DTE ENERGY CO quarterly report, Q3 FY2011

DTE Energy Company — Q3 2011 Form 10-Q Summary

Business context and reporting period

DTE Energy is a diversified energy company whose principal regulated businesses are Detroit Edison, serving approximately 2.1 million electric customers in southeastern Michigan, and MichCon, serving approximately 1.2 million natural-gas customers throughout Michigan. Non-utility businesses include gas storage and pipelines, unconventional gas production, power and industrial projects, and energy trading.

The unaudited filing covers the three and nine months ended September 30, 2011, with comparisons to the corresponding 2010 periods. Results are not necessarily indicative of the full year.

Financial performance and key metrics

Metric	Q3 2011	Q3 2010	9M 2011	9M 2010
Operating revenues	$2.265 billion	$2.139 billion	$6.724 billion	$6.384 billion
Operating income	$399 million	$386 million	$1.077 billion	$1.114 billion
Net income attributable to DTE	$183 million	$163 million	$561 million	$478 million
Diluted EPS	$1.07	$0.96	$3.30	$2.84
Dividends declared per share	$0.59	$0.56	$1.74	$1.62

Revenue increased 5.9% in the quarter and 5.3% for nine months.
Net income attributable to DTE increased 12.3% in the quarter and 17.4% for nine months. Nine-month earnings included an $88 million income-tax benefit from Michigan Corporate Income Tax enactment.
Approximate operating margin was 17.6% in Q3 2011 versus 18.0% in Q3 2010, and 16.0% for nine months versus 17.4% in the prior-year period.
Net cash provided by operating activities was $1.486 billion for nine months, compared with $1.509 billion in 2010.
Capital expenditures were $1.029 billion for nine months, including $968 million for utility projects and $61 million for non-utility projects.
Cash used in investing activities was $1.052 billion; cash used in financing activities was $453 million. Cash and cash equivalents declined to $46 million from $65 million at December 31, 2010.
At September 30, total current and long-term debt was approximately $7.7 billion, compared with approximately $8.0 billion at year-end 2010. Long-term debt had a fair value of $8.8 billion versus a carrying value of $7.7 billion.
Available liquidity was approximately $1.6 billion, consisting of $1.556 billion of net availability under credit facilities, before considering other liquidity factors.
DTE, Detroit Edison, and MichCon reported funded-debt-to-capitalization ratios of 0.49, 0.52, and 0.47, respectively, within the 0.65 covenant limit.

Material changes versus the prior comparable period

Electric Utility nine-month earnings rose modestly to $345 million from $343 million. Gross margin increased $21 million, but operating income declined because of higher restoration, maintenance, outage, energy-optimization, and renewable-energy costs.
Electric sales declined to 37,150 thousand MWh from 38,828 thousand MWh for nine months, primarily reflecting lower interconnection and industrial sales. Purchased power costs and the overall average unit cost increased.
Gas Utility nine-month earnings declined to $69 million from $92 million. Gross margin decreased $18 million, while operating and maintenance expense increased $24 million, partly due to the prior-year deferral of restructuring costs.
Gas Storage and Pipelines earnings increased to $42 million from $36 million, aided by earnings from subsidiaries transferred into the segment and a prior-period customer-service settlement.
Power and Industrial Projects earnings declined to $27 million from $66 million, primarily because of the expiration of a long-term coal rail transportation contract and lower production tax credits.
Energy Trading earnings improved to $36 million from breakeven for nine months, reflecting stronger realized and unrealized trading margins. Management cautioned that mark-to-market accounting creates timing-related volatility.
Corporate and Other improved to $47 million of earnings from a $50 million loss, primarily due to lower interest expense and the $88 million MCIT tax benefit.
Long-term debt issuance totaled $1.028 billion, while $991 million of debt was retired during 2011. The company also repurchased $18 million of common stock and paid $289 million of common dividends during the first nine months.

Guidance, outlook, risks, contingencies, and unusual items

Management expected 2011 operating cash flow to be comparable to 2010 and planned approximately $1.7 billion of capital investment, including utility, environmental, renewable-energy, and non-utility projects.
Management expects long-term growth from regulated utility investment, gas storage and pipeline expansion, and selected non-utility opportunities, while emphasizing cost control, customer affordability, and liquidity management.
On October 20, 2011, after the quarter-end, the MPSC approved a $175 million annual Detroit Edison revenue increase. Detroit Edison had self-implemented a $107 million increase in April, with approximately $31 million credited to a regulatory asset as of September 30.
The MPSC approved a new revenue decoupling mechanism effective April 1, 2012, and terminated or changed several existing tracking mechanisms. Detroit Edison had accrued approximately $56 million plus interest for an initial RDM refund and approximately $71 million plus interest for the February-September 2011 period; the final amount could be materially higher.
Pending regulatory matters included a $52.6 million Detroit Edison 2010 PSCR under-recovery and proposed 2012 PSCR costs of approximately $1.4 billion, including approximately $158 million for projected 2011 under-recovery.
Environmental compliance remains a significant capital and legal risk. Detroit Edison estimated approximately $200 million of 2011 environmental capital spending and up to $2 billion through 2020 under then-current regulations, excluding potentially material future requirements.
The EPA appealed the dismissal of litigation involving Monroe Power Plant Unit 2. Potential outcomes could include additional pollution controls, facility retirements, environmental programs, or fines; the company could not quantify the impact.
Nuclear-related risks include Fermi 2 operating, insurance, decommissioning, spent-fuel disposal, and regulatory risks. The Fermi 2 license expires in 2025, and DTE intends to apply for a 20-year renewal.
Asset-retirement obligation revisions produced a $19 million Fermi 1 decommissioning accrual and an approximately $6 million reduction related to asbestos-removal estimates during 2011.
The company had approximately $5 billion of long-term purchase commitments from 2011 through 2051 and estimated 2011 capital expenditures of approximately $1.7 billion.
At September 30, the company had approximately $209 million of transactions potentially subject to collateral requests if DTE were downgraded below investment grade. Trading-counterparty gross credit exposure was $659 million.
In October 2011, DTE renewed its $1.0 billion and $800 million revolving credit facilities as a new $1.8 billion five-year facility expiring in October 2016.

Most important facts for investors to verify

Separate recurring operating performance from the $88 million one-time MCIT tax benefit included in nine-month earnings.
Track MPSC resolution of the Detroit Edison RDM, PSCR, CIM, LIEEF, and rate-case matters, including possible refunds or under-recovery collections.
Assess whether electric sales weakness, industrial demand, customer conservation, theft, and uncollectible accounts could pressure utility margins and cash flow.
Evaluate the sustainability and mark-to-market volatility of Energy Trading earnings.
Review the funding requirements and regulatory recovery prospects for approximately $1.7 billion of 2011 capital spending and longer-term environmental obligations.
Monitor EPA appeals, environmental rulemakings, coal-ash requirements, nuclear obligations, and related potential capital expenditures or penalties.
Confirm debt refinancing needs, credit-facility availability, covenant compliance, and exposure to interest-rate and commodity-price movements.