DTE Energy Company 2009 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 in southeastern Michigan, and MichCon, serving approximately 1.2 million natural-gas customers throughout Michigan. Non-utility operations include gas pipelines and storage, unconventional gas production, power and industrial projects, coal transportation and marketing, and energy trading.
The filing covers the fiscal year ended December 31, 2009. The fourth-quarter results were included in the annual filing; reported fourth-quarter revenue was $2.121 billion and net income attributable to DTE Energy was $120 million.
Financial performance and key metrics
| Metric | 2009 | 2008 | Change |
|---|---|---|---|
| Operating revenues | $8.014 billion | $9.329 billion | Down approximately 14% |
| Income from continuing operations | $535 million | $531 million | Up approximately 1% |
| Net income attributable to DTE Energy | $532 million | $546 million | Down approximately 3% |
| Diluted EPS | $3.24 | $3.34 | Down $0.10 |
| Operating income | $1.249 billion | $1.263 billion | Down approximately 1% |
| Operating margin | Approximately 15.6% | Approximately 13.5% | Improved |
| Cash flow from operations | $1.819 billion | $1.559 billion | Up $260 million |
| Capital expenditures | $1.035 billion | $1.373 billion | Down $338 million |
| Long-term debt, including capital leases | $7.370 billion | $7.741 billion | Down $371 million |
| Cash and cash equivalents | $52 million | $86 million | Down $34 million |
| Total assets | $24.195 billion | $24.590 billion | Down $395 million |
| Shareholders’ equity | $6.278 billion | $5.995 billion | Up $283 million |
Cash used in investing activities was $1.064 billion, while cash used in financing activities was $789 million. The company paid approximately $347 million in common-stock dividends and declared $2.12 per share. Net debt-to-total-capitalization ratios were 51% for DTE Energy, 52% for Detroit Edison and 49% for MichCon, all within the 65% covenant limit.
- Electric Utility: Revenue was $4.714 billion, down from $4.874 billion. Net income increased to $376 million from $331 million. Operating margin improved to 19% from 16%, aided by rate relief, lower fuel and purchased-power costs, and cost reductions, despite lower demand.
- Gas Utility: Revenue was $1.788 billion, down from $2.152 billion, primarily because of lower gas costs, conservation and lower volumes. Net income was $80 million versus $85 million, and operating margin increased to 10% from 9%.
- Gas Storage and Pipelines: Net income increased to $49 million from $38 million as capacity sales, storage contract renewals and pipeline equity earnings improved.
- Unconventional Gas Production: The segment recorded a $9 million loss versus $84 million of income in 2008, which included an $80 million after-tax gain on a Barnett shale property sale. Year-end proved reserves were 234 Bcfe, and 2009 production was 5 Bcfe.
- Power and Industrial Projects: Net income declined to $31 million from $40 million because of weaker coal, emissions and coke demand and pricing.
- Energy Trading: Net income increased to $75 million from $42 million, driven by higher realized trading and storage-optimization margins, partly offset by lower unrealized margins.
Material changes versus the prior comparable period
- Electric sales and deliveries declined materially, particularly industrial sales, reflecting the recession and weakness in the automotive and steel industries. Total electric sales declined to 51,132 thousand MWh from 54,299 thousand MWh.
- Gas sales volume declined to 137 Bcf from 148 Bcf, while customer conservation, warmer weather, theft and uncollectible accounts pressured the Gas Utility.
- Total utility uncollectible expense declined to $171 million from $213 million, but past-due receivables remained elevated.
- Fuel, purchased-power and gas expense declined to $3.118 billion from $4.306 billion, while depreciation, depletion and amortization increased to $1.020 billion from $901 million.
- Operating cash flow improved despite lower revenue, primarily because of lower working-capital requirements and noncash depreciation and deferred-tax items.
- DTE reduced short-term borrowings by $417 million and issued $427 million of long-term debt, compared with $1.310 billion issued in 2008. No common-stock repurchases were made under the $850 million authorization, which expired December 31, 2009.
- The company completed a new $1.0 billion two-year revolving credit facility and had total credit-facility availability of approximately $1.512 billion at year-end.
Guidance, outlook, risks and unusual items
- Management expected 2010 operating cash flow to be lower because of higher tax payments and working-capital requirements. Base capital spending for existing businesses was expected to reach $1.4 billion.
- Planned 2010-2012 capital investments were $4.0 billion to $4.8 billion, including $3.0 billion to $3.4 billion for Detroit Edison, $0.4 billion to $0.5 billion for MichCon and $0.6 billion to $0.9 billion for non-utility businesses.
- Management expected to invest approximately $25 million in the Barnett shale in 2010, drill 10 to 15 wells and produce approximately 5 Bcfe.
- A January 2010 MPSC order approved a $217 million, or 4.8%, Detroit Edison annual revenue increase, below the $280 million self-implemented increase. DTE recorded a $27 million refund liability, including interest.
- MichCon self-implemented $170 million of a requested $193 million annual rate increase effective January 1, 2010, subject to refund pending a final MPSC order expected in June 2010.
- Environmental capital expenditures were estimated at up to $2.2 billion through 2019 under existing regulations. Additional costs could result from greenhouse-gas, coal-ash, mercury, water-intake and other environmental requirements.
- The EPA issued a Notice of Violation/Finding of Violation concerning five Detroit Edison plants. Potential outcomes include litigation, fines, supplemental environmental programs and additional pollution-control equipment; the filing does not provide a clear estimate of the potential financial impact.
- The Kivalina climate-change lawsuit sought up to $400 million. Federal claims were dismissed, but plaintiffs appealed to the Ninth Circuit.
- Pension and postretirement plans were underfunded by $887 million and $1.287 billion, respectively. Management expected 2010 contributions of up to $200 million to pension plans and up to $130 million to postretirement plans.
- Debt maturities totaled approximately $661 million in 2010. Total contractual obligations were $18.984 billion, including debt, interest, leases, purchase obligations and other long-term obligations.
- Energy-trading derivatives produced a net mark-to-market liability of $93 million at year-end. Reported earnings may be volatile because derivatives are marked to market while related physical assets and contracts may not be.
- Guarantees related to discontinued synthetic-fuel operations had an estimated maximum potential liability of $2.8 billion, although the filing does not indicate that a loss was probable.
- Millennium Pipeline debt was fully drawn at $800 million; DTE guaranteed 26%, with a maximum potential borrowing guarantee of approximately $210 million, plus exposure related to interest-rate swaps.
Investor verification points
- Verify the final MPSC outcomes for Detroit Edison and MichCon rate cases, including refunds, decoupling mechanisms and uncollectible-expense recovery.
- Monitor the renewal of the $925 million revolving facility expiring in October 2010 and the $70 million letter-of-credit facility expiring in June 2010.
- Assess whether the planned $4.0 billion to $4.8 billion capital program can be recovered through rates without weakening credit metrics or dividends.
- Review the EPA Clean Air Act matter, coal-ash rules, climate regulation and cooling-water requirements for potential incremental expenditures.
- Track pension and postretirement funding requirements, discount rates, asset returns and the effect on cash flow.
- Evaluate exposure to automotive and steel customers, including additional plant closures, bankruptcy recoveries and contract guarantees.
- Review Energy Trading mark-to-market positions, collateral requirements and the approximately $250 million of transactions potentially subject to collateral requests after a below-investment-grade downgrade.
- Confirm the treatment and potential realization of the $197 million of unused alternative minimum tax credits and the $2.8 billion maximum synthetic-fuel guarantee exposure.