Michigan Public Service Commission order was expected in November 2022.
- DTE Energy expects to continue regular dividends, with approximately $0.7 billion anticipated in 2022, subject to Board approval and future financial conditions. It also expected approximately $1.3 billion of common stock issuance in November 2022 under the 2019 equity units.
- In August 2022, DTE Energy remarketed $1.3 billion of senior notes, resetting the interest rate to 4.22% and moving maturity to November 2024.
- Energy Trading results remain exposed to commodity-price volatility, derivative mark-to-market effects, timing mismatches with non-derivative positions, counterparty credit risk, and regional transmission market changes. A 10% adverse movement in selected market inputs could materially affect derivative or debt fair values.
- A downgrade below investment grade could require up to $699 million of cash or letters of credit under ratings-trigger provisions; $287 million had been posted against relevant derivative liabilities at September 30, 2022.
- Environmental and regulatory risks include greenhouse-gas, coal ash, wastewater, air-quality, remediation, and nuclear decommissioning requirements. DTE Electric estimated approximately $560 million of CCR and ELG-related capital expenditures, including $455 million for 2022–2026.
- EES Coke faced federal Clean Air Act litigation and a separate state notice of violation; the filing stated that the outcome and financial impact could not be predicted.
- DTE Electric and Consumers Energy sued Toshiba-related entities over the delayed Ludington hydroelectric plant overhaul. Counterclaims sought approximately $15 million, of which DTE Electric could be responsible for 49%; the company said the claims lacked merit and the outcome was uncertain.
- DTE Energy estimated maximum potential liability of $605 million under guarantees related to divested reduced-emissions-fuel facilities, although payments were considered remote.
Most important facts for an investor to verify
- Actual outcome of the DTE Electric rate case, including the approved rate increase and return on equity.
- Execution of the planned November 2022 equity issuance and its effect on share count, EPS, leverage, and dividends.
- Conversion of Energy Trading mark-to-market gains and losses into realized results and the related collateral requirements.
- Operating cash flow, working-capital recovery, and liquidity trends given low cash balances and substantial capital spending.
- Debt maturities, floating-rate exposure, covenant compliance, and the effect of rising interest rates.
- Progress, cost, and regulatory recovery for coal retirements, renewable generation, grid investment, CCR/ELG compliance, and nuclear obligations.
- Developments and potential liabilities in the EES Coke and Ludington litigation matters.
- Whether DTE Vantage’s reduced-emissions-fuel closure and new renewable projects offset the expected near-term earnings decline.