DTE Energy Company and DTE Electric Company — 2015 Second-Quarter Form 10-Q
Business context and reporting period
This combined, unaudited Form 10-Q covers the quarter and six months ended June 30, 2015. 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 businesses. DTE Electric serves approximately 2.1 million electric customers in southeastern Michigan and is wholly owned by DTE Energy. DTE Electric files using reduced disclosure provisions.
Financial performance and condition
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| DTE Energy operating revenues | $2.268 billion vs. $2.698 billion | $5.252 billion vs. $6.628 billion |
| DTE Energy operating income | $204 million vs. $249 million | $665 million vs. $809 million |
| Net income attributable to DTE Energy | $109 million, or $0.61 diluted EPS, vs. $124 million and $0.70 | $382 million, or $2.13 diluted EPS, vs. $450 million and $2.54 |
| DTE Electric operating revenues | $1.147 billion vs. $1.281 billion | $2.350 billion vs. $2.691 billion |
| DTE Electric net income | $99 million vs. $130 million | $236 million vs. $267 million |
| DTE Energy operating cash flow | Not separately presented | $1.180 billion vs. $1.076 billion |
- DTE Energy’s operating margin was approximately 9.0% for the quarter and 12.7% for the six months, compared with approximately 9.2% and 12.2% in the prior-year periods, based on reported operating revenue and operating income.
- Cash and cash equivalents were $230 million at June 30, 2015, compared with $48 million at December 31, 2014. Net cash used in investing activities was $1.036 billion, including $895 million of utility and non-utility capital expenditures and a $241 million acquisition. Net cash from financing activities was $38 million.
- DTE Energy had $8.835 billion of long-term debt, excluding the current portion, and $467 million of current long-term debt. Short-term borrowings were zero, compared with $398 million at year-end 2014. DTE Energy reported approximately $2.2 billion of available liquidity, including cash and available revolving credit capacity.
- DTE Energy’s funded-debt-to-capitalization ratio was 0.51 to 1, versus a 0.65 to 1 covenant limit. DTE Electric’s ratio was 0.50 to 1. Approximately $470 million of DTE Energy long-term debt matures during the following 12 months.
- DTE Energy declared dividends of $0.69 per common share in the quarter, compared with $0.66 in the prior-year quarter. The June 30, 2015 share count was approximately 179.5 million.
Material changes versus the prior comparable period
- DTE Energy earnings declined primarily because of lower Electric and Power and Industrial Projects earnings in the quarter, and lower Electric, Gas, and Energy Trading earnings for the six-month period. Gas Storage and Pipelines improved in both periods; Energy Trading improved in the quarter but remained below the prior-year six-month result.
- Electric segment gross margin decreased $112 million in the quarter and $213 million year to date. Drivers included lower securitization bond and tax surcharge revenue, weaker base sales including weather effects, and a $19 million Fermi 2 purchased-power cost disallowance.
- Energy Trading’s net loss improved to $3 million from $14 million in the quarter, but six-month earnings fell to a $12 million loss from $28 million of income. Results were affected by lower gas prices, realized and unrealized margin volatility, and timing differences from mark-to-market accounting.
- DTE Electric purchased a 732-MW natural-gas facility for approximately $241 million in January 2015. Management also planned another natural-gas facility acquisition in the third quarter.
- DTE Energy issued $300 million of 3.30% senior notes due 2022. DTE Electric issued $500 million of 3.70% mortgage bonds due 2045 and redeemed $105 million of securitization bonds and $10 million of mortgage bonds.
- DTE Electric’s securitization bonds were fully repaid in March 2015, and the related regulatory assets were fully amortized by March 31, 2015.
- Asset retirement obligations increased to $2.157 billion for DTE Energy and $1.986 billion for DTE Electric, principally because of revised coal-ash-related cash-flow estimates.
Guidance, outlook, risks, contingencies, and unusual items
- Management expected 2015 operating cash flow of approximately $1.7 billion and capital investments of approximately $2.6 billion. DTE Electric estimated 2015–2019 capital investments of $7.5 billion, including base infrastructure, new generation, and environmental compliance; DTE Gas estimated $1.6 billion over the same period.
- DTE Electric self-implemented a $230 million annualized rate increase effective July 1, 2015, while its rate case requested a $370 million increase. A final MPSC order was expected in December 2015.
- In July 2015, the MPSC ordered DTE Electric to refund an industrial customer approximately $20 million plus 7% interest; approximately $16 million was expected to be recoverable through regulatory mechanisms. The company did not expect a material financial-statement impact.
- DTE Electric estimated approximately $120 million of coal-ash compliance costs under the EPA’s Coal Combustion Residual Rule. Additional potential costs related to air, water, greenhouse-gas, and other environmental regulations could not be quantified clearly.
- Material risks include regulatory recovery and rate decisions, environmental compliance, nuclear operations and decommissioning, weather and demand, commodity-price and mark-to-market volatility, interest rates, access to capital, counterparty credit, cyber and physical security, litigation, and construction costs or delays.
- DTE Energy had approximately $404 million of potential collateral-posting obligations if its credit rating fell below investment grade. Its trading counterparties had $647 million of net credit exposure after cash collateral at June 30, 2015.
- DTE Energy estimated maximum potential liabilities of approximately $850 million under discontinued synthetic-fuel guarantees and $210 million under reduced-emissions-fuel guarantees; payment was considered remote.
Important facts for investors to verify
- Reconcile the sharp revenue decline with lower commodity prices, trading volumes, and the expiration or amortization of securitization-related mechanisms.
- Assess the final outcome of DTE Electric’s rate case and the recoverability of the customer refund and Fermi 2 purchased-power disallowance.
- Monitor environmental rulemaking, coal-ash obligations, New Source Review proceedings, and potential nuclear-related liabilities.
- Evaluate the funding requirements for planned capital expenditures, debt maturities, pension and postretirement contributions, and the additional gas-facility acquisition.
- Review Energy Trading’s mark-to-market exposures, timing-related gains and losses, derivative collateral requirements, and sensitivity to natural-gas, electricity, and interest-rate movements.
- Confirm that the reported liquidity and covenant compliance remain adequate under adverse commodity, regulatory, credit-rating, and capital-market conditions.