DTE Energy Company and DTE Electric Company — Q1 2017 Form 10-Q Summary
Business context and reporting period
This combined, unaudited Form 10-Q covers the three months ended March 31, 2017. DTE Energy is the parent company of regulated electric and natural gas utilities and non-utility businesses, including gas pipelines and storage, power and industrial projects, and energy trading. DTE Electric is a wholly owned subsidiary and files reduced disclosures. DTE Electric serves approximately 2.2 million electric customers in southeastern Michigan; DTE Gas serves approximately 1.3 million natural gas customers throughout Michigan.
Key financial metrics
| Metric | DTE Energy Q1 2017 | DTE Energy Q1 2016 | Change |
|---|---|---|---|
| Operating revenues | $3,236 million | $2,566 million | +26% |
| Operating income | $569 million | $381 million | +49% |
| Operating margin | 17.6% | 14.8% | +2.8 points |
| Net income attributable to DTE Energy | $400 million | $247 million | +62% |
| Diluted EPS | $2.23 | $1.37 | +$0.86 |
| Net income margin attributable to DTE Energy | 12.4% | 9.6% | +2.8 points |
| Dividends declared per share | $0.825 | $0.73 | +13% |
| Net cash from operating activities | $787 million | $745 million | +$42 million |
| Capital expenditures and equity-method contributions | $667 million | $450 million | +$217 million |
DTE Energy ended the quarter with $82 million of cash and cash equivalents, compared with $92 million at December 31, 2016. Total assets were $32.1 billion and total equity was $9.7 billion. Long-term debt, including the current portion and excluding capital leases, was approximately $11.8 billion.
DTE Energy issued $500 million of 3.80% senior notes due 2027 and reduced short-term borrowings by $440 million during the quarter. Available liquidity was approximately $2.0 billion, including cash and availability under unsecured revolving credit agreements. The total funded debt-to-capitalization ratio was 0.53 to 1, within the 0.65 to 1 covenant limit.
DTE Electric financial metrics
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Operating revenues | $1,175 million | $1,153 million | +2% |
| Operating income | $217 million | $245 million | -11% |
| Operating margin | 18.5% | 21.2% | -2.7 points |
| Net income | $106 million | $127 million | -17% |
| Net income margin | 9.0% | 11.0% | -2.0 points |
| Net cash from operating activities | $411 million | $453 million | -$42 million |
| Net cash used for investing activities | $387 million | $297 million | +$90 million use of cash |
DTE Electric had $11 million of cash and cash equivalents at March 31, 2017, $5.9 billion of long-term debt, and $5.99 billion of shareholder equity. Its available revolving credit capacity was $400 million, with $341 million net availability after outstanding borrowings.
Material changes versus the prior comparable period
- DTE Energy earnings increased primarily because of substantially higher Energy Trading and Gas segment results, with additional growth from Gas Storage and Pipelines, Power and Industrial Projects, and Corporate and Other.
- Energy Trading net income attributable to DTE Energy increased to $96 million from a $7 million loss. The improvement was driven largely by favorable mark-to-market and realized timing effects in gas structured strategies. Management stated that $95 million of favorable unrealized gas-related results represented timing gains expected to reverse as underlying contracts settle.
- Gas segment net income increased to $107 million from $87 million. Gross margin improved by $49 million, primarily from new rates and revenue decoupling, partly offset by unfavorable weather.
- Gas Storage and Pipelines net income attributable to DTE Energy increased to $45 million from $30 million, reflecting the October 2016 acquisition of AGS and a 55% interest in SGG and increased Susquehanna gathering volumes.
- DTE Electric net income declined to $106 million from $127 million. Gross margin increased $43 million, including $46 million from new rates, but operating and maintenance expense increased $59 million, including higher outage, storm restoration, distribution, and benefit costs. The company also incurred $9 million related to a 2016 generation-facility fire, with partial insurance reimbursement expected.
- Non-utility revenue increased $616 million, led by Energy Trading and Power and Industrial Projects. The increase includes substantial commodity-related activity and should not be interpreted as equivalent to recurring margin growth.
- DTE Energy adopted the inventory simplification standard without significant impact. It also recognized $13 million of excess tax benefits from stock-based compensation, contributing to the lower effective tax rate of 22% versus 26% in the prior-year quarter.
Guidance, outlook, risks, contingencies, and unusual items
- Management expects approximately $1.9 billion of 2017 operating cash flow and approximately $3.0 billion of 2017 capital expenditures and contributions to equity-method investees.
- Planned 2017–2021 capital investments include approximately $8.4 billion for DTE Electric, $1.8 billion for DTE Gas, $2.2 billion to $2.8 billion for Gas Storage and Pipelines, and $600 million to $1.0 billion for Power and Industrial Projects.
- DTE Electric filed a new rate case on April 19, 2017 requesting a $231 million annual base-rate increase and a return on equity increase from 10.1% to 10.5%. It anticipated self-implementing an increase in November 2017, subject to MPSC proceedings.
- The MPSC approved an annual DTE Electric revenue increase of $184 million effective February 7, 2017, below the $344 million originally requested. DTE Electric recorded an estimated $37 million customer refund liability.
- NEXUS Pipeline approvals were delayed because the FERC lacked a quorum. DTE Energy was targeting a year-end 2017 in-service date, contingent on timely appointment of a FERC commissioner.
- Energy Trading remains exposed to commodity-price, regulatory, and mark-to-market volatility. DTE Energy reported approximately $437 million of potential collateral requirements if its credit rating fell below investment grade.
- Environmental and regulatory risks include Clean Air Act litigation, coal ash and wastewater compliance, cooling-water intake requirements, greenhouse-gas regulation, and potential additional pollution-control or facility-retirement costs. The filing does not provide a clear estimate for the potential impact of the principal Clean Air Act litigation.
- DTE Electric estimated approximately $309 million of coal-combustion-residual and effluent-control costs over the next six years, although EPA reconsideration and an administrative stay could change compliance requirements and timing.
- DTE Energy made $126 million of pension contributions during the quarter and may make additional 2017 contributions of up to $180 million. DTE Electric may provide up to $145 million of the additional amount.
- The 2016 AGS and SGG acquisition involved approximately $1.2 billion of cash consideration plus assumed SGG debt of $204 million. The purchase-price allocation remains preliminary; a first-quarter working-capital adjustment increased goodwill by approximately $6 million.
- Management stated that disclosure controls were effective and that there were no material changes in internal control over financial reporting during the quarter. A new customer billing system was implemented in April 2017.
Most important facts for investors to verify
- Whether Energy Trading’s Q1 mark-to-market gains reverse in subsequent periods and how much of reported earnings is recurring.
- The timing and final outcome of the DTE Electric rate case, refund reconciliation, PSCR proceedings, and depreciation-rate case.
- The status, financing requirements, construction schedule, and regulatory approval of the NEXUS Pipeline.
- Actual capital spending, pension contributions, and cash generation relative to management’s 2017 expectations.
- Potential costs and timing associated with Clean Air Act litigation, coal ash, wastewater, ozone, SO2, and other environmental requirements.
- DTE Energy’s leverage, liquidity, and potential collateral requirements under ratings-trigger provisions, especially during periods of commodity-price volatility.
- The final purchase-price allocation and operating contribution of AGS and SGG.