DTE Energy Company — 2013 Third-Quarter Form 10-Q Summary
Business context and reporting period
DTE Energy is a diversified energy company whose principal businesses are DTE Electric, a regulated electric utility serving approximately 2.1 million customers in southeastern Michigan, and DTE Gas, a regulated natural-gas utility serving approximately 1.2 million customers throughout Michigan. Non-utility businesses include gas storage and pipelines, power and industrial projects, and energy trading.
This unaudited Form 10-Q covers the three and nine months ended September 30, 2013, with comparisons to the corresponding 2012 periods. The company reported 176.8 million common shares outstanding at September 30, 2013.
Financial performance and key metrics
| Metric | Three months ended September 30, 2013 | Three months ended September 30, 2012 | Nine months ended September 30, 2013 | Nine months ended September 30, 2012 |
|---|---|---|---|---|
| Operating revenues | $2,387 million | $2,190 million | $7,128 million | $6,442 million |
| Operating income | $329 million | $406 million | $962 million | $1,012 million |
| Net income attributable to DTE Energy | $198 million | $227 million | $537 million | $529 million |
| Diluted EPS | $1.13 | $1.31 | $3.07 | $3.08 |
| Dividends declared per share | $0.66 | $0.62 | $1.93 | $1.80 |
| Operating margin | 13.8% | 18.5% | 13.5% | 15.7% |
Operating revenues increased 9.0% in the quarter and 10.6% year to date, while operating income declined 19.0% and 4.9%, respectively. Net income attributable to DTE declined 12.8% in the quarter but increased 1.5% for the first nine months. The effective income tax rate declined to 28% from 32% in the quarter and to 29% from 32% year to date, primarily because of higher production tax credits.
- Electric segment net income attributable to DTE was $179 million in the quarter and $383 million year to date, down from $194 million and $417 million, respectively. Electric gross margin declined $29 million in the quarter and $35 million year to date, primarily reflecting lower base sales and weather effects.
- Gas segment net income was a $13 million loss in the quarter versus $4 million of income in 2012, but increased to $91 million year to date from $60 million. Quarterly results reflected higher operating and maintenance expenses and lower gross margin; year-to-date results benefited from weather and regulatory mechanisms.
- Gas Storage and Pipelines net income attributable to DTE increased to $16 million from $14 million in the quarter and to $49 million from $48 million year to date.
- Power and Industrial Projects net income attributable to DTE increased to $27 million from $22 million in the quarter and to $46 million from $40 million year to date, supported by higher renewable-fuel volumes and acquired on-site projects.
- Energy Trading reported a $6 million loss in the quarter versus $1 million of income and a $1 million loss year to date versus $3 million of income. Quarterly gross margin declined $11 million, principally from timing-related losses in a gas structured strategy.
Cash flow, balance sheet, debt, and liquidity
- Net cash from operating activities was $1.715 billion for the first nine months of 2013, compared with $1.729 billion in 2012.
- Capital expenditures were $1.371 billion, consisting of $1.101 billion for utility projects and $270 million for non-utility projects, compared with $1.222 billion in 2012.
- Net cash used in financing activities was $372 million, including $768 million of long-term debt issuance, $855 million of long-term debt redemptions, and $329 million of common-stock dividends.
- Cash and cash equivalents were $71 million at September 30, 2013, compared with $65 million at December 31, 2012. Management expected approximately $1.9 billion of 2013 operating cash flow and approximately $2.1 billion of 2013 capital expenditures.
- Total debt, including current and long-term debt and capital leases, was approximately $8.013 billion at September 30, 2013, compared with approximately $8.383 billion at year-end 2012. Long-term debt carrying value was $7.729 billion, with a reported fair value of $8.241 billion.
- Approximately $900 million of long-term debt was scheduled to mature during the following twelve months. The company reported approximately $1.5 billion of available liquidity, consisting of cash and availability under unsecured revolving credit agreements.
- Total credit facilities were $1.975 billion, with net availability of $1.469 billion at September 30, 2013. DTE Energy's funded-debt-to-capitalization ratio was 0.48 to 1, below the 0.65 to 1 covenant limit.
- Total assets were $26.231 billion and total equity was $7.910 billion at September 30, 2013. Pension and postretirement liabilities declined materially after benefit-plan changes and contributions, including a $200 million common-stock contribution to pension plans.
Material changes, outlook, risks, and unusual items
- Management continued to target long-term earnings growth, a strong balance sheet, and an attractive dividend yield. No specific earnings-per-share or revenue guidance was provided in the filing.
- Planned 2013 capital expenditures were approximately $2.1 billion. DTE Electric estimated 2013-2017 investments of $6.4 billion for base infrastructure, environmental compliance, renewable energy, and energy efficiency. DTE Gas estimated $1.08 billion of investments over the same period.
- The City of Detroit began transitioning Public Lighting Department customers to DTE Electric's distribution system over an expected five- to seven-year period. The MPSC authorized accounting deferral of certain incremental costs, but recovery of some costs remained subject to future proceedings.
- DTE Electric reported an approximately $87 million net under-recovery in its 2012 Power Supply Cost Recovery reconciliation. Certain intervenors challenged recovery of approximately $30 million of Fermi 2-related purchased-power costs; resolution was expected in 2014.
- Fermi 2 returned to full production after completion of repairs in September 2013. The company continued developing dry-cask storage for spent nuclear fuel and expected initial offload from the fuel pool in 2014.
- Environmental compliance remains a significant investment and litigation issue. DTE Electric estimated up to $1.8 billion of additional environmental capital expenditures through 2021 under then-current regulations, excluding potential future requirements.
- EPA and Sierra Club proceedings concerning alleged Clean Air Act violations at coal-fired plants could require additional pollution controls, facility retirements, environmental programs, or fines. The company stated that it could not predict the financial impact or outcome of the principal EPA matter.
- Energy Trading remained exposed to commodity-price volatility, mark-to-market timing differences, regulatory changes, and counterparty credit risk. A downgrade below investment grade could have triggered approximately $327 million of collateral requirements under ratings-sensitive contracts.
- The company estimated approximately $6.2 billion of purchase commitments from 2013 through 2052. Synthetic-fuel and reduced-emissions-fuel guarantees had maximum potential liabilities of approximately $1.2 billion and $125 million, respectively, although payment was considered remote.
- Detroit's Chapter 9 bankruptcy filing created approximately $20 million of pre-petition receivables; management stated that Detroit was paying currently and expected no material financial impact.
- New labor agreements became effective in March 2013 and generally extend into 2017. The company identified a work interruption as an additional risk, although no interruption was reported.
Most important facts for an investor to verify
- Whether the decline in quarterly electric and gas earnings is temporary or reflects persistent customer-demand, weather, cost, or regulatory trends.
- The outcome and recoverability of the approximately $87 million PSCR under-recovery and disputed Fermi 2 purchased-power costs.
- Potential financial exposure from EPA and Sierra Club Clean Air Act proceedings and evolving environmental rules, including MATS, CSAPR, coal-ash, and greenhouse-gas requirements.
- Whether approximately $1.5 billion of reported liquidity remains sufficient after the approximately $900 million of near-term debt maturities and planned capital spending.
- The effect of commodity-price movements, derivative mark-to-market timing, and the approximately $327 million of potential collateral requirements on Energy Trading cash flow and earnings.
- Execution and regulatory recovery for the planned utility infrastructure, environmental, renewable, Detroit Public Lighting transition, and non-utility growth investments.