DTE Energy Company 2018 Second-Quarter Form 10-Q Summary
Business Context and Reporting Period
This combined unaudited Form 10-Q covers DTE Energy Company and its wholly owned subsidiary, DTE Electric Company, for the three and six months ended June 30, 2018. DTE Energy operates regulated electric and gas utilities in Michigan and non-utility businesses in gas storage and pipelines, power and industrial projects, and energy trading. DTE Electric serves approximately 2.2 million customers in southeastern Michigan.
Key Financial Metrics
| Metric | Three Months Ended June 30 | Six Months Ended June 30 |
|---|---|---|
| DTE Energy operating revenues | $3.159 billion, versus $2.855 billion | $6.912 billion, versus $6.091 billion |
| Operating income | $329 million, versus $320 million | $833 million, versus $905 million |
| Net income attributable to DTE Energy | $234 million, versus $177 million | $595 million, versus $577 million |
| Diluted EPS | $1.29, versus $0.99 | $3.29, versus $3.21 |
| Net margin | Approximately 7.4%, versus 6.2% | Approximately 8.6%, versus 9.5% |
| Operating margin | Approximately 10.4%, versus 11.2% | Approximately 12.1%, versus 14.9% |
- Utility operations generated $1.514 billion of second-quarter revenue and $3.254 billion for the six-month period. Non-utility operations generated $1.645 billion and $3.658 billion, respectively.
- Six-month operating cash flow was $1.433 billion, up from $1.183 billion. Investing cash outflows were $1.380 billion, including $1.157 billion of utility and non-utility plant expenditures and $233 million of contributions to equity-method investees.
- Six-month financing cash flow was negative $56 million. DTE Energy issued $520 million of long-term debt, redeemed $102 million, reduced short-term borrowings by $147 million, and paid $309 million of common-stock dividends.
- Cash, cash equivalents, and restricted cash totaled $86 million at June 30, 2018, compared with $89 million at December 31, 2017.
- Debt included $12.705 billion of long-term debt, $474 million of short-term borrowings, and $5 million of current long-term debt. DTE Energy reported approximately $1.6 billion of available liquidity, including cash and unused revolving credit capacity.
- DTE Energy's funded-debt-to-capitalization ratio was 0.54 to 1, below the 0.65 covenant limit. DTE Electric's ratio was 0.51 to 1.
- DTE Energy's interim effective tax rate was 7% for the quarter and 13% for the six months, versus 25% and 23% in the comparable 2017 periods. The reduction primarily reflected the Tax Cuts and Jobs Act corporate tax-rate reduction from 35% to 21%.
- DTE Electric reported second-quarter net income of $163 million, versus $138 million, and six-month net income of $303 million, versus $244 million.
Material Changes Versus the Prior Comparable Period
- Second-quarter consolidated net income increased $57 million, primarily from improved Electric, Gas, Gas Storage and Pipelines, and Power and Industrial Projects results.
- Six-month net income increased $18 million despite lower Energy Trading and Corporate and Other earnings. The period included a $21 million increase in DTE Energy income-tax expense from deferred-tax remeasurement true-up adjustments.
- Electric Utility Margin increased $27 million in the quarter and $32 million year to date, helped by favorable weather, new rates, and the absence of a prior-year PSCR disallowance. These benefits were partly offset by $38 million and $77 million of TCJA rate-reduction reserves.
- Gas Utility Margin increased $27 million in the quarter and $21 million year to date, primarily due to weather and higher midstream storage and transportation revenues.
- Gas Storage and Pipelines attributable earnings increased to $60 million for the quarter and $122 million year to date, driven primarily by higher pipeline and gathering volumes.
- Power and Industrial Projects attributable earnings increased to $43 million for the quarter and $88 million year to date, supported by improved steel-business demand, renewable production, and higher production tax credits.
- Energy Trading produced a $5 million loss in the quarter and $26 million of earnings year to date, compared with breakeven and $96 million, respectively. The decline reflected unfavorable realized and unrealized margins, particularly in gas structured strategies.
Guidance, Outlook, Commentary, Risks, and Unusual Items
- No consolidated earnings-per-share guidance is provided in the filing. Management expects approximately $2.2 billion of 2018 operating cash flow and approximately $3.6 billion of 2018 capital investments and contributions to equity-method investees.
- DTE Electric estimated 2018-2022 capital investments of $10.4 billion, including distribution infrastructure, replacements, and new generation. DTE Gas estimated $2.1 billion, while Gas Storage and Pipelines estimated $2.8 billion to $3.4 billion and Power and Industrial Projects estimated $800 million to $1.2 billion.
- DTE Energy is transitioning away from coal and targets at least 50% clean energy by 2030. DTE Electric received approval for a natural-gas combined-cycle facility of approximately 1,100 megawatts, with recoverable costs capped at $951.8 million.
- DTE Electric's 2017 rate case resulted in an approved annual base-rate increase of $74.4 million and a recorded customer-refund liability of $25 million. A new rate case filed in July 2018 requested a $328 million base-rate increase and a return-on-equity increase from 10.0% to 10.5%.
- TCJA-related revenue reductions of $157 million for DTE Electric and $38.2 million for DTE Gas were approved after quarter-end or became effective after quarter-end. Additional Credit B and Calculation C regulatory proceedings remained pending.
- DTE Energy expects the NEXUS Pipeline to enter service in the third quarter of 2018. DTE Energy owns a 50% interest and reported an $868 million investment balance at June 30, 2018.
- Energy Trading earnings remain exposed to commodity-price volatility and timing differences caused by mark-to-market accounting for derivatives versus accrual accounting for related non-derivative assets and contracts. At June 30, DTE Energy had $16 million of net mark-to-market assets, but reported $508 million of potential collateral requirements if ratings fell below investment grade.
- Environmental and regulatory risks include Clean Air Act litigation and potential pollution-control requirements, mercury-emissions matters, coal-ash and wastewater rules, ozone non-attainment requirements, contaminated-site remediation, and possible changes to greenhouse-gas regulation.
- DTE Energy estimated maximum potential liabilities of approximately $400 million under synthetic-fuel guarantees, $453 million under reduced-emissions-fuel guarantees, and $107 million under NEXUS guarantees; payments were considered remote.
- The registrants adopted revenue-recognition, pension-presentation, and financial-instrument accounting standards in 2018. The revenue standard did not materially affect results; the financial-instrument adoption reclassified $5 million for DTE Energy and $3 million for DTE Electric from accumulated other comprehensive income to retained earnings.
- Both DTE Energy and DTE Electric concluded that disclosure controls and procedures were effective, with no material changes in internal control over financial reporting during the quarter.
Important Facts for Investors to Verify
- Reconcile reported earnings growth with the decline in six-month operating income and assess the sustainability of tax-rate benefits and production tax credits.
- Review regulatory recovery and refund outcomes, including DTE Electric's $25 million refund liability, the 2018 electric and gas rate cases, and all TCJA Credit B and Calculation C proceedings.
- Monitor execution, funding, and regulatory recovery for the substantial utility capital program and the NEXUS Pipeline in-service schedule.
- Evaluate Energy Trading's derivative exposure, mark-to-market timing effects, collateral requirements, and counterparty credit exposure.
- Assess potential environmental, mercury, Clean Air Act, coal-ash, wastewater, and remediation liabilities that the filing states cannot yet quantify clearly.
- Consider the separation of DTE Energy and DTE Electric obligations: the filing states that neither registrant generally guarantees the debt securities of the other.