DTE Energy Company and DTE Electric Company — 2019 Q3 Form 10-Q Summary
Business context and reporting period
Unaudited combined quarterly report for the three and nine months ended September 30, 2019, filed October 28, 2019. DTE Energy is a diversified energy company comprising regulated electric and gas utilities and non-utility gas infrastructure, 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.
Financial performance and key metrics
| Metric | DTE Energy Q3 2019 | Q3 2018 | DTE Energy 9M 2019 | 9M 2018 |
|---|---|---|---|---|
| Operating revenues | $3.119 billion | $3.550 billion | $9.521 billion | $10.462 billion |
| Operating income | $450 million | $429 million | $1.292 billion | $1.262 billion |
| Net income attributable to DTE Energy | $319 million | $334 million | $902 million | $929 million |
| Diluted EPS | $1.73 | $1.84 | $4.91 | $5.13 |
| Operating margin | 14.4% | 12.1% | 13.6% | 12.1% |
| Net margin attributable to DTE Energy | 10.2% | 9.4% | 9.5% | 8.9% |
- Revenue declined 12% in the quarter and 9% year to date, primarily because of lower non-utility revenue, particularly in Energy Trading and Power and Industrial Projects. Operating income increased despite lower revenue because the associated commodity costs also declined.
- DTE Electric reported Q3 net income of $307 million versus $305 million and nine-month net income of $587 million versus $608 million. Utility margin increased $38 million in the quarter and $39 million year to date, driven mainly by new rates and regulatory mechanisms, but partly offset by unfavorable weather and lower sales.
- DTE Energy’s Q3 segment earnings were Electric $307 million, Gas $(38) million, Gas Storage and Pipelines $60 million, Power and Industrial Projects $49 million, Energy Trading $(14) million, and Corporate and Other $(45) million.
- Net cash from operating activities was $1.901 billion for the first nine months, down from $2.047 billion in 2018. Investing cash use was $2.558 billion, including $2.159 billion of plant and equipment expenditures and $174 million for acquisitions. Financing provided $657 million.
- Cash, cash equivalents, and restricted cash were $76 million at September 30, 2019, unchanged from year-end after financing activity.
- DTE Energy reported $724 million of short-term borrowings and $15.064 billion of long-term debt, including current maturities and finance leases. DTE Electric reported $479 million of short-term borrowings and approximately $7.187 billion of long-term debt, including current maturities and finance leases.
- Available liquidity under unsecured revolving credit facilities and letter-of-credit facilities was $1.645 billion for DTE Energy, DTE Electric, and DTE Gas combined; DTE Energy separately described approximately $1.7 billion of available liquidity including cash. Debt-to-capitalization ratios were 57% for DTE Energy and 52% for DTE Electric, within the 65% covenant limit.
Material changes versus the prior comparable period
- DTE Energy’s nine-month net income decreased $27 million, or approximately 3%, while diluted EPS decreased from $5.13 to $4.91. Q3 net income decreased $15 million, or approximately 4.5%.
- Electric segment earnings decreased $21 million year to date despite higher utility margin, reflecting higher depreciation, operating costs, and $13 million of disallowed capital expenditures under the May 2019 rate order.
- Gas segment earnings increased $33 million year to date, primarily from higher rates, midstream storage and transportation revenue, and favorable regulatory mechanisms; the segment incurred a Q3 loss because of seasonal cost and expense patterns.
- Gas Storage and Pipelines earnings declined $30 million year to date, mainly because of lower earnings from pipeline investments and higher noncontrolling-interest effects after DTE Energy increased its SGG ownership to 85%.
- Power and Industrial Projects earnings declined $42 million year to date, largely reflecting the sale of interests in three renewable fuel projects and project terminations, partly offset by improved margins and lower operating expenses.
- Energy Trading earnings were broadly stable, but results remain exposed to mark-to-market timing and commodity-price volatility. Nine-month non-utility margin increased $2 million, while reported revenue decreased because of lower natural gas prices.
- DTE Energy adopted the new lease standard on January 1, 2019, recognizing approximately $137 million of operating lease right-of-use assets and $130 million of lease liabilities. The adoption did not materially affect earnings.
- DTE Energy issued approximately $1.433 billion of long-term debt net of issuance costs through September 30, 2019. DTE Electric issued $650 million of 3.95% green mortgage bonds due 2049.
Guidance, outlook, risks, contingencies, and unusual items
- Management expected approximately $2.7 billion of 2019 operating cash flow and approximately $5.9 billion of 2019 utility, non-utility, and equity-investee capital spending. DTE Electric’s estimated 2019–2023 capital investment is $11.3 billion; DTE Gas estimated $2.5 billion over the same period.
- DTE Electric plans to retire its remaining coal-fired units over time, including six units through 2022 and the Belle River and Monroe units by 2040. DTE Energy targets carbon reductions of 32% by the early 2020s, at least 50% by 2030, and 80% by 2040 from 2005 levels, with a net-zero electric-generation goal by 2050.
- DTE Electric filed a rate case requesting a $351 million base-rate increase and a return on equity increase from 10.0% to 10.5%; a final MPSC order was expected by May 2020. The 2018 rate case resulted in a $125 million annual increase effective May 9, 2019, with a 10.0% authorized return on equity.
- In October 2019, DTE Energy agreed to acquire 100% of M5 Louisiana Gathering for an estimated $2.65 billion, including $2.25 billion cash at closing and an estimated $400 million milestone payment. Closing was expected in December 2019 and was to be financed with equity units, common stock, and senior notes.
- DTE Energy had $517 million of potential collateral requirements if its credit rating fell below investment grade. Energy Trading also had $871 million of net counterparty credit exposure after cash collateral.
- Environmental and regulatory matters include Clean Air Act litigation and potential controls, coal-combustion-residual and wastewater compliance, sulfur-dioxide implementation plans, and remediation obligations. Accrued remediation liabilities were $8 million for DTE Electric and $25 million for DTE Gas at September 30, 2019.
- DTE Energy provided maximum potential guarantees of approximately $400 million for synthetic-fuel obligations, $491 million for renewable fuel facilities, and $242 million and $377 million for separate NEXUS capacity obligations. Management generally considered payment under these guarantees remote.
- PG&E filed for bankruptcy, but its account was substantially current at September 30, 2019; no reserve was recorded. DTE Energy identified approximately $102 million of related long-lived assets and $72 million of related equity investments and notes receivable.
- Reported earnings can be volatile because Energy Trading marks derivatives to market while related physical contracts and assets may be accounted for on an accrual basis. Management noted that timing differences generally reverse upon delivery or settlement.
Important facts an investor should verify
- Whether the pending DTE Electric rate case produces the requested revenue increase and return on equity.
- Funding, leverage, equity issuance, and closing conditions for the $2.65 billion M5 Louisiana Gathering acquisition.
- Progress and final costs of the coal-unit retirements, renewable and gas-generation replacement plan, and carbon-reduction commitments.
- Exposure to commodity-price volatility, derivative mark-to-market changes, counterparty credit risk, and the $517 million downgrade-related collateral requirement.
- Potential costs and recoverability associated with environmental proceedings, coal ash and wastewater compliance, remediation, and Clean Air Act litigation.
- Actual 2019 operating cash flow and capital spending compared with management’s approximate $2.7 billion and $5.9 billion expectations.
- The separate credit profiles and obligations of DTE Energy and DTE Electric; the combined filing states that neither entity generally guarantees the other’s debt securities.