DTE Energy Company and DTE Electric Company — Q1 2020 Form 10-Q Summary
Business context and reporting period
Combined unaudited Form 10-Q for the three months ended March 31, 2020, filed April 28, 2020. DTE Energy operates regulated electric and gas utilities and non-utility businesses, including gas storage and pipelines, power and industrial projects, and energy trading. 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 2020 | Q1 2019 | Change |
|---|---|---|---|
| Operating revenue | $3.022 billion | $3.514 billion | Down $492 million |
| Operating income | $546 million | $542 million | Up $4 million |
| Net income attributable to DTE Energy | $340 million | $401 million | Down $61 million |
| Diluted EPS | $1.76 | $2.19 | Down $0.43 |
| Operating margin | 18.1% | 15.4% | Up approximately 2.7 percentage points |
| Net margin | 11.2% | 11.4% | Down approximately 0.2 percentage points |
| Cash flow from operations | $1.061 billion | $752 million | Up $309 million |
| Capital expenditures | $1.188 billion | $668 million | Up $520 million |
DTE Energy reported total assets of $43.232 billion at March 31, 2020, compared with $41.882 billion at December 31, 2019. Cash, cash equivalents, and restricted cash totaled $676 million, including $552 million of cash and cash equivalents and $124 million of restricted cash.
Debt included $1.131 billion of short-term borrowings, $387 million of current long-term debt, and $17.026 billion of long-term debt excluding the current portion. The total funded debt-to-capitalization ratio was 0.59 for DTE Energy and 0.53 for DTE Electric, within the 0.65 covenant limit.
Available liquidity at March 31, 2020 was approximately $2.5 billion according to management, consisting of cash, available credit facilities, and term loans. Facility availability presented in Note 11 totaled $1.698 billion, including $1.122 billion for DTE Energy, $429 million for DTE Electric, and $147 million for DTE Gas.
DTE Electric results
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Operating revenue | $1.212 billion | $1.235 billion | Down $23 million |
| Operating income | $214 million | $226 million | Down $12 million |
| Net income | $94 million | $147 million | Down $53 million |
| Cash flow from operations | $474 million | $322 million | Up $152 million |
DTE Electric utility margin increased $29 million, primarily from implementation of new rates, partially offset by unfavorable weather, lower base sales, and the transitional reconciliation mechanism. Net income declined primarily because of a $31 million investment loss in 2020 versus a $17 million investment gain in 2019, higher interest expense, and higher depreciation.
Material changes versus the prior comparable period
- Consolidated revenue declined primarily because of lower non-utility revenue: energy trading revenue fell $388 million and power and industrial projects revenue fell $81 million. Gas storage and pipelines revenue increased $54 million, principally from the Blue Union and LEAP acquisition.
- Net income decreased 15% to $340 million. Electric segment earnings fell $53 million and Gas segment earnings fell $30 million, partly offset by a $24 million increase in Gas Storage and Pipelines earnings.
- Operating income was relatively stable despite lower revenue because fuel, purchased power, and gas costs decreased substantially, particularly in non-utility operations.
- Operating cash flow increased $309 million, primarily due to working-capital changes and higher deferred income taxes.
- Investing cash use increased to $1.342 billion, driven by higher utility and non-utility capital spending and $128 million of acquisition-related cash payments.
- Financing cash flow increased to $864 million, supported by $1.092 billion of long-term debt issuance and a $303 million increase in short-term borrowings, partially offset by $300 million of debt redemption and $195 million of common dividends.
- DTE Energy acquired an 8 MW combined heat and power facility for approximately $97 million and completed an additional renewable energy project acquisition for approximately $33 million.
Guidance, outlook, commentary, and unusual items
- Management expected approximately $3.0 billion of 2020 operating cash flow and approximately $4.5 billion of 2020 capital investments and equity-method investee contributions for DTE Energy.
- Planned 2020–2024 capital investments were estimated at $12.0 billion for DTE Electric, $3.0 billion for DTE Gas, $2.2–$2.7 billion for Gas Storage and Pipelines, and $1.0–$1.4 billion for Power and Industrial Projects.
- DTE Electric and DTE Gas had pending Michigan Public Service Commission rate cases requesting base-rate increases of $351 million and $204 million, respectively. The filing stated that final orders were expected by May 2020 and September 2020.
- COVID-19 reduced electric demand, affected production in certain industrial businesses, increased customer credit risk, disrupted capital markets, and caused a $34 million combined investment loss in certain non-qualified benefit plan trusts. Management stated that the first-quarter financial impact was not material but could not predict the ultimate effect.
- The MPSC’s April 15, 2020 COVID-19 order authorized deferral of certain uncollectible expenses above amounts included in current rates. The company was evaluating the accounting and financial impact.
- In April 2020, Fitch downgraded DTE Energy’s unsecured debt rating from BBB+ to BBB, citing increased leverage and business risk following the midstream acquisition. Management did not expect the downgrade to impair liquidity or capital-market access.
- DTE Energy maintained goals to reduce electric-utility carbon emissions 32% by the early 2020s, 50% by 2030, and 80% by 2040 from 2005 levels, with a net-zero goal by 2050.
- DTE Energy’s contractual collateral requirement upon a downgrade below investment grade was $381 million at March 31, 2020. The company had $676 million of derivatives in net liability positions subject to hard triggers, with no collateral posted against those liabilities.
- The filing identifies environmental compliance, coal ash and effluent requirements, EPA proceedings, commodity-price volatility, derivative mark-to-market timing, PG&E bankruptcy exposure, access to capital, pension and investment performance, and COVID-19 as key risks.
Important facts investors should verify
- Subsequent results and cash-collection trends related to COVID-19, customer shutoff suspensions, uncollectible accounts, and the MPSC deferral order.
- Final outcomes of the DTE Electric and DTE Gas rate cases and the extent of recoverable capital and pandemic-related costs.
- Post-quarter-end borrowing, including the April 2020 term loans for DTE Electric and DTE Gas and the $600 million DTE Electric mortgage-bond issuance.
- Leverage, credit ratings, collateral requirements, and liquidity after the Fitch downgrade and continued capital spending.
- Final purchase-price allocation and contingent consideration for the Blue Union and LEAP acquisition, including the potential payment of up to approximately $385 million.
- Exposure to energy-trading fair-value volatility and the timing of reversals from gas structured transactions.
- Potential costs and timing associated with environmental litigation, coal ash compliance, emissions rules, and remediation obligations.