DTE Energy Company and DTE Electric Company: Q2 2019 Form 10-Q Summary
Business context and reporting period
This combined, unaudited Form 10-Q covers the three and six months ended June 30, 2019, filed July 24, 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 operations. DTE Electric serves approximately 2.2 million customers in southeastern Michigan and is wholly owned by DTE Energy.
Key financial metrics
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| DTE Energy operating revenue | $2,888 million | $3,159 million | $6,402 million | $6,912 million |
| DTE Energy operating income | $300 million | $329 million | $842 million | $833 million |
| Net income attributable to DTE Energy | $182 million | $234 million | $583 million | $595 million |
| Diluted EPS | $0.99 | $1.29 | $3.18 | $3.29 |
| DTE Electric operating revenue | $1,190 million | $1,276 million | $2,425 million | $2,481 million |
| DTE Electric net income | $133 million | $163 million | $280 million | $303 million |
DTE Energy's approximate operating margin was 10.4% in Q2 2019 versus 10.4% in Q2 2018, and 13.2% for the first six months versus 12.0% in the prior-year period. Net margin attributable to DTE Energy was approximately 6.3% in Q2 2019 versus 7.4% in Q2 2018. The filing presents Utility Margin and Non-utility Margin as non-GAAP measures, rather than as consolidated GAAP margins.
- Six-month operating cash flow was $1,367 million, compared with $1,433 million in 2018.
- Six-month investing cash use was $1,514 million, including $1,396 million of plant and equipment expenditures.
- Six-month financing cash flow was $133 million, including $1,438 million of long-term debt issuance, $606 million of net short-term borrowing repayments, $345 million of common dividends, and $300 million for purchases of noncontrolling interests, principally SGG.
- Cash, cash equivalents, and restricted cash ended at $62 million, down from $76 million at December 31, 2018.
- At June 30, DTE Energy had $13,569 million of long-term debt, excluding current maturities, and $1,498 million of current long-term debt. Total debt is approximately $15.1 billion excluding finance leases.
- DTE Energy reported approximately $2.4 billion of available liquidity, consisting of cash and available revolving credit capacity. Net availability under specified credit facilities was $2,338 million.
- DTE Energy's funded debt-to-capitalization ratio was 0.57 to 1, within the 0.65 to 1 covenant limit. DTE Electric's ratio was 0.51 to 1.
Material changes versus the prior comparable period
- Q2 DTE Energy net income declined $52 million, or approximately 22%, and diluted EPS declined $0.30. Management attributed the decline principally to lower earnings from Electric, Gas, Gas Storage and Pipelines, and Power and Industrial Projects.
- Six-month net income declined $12 million, while operating income increased $9 million. The improvement in operating income was more than offset by higher interest expense and other deductions.
- Utility revenue declined in Q2, but utility fuel and purchased-power costs also declined. Electric Utility Margin decreased $22 million in Q2, primarily because unfavorable weather and lower base sales offset the benefit of new rates. Six-month Electric Utility Margin increased $1 million.
- Gas Utility Margin decreased $2 million in Q2 but increased $72 million for the six months, supported by new rates, weather, midstream storage and transportation revenue, and regulatory mechanisms.
- Power and Industrial Projects revenue fell $136 million in Q2 and $315 million year to date, primarily due to the sale of interests in three projects and project terminations in the reduced-emissions-fuel business. Its Non-utility Margin nevertheless increased $8 million in Q2 and $23 million year to date.
- Gas Storage and Pipelines attributable earnings decreased to $50 million from $60 million in Q2 and to $98 million from $122 million year to date. DTE Energy acquired an additional 30% of SGG in May 2019, increasing ownership to 85%; the transaction contributed to the $300 million purchase of noncontrolling interests.
- Energy Trading reported a Q2 loss of $6 million versus a $5 million loss in 2018, while year-to-date earnings were $26 million in both periods. Results remain affected by mark-to-market timing and commodity-price volatility.
- Depreciation and amortization increased $33 million in Q2 and $48 million year to date for DTE Energy, reflecting a larger depreciable base and, for DTE Electric, higher depreciation rates effective May 9, 2019.
- DTE Energy issued $800 million of senior notes in June 2019. DTE Electric issued $650 million of 3.95% mortgage bonds due 2049 in February, designated as Green Bonds.
Guidance, outlook, risks, contingencies, and unusual items
- Management expected approximately $2.4 billion of 2019 operating cash flow and approximately $3.9 billion of 2019 utility, non-utility, and equity-investee capital expenditures. DTE Electric expected approximately $2.2 billion of 2019 capital expenditures.
- DTE Energy estimated 2019-2023 capital investments of approximately $11.3 billion for DTE Electric, $2.5 billion for DTE Gas, $4.0 billion to $5.0 billion for Gas Storage and Pipelines, and $1.0 billion to $1.4 billion for Power and Industrial Projects.
- DTE Electric received MPSC approval for a $125 million annual base-rate increase effective May 9, 2019, with a 10.0% authorized return on equity. It filed a new rate case in July 2019 requesting a $351 million increase and a 10.5% return on equity; a final order was expected by May 2020.
- DTE Gas's Calculation C tax-reform case sought a $12 million annual revenue-requirement reduction, with an MPSC decision expected by August 2019.
- DTE Energy updated its carbon-reduction goals to 32% by the early 2020s, at least 50% by 2030, and 80% by 2040, measured against 2005 emissions. Coal-unit retirements and replacement generation are expected to require substantial capital investment.
- DTE Energy's trading and derivative activities create exposure to commodity prices, interest rates, foreign exchange, counterparty credit, and mark-to-market timing. A downgrade below investment grade could require up to $541 million of collateral under ratings-trigger provisions.
- PG&E's Chapter 11 filing created counterparty and asset-value risk for DTE Energy's renewable power projects. Management reported that receivables were substantially current, no reserve was required, and no impairment trigger had been identified as of June 30, 2019; future contract rejection or renegotiation could result in impairment.
- Environmental and regulatory matters include Clean Air Act litigation and notices, coal-ash and wastewater compliance, potential sulfur-dioxide controls, contaminated-site remediation, and a March 2019 EPA finding of violation involving the EES Coke facility. The filing states that impacts cannot presently be quantified for several matters.
- On June 28, 2019, DTE Electric entered into an EPA Consent Agreement and Final Order related to mercury emission exceedances at the Trenton Channel plant, agreeing to a $25,133 civil penalty and $95,000 of environmental projects.
- DTE Energy estimates maximum potential liabilities of approximately $400 million for synthetic-fuel guarantees, $476 million for reduced-emissions-fuel guarantees, and substantial NEXUS guarantee obligations; management considers payments under these guarantees remote.
- The companies adopted the new lease standard prospectively on January 1, 2019, recognizing operating lease right-of-use assets and liabilities. DTE Energy also reclassified $25 million of tax effects from accumulated other comprehensive income to retained earnings under ASU 2018-02.
Most important facts for investors to verify
- Reconcile Q2 earnings deterioration with weather impacts, rate implementation, higher depreciation, interest expense, and non-utility project sales or terminations.
- Monitor the outcome of DTE Electric's $351 million rate case and DTE Gas's Calculation C proceeding, including authorized returns and recovery of infrastructure investment.
- Assess whether the planned capital program can be funded while maintaining leverage, liquidity, dividend capacity, and investment-grade credit metrics.
- Review debt maturities of approximately $1.5 billion over the next twelve months and the planned October 2019 DTE Gas private-placement debt issuance.
- Evaluate exposure to derivative mark-to-market volatility, collateral requirements, commodity prices, and counterparty credit risk.
- Track environmental proceedings, coal-unit retirements, coal-ash and wastewater compliance, and potential remediation or pollution-control expenditures.
- Reassess PG&E-related contracts and investments if the bankruptcy process changes payment terms or contract enforceability.