DTE Energy Company 2013 First-Quarter Form 10-Q Summary
Business Context and Reporting Period
DTE Energy Company reported unaudited consolidated results for the three months ended March 31, 2013. The company operates regulated electric and natural-gas utilities in Michigan and non-utility businesses in gas storage and pipelines, power and industrial projects, and energy trading. DTE Electric serves approximately 2.1 million customers and DTE Gas approximately 1.2 million customers.
Financial Results and Key Metrics
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Operating revenues | $2.516 billion | $2.239 billion | +$277 million |
| Operating income | $410 million | $312 million | +$98 million |
| Net income | $235 million | $158 million | +$77 million |
| Net income attributable to DTE Energy | $234 million | $156 million | +$78 million |
| Diluted earnings per share | $1.34 | $0.91 | +$0.43 |
| Operating margin | 16.3% | 13.9% | +2.4 percentage points |
| Net margin attributable to DTE Energy | 9.3% | 7.0% | +2.3 percentage points |
| Dividends declared per share | $0.62 | $0.59 | +$0.03 |
Operating expenses were $2.106 billion, including $1.024 billion of fuel, purchased power and gas costs, $735 million of operation and maintenance expense, and $259 million of depreciation, depletion and amortization. The effective tax rate was 31%, compared with 32% in the prior-year period.
Net cash provided by operating activities was $597 million, compared with $620 million in Q1 2012. Capital expenditures totaled $382 million, comprising $309 million for utility projects and $73 million for non-utility projects. Net cash used in investing activities was $332 million and net cash used in financing activities was $112 million. Cash and cash equivalents increased from $65 million at December 31, 2012 to $218 million at March 31, 2013.
At March 31, 2013, total assets were $25.949 billion and total equity was $7.632 billion. Current liabilities were $2.476 billion. Long-term debt was $7.218 billion, while current maturities of long-term debt were $840 million. DTE reported no short-term borrowings at quarter-end, compared with $240 million at December 31, 2012.
Total credit facilities were $1.975 billion, with $1.802 billion of net availability. Management reported approximately $2.0 billion of available liquidity, including cash and revolving credit capacity. The company was in compliance with its funded-debt-to-capitalization covenant; DTE Energy’s ratio was 0.48 to 1 against a maximum of 0.65 to 1.
Material Changes Versus the Prior Comparable Period
- Electric segment net income increased to $115 million from $96 million, supported by higher gross margin, favorable weather, surcharge activity, and lower operation and maintenance costs.
- Gas segment net income increased to $96 million from $52 million, primarily due to favorable weather, the 2012 rate order, lost and stolen gas, and higher energy-optimization revenue.
- Energy Trading reported $7 million of net income versus a $2 million loss, primarily from favorable power full-requirements performance and unrealized natural-gas and power trading gains. The segment remains exposed to mark-to-market volatility.
- Power and Industrial Projects increased net income to $12 million from $8 million, primarily reflecting newly acquired on-site projects, higher reduced-emissions-fuel volumes, and increased production tax credits.
- Gas Storage and Pipelines net income was unchanged at $17 million. Corporate and Other improved to a $13 million loss from a $15 million loss.
- Accrued postretirement liability declined to $721 million from $1.160 billion at year-end 2012. A March 2013 benefit-plan remeasurement reduced the accumulated postretirement benefit obligation by $258 million and is expected to reduce 2013 postretirement benefit costs by approximately $69 million.
- DTE Electric issued $375 million of 4.00% mortgage bonds due 2043 and redeemed $141 million of long-term debt, including $88 million of securitization bonds and $51 million of tax-exempt revenue bonds.
- The company contributed $100 million to pension plans, including $50 million of common stock, and $145 million to other postretirement benefit plans.
Guidance, Outlook, Risks and Unusual Items
- Management expected approximately $1.8 billion of 2013 operating cash flow and approximately $2.2 billion of 2013 capital expenditures. It also expected to issue approximately $300 million of equity through dividend reinvestment and employee benefit plans.
- Estimated 2013 capital investment includes approximately $335 million for DTE Electric environmental compliance and up to $1.8 billion of additional environmental capital expenditures through 2021 under current regulations. DTE Gas received approval for an infrastructure recovery mechanism tied to approximately $77 million of annual investment, beginning in May 2013.
- Approximately $800 million of long-term debt was scheduled to mature over the following twelve months. Management expected repayment through internally generated funds and additional long-term financing.
- DTE Electric’s Fermi 2 plant continued operating at approximately 68% of full capacity following a 2012 feed-water-pump failure. Repairs were expected to be completed in the third quarter of 2013; the company was seeking recovery of incremental purchased-power costs through the PSCR process.
- Regulatory matters included an approximately $87 million PSCR under-recovery filing, a $44 million electric restoration surcharge, a $9 million electric uncollectible-expense refund, an approximately $20 million DTE Gas refund request, and an $8.6 million gas revenue-decoupling surcharge.
- Environmental and legal exposures include EPA Clean Air Act proceedings, a Sierra Club lawsuit involving four coal-fired plants, potential additional pollution-control or retirement costs, and developing coal-ash and cooling-water regulations. The filing states that the financial impact and timing of certain matters cannot currently be predicted.
- Ratings-trigger provisions could require approximately $306 million of cash or letters of credit if DTE Energy were downgraded below investment grade. The company also had approximately $4.4 billion of long-term purchase commitments from 2013 through 2052.
- The unconventional gas production business was sold in December 2012; the Q1 2012 comparative period included approximately $10 million of revenue from that discontinued operation.
- Forward-looking results remain sensitive to weather, regulatory recovery, commodity prices, market liquidity, nuclear operations, environmental requirements, interest rates, pension and benefit-plan assumptions, counterparty credit, labor relations, and access to capital markets.
Important Facts for Investors to Verify
- Whether the strong utility earnings improvement, particularly in Gas, is sustainable after weather and surcharge effects normalize.
- The timing and recovery of the PSCR under-recovery and other regulatory balances, including the approximately $87 million electric filing.
- Fermi 2 repair completion, insurance recovery, operating capacity, and purchased-power cost recovery.
- Progress and potential financial impact of EPA, Sierra Club, coal-ash, cooling-water, and other environmental proceedings.
- Actual 2013 operating cash flow and capital spending compared with management’s $1.8 billion and $2.2 billion expectations.
- Debt maturities, refinancing requirements, covenant compliance, liquidity availability, and potential collateral requirements under ratings triggers.
- Volatility in Energy Trading results caused by unrealized mark-to-market gains and losses and mismatches between derivative and non-derivative accounting.
- The effect of the postretirement-plan remeasurement and new labor contracts on future benefit costs and cash contributions.