DTE Energy Company — 2016 Q2 Form 10-Q Summary
Business context and reporting period
Unaudited combined quarterly report for DTE Energy Company and wholly owned DTE Electric Company for the three and six months ended June 30, 2016, filed July 26, 2016. DTE Energy operates regulated electric and gas utilities and non-utility gas storage and pipelines, power and industrial projects, and energy trading businesses. DTE Electric serves approximately 2.2 million electric customers in southeastern Michigan; DTE Gas serves approximately 1.2 million natural-gas customers throughout Michigan.
Key financial metrics
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| DTE Energy operating revenue | $2,262 million | $2,268 million | $4,828 million | $5,252 million |
| Operating income | $256 million | $204 million | $637 million | $665 million |
| Net income attributable to DTE Energy | $152 million | $109 million | $399 million | $382 million |
| Diluted EPS | $0.84 | $0.61 | $2.22 | $2.13 |
| Dividends declared per share | $0.73 | $0.69 | $1.46 | $1.38 |
| Operating margin | Approximately 11.3% | Approximately 9.0% | Approximately 13.2% | Approximately 12.7% |
DTE Energy’s six-month net cash from operating activities was $1.272 billion, compared with $1.180 billion in the prior-year period. Investing activities used $938 million, including $861 million of utility and non-utility plant expenditures and contributions to equity-method investees. Financing activities used $339 million. Cash and cash equivalents declined from $37 million at December 31, 2015 to $32 million at June 30, 2016.
At June 30, 2016, DTE Energy had $9.343 billion of long-term debt, $175 million of short-term borrowings, and $165 million of current long-term debt. Total equity was $8.799 billion. Available liquidity was approximately $1.8 billion, including cash and unused revolving credit capacity. Credit-facility availability was $1.756 billion after $314 million of outstanding commercial paper and letters of credit. The funded-debt-to-capitalization ratio was 0.50 to 1.00, within the 0.65 covenant limit.
DTE Electric reported Q2 operating revenue of $1.215 billion, operating income of $265 million, and net income of $135 million. For the first six months, it reported revenue of $2.368 billion, operating income of $510 million, and net income of $262 million. Six-month operating cash flow was $825 million, compared with $368 million in 2015; capital expenditures were $640 million.
Material changes versus the prior comparable period
- DTE Energy Q2 net income increased 39% and diluted EPS increased 38%, primarily from higher Electric, Gas, and Gas Storage and Pipelines earnings, partly offset by weaker Energy Trading results.
- Six-month net income increased 4%, while revenue declined 8% because of lower non-utility revenue, particularly in Power and Industrial Projects and Energy Trading.
- Electric segment net income increased to $135 million from $99 million in Q2 and to $262 million from $235 million for the six months. Electric gross margin increased $87 million in Q2 and $92 million year to date, helped by base-rate effects, weather, and the absence of a prior-year PSCR disallowance.
- Gas segment net income improved to $13 million from a $7 million loss in Q2, but declined to $100 million from $104 million for the six months because of warm first-quarter weather.
- Gas Storage and Pipelines net income increased to $35 million from $25 million in Q2 and to $65 million from $52 million for the six months, primarily from higher Bluestone Pipeline and Susquehanna gathering volumes and pipeline investment earnings.
- Power and Industrial Projects net income attributable to DTE Energy increased to $15 million from $8 million in Q2, but declined to $32 million from $41 million for the six months. Lower steel-industry demand and the January 2016 closure of the Shenango coke battery reduced gross margin.
- Energy Trading reported a $23 million Q2 loss and a $30 million six-month loss, compared with losses of $3 million and $12 million, respectively. The deterioration reflected unfavorable unrealized and realized commodity-trading margins, particularly in gas strategies.
- DTE Energy issued $300 million of 5.375% junior subordinated debentures and DTE Electric issued $300 million of 3.70% mortgage bonds. DTE Energy redeemed $303 million of debt and DTE Electric redeemed $10 million.
Guidance, outlook, risks, contingencies, and unusual items
- Management expected approximately $1.8 billion of 2016 operating cash flow, approximately $100 million below 2015, and approximately $2.7 billion of 2016 capital investments and contributions to equity-method investees.
- Estimated 2016–2020 capital investments include $8.2 billion for DTE Electric, $1.6 billion for DTE Gas, $2.0 billion to $2.6 billion for Gas Storage and Pipelines, and $600 million to $900 million for Power and Industrial Projects.
- DTE Electric filed for a $344 million base-rate increase and later applied for a $245 million self-implemented increase effective August 1, 2016. DTE Gas filed for a $183 million rate increase and applied for a $103 million self-implemented increase effective November 1, 2016. Final regulatory orders were expected in 2016–2017.
- NEXUS Pipeline development continued; DTE Energy owned a 50% interest with an investment balance of approximately $205 million at June 30, 2016. A FERC order was expected in the first quarter of 2017 and estimated in-service timing was the fourth quarter of 2017.
- Energy Trading remains exposed to commodity-price volatility and mark-to-market timing differences because derivatives are revalued while certain related physical assets and contracts are not. Six-month derivative losses recognized in income totaled $65 million.
- A downgrade below investment grade could require approximately $322 million of collateral under ratings-trigger provisions. DTE Energy had approximately $482 million of derivative net liability positions subject to hard triggers.
- Environmental and regulatory matters include Clean Air Act litigation and potential pollution-control requirements, coal-ash and effluent-compliance costs estimated at approximately $280 million over seven years, DTE Gas remediation obligations, and other environmental proceedings. DTE Energy cannot predict the final outcome or financial impact of certain matters.
- Maximum potential liabilities under discontinued synthetic-fuel guarantees and reduced-emissions-fuel guarantees were estimated at approximately $850 million and $323 million, respectively; payment was considered remote.
- The filing identifies weather, regulatory recovery, environmental compliance, nuclear operations, capital-market access, interest rates, commodity prices, counterparty credit, outages, cyber and terrorism exposure, and pension and investment performance as material risks.
Important facts for investors to verify
- Confirm the final MPSC outcomes and revenue-recognition effects of the DTE Electric and DTE Gas rate cases.
- Track Energy Trading’s derivative exposures, mark-to-market losses, collateral requirements, and subsequent reversals of timing-related losses.
- Assess funding needs for the planned utility, environmental, NEXUS, and other growth investments against operating cash flow and debt capacity.
- Review developments in Clean Air Act, coal-ash, effluent, greenhouse-gas, and remediation matters, including potential rate recovery.
- Monitor leverage, liquidity, debt maturities, ratings-trigger collateral exposure, pension obligations, and nuclear decommissioning assets.
- Reconcile DTE Energy consolidated results with DTE Electric standalone results because DTE Electric’s debt and resources are legally separate from DTE Energy and its other subsidiaries.