DTE Energy Company: Q1 2011 Form 10-Q Summary
Business context and reporting period
DTE Energy is a diversified energy company with regulated electric and gas utilities serving approximately 2.1 million and 1.2 million customers, respectively, primarily in Michigan. Non-utility businesses include gas storage and pipelines, unconventional gas production, power and industrial projects, and energy trading. The filing covers the unaudited three months ended March 31, 2011, compared with the three months ended March 31, 2010.
Financial performance and liquidity
| Metric | Q1 2011 | Q1 2010 | Change |
|---|---|---|---|
| Operating revenues | $2.431 billion | $2.453 billion | Down $22 million |
| Operating income | $390 million | $472 million | Down $82 million |
| Net income | $178 million | $230 million | Down $52 million |
| Net income attributable to DTE | $176 million | $229 million | Down $53 million |
| Diluted EPS | $1.04 | $1.38 | Down $0.34 |
| Operating cash flow | $722 million | $817 million | Down $95 million |
| Capital expenditures | $270 million | $239 million | Up $31 million |
| Dividends declared per share | $0.56 | $0.53 | Up $0.03 |
Consolidated operating margin was approximately 16.0% in Q1 2011 versus 19.2% in Q1 2010. Net margin attributable to DTE was approximately 7.2% versus 9.3%. Fuel, purchased power and gas expense increased to $1.071 billion from $995 million, while operation and maintenance expense declined to $631 million from $652 million. The effective tax rate increased to 37% from 34%, primarily because production tax credits for steel industry fuel expired at December 31, 2010.
At March 31, 2011, cash and cash equivalents were $197 million, compared with $65 million at December 31, 2010. Total assets were $24.489 billion and total equity was $6.837 billion. Current liabilities were $2.555 billion, including $899 million of current long-term debt. Long-term debt, including the current portion, was approximately $7.9 billion carrying value, with a reported fair value of $8.4 billion. The company reported no short-term borrowings at March 31, 2011.
Credit facilities totaled $1.975 billion, with net availability of approximately $1.841 billion after $134 million of letters of credit. Management stated that approximately $1.8 billion of liquidity was available. Funded debt-to-capitalization ratios were 49% for DTE Energy, 51% for Detroit Edison and 46% for MichCon, within the 65% covenant limit.
Material changes versus the prior comparable period
- Electric Utility net income declined to $85 million from $91 million. Gross margin increased $12 million, but operating income fell because of higher maintenance costs, outage costs and a $19 million Fermi 1 decommissioning accrual.
- Gas Utility net income increased to $83 million from $79 million. Colder weather and revenue decoupling benefits partly offset lower gross margin and lower revenue.
- Gas Storage and Pipelines net income increased to $15 million from $14 million, primarily from a settlement related to prior-year gas treating services.
- Power and Industrial Projects net income declined to $10 million from $18 million. Lower coal transportation and marketing activity and the expiration of production tax credits were significant factors.
- Energy Trading net income declined sharply to $2 million from $38 million. Gross margin fell to $26 million from $89 million due to lower market volatility and unfavorable timing-related derivative results.
- Electric sales declined to 11,327 thousand MWh from 12,194 thousand MWh, primarily due to lower interconnection and industrial sales. Residential sales increased because of colder weather.
- Operating cash flow decreased primarily because of lower earnings, weaker working-capital effects and higher pension and postretirement contributions. Financing cash use declined to $346 million from $505 million, largely because of lower net short-term debt repayments.
Guidance, outlook, risks and unusual items
- Management expects 2011 cash flow from operations to be comparable to 2010 levels and anticipates approximately $1.7 billion of 2011 capital expenditures.
- Approximately $900 million of long-term debt matures during the next twelve months, including $600 million of DTE Energy unsecured debt maturing in June 2011. Management expects to use internal funds and short-term debt for the June maturity and refinance other maturities with long-term debt.
- Detroit Edison requested a $443 million annual base-rate increase and planned to self-implement $107 million beginning April 28, 2011. If the final MPSC order does not support the increase, the company may have to refund the difference with interest.
- The company contributed $200 million to pension plans and $81 million to other postretirement plans in January 2011 and may contribute up to an additional $90 million to postretirement plans by year-end.
- Management expects bonus depreciation deductions to generate approximately $100 million to $200 million of cash during 2011–2012, representing an acceleration of tax benefits.
- Environmental compliance remains a significant capital requirement. Detroit Edison expects more than $230 million of 2011 environmental capital expenditures and up to $2.1 billion through 2020 under current regulations. Potential future EPA rules could increase these amounts.
- DTE Energy and Detroit Edison face an EPA-related civil action concerning Monroe Power Plant Unit 2 and other alleged Clean Air Act violations. The liability phase was scheduled for trial in September 2011; potential equipment, retirement, mitigation and fine costs were not quantifiable.
- The company recorded a $19 million first-quarter increase in asset retirement obligations for revised Fermi 1 decommissioning estimates and intends, subject to NRC notification, to suspend activity and place the facility in safe storage.
- Energy Trading results remain sensitive to commodity-price volatility, derivative mark-to-market timing, financial reform and regional transmission organization rules. A downgrade below investment grade could trigger approximately $202 million of collateral requests under certain contracts.
- Other risks include nuclear operations, severe weather, customer credit and uncollectible accounts, access to capital markets, regulatory cost recovery, environmental proceedings, commodity prices, pension assumptions, labor contracts and litigation.
Most important facts for investors to verify
- Whether the MPSC ultimately approved Detroit Edison’s requested rate increase and the extent of any required refund of the self-implemented increase.
- The timing and funding of approximately $900 million of debt maturities, including the $600 million June 2011 maturity.
- Whether Energy Trading earnings recover from the Q1 decline and how much reported volatility reflects derivative timing rather than underlying economics.
- The outcome and potential financial exposure from the EPA litigation and pending environmental regulations.
- Actual 2011 capital spending, pension and postretirement contributions, and operating cash flow compared with management’s expectations.
- The effect of expired production tax credits and any replacement tax benefits on Power and Industrial Projects results.
- Future MPSC decisions on PSCR, GCR, uncollectible expense, customer-choice and other regulatory tracking mechanisms.