DTE Energy Company — 2012 Second-Quarter Form 10-Q Summary
Business Context and Reporting Period
DTE Energy is a diversified energy company with regulated electric and gas utilities, gas storage and pipelines, unconventional gas production, power and industrial projects, and energy trading operations. Detroit Edison serves approximately 2.1 million electric customers, while MichCon and Citizens serve approximately 1.2 million natural-gas customers. The filing covers the three and six months ended June 30, 2012; financial statements are unaudited.
Key Financial Metrics
| Metric | Three Months Ended June 30 | Six Months Ended June 30 |
|---|---|---|
| Operating revenues | $2.025 billion vs. $2.028 billion | $4.274 billion vs. $4.459 billion |
| Operating income | $294 million vs. $288 million | $606 million vs. $678 million |
| Net income attributable to DTE | $146 million vs. $202 million | $302 million vs. $378 million |
| Diluted EPS | $0.86 vs. $1.19 | $1.77 vs. $2.23 |
| Operating margin | 14.5% vs. 14.2% | 14.2% vs. 15.2% |
| Dividends declared per share | $0.59 vs. $0.59 | $1.18 vs. $1.15 |
| Net cash from operating activities | Not separately provided | $1.161 billion vs. $1.159 billion |
Six-month operating expenses declined to $3.668 billion from $3.781 billion, primarily due to lower fuel, purchased power and gas costs, partly offset by higher operation and maintenance expense. The effective tax rate was 32% in both 2012 periods, compared with negative 14% for the second quarter and 17% for the first six months of 2011, when DTE recorded an $88 million Michigan Corporate Income Tax benefit.
At June 30, 2012, cash and cash equivalents were $185 million, compared with $68 million at December 31, 2011. Total assets were $26.075 billion and total equity was $7.184 billion. Long-term debt, including current and noncurrent portions, was approximately $8.060 billion, excluding certain other current borrowings and reported classifications. The filing reported approximately $1.9 billion of available liquidity, consisting of cash and available revolving credit capacity; net availability under listed credit facilities was $1.714 billion.
Cash Flow, Capital Spending, and Debt
- Operating cash flow was essentially unchanged year over year despite lower net income, supported by working-capital changes and deferred taxes.
- Investing cash usage increased to $832 million from $767 million, including $708 million of utility capital expenditures and $131 million of non-utility expenditures.
- Financing cash usage declined to $212 million from $396 million, reflecting lower long-term debt redemptions, partly offset by a $380 million reduction in short-term borrowings.
- DTE issued $500 million of Detroit Edison mortgage bonds in June 2012, with maturities in 2022 and 2042. More than $800 million of long-term debt was scheduled to mature over the following twelve months.
- The company expected approximately $1.9 billion of 2012 operating cash flow and approximately $1.9 billion of 2012 capital expenditures, excluding a planned power and industrial project acquisition.
Material Changes Versus the Prior Comparable Period
- Consolidated earnings declined primarily because the 2011 period included the $88 million Michigan tax benefit. Excluding this unusual tax item, the comparison is more favorable.
- Electric Utility six-month net income increased to $223 million from $188 million. Gross margin increased $45 million, supported by rate increases, weather, renewable-energy programs, and regulatory mechanisms.
- Gas Utility six-month net income declined to $56 million from $80 million. Gross margin fell $45 million, primarily because of warmer weather, partly offset by revenue-decoupling and other mechanisms.
- Gas Storage and Pipelines earnings increased to $34 million from $29 million, while Power and Industrial Projects earnings increased to $18 million from $15 million.
- Energy Trading earnings declined to $2 million from $14 million for the first six months, reflecting mild temperatures, fewer market opportunities, and unfavorable gas-trading results.
- Power and Industrial Projects revenue increased substantially because of new reduced-emissions-fuel projects, but much of the increase was matched by related operating expense and affiliate transactions.
Guidance, Outlook, Risks, and Unusual Items
- Management expects long-term growth from utility infrastructure, environmental and renewable investments, and expansion of the Gas Storage and Pipelines and Power and Industrial Projects segments. The company also expected to pursue monetization opportunities in unconventional gas production.
- DTE expected 2012 unconventional gas production of approximately 8–9 Bcfe and approximately $45 million of capital investment to drill about 47 wells. Proved reserves were reported at 279 million Bcfe at June 2012, compared with 186 million Bcfe at December 2011.
- MichCon filed a rate case seeking approximately $77 million of additional annual revenue and expected to self-implement new rates in the fourth quarter of 2012.
- Detroit Edison’s Fermi 2 plant was manually shut down in June after a feedwater-pump failure and was operating at reduced power with one pump. Management expected insurance coverage for property damage and did not expect a significant earnings impact, although the restart date and power level had not been determined.
- A Michigan Court of Appeals decision reversed the electric revenue-decoupling mechanism authorization and remanded aspects of the advanced-metering program. DTE retained recorded RDM liabilities of $56 million and $71 million for two reconciliation periods, while potential refund amounts could vary materially based on regulatory outcomes.
- Environmental and regulatory exposure remains significant. Detroit Edison estimated approximately $2.0 billion of additional environmental capital expenditures through 2021 under then-current regulations, with possible additional costs from evolving air, water, greenhouse-gas, and coal-ash requirements.
- The company disclosed ongoing EPA litigation and notices of violation involving power plants, environmental matters at coke facilities, and the Kivalina climate-related lawsuit, for which plaintiffs sought up to $400 million. Outcomes and financial impacts were described as uncertain.
- DTE had approximately $5.3 billion of long-term purchase commitments from 2012 through 2051. Maximum potential liabilities under synthetic-fuel guarantees were approximately $1.2 billion, although payment was considered remote.
- Commodity, interest-rate, counterparty-credit, weather, nuclear-operating, regulatory, environmental, capital-market, and unplanned-outage risks could materially affect earnings, liquidity, and cash flow. Credit facilities required a funded-debt-to-capitalization ratio of no more than 0.65; DTE reported a ratio of 0.50 at June 30, 2012.
Most Important Facts for Investors to Verify
- Whether Fermi 2 returned to service as planned and whether the outage affected power costs, insurance recoveries, or earnings.
- The final resolution and timing of Detroit Edison RDM liabilities, the advanced-metering remand, and MichCon’s rate case.
- Actual 2012 operating cash flow, capital expenditures, debt maturities, refinancing activity, and liquidity usage.
- The sustainability of Electric Utility margin improvement and the impact of weather and customer conservation on Gas Utility results.
- Energy Trading mark-to-market volatility, commodity-price exposure, and counterparty collateral requirements.
- Environmental litigation, EPA regulatory developments, coal-ash and emissions compliance costs, and potential effects on rates and asset retirements.
- Progress and valuation of unconventional gas monetization, reserve growth, and the planned power and industrial acquisition.