DTE Energy Company 2012 First-Quarter Form 10-Q Summary
Business context and reporting period
DTE Energy is a diversified energy company whose principal businesses are Detroit Edison, a regulated electric utility serving approximately 2.1 million customers, and MichCon and Citizens, regulated gas utilities serving approximately 1.2 million customers. Non-utility operations include gas storage and pipelines, unconventional gas production, power and industrial projects, and energy trading.
The filing covers the unaudited three months ended March 31, 2012, compared with the three months ended March 31, 2011. Results were materially affected by unseasonably mild weather, particularly in the Gas Utility and Energy Trading segments.
Key financial metrics
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Operating revenue | $2.249 billion | $2.431 billion | Down $182 million |
| Operating income | $312 million | $390 million | Down $78 million |
| Net income | $158 million | $178 million | Down $20 million |
| Net income attributable to DTE | $156 million | $176 million | Down $20 million |
| Diluted earnings per share | $0.91 | $1.04 | Down $0.13 |
| Operating margin | 13.9% | 16.0% | Down approximately 2.1 percentage points |
| Net margin attributable to DTE | 6.9% | 7.2% | Lower year over year |
| Dividends declared per share | $0.59 | $0.56 | Up $0.03 |
| Cash flow from operations | $620 million | $722 million | Down $102 million |
| Capital expenditures | $392 million | $270 million | Up $122 million |
Fuel, purchased power and gas expense declined $182 million, while operation and maintenance expense increased $95 million. The effective income tax rate decreased to 32% from 37%, primarily because of increased production tax credits.
At March 31, 2012, total assets were $25.846 billion and total equity was $7.147 billion. Cash and cash equivalents were $57 million, compared with $68 million at December 31, 2011. Current assets were $2.951 billion and current liabilities were $2.530 billion.
Debt included $313 million of short-term borrowings, $530 million of current maturities of long-term debt, and $7.093 billion of long-term debt excluding the current portion. The carrying value of long-term debt was approximately $7.6 billion, compared with a fair value of approximately $8.6 billion.
Material changes versus the prior comparable period
- Electric Utility net income increased to $96 million from $85 million. Gross margin increased $6 million, while higher restoration, line-clearance, employee-benefit and uncollectible expenses partly offset lower depreciation and the absence of a $19 million 2011 Fermi 1 decommissioning accrual.
- Gas Utility net income declined to $52 million from $83 million. Gross margin decreased $50 million, primarily because of mild weather, with additional effects from the revenue decoupling mechanism.
- Gas Storage and Pipelines net income increased to $17 million from $15 million, primarily due to higher equity earnings.
- Power and Industrial Projects net income attributable to DTE declined to $8 million from $10 million despite substantially higher revenue from reduced-emissions fuel projects. Operating expenses increased substantially with the new projects, while production tax credits increased by $9 million.
- Energy Trading moved to a $2 million loss from $2 million of income. Gross margin declined $11 million, reflecting unfavorable unrealized and realized results associated largely with mild weather and gas and power trading strategies.
- Operating cash flow decreased $102 million, while investing cash use increased $99 million due primarily to higher utility and non-utility capital expenditures. Financing cash use declined to $288 million from $346 million.
Liquidity, capital allocation and outlook
Management expects approximately $1.9 billion of operating cash flow and approximately $1.9 billion of 2012 capital expenditures. DTE reported approximately $1.4 billion of available liquidity at March 31, 2012, including $1.378 billion of net availability under combined credit facilities. The facilities had total commitments of $1.975 billion and $597 million of borrowings and letters of credit outstanding.
DTE expects approximately $500 million of long-term debt maturities during the next twelve months, expects to issue approximately $300 million of equity through its dividend reinvestment and employee benefit plans, and may make up to $240 million of pension contributions and up to an additional $120 million of VEBA contributions. Management expects up to approximately $120 million of 2012 cash benefit from bonus depreciation deductions.
Management is focused on utility investment, environmental and renewable projects, regulatory cost recovery, operating efficiency, customer satisfaction, and growth in Gas Storage and Pipelines and Power and Industrial Projects. MichCon filed a rate case requesting approximately $77 million of additional base rates and expected to self-implement new rates in the fourth quarter of 2012.
Risks, contingencies and unusual items
- The Michigan Court of Appeals ruled in April 2012 that the MPSC lacked authority to implement an electric Revenue Decoupling Mechanism. Further appellate review was possible. DTE retained related refund liabilities, including $56 million for the 2010 period and $71 million for the 2011 period, while the matter remained unresolved.
- Detroit Edison reported a potential range of approximately $56 million to $140 million for one pilot RDM refund period and approximately $10 million to $130 million for the second period, depending on the calculation methodology adopted.
- Detroit Edison filed a 2011 power supply cost reconciliation showing a net under-recovery of $148 million, including $52.6 million related to the 2010 year.
- Environmental compliance remains a major capital requirement. Detroit Edison estimated approximately $255 million of 2012 environmental capital expenditures and up to approximately $1.9 billion through 2021 under current regulations. Additional costs from air, water, coal ash and greenhouse-gas rules could be material but were not quantifiable.
- An EPA appeal remained pending regarding alleged Clean Air Act violations at Detroit Edison facilities, including Monroe Power Plant Unit 2. Potential outcomes include additional controls, early facility retirement, environmental programs or fines; the financial impact was not determinable.
- Derivative positions and mark-to-market accounting may create earnings volatility because derivatives are revalued while certain economically offsetting non-derivative assets and contracts are not. A downgrade below investment grade could have resulted in approximately $344 million of collateral requests under ratings-trigger provisions.
- DTE had approximately $5.3 billion of estimated long-term purchase commitments from 2012 through 2051. It also disclosed maximum potential liabilities of approximately $1.2 billion under synthetic-fuel guarantees, although payment was considered remote.
- Controls and procedures were evaluated as effective, and the filing reported no material changes in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Resolution and appellate status of the Detroit Edison RDM refund liabilities and the related range of potential customer refunds.
- Outcome of the Detroit Edison and MichCon rate proceedings, including the requested $77 million MichCon increase and recovery of infrastructure and environmental spending.
- Actual weather-normalized utility demand, future power supply cost under-recoveries, and the timing of regulatory recovery.
- Progress and final cost of environmental compliance projects, including EPA proceedings and coal ash and water-intake requirements.
- Energy Trading and derivative mark-to-market exposure, collateral requirements, and counterparty credit risk.
- Capital spending, debt refinancing, pension and postretirement contributions, and maintenance of approximately $1.4 billion of reported liquidity.