DTE Energy Company 2018 Q3 Form 10-Q Summary
Business context and reporting period
Combined unaudited Form 10-Q for DTE Energy Company and wholly owned DTE Electric Company for the quarter and nine months ended September 30, 2018, filed October 24, 2018. DTE Energy operates regulated electric and gas utilities and non-utility gas infrastructure, power and industrial projects, and energy trading businesses. DTE Electric serves approximately 2.2 million electric customers in southeastern Michigan.
Key financial metrics
| Metric | Q3 2018 | Q3 2017 | 9M 2018 | 9M 2017 |
|---|---|---|---|---|
| DTE Energy operating revenue | $3.550 billion | $3.245 billion | $10.462 billion | $9.336 billion |
| DTE Energy net income attributable to DTE Energy | $334 million | $270 million | $929 million | $847 million |
| DTE Energy diluted EPS | $1.84 | $1.51 | $5.13 | $4.72 |
| DTE Energy operating income | $429 million | $434 million | $1.262 billion | $1.339 billion |
| DTE Electric operating revenue | $1.521 billion | $1.434 billion | $4.002 billion | $3.827 billion |
| DTE Electric net income | $305 million | $219 million | $608 million | $463 million |
| DTE Energy operating cash flow | Not separately provided for the quarter | Not separately provided for the quarter | $2.047 billion | $1.550 billion |
DTE Energy's nine-month operating margin was approximately 12.1%, compared with approximately 14.3% in the prior-year period. The decline primarily reflected higher non-utility fuel and purchased-power costs and weaker Energy Trading margins. The nine-month effective tax rate decreased to 12% from 22%, principally due to the Tax Cuts and Jobs Act reduction in the federal corporate tax rate from 35% to 21%, partially offset by tax true-ups and a $20 million AMT credit valuation allowance.
- September 30, 2018 cash, cash equivalents, and restricted cash were $104 million for DTE Energy and $12 million of cash and cash equivalents for DTE Electric.
- DTE Energy total assets were $35.292 billion and total equity was $10.690 billion at September 30, 2018.
- DTE Energy long-term debt was $13.620 billion, excluding current portion; total funded debt-to-capitalization was 54%, within the 65% covenant limit.
- DTE Energy reported approximately $1.884 billion of net availability under revolving credit and letter-of-credit facilities. Management reported approximately $2.0 billion of total liquidity, including cash and available revolver capacity.
- DTE Energy invested $1.779 billion in utility and non-utility plant and equipment and contributed $545 million to equity-method investees during the first nine months.
- DTE Energy declared $2.65 per common share of dividends during the first nine months, compared with $2.48 in the prior-year period.
Material changes versus the prior comparable period
- DTE Energy net income attributable to the company increased 24% in the third quarter and 10% for the nine-month period. DTE Electric net income increased 39% and 31%, respectively.
- Electric utility margin increased $77 million in the quarter and $109 million year to date, supported by favorable weather, new rates, and regulatory mechanisms. These benefits were partly offset by $40 million and $117 million of TCJA-related rate reductions.
- Gas utility margin increased $6 million in the quarter and $27 million year to date, but Gas segment net income declined to a $30 million loss in the quarter and $88 million for the nine-month period, primarily reflecting higher operations and maintenance expense and uncollectible accounts expense.
- Gas Storage and Pipelines net income attributable to DTE Energy increased to $66 million from $36 million in the quarter and to $188 million from $121 million year to date, driven mainly by higher pipeline and gathering volumes and increased earnings from pipeline investments.
- Power and Industrial Projects net income attributable to DTE Energy increased to $58 million from $44 million in the quarter and to $146 million from $104 million year to date, supported by higher production, improved steel-sector demand, renewable projects, and production tax credits.
- Energy Trading net income declined to a $13 million loss from $1 million of income in the quarter and to $13 million from $97 million year to date. The decline reflected weaker gas structured and power trading results, including mark-to-market timing losses that management expects to reverse as underlying contracts settle.
- Operating cash flow increased $497 million year to date, while investing cash use increased $534 million, primarily because of higher capital spending and contributions to equity-method investees, including NEXUS.
- DTE Energy issued $1.445 billion of debt during 2018, including a $600 million senior-notes issuance and $525 million of DTE Electric green bonds. It redeemed $105 million of debt.
Guidance, outlook, risks, and unusual items
- Management expected approximately $2.2 billion of 2018 operating cash flow and approximately $3.6 billion of 2018 utility, non-utility, and equity-method-investee capital investments. The filing does not provide a consolidated 2018 earnings-per-share guidance figure.
- DTE Electric estimated $10.4 billion of capital investments for 2018–2022, including distribution infrastructure, capital replacements, and new generation. DTE Gas estimated $2.1 billion, Gas Storage and Pipelines $2.8–$3.4 billion, and Power and Industrial Projects $800 million–$1.2 billion over the same period.
- DTE Electric requested a $328 million base-rate increase, an increase in authorized return on equity from 10.0% to 10.5%, and an infrastructure recovery mechanism. A final MPSC order was expected by May 2019.
- DTE Electric's TCJA Credit A reduced revenues by $157 million beginning August 1, 2018; its Credit B filing contemplated a $93 million customer refund from January through June 2019. DTE Gas received approval for a $25 million Credit B refund effective January through June 2019.
- DTE Electric recorded a $26.2 million liability for a customer refund related to its prior self-implemented surcharge.
- NEXUS received FERC authorization on October 10, 2018. DTE Energy owns a 50% interest, with an investment balance of $1.176 billion at September 30, 2018.
- Energy Trading remains exposed to commodity-price volatility and mark-to-market timing differences. DTE Energy's net collateral requirement under below-investment-grade ratings triggers was estimated at $502 million, before considering associated offsetting positions.
- Key regulatory and environmental matters include EPA and Clean Air Act proceedings, mercury-emissions notices, coal-ash and wastewater requirements, ozone and sulfur-dioxide compliance, nuclear operations, and remediation obligations. The potential financial impact of several matters was not quantifiable at filing.
- Environmental litigation involving DTE Electric power plants was stayed for settlement discussions. A separate September 2018 EPA notice concerning mercury exceedances at the Trenton Channel plant remained unresolved.
- The registrants adopted revenue recognition and pension presentation standards in 2018 without a significant reported effect. They expected to adopt the new lease standard on January 1, 2019 and were still assessing its balance-sheet impact.
Facts investors should verify
- Reconcile the improvement in reported earnings with the decline in operating income and assess the sustainability of tax-rate benefits, production tax credits, and regulatory mechanisms.
- Review Energy Trading's mark-to-market exposures, the $144 million of year-to-date timing-related losses identified in gas strategies, and potential collateral requirements under ratings triggers.
- Track the DTE Electric rate case, TCJA refunds and regulatory liabilities, and the recovery of planned utility capital investments.
- Evaluate funding needs for the approximately $3.6 billion 2018 capital program, rising long-term debt, and the company's dependence on capital-market access.
- Assess NEXUS execution, partnership funding commitments, guarantee obligations, and expected contribution to future earnings and cash flow.
- Monitor EPA, MPSC, environmental, coal-ash, mercury, nuclear, and remediation proceedings because the filing states that potential impacts for several matters cannot currently be quantified.