DTE Energy Company — Q1 2010 Form 10-Q Summary
Business context and reporting period
DTE Energy is a diversified energy company comprising regulated electric and gas utilities in Michigan and non-utility businesses in gas storage and pipelines, unconventional gas production, power and industrial projects, and energy trading. Detroit Edison serves approximately 2.1 million electric customers, while MichCon serves approximately 1.2 million gas customers.
The filing covers the unaudited three months ended March 31, 2010, compared with the three months ended March 31, 2009. The company adopted new variable-interest-entity consolidation guidance prospectively on January 1, 2010.
Financial results and key metrics
| Metric | Q1 2010 | Q1 2009 | Change |
|---|---|---|---|
| Operating revenue | $2,453 million | $2,255 million | +$198 million, 8.8% |
| Operating income | $472 million | $395 million | +$77 million, 19.5% |
| Operating margin | 19.2% | 17.5% | +1.7 percentage points |
| Net income | $230 million | $179 million | +$51 million, 28.5% |
| Net income attributable to DTE | $229 million | $178 million | +$51 million, 28.7% |
| Diluted EPS | $1.38 | $1.09 | +$0.29, 26.6% |
| Net margin attributable to DTE | 9.3% | 7.9% | +1.4 percentage points |
| Dividend declared per share | $0.53 | $0.53 | Unchanged |
Net income growth was driven primarily by higher earnings in the Electric Utility, Gas Utility, and Power and Industrial Projects segments. The effective tax rate declined to 34% from 35%.
- Electric Utility: Net income increased to $91 million from $78 million. Gross margin rose $25 million, principally from the January 2010 rate order and securitization and tax surcharge rate increases, partly offset by lower sales and other items.
- Gas Utility: Net income increased to $79 million from $61 million. Gross margin rose $33 million, including a $71 million benefit from the January 2010 self-implemented rate increase, partly offset by warmer weather, conservation, and lower volumes.
- Gas Storage and Pipelines: Net income was unchanged at $14 million.
- Unconventional Gas Production: Net loss increased to $3 million from $2 million, including a $4 million impairment of expired or expiring Barnett shale leasehold positions.
- Power and Industrial Projects: Net income increased to $18 million from $4 million, reflecting higher coke demand and on-site services. The segment also benefited from production tax credits.
- Energy Trading: Net income declined to $38 million from $40 million. Gross margin was broadly stable, with higher realized margins offset by lower unrealized margins.
Cash flow, balance sheet, debt, and liquidity
| Metric | March 31, 2010 | December 31, 2009 or Q1 2009 |
|---|---|---|
| Net cash from operating activities | $817 million | $839 million in Q1 2009 |
| Capital expenditures | $239 million | $326 million in Q1 2009 |
| Net cash used in investing activities | $171 million | $256 million in Q1 2009 |
| Net cash used in financing activities | $505 million | $581 million in Q1 2009 |
| Cash and cash equivalents | $193 million | $52 million at December 31, 2009 |
| Total assets | $24.2 billion | $24.2 billion at December 31, 2009 |
| Total equity | $6.6 billion | $6.3 billion at December 31, 2009 |
| Long-term debt, including current portion, carrying value | Approximately $8.0 billion | Approximately $8.0 billion at December 31, 2009 |
Operating cash flow declined $22 million year over year because of less favorable working-capital changes. Cash increased by $141 million during the quarter. The company contributed $200 million to pension plans, including $100 million of DTE common stock.
Credit facilities totaled $2.045 billion, with $1.776 billion of net availability at March 31, 2010. There were no commercial paper borrowings; $269 million of letters of credit were outstanding. DTE Energy’s funded debt-to-capitalization ratio was 0.50 to 1, below its 0.65 to 1 covenant limit. A demand financing agreement with the clearing agent had $81 million outstanding.
Material changes, outlook, and unusual items
- MichCon self-implemented $170 million of its requested annual rate increase effective January 1, 2010. A final MPSC order was expected by June 2010; the company recorded a $9 million potential customer refund liability.
- Detroit Edison and MichCon filed amended 2010–2015 energy optimization plans seeking recovery of approximately $406 million and $150 million, respectively.
- Five previously unconsolidated variable-interest entities were consolidated beginning January 1, 2010. This increased reported Power and Industrial Projects revenue and operating expense but had no impact on DTE-attributable net income.
- The company expects 2010 capital expenditures of approximately $1.4 billion and environmental capital expenditures of up to $2.2 billion through 2019 under current requirements.
- Management expects approximately $20 million of production tax credits from steel-industry fuel projects during 2010. Unconventional Gas Production plans approximately $25 million of 2010 investment for 10 to 15 wells and expects production of approximately 5 Bcfe.
- DTE agreed to issue $300 million of 4.89% Detroit Edison senior notes expected to fund in September 2010, with proceeds intended to refinance debt due in October 2010.
- A $925 million revolving facility expires in October 2010; management expected to pursue renewal.
- Major risks include weak Michigan economic conditions, customer conservation and theft, high uncollectible accounts, regulatory outcomes, commodity-price volatility, derivative mark-to-market volatility, environmental compliance costs, nuclear operations, capital-market access, and pension and postretirement obligations.
- Detroit Edison faces potential additional environmental expenditures and an EPA Notice of Violation/Finding of Violation concerning five power plants. The filing does not provide a clear estimate of any resulting liability.
- DTE guaranteed 26% of an $800 million Millennium Pipeline borrowing facility. Its maximum potential exposure under the debt guarantee was approximately $210 million, with approximately $12 million of exposure on related interest-rate swaps at March 31, 2010.
Important facts for investors to verify
- Final MPSC decisions on the MichCon rate case, potential refunds, PSCR/GCR reconciliations, and energy optimization plans.
- Renewal of the $925 million revolving credit facility and refinancing of Detroit Edison debt due in October 2010.
- Actual 2010 capital spending, environmental compliance costs, and recovery of those costs through regulated rates.
- Trends in utility sales, customer arrears, theft, uncollectible expense, and the effectiveness of revenue-decoupling and tracking mechanisms.
- Exposure to derivative valuation changes, collateral requirements, and energy-trading earnings volatility.
- Progress and ultimate cost of EPA, coal-ash, cooling-water, climate, nuclear-waste, and other environmental matters.
- Future funding requirements for pension, postretirement, nuclear decommissioning, and other asset-retirement obligations.