DTE Energy Company and DTE Electric Company — 2019 Q1 Form 10-Q
Reporting period: Three months ended March 31, 2019. The combined filing covers DTE Energy, a diversified energy company, and its wholly owned regulated electric subsidiary, DTE Electric. DTE Energy also owns DTE Gas and non-utility businesses in gas storage and pipelines, power and industrial projects, and energy trading. The financial statements are unaudited.
Financial performance and key metrics
| Metric | DTE Energy 2019 | DTE Energy 2018 | Change |
|---|---|---|---|
| Operating revenues | $3.514 billion | $3.753 billion | Down $239 million |
| Operating income | $542 million | $504 million | Up $38 million |
| Net income | $408 million | $351 million | Up $57 million |
| Net income attributable to DTE Energy | $401 million | $361 million | Up $40 million |
| Diluted EPS | $2.19 | $2.00 | Up $0.19 |
| Net cash from operating activities | $752 million | $838 million | Down $86 million |
- Consolidated operating margin was approximately 15.4%, compared with approximately 13.4% in the prior-year quarter, reflecting lower non-utility fuel costs and improved utility performance despite lower revenue.
- Utility revenue increased to $1.864 billion from $1.740 billion, while non-utility revenue declined to $1.650 billion from $2.013 billion, primarily because of lower energy trading and Power and Industrial Projects revenue.
- Segment net income attributable to DTE Energy was $147 million for Electric, $151 million for Gas, $48 million for Gas Storage and Pipelines, $26 million for Power and Industrial Projects, $32 million for Energy Trading, and a $3 million Corporate and Other loss.
- Electric utility margin increased $23 million, driven by weather, new rates, base sales, and regulatory mechanisms. Gas utility margin increased $74 million, driven by new rates, weather, TCJA regulatory liability amortization, and higher midstream storage and transportation revenue.
Cash flow, balance sheet, debt, and liquidity
- Cash, cash equivalents, and restricted cash declined to $61 million at March 31, 2019, from $76 million at December 31, 2018.
- Operating cash flow of $752 million was more than offset by $748 million of investing outflows, including $668 million of utility and non-utility plant expenditures and $48 million of notes receivable investments.
- DTE Energy issued $644 million of long-term debt during the quarter, including DTE Electric’s $650 million of 3.95% green mortgage bonds due 2049, net of issuance costs in the cash flow statement.
- Total DTE Energy long-term debt, including current and noncurrent amounts but excluding finance lease obligations, was approximately $14.3 billion at March 31, 2019, versus $13.6 billion at year-end 2018. Short-term borrowings were $156 million, down from $609 million.
- Available liquidity was approximately $1.8 billion, consisting primarily of cash and availability under unsecured revolving credit agreements. Reported net availability under the facilities was $1.769 billion.
- DTE Energy and DTE Electric were in compliance with their funded debt-to-capitalization covenant, reporting ratios of 0.55 and 0.51, respectively, against a maximum of 0.65.
- Management expects approximately $2.4 billion of 2019 operating cash flow and approximately $3.9 billion of 2019 capital investments and equity-method-investee contributions. Approximately $1.5 billion of long-term debt, including capital leases, matures within the next twelve months.
DTE Electric standalone
- Operating revenue increased to $1.235 billion from $1.205 billion, while net income increased to $147 million from $140 million.
- Operating income declined to $226 million from $253 million, and operating margin decreased to approximately 18.3% from 21.0%, primarily because of higher operation and maintenance, depreciation, and tax-related expenses.
- Operating cash flow was $322 million versus $323 million. Investing outflows increased to $639 million from $371 million, primarily because of higher capital expenditures and notes receivable activity.
- DTE Electric had $10 million of cash, $7.184 billion of long-term debt, and $6.816 billion of shareholder equity at March 31, 2019.
Material changes and unusual items
- DTE Energy adopted the new lease standard, Topic 842, on January 1, 2019, recognizing operating lease right-of-use assets and liabilities of approximately $137 million and $130 million, respectively. DTE Electric recognized approximately $74 million and $67 million.
- DTE Energy adopted ASU 2018-02 and reclassified $25 million of TCJA-related tax effects from accumulated other comprehensive loss to retained earnings.
- The effective tax rate declined to 12% from 16% for DTE Energy and to 16% from 25% for DTE Electric. The changes primarily reflected TCJA regulatory liability amortization and the absence of 2018 deferred-tax remeasurement charges, partly offset by lower production tax credits for DTE Energy.
- DTE Electric’s investment gains contributed $17 million to other income in 2019, compared with an investment loss in 2018. DTE Energy’s results also benefited from lower corporate losses.
- Energy Trading’s non-utility margin increased $4 million despite a $197 million decline in revenue; results included timing-related mark-to-market effects that may reverse as underlying contracts settle.
Regulatory matters, outlook, and risks
- DTE Electric reduced its pending rate-case request from $328 million to $248.6 million. A final Michigan Public Service Commission order was expected in May 2019. DTE Electric also recorded a liability for a $27.2 million customer refund approved in March 2019.
- DTE Energy targets carbon-emissions reductions of 32% by the early 2020s, at least 50% by 2030, and 80% by 2040 from 2005 levels. DTE Electric plans substantial investment in distribution infrastructure, renewable generation, natural-gas generation, and coal-unit retirements.
- Planned 2019–2023 capital investments include approximately $11.3 billion for DTE Electric, $2.5 billion for DTE Gas, $4.0 billion to $5.0 billion for Gas Storage and Pipelines, and $1.0 billion to $1.4 billion for Power and Industrial Projects.
- Material risks include regulatory recovery and rate-case outcomes, environmental compliance and potential pollution-control requirements, coal-ash and wastewater rules, weather, outages, commodity-price volatility, derivative mark-to-market timing, interest rates, capital-market access, cyber and operational risks, and nuclear decommissioning obligations.
- DTE Energy had $537 million of potential collateral-posting obligations if certain guarantees and contracts were triggered by a downgrade below investment grade.
- PG&E filed for bankruptcy protection. DTE Energy had approximately $105 million of related long-lived assets and approximately $74 million of equity investments and notes receivable. No reserve or impairment was recorded as of March 31, 2019, but losses could arise if contracts are rejected or not honored.
- Environmental proceedings remain pending, including EPA-related New Source Review matters and a mercury-emissions notice of violation concerning the Trenton Channel plant. The filing does not provide a clear estimate of potential financial exposure.
Important facts for investors to verify
- Whether the MPSC approved DTE Electric’s pending rate case and how the final order affects revenue, depreciation, and authorized returns.
- Actual 2019 operating cash flow and capital spending compared with management’s $2.4 billion and $3.9 billion expectations.
- Debt refinancing and liquidity coverage for approximately $1.5 billion of debt maturities within twelve months.
- Exposure to derivative mark-to-market reversals, commodity prices, and the $537 million downgrade-related collateral requirement.
- Potential costs and timing associated with environmental litigation, coal-ash and wastewater compliance, remediation, and nuclear decommissioning.
- Developments in PG&E’s bankruptcy and any resulting impairment or contract-recovery impacts.