DTE Energy Company 2010 Form 10-K Summary
Business Context and Reporting Period
DTE Energy is a diversified energy company headquartered in Detroit, Michigan. Its principal regulated businesses are Detroit Edison, serving approximately 2.1 million electric customers, and MichCon/Citizens, serving approximately 1.2 million natural-gas customers. Non-utility operations include gas storage and pipelines, unconventional gas production, power and industrial projects, and energy trading.
This Form 10-K covers the fiscal year ended December 31, 2010. The filing also provides unaudited quarterly information for 2010 and 2009.
Key Financial Metrics
| Metric | 2010 | 2009 | Change |
|---|---|---|---|
| Operating revenues | $8.557 billion | $8.014 billion | Up $543 million |
| Operating income | $1.464 billion | $1.249 billion | Up $215 million |
| Operating margin | 17.1% | 15.6% | Up approximately 1.5 percentage points |
| Net income attributable to DTE | $630 million | $532 million | Up $98 million |
| Diluted EPS | $3.74 | $3.24 | Up $0.50 |
| Net margin | 7.4% | 6.6% | Improved |
| Cash flow from operations | $1.825 billion | $1.819 billion | Essentially flat |
| Capital expenditures | $1.099 billion | $1.035 billion | Up $64 million |
| Long-term debt, including capital leases | $7.089 billion | $7.370 billion | Down $281 million |
| Total assets | $24.896 billion | $24.195 billion | Up $701 million |
| DTE shareholders’ equity | $6.722 billion | $6.278 billion | Up $444 million |
Cash and cash equivalents were $65 million at year-end, compared with $52 million in 2009. DTE reported approximately $1.7 billion of available liquidity at December 31, 2010 through revolving credit facilities. Total credit-facility availability, including facilities for Detroit Edison and MichCon, was approximately $1.672 billion after outstanding commercial paper and letters of credit.
The company paid $360 million of common-stock dividends in 2010 and declared dividends of $2.18 per share. Its total funded debt-to-capitalization ratio was 49%, within the 65% covenant limit.
Segment Performance and Material Changes
- Electric Utility: Net income increased to $441 million from $376 million. Operating income increased to $1.028 billion from $899 million, and operating margin improved to 21% from 19%. Higher gross margin, rate relief, weather effects net of revenue decoupling, and lower uncollectible expense were partially offset by higher restoration, environmental, legal, and renewable-energy costs.
- Gas Utility: Net income increased to $127 million from $80 million despite revenue declining to $1.648 billion from $1.788 billion. Gross margin increased to $778 million from $731 million, aided by the 2010 rate order, tracking mechanisms, lower uncollectible expense, and lower depreciation.
- Gas Storage and Pipelines: Net income attributable to DTE rose modestly to $51 million from $49 million, driven by higher storage revenue and lower project-development costs.
- Unconventional Gas Production: The segment recorded an $11 million loss versus a $9 million loss in 2009. The company recorded $10 million of impairment losses on unproved Barnett shale leasehold positions. Production was approximately 4.8 Bcfe, compared with 5.0 Bcfe in 2009.
- Power and Industrial Projects: Net income increased sharply to $85 million from $31 million. Revenue increased to $1.144 billion from $661 million, partly reflecting the consolidation of five variable-interest entities under new accounting guidance and stronger coke and on-site services results.
- Energy Trading: Net income fell to $6 million from $75 million. Gross margin declined to $89 million from $201 million because of lower commodity-price volatility, weaker trading performance, lower risk positions, and the absence of prior-year timing-related gains.
Adoption of ASU 2009-17 resulted in consolidation of five previously equity-accounted entities in Power and Industrial Projects. The change increased 2010 operating revenue by approximately $174 million and operating and maintenance expense by approximately $122 million, without affecting net income attributable to DTE.
Cash Flow, Debt, Liquidity, and Funding
- Operating cash flow was $1.825 billion, while investing cash use was $1.226 billion, primarily for utility and non-utility capital spending.
- Financing activities used $586 million, including $360 million of common dividends, $663 million of long-term debt redemptions, and a $177 million reduction in short-term borrowings, partially offset by $614 million of long-term debt issuance.
- DTE issued approximately $620 million of long-term debt in 2010 and redeemed $500 million of Detroit Edison senior notes.
- Approximately $900 million of long-term debt was scheduled to mature during the following twelve months, including $600 million of DTE Energy unsecured debt due in June 2011.
- Contractual obligations totaled approximately $19.954 billion, including $7.970 billion of long-term debt principal, $5.547 billion of interest, $5.921 billion of energy purchase obligations, and $211 million of operating leases.
- Pension plans were underfunded by $872 million and other postretirement benefit plans were underfunded by approximately $1.276 billion at year-end. DTE contributed $200 million to pension plans and $160 million to postretirement plans in 2010.
Guidance, Outlook, Risks, and Unusual Items
- Management expected 2011 operating cash flow of approximately $1.9 billion and base-level capital expenditures of up to $1.4 billion.
- Planned 2011–2013 capital investments were estimated at $4.5 billion to $5.3 billion, including $3.4 billion to $3.8 billion for Detroit Edison, $500 million to $600 million for MichCon, and $600 million to $900 million for non-utility businesses.
- DTE expected approximately $25 million of 2011 unconventional-gas capital investment, approximately 20 new wells, and production of approximately 6 Bcfe.
- A long-term rail transportation contract expired January 1, 2011. Management anticipated approximately $130 million of lower transportation-related revenue, largely offset by lower variable costs.
- Steel-industry-fuel tax credits expired December 31, 2010, expected to reduce 2011 tax credits by approximately $29 million.
- Environmental expenditures were estimated at $2.230 billion through 2020, including approximately $2.1 billion for air-related compliance. Detroit Edison expected more than $230 million of air-compliance capital spending in 2011.
- The EPA and Department of Justice pursued litigation concerning alleged Clean Air Act violations at Detroit Edison plants, including Monroe Power Plant Unit 2. The preliminary-injunction motion was denied in January 2011, but the liability phase was scheduled for trial in May 2011. The financial impact remained indeterminate.
- Other unresolved matters included EPA and state investigations involving coke facilities, potential coal-ash regulation, cooling-water requirements, climate-change regulation, and the Kivalina climate litigation seeking up to $400 million in relocation damages.
- Key ongoing risks include rate recovery and regulatory decisions, customer-choice migration, economic conditions and uncollectible accounts, commodity prices, environmental compliance, nuclear operations, pension funding, credit ratings, counterparty exposure, energy-trading volatility, weather, outages, and access to capital markets.
- Management stated that it expected sufficient operating flexibility, cash resources, and funding sources to meet foreseeable operating and capital needs. The filing does not provide a formal earnings-per-share outlook.
Most Important Facts for Investors to Verify
- Whether the EPA environmental litigation or related regulatory actions could require substantial pollution-control spending, plant retirements, supplemental programs, or fines.
- Whether the planned $4.5 billion to $5.3 billion capital program can be recovered through rates without weakening credit metrics or dividend capacity.
- The refinancing plan for approximately $900 million of near-term debt maturities and the continued availability of revolving credit facilities.
- The sustainability of 2010 utility earnings gains given lower electric and gas volumes, customer-choice migration, economic conditions, and regulatory true-ups.
- The effect of the expired rail contract and steel-industry-fuel tax credits on 2011 Power and Industrial Projects results.
- The sensitivity of pension and postretirement obligations to discount rates, asset returns, healthcare-cost trends, and future required contributions.
- The potential for goodwill impairment, particularly in the Gas Utility reporting unit, which passed its 2010 impairment test by only a 7% fair-value margin.
- The company’s exposure to energy-trading counterparties, collateral requirements, derivative valuation changes, and potential credit-rating triggers.