filings.toolsItem 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following combined discussion is separately filed by DTE Energy and DTE Electric. However, DTE Electric does not make any representations as to information related solely to DTE Energy or the subsidiaries of DTE Energy other than itself.
EXECUTIVE OVERVIEW
DTE Energy is a diversified energy company with 2017 Operating Revenues of approximately $12.6 billion and Total Assets of approximately $33.8 billion. DTE Energy is the parent company of DTE Electric and DTE Gas, regulated electric and natural gas utilities engaged primarily in the business of providing electricity and natural gas sales, distribution, and storage services throughout Michigan. DTE Energy operates three energy-related non-utility segments with operations throughout the United States.
The following table summarizes DTE Energy's financial results:
| Years Ended December 31, | |||||||||||
| 2017 | 2016 | 2015 | |||||||||
| (In millions, except per share amounts) | |||||||||||
| Net Income Attributable to DTE Energy Company | $ | 1,134 | $ | 868 | $ | 727 | |||||
| Diluted Earnings per Common Share | $ | 6.32 | $ | 4.83 | $ | 4.05 |
The increase in 2017 Net Income Attributable to DTE Energy Company is primarily due to higher earnings in the Gas Storage and Pipelines, Energy Trading, and Power and Industrial Projects segments, partially offset by lower earnings in the Corporate and Other segment. The 2017 increase is also due to $105 million of net income tax benefit related to the enactment of the TCJA. The increase in 2016 Net Income Attributable to DTE Energy Company is primarily due to higher earnings in the Electric and Power and Industrial Projects segments.
Please see detailed explanations of segment performance in the following "Results of Operations" section.
DTE Energy's strategy is to achieve long-term earnings growth, a strong balance sheet, and an attractive dividend yield.
DTE Energy's utilities are investing capital to improve customer reliability through investments in base infrastructure and new generation, and to comply with environmental requirements. DTE Energy expects that planned significant capital investments will result in earnings growth. DTE Energy is focused on executing plans to achieve operational excellence and customer satisfaction with a focus on customer affordability. DTE Energy operates in a constructive regulatory environment and has solid relationships with its regulators.
In May 2017, DTE Energy announced its plan to reduce carbon emissions. This goal will be attained by cutting carbon emissions 30% by the early 2020s, 45% by 2030, 75% by 2040, and more than 80% by 2050. To achieve this reduction, DTE Energy will transition away from coal-powered sources and incorporate more renewable energy, energy efficiency, demand response, and highly-efficient natural gas fueled power plants. DTE Energy has already begun the transition in the way it produces power through the continued retirement of its aging coal-fired plants. Refer to the "Capital Investments" section below for further discussion.
DTE Energy has significant investments in non-utility businesses. DTE Energy employs disciplined investment criteria when assessing growth opportunities that leverage its assets, skills, and expertise, and provides diversity in earnings and geography. Specifically, DTE Energy invests in targeted energy markets with attractive competitive dynamics where meaningful scale is in alignment with its risk profile. DTE Energy expects growth opportunities in the Gas Storage and Pipelines and Power and Industrial Projects segments.
A key priority for DTE Energy is to maintain a strong balance sheet which facilitates access to capital markets and reasonably priced short-term and long-term financing. Near-term growth will be funded through internally generated cash flows and the issuance of debt and equity. DTE Energy has an enterprise risk management program that, among other things, is designed to monitor and manage exposure to earnings and cash flow volatility related to commodity price changes, interest rates, and counterparty credit risk.
CAPITAL INVESTMENTS
DTE Energy's utility businesses require significant capital investments to maintain and improve the electric generation and electric and natural gas distribution infrastructure and to comply with environmental regulations and renewable energy requirements.
DTE Electric's capital investments over the 2018-2022 period are estimated at $10.4 billion comprised of $4.1 billion for capital replacements and other projects, $4.3 billion for distribution infrastructure, and $2.0 billion for new generation. DTE Electric has retired four coal-fired generation units at the Trenton Channel, River Rouge, and St Clair facilities and has announced plans to retire its remaining thirteen coal-fired generating units. Seven of these coal-fired generating units will be retired through 2023 at the Trenton Channel, River Rouge, and St. Clair facilities. The remaining coal-fired generating units at the Belle River and Monroe facilities are expected to be retired by 2040. The retired facilities will be replaced with renewables, energy efficiency, demand response, and natural gas fueled generation. In September 2016, DTE Electric received an order from the MPSC in its amended Renewable Energy Plan approving two 150 megawatt wind projects expected to be constructed and in service between 2018 and 2020, and 25 megawatts of company-owned solar projects which will be constructed and in service between 2019 and 2020. DTE Electric constructed and placed in service 50 megawatts of solar generation in 2017. DTE Electric plans to build a natural gas fueled combined cycle generation facility to provide approximately 1,100 megawatts of energy beginning in 2022. In the third quarter of 2017, DTE Electric filed a CON with the MPSC seeking approval for the planned build of this natural gas plant. On January 31, 2018, DTE Electric filed its five-year distribution operations investment and maintenance plan to improve system reliability with the MPSC. DTE Electric plans to seek regulatory approval for capital expenditures consistent with prior ratemaking treatment.
DTE Gas' capital investments over the 2018-2022 period are estimated at $2.1 billion comprised of $950 million for base infrastructure, $1.1 billion for gas main renewal, meter move out, and pipeline integrity programs, and $10 million for expenditures related to the NEXUS Pipeline. DTE Gas plans to seek regulatory approval in general rate case filings for base infrastructure capital expenditures consistent with prior ratemaking treatment.
DTE Energy's non-utility businesses' capital investments are primarily for expansion, growth, and ongoing maintenance. Gas Storage and Pipelines' capital investments over the 2018-2022 period are estimated at $2.8 billion to $3.4 billion for gathering and pipeline investments and expansions, including the NEXUS Pipeline. Power and Industrial Projects' capital investments over the 2018-2022 period are estimated at $800 million to $1.2 billion for investments in cogeneration and on-site energy projects.
ENVIRONMENTAL MATTERS
The Registrants are subject to extensive environmental regulation. Additional costs may result as the effects of various substances on the environment are studied and governmental regulations are developed and implemented. Actual costs to comply could vary substantially. The Registrants expect to continue recovering environmental costs related to utility operations through rates charged to customers, as authorized by the MPSC.
DTE Electric is subject to the EPA ozone and fine particulate transport and acid rain regulations that limit power plant emissions of SO2 and NOx. The EPA and the State of Michigan have also issued emission reduction regulations relating to ozone, fine particulate, regional haze, mercury, and other air pollution. These rules have led to controls on fossil-fueled power plants to reduce NOx, SO2, mercury and other emissions. Additional rulemakings are expected over the next few years which could require additional controls for SO2, NOx, and other hazardous air pollutants. To comply with existing requirements, DTE Electric spent approximately $2.4 billion through 2017. DTE Electric does not anticipate additional capital expenditures through 2024.
The EPA has implemented regulatory actions under the Clean Air Act to address emissions of GHGs from the utility sector and other sectors of the economy. Among these actions, the EPA finalized performance standards for emissions of carbon dioxide from new and existing EGUs. The carbon standards for new sources are not expected to have a material impact on DTE Electric since DTE Electric has no plans to build new coal-fired generation, and any potential new gas generation will be able to comply with the applicable standards. In February 2016, the U.S. Supreme Court granted petitioners' requests for a stay of the carbon rules for existing EGUs (also known as the EPA Clean Power Plan) pending final review by the courts. The Clean Power Plan has no legal effect while the stay is in place. On March 28, 2017, a presidential executive order was issued on "Promoting Energy Independence and Economic Growth." The order instructs the EPA to review, and if appropriate, suspend, revise or rescind the Clean Power Plan rule. Additionally, federal agencies have been directed to conduct a review of all existing regulations that potentially burden the development and use of domestically produced energy resources. Following the issuance of this order, the federal government requested the U.S. Court of Appeals for the D.C. Circuit to hold all legal challenges in abeyance until the review of these regulations is completed. On October 10, 2017, the EPA proposed to rescind the Clean Power Plan and announced its intent to issue an ANPR seeking input as to whether it should replace the rule and, if so, what form it should take. It is not possible to determine the potential impact of the EPA's repeal and possible replacement of the Clean Power Plan on existing sources at this time.
Pending or future legislation or other regulatory actions could have a material impact on DTE Electric's operations and financial position and the rates charged to its customers. Impacts include expenditures for environmental equipment beyond what is currently planned, financing costs related to additional capital expenditures, the purchase of emission credits from market sources, higher costs of purchased power, and the retirement of facilities where control equipment is not economical. DTE Electric would seek to recover these incremental costs through increased rates charged to its utility customers, as authorized by the MPSC.
Increased costs for energy produced from traditional coal-based sources due to recent, pending, and future regulatory initiatives, could also increase the economic viability of energy produced from renewable, natural gas fueled generation, and/or nuclear sources, energy efficiency initiatives, and the potential development of market-based trading of carbon instruments which could provide new business opportunities for DTE Energy's utility and non-utility segments. At the present time, it is not possible to quantify the financial impacts of these climate related regulatory initiatives on the Registrants or their customers.
See Items 1. and 2. Business and Properties and Note 18 to the Consolidated Financial Statements in Item 8 of this Report, "Commitments and Contingencies," for further discussion of Environmental Matters.
OUTLOOK
The next few years will be a period of rapid change for DTE Energy and for the energy industry. DTE Energy's strong utility base, combined with its integrated non-utility operations, position it well for long-term growth.
Looking forward, DTE Energy will focus on several areas that are expected to improve future performance:
| • | electric and gas customer satisfaction; |
| • | electric distribution system reliability; |
| • | new electric generation; |
| • | gas distribution system renewal; |
| • | rate competitiveness and affordability; |
| • | regulatory stability and investment recovery for the electric and gas utilities; |
| • | employee safety and engagement; |
| • | cost structure optimization across all business segments; |
| • | cash, capital, and liquidity to maintain or improve financial strength; and |
| • | investments that integrate assets and leverage skills and expertise. |
DTE Energy will continue to pursue opportunities to grow its businesses in a disciplined manner if it can secure opportunities that meet its strategic, financial, and risk criteria.
RESULTS OF OPERATIONS
Management’s Discussion and Analysis of Financial Condition and Results of Operations includes financial information prepared in accordance with GAAP, as well as the non-GAAP financial measures, Utility Margin and Non-utility Margin, discussed below, which DTE Energy uses as measures of its operational performance. Generally, a non-GAAP financial measure is a numerical measure of financial performance, financial position or cash flows that excludes (or includes) amounts that are included in (or excluded from) the most directly comparable measure calculated and presented in accordance with GAAP.
DTE Energy uses Utility Margin and Non-utility Margin, non-GAAP financial measures, to assess its performance by reportable segment.
Utility Margin includes electric and gas Operating Revenues net of Fuel, purchased power, and gas expenses. The utilities’ fuel, purchased power, and natural gas supply are passed through to customers, and therefore, result in changes to the utilities’ revenues that are comparable to changes in such expenses. As such, DTE Energy believes Utility Margin provides a meaningful basis for evaluating the utilities’ operations across periods, as it excludes the revenue effect of fluctuations in these expenses.
The Non-utility Margin relates to our Power and Industrial Projects and Energy Trading segments. For the Power and Industrial Projects segment, Non-utility Margin primarily includes Operating Revenues net of Fuel, purchased power, and gas expenses. Operating Revenues include sales of refined coal to third parties and the affiliated Electric utility, metallurgical coke and related by-products, petroleum coke, renewable natural gas, and electricity, as well as rental income and revenues from utility-type consulting, management, and operational services. For the Energy Trading segment, Non-utility Margin includes revenue and realized and unrealized gains and losses from physical and financial power and gas marketing, optimization, and trading activities, net of Purchased power and gas related to these activities. DTE Energy evaluates its operating performance of these non-utility businesses using the measure of Operating Revenues net of Fuel, purchased power, and gas expenses.
Utility Margin and Non-utility Margin are not measures calculated in accordance with GAAP and should be viewed as a supplement to and not a substitute for the results of operations presented in accordance with GAAP. Utility Margin and Non-utility Margin do not intend to represent operating income, the most comparable GAAP measure, as an indicator of operating performance and are not necessarily comparable to similarly titled measures reported by other companies.
The following sections provide a detailed discussion of the operating performance and future outlook of DTE Energy's segments. Segment information, described below, includes intercompany revenues and expenses, and other income and deductions that are eliminated in the Consolidated Financial Statements.
| 2017 | 2016 | 2015 | |||||||||
| (In millions) | |||||||||||
| Net Income (Loss) Attributable to DTE Energy by Segment: | |||||||||||
| Electric | $ | 606 | $ | 622 | $ | 542 | |||||
| Gas | 146 | 138 | 132 | ||||||||
| Gas Storage and Pipelines | 275 | 119 | 107 | ||||||||
| Power and Industrial Projects | 138 | 95 | 16 | ||||||||
| Energy Trading | 72 | (45 | ) | (22 | ) | ||||||
| Corporate and Other | (103 | ) | (61 | ) | (48 | ) | |||||
| Net Income Attributable to DTE Energy Company | $ | 1,134 | $ | 868 | $ | 727 |
ELECTRIC
The Results of Operations discussion for DTE Electric is presented in a reduced disclosure format in accordance with General Instruction I (2) (a) of Form 10-K for wholly-owned subsidiaries.
The Electric segment consists principally of DTE Electric. Electric results are discussed below:
| 2017 | 2016 | 2015 | |||||||||
| (In millions) | |||||||||||
| Operating Revenues — Utility operations | $ | 5,102 | $ | 5,225 | $ | 4,901 | |||||
| Fuel and purchased power — utility | 1,454 | 1,532 | 1,573 | ||||||||
| Utility Margin | 3,648 | 3,693 | 3,328 | ||||||||
| Operation and maintenance | 1,428 | 1,455 | 1,344 | ||||||||
| Depreciation and amortization | 753 | 750 | 637 | ||||||||
| Taxes other than income | 302 | 284 | 277 | ||||||||
| Operating Income | 1,165 | 1,204 | 1,070 | ||||||||
| Other (Income) and Deductions | 238 | 229 | 238 | ||||||||
| Income Tax Expense | 321 | 353 | 290 | ||||||||
| Net Income Attributable to DTE Energy Company | $ | 606 | $ | 622 | $ | 542 |
See DTE Electric's Consolidated Statements of Operations in Item 8 of this Report for a complete view of its results.
Utility Margin decreased $45 million in 2017 and increased $365 million in 2016. Revenues associated with certain mechanisms and surcharges are offset by related expenses elsewhere in the Registrants' Consolidated Statements of Operations.
The following table details changes in various Utility Margin components relative to the comparable prior period:
| 2017 | 2016 | ||||||
| (In millions) | |||||||
| Implementation of new rates | $ | 124 | $ | 198 | |||
| PSCR disallowance in 2017 and 2015, respectively | (13 | ) | 19 | ||||
| Base sales | (26 | ) | 20 | ||||
| Weather | (109 | ) | 96 | ||||
| Securitization bond and tax surcharge | — | 40 | |||||
| Renewable energy program | — | 12 | |||||
| Amortization of refundable revenue decoupling/deferred gain in 2015 | — | (63 | ) | ||||
| Regulatory mechanisms and other | (21 | ) | 43 | ||||
| Increase (decrease) in Utility Margin | $ | (45 | ) | $ | 365 |
| 2017 | 2016 | 2015 | ||||||
| (In thousands of MWh) | ||||||||
| DTE Electric Sales | ||||||||
| Residential | 14,885 | 15,875 | 15,001 | |||||
| Commercial | 17,283 | 17,521 | 17,192 | |||||
| Industrial | 9,897 | 10,004 | 9,690 | |||||
| Other | 258 | 264 | 291 | |||||
| 42,323 | 43,664 | 42,174 | ||||||
| Interconnection sales(a) | 2,623 | 2,334 | 4,108 | |||||
| Total DTE Electric Sales | 44,946 | 45,998 | 46,282 | |||||
| DTE Electric Deliveries | ||||||||
| Retail and wholesale | 42,323 | 43,664 | 42,174 | |||||
| Electric retail access, including self generators(b) | 4,820 | 4,936 | 4,899 | |||||
| Total DTE Electric Sales and Deliveries | 47,143 | 48,600 | 47,073 |
| (a) | Represents power that is not distributed by DTE Electric. |
| (b) | Represents deliveries for self generators that have purchased power from alternative energy suppliers to supplement their power requirements. |
DTE Electric sales decreased for residential, commercial, and industrial primarily due to favorable weather in 2016.
Operation and maintenance expense decreased $27 million in 2017 and increased $111 million in 2016. The decrease in 2017 was primarily due to decreased power plant generation expenses of $66 million, partially offset by increased storm restoration expenses of $27 million, and increased line clearance expenses of $10 million. The decrease in power plant generation expenses includes an increase of $6 million of costs related to the 2016 fire at a generation facility, offset by $21 million of insurance proceeds received in 2017. The increase in 2016 was primarily due to increased power plant generation expenses of $55 million related to outages, increased distribution operations expenses of $13 million, and $47 million of expenses related to the deferral of negative other postretirement costs pursuant to the order in DTE Electric's base rate case, received in December 2015. The increase in the power plant generation expenses included $19 million of costs related to a fire at a generation facility which were partially reimbursed by insurance proceeds in 2017.
Depreciation and amortization expense increased $3 million in 2017 and increased $113 million in 2016. In 2017, the increase was due to $45 million of increased expense from an increased depreciable base, partially offset by a decrease of $29 million associated with the TRM, and a decrease of $13 million in amortization of regulatory assets. In 2016, $38 million of the increase was due to a higher depreciable base, $42 million was primarily due to the end of Securitization amortization in 2015, and an additional $42 million was associated with the TRM, offset by a $9 million decrease in nuclear decommissioning amortization.
Other (Income) and Deductions increased $9 million in 2017 and decreased $9 million in 2016. The increase in 2017 was primarily due to higher interest expense of $10 million, lower interest income of $8 million related to a sales and use tax settlement received in 2016, and a $7 million contribution to the DTE Energy Foundation, partially offset by $12 million of higher investment earnings and a $3 million decrease in Low Income Self-Sufficiency Plan (LSP) contributions to not-for-profit organizations in 2016. The decrease in 2016 was primarily due to $13 million of higher investment earnings, $8 million of interest income related to a sales and use tax settlement, offset by $3 million of LSP contributions to not-for-profit organizations, $2 million AFUDC equity, and $6 million higher interest expense.
Outlook — DTE Electric will continue to move forward in its efforts to achieve operational excellence, sustain strong cash flows, and earn its authorized return on equity. DTE Electric expects that planned significant capital investments will result in earnings growth. DTE Electric expects to continue its efforts to improve productivity and decrease costs while improving customer satisfaction with consideration of customer rate affordability. Looking forward, additional factors may impact earnings such as weather, the outcome of regulatory proceedings, benefit plan design changes, investment returns and changes in discount rate assumptions in benefit plans and health care costs, impact of 2016 Michigan energy legislation, uncertainty of legislative or regulatory actions regarding climate change, and effects of energy efficiency programs.
DTE Electric filed a rate case with the MPSC on April 19, 2017 requesting an increase in base rates of $231 million based on a projected twelve-month period ending October 31, 2018. The requested increase in base rates is primarily due to an increase in net plant resulting from infrastructure investments, environmental compliance, and reliability improvement projects. The rate filing also includes projected changes in sales, operation and maintenance expenses, and working capital. The rate filing also requests an increase in return on equity from 10.1% to 10.5%. On September 8, 2017, DTE Electric filed an application with the MPSC for a $125 million self-implemented base rate increase effective November 1, 2017. A final MPSC order in this case is expected by April 2018.
On January 19, 2018, DTE Electric filed information with the MPSC regarding the potential change in revenue requirements due to the TCJA effective January 1, 2018, and outlined our recommended method to flow the current and deferred tax benefits of those impacts to ratepayers.
GAS
The Gas segment consists principally of DTE Gas. Gas results are discussed below:
| 2017 | 2016 | 2015 | |||||||||
| (In millions) | |||||||||||
| Operating Revenues — Utility operations | $ | 1,388 | $ | 1,324 | $ | 1,376 | |||||
| Cost of gas — utility | 443 | 454 | 526 | ||||||||
| Utility Margin | 945 | 870 | 850 | ||||||||
| Operation and maintenance | 451 | 411 | 430 | ||||||||
| Depreciation and amortization | 123 | 106 | 104 | ||||||||
| Taxes other than income | 65 | 64 | 62 | ||||||||
| Asset (gains) losses and impairments, net | — | 4 | — | ||||||||
| Operating Income | 306 | 285 | 254 | ||||||||
| Other (Income) and Deductions | 82 | 70 | 50 | ||||||||
| Income Tax Expense | 78 | 77 | 72 | ||||||||
| Net Income Attributable to DTE Energy Company | $ | 146 | $ | 138 | $ | 132 |
Utility Margin increased $75 million in 2017 and increased $20 million in 2016. Revenues associated with certain surcharges are offset by related expenses elsewhere in DTE Energy's Consolidated Statements of Operations.
The following table details changes in various Utility Margin components relative to the comparable prior period:
| 2017 | 2016 | ||||||
| (In millions) | |||||||
| Implementation of new rates | $ | 80 | $ | 23 | |||
| Revenue decoupling mechanism | 4 | (7 | ) | ||||
| Home protection program | 3 | 4 | |||||
| Midstream storage and transportation revenues | (5 | ) | (2 | ) | |||
| Weather | (6 | ) | (22 | ) | |||
| Infrastructure recovery mechanism | — | 12 | |||||
| Other | (1 | ) | 12 | ||||
| Increase in Utility Margin | $ | 75 | $ | 20 |
| 2017 | 2016 | 2015 | ||||||
| (In Bcf) | ||||||||
| Gas Markets | ||||||||
| Gas sales | 119 | 116 | 122 | |||||
| End-user transportation | 165 | 182 | 169 | |||||
| 284 | 298 | 291 | ||||||
| Intermediate transportation | 260 | 214 | 289 | |||||
| Total Gas sales | 544 | 512 | 580 |
Operation and maintenance expense increased $40 million in 2017 and decreased $19 million in 2016. The increase in 2017 was primarily due to increased employee benefits expenses of $30 million, increased corporate expenses of $3 million, and increased gas operations expenses of $3 million. The decrease in 2016 was primarily due to decreased uncollectible expenses of $14 million and decreased transmission expenses of $8 million. The decreased uncollectible expenses and transmission expenses in 2016 were primarily the result of weather-related impacts of warmer weather in 2016. Additionally, DTE Gas took actions to reduce costs to partially offset the negative impacts to revenue and utility margin resulting from the warmer weather in 2016.
Depreciation and amortization expense increased $17 million in 2017 and increased $2 million in 2016. The increase in 2017 was primarily due to increased expense from an increased depreciable base and higher depreciation rates.
Other (Income) and Deductions increased $12 million in 2017 and increased $20 million in 2016. The increase in 2017 was primarily due to increased contributions to the DTE Energy Foundation and other not-for-profit organizations of $7 million and higher interest expense of $5 million. The increase in 2016 was primarily due to contributions to the DTE Energy Foundation and other not-for-profit organizations.
Outlook — DTE Gas will continue to move forward in its efforts to achieve operational excellence, sustain strong cash flows, and earn its authorized return on equity. DTE Gas expects that planned significant infrastructure capital investments will result in earnings growth. Looking forward, additional factors may impact earnings such as weather, the outcome of regulatory proceedings, benefit plan design changes, and investment returns and changes in discount rate assumptions in benefit plans and health care costs. DTE Gas expects to continue its efforts to improve productivity and decrease costs while improving customer satisfaction with consideration of customer rate affordability.
DTE Gas filed a rate case with the MPSC on November 22, 2017 requesting an increase in base rates of $85.1 million based on a projected twelve-month period ending September 30, 2019. The requested increase in base rates is primarily due to an increase in net plant. The rate filing also includes projected changes in sales, operations, maintenance expenses, and working capital. The rate filing also requests an increase in return on equity from 10.1% to 10.5%. A final MPSC order in this case is expected by September 2018.
On January 19, 2018, DTE Gas filed information with the MPSC regarding the potential change in revenue requirements due to the TCJA effective January 1, 2018, and outlined our recommended method to flow the current and deferred tax benefits of those impacts to ratepayers.
GAS STORAGE AND PIPELINES
The Gas Storage and Pipelines segment consists of the non-utility gas pipelines and storage businesses. Gas Storage and Pipelines results are discussed below:
| 2017 | 2016 | 2015 | |||||||||
| (In millions) | |||||||||||
| Operating Revenues — Non-utility operations | $ | 453 | $ | 302 | $ | 243 | |||||
| Cost of gas — Non-utility | 30 | 6 | — | ||||||||
| Operation and maintenance | 83 | 81 | 58 | ||||||||
| Depreciation and amortization | 76 | 45 | 30 | ||||||||
| Taxes other than income | 8 | 4 | 5 | ||||||||
| Asset (gains) losses and impairments, net | 2 | — | — | ||||||||
| Operating Income | 254 | 166 | 150 | ||||||||
| Other (Income) and Deductions | (18 | ) | (31 | ) | (29 | ) | |||||
| Income Tax Expense (Benefit) | (30 | ) | 71 | 70 | |||||||
| Net Income | 302 | 126 | 109 | ||||||||
| Less: Net Income Attributable to Noncontrolling Interests | 27 | 7 | 2 | ||||||||
| Net Income Attributable to DTE Energy Company | $ | 275 | $ | 119 | $ | 107 |
Operating Revenues — Non-utility operations increased $151 million in 2017 and increased $59 million in 2016. The increase in both periods was primarily due to the acquisition of AGS and SGG in October 2016 and increased volumes on the Bluestone Pipeline and Susquehanna gathering systems.
Cost of gas — Non-utility increased $24 million in 2017 and increased $6 million in 2016. The increase in both periods was primarily driven by the physical purchase of gas from AGS customers for resale to optimize available transportation capacity.
Operation and maintenance expense increased $2 million in 2017 and increased $23 million in 2016. The 2016 increase was primarily due to the transaction costs related to the acquisition of AGS and SGG in 2016 and increased activity on the Susquehanna gathering system.
Depreciation and amortization expense increased $31 million in 2017 and increased $15 million in 2016. The 2017 increase was primarily due to the acquisition of AGS and SGG in October 2016. The 2016 increase was due primarily to the acquisition of AGS and SGG and additional Bluestone and Susquehanna expansion projects placed in service.
Other (Income) and Deductions decreased $13 million in 2017 and increased $2 million in 2016. The 2017 decrease was primarily due to a $16 million net loss on extinguishment of debt within the storage business, and contributions to the DTE Energy Foundation and other not-for-profit organizations, partially offset by increased earnings from pipeline investments. The 2016 increase was primarily due to increased earnings from pipeline investments, partially offset by increased interest expense as a result of the acquisition of AGS and SGG in 2016.
Income Tax Expense (Benefit) decreased $101 million in 2017 from the expense of $71 million in 2016 and increased $1 million in 2016. The 2017 decrease was primarily due to the $115 million remeasurement of deferred tax assets and liabilities to reflect the reduction in the corporate tax rate from the enactment of the TCJA in December 2017. This was partially offset by increased tax expense on higher earnings in 2017.
Net Income Attributable to Noncontrolling Interests increased $20 million in 2017 and increased $5 million in 2016. The increase in both periods was primarily due to the acquisition of SGG in October 2016.
See Note 4 to the Consolidated Financial Statements in Item 8 of this Report, "Acquisitions and Exit Activities" for discussion of the acquisition of AGS and SGG in October 2016.
Outlook — The Bluestone Pipeline and Susquehanna gathering system are being expanded with additional compression facilities and gathering lines as needed to accommodate shipper demand. DTE Energy believes its long-term agreement with Southwestern Energy Production Company and the quality of the natural gas reserves in the Marcellus region soundly positions Bluestone Pipeline and Susquehanna gathering system for future growth.
Progress continues on development activities on the NEXUS Pipeline, a transportation path to transport Appalachian Basin shale gas, including Utica and Marcellus shale gas, directly to consuming markets in northern Ohio, southeastern Michigan, and Dawn Ontario. DTE Energy owns a 50% partnership interest in the NEXUS Pipeline. The FERC application was approved on August 25, 2017 and construction commenced in October 2017. DTE Energy anticipates a third quarter 2018 in-service date for the NEXUS Pipeline.
The October 2016 acquisition of AGS and SGG provides a platform for midstream growth and access to further investment opportunities in the Appalachian basin, an additional connection to the NEXUS Pipeline which should drive incremental volumes on the NEXUS Pipeline, and a new set of producer relationships that may lead to more partnering opportunities.
In May 2017, DTE Energy filed a FERC application for approval of the Birdsboro Pipeline, a 14-mile lateral to serve a new power plant in Pennsylvania. DTE Energy is targeting a 2018 in-service date.
Gas Storage and Pipelines expects to maintain its steady growth by developing an asset portfolio with multiple growth platforms through investment in new projects and expansions. Gas Storage and Pipelines will continue to look for additional investment opportunities and other storage and pipeline projects at favorable prices.
POWER AND INDUSTRIAL PROJECTS
The Power and Industrial Projects segment is comprised primarily of projects that deliver energy and utility-type products and services to industrial, commercial, and institutional customers, produce reduced emissions fuel, and sell electricity from renewable energy projects. Power and Industrial Projects results are discussed below:
| 2017 | 2016 | 2015 | |||||||||
| (In millions) | |||||||||||
| Operating Revenues — Non-utility operations | $ | 2,089 | $ | 1,906 | $ | 2,224 | |||||
| Fuel, purchased power, and gas — non-utility | 1,813 | 1,640 | 1,837 | ||||||||
| Non-utility Margin | 276 | 266 | 387 | ||||||||
| Operation and maintenance | 343 | 320 | 379 | ||||||||
| Depreciation and amortization | 72 | 72 | 78 | ||||||||
| Taxes other than income | 11 | 13 | 15 | ||||||||
| Asset (gains) losses and impairments, net | 20 | (1 | ) | 106 | |||||||
| Operating Loss | (170 | ) | (138 | ) | (191 | ) | |||||
| Other (Income) and Deductions | (64 | ) | (52 | ) | (58 | ) | |||||
| Income Taxes | |||||||||||
| Benefit | (42 | ) | (26 | ) | (49 | ) | |||||
| Production Tax Credits | (153 | ) | (114 | ) | (91 | ) | |||||
| (195 | ) | (140 | ) | (140 | ) | ||||||
| Net Income | 89 | 54 | 7 | ||||||||
| Less: Net Loss Attributable to Noncontrolling Interests | (49 | ) | (41 | ) | (9 | ) | |||||
| Net Income Attributable to DTE Energy Company | $ | 138 | $ | 95 | $ | 16 |
Operating Revenues — Non-utility operations increased $183 million in 2017 and decreased $318 million in 2016. The changes are due to the following:
| 2017 | |||
| (In millions) | |||
| Higher demand due to improved conditions in the steel business | $ | 107 | |
| Higher production driven by new projects, offset by lower coal prices in the REF business | 102 | ||
| Lower production and one-time recovery in 2016, offset by an acquisition in the renewables business | (9 | ) | |
| Lower sales primarily associated with expired contracts in the on-site business | (17 | ) | |
| $ | 183 | ||
| 2016 | |||
| (In millions) | |||
| Closure of the Shenango coke battery and lower demand in the steel business | $ | (264 | ) |
| Termination of a lease agreement in the REF business | (40 | ) | |
| Contract termination at a renewable power project facility, offset by a one-time revenue recovery | (9 | ) | |
| Other | (5 | ) | |
| $ | (318 | ) |
Non-utility Margin increased $10 million in 2017 and decreased $121 million in 2016. The changes are due to the following:
| 2017 | |||
| (In millions) | |||
| Higher demand due to improved conditions in the steel business | $ | 42 | |
| Lower production and one-time recovery in 2016 in the renewables business | (11 | ) | |
| Lower sales primarily associated with expired contracts in the on-site business | (15 | ) | |
| Other | (6 | ) | |
| $ | 10 | ||
| 2016 | |||
| (In millions) | |||
| Closure of the Shenango coke battery and lower demand in the steel business | $ | (114 | ) |
| Termination of a lease agreement in the REF business | (12 | ) | |
| Lower fuel costs in a renewable power project business | 5 | ||
| $ | (121 | ) |
Operation and maintenance expense increased $23 million in 2017 and decreased $59 million in 2016. The 2017 increase was primarily due to an increase in maintenance spending driven by improved conditions in the steel business of $16 million, higher maintenance and a new acquisition in the renewables business of $7 million, and an increase associated with new projects in the REF business of $5 million, offset by lower spending as a result of the closure of the Shenango coke battery in 2015 of $6 million. The 2016 decrease was primarily due to lower spending as a result of the closure of the Shenango coke battery in 2015 of $68 million, cost control due to lower demand in the steel business, and lower spending primarily due to the closure of a renewable power project of $4 million, partially offset by an increase associated with new projects in the REF business of $14 million.
Asset (gains) losses and impairments, net decreased by $21 million in 2017 from the net gain of $1 million in 2016 and decreased by $107 million in 2016 from the net loss of $106 million in 2015. The 2017 decrease was primarily due to an impairment in the REF business of $14 million and an impairment of a petroleum coke project of $6 million. The 2016 decrease was primarily due to a loss associated with the closure of the Shenango coke battery in 2015.
Other (Income) and Deductions increased $12 million in 2017 and decreased $6 million in 2016. The 2017 increase was primarily due to increased equity earnings in the renewable business of $9 million and insurance settlements in the renewable and REF businesses of $6 million, offset by increased contributions to the DTE Energy Foundation of $6 million. The 2016 decrease was primarily due to the reduction of refined coal produced at REF sites with investors of $9 million and lower equity earnings primarily from a renewable power project of $8 million, offset by higher contributions to the DTE Energy Foundation and other not-for-profit organizations in 2015 of $11 million.
Income Taxes — Benefit increased by $16 million in 2017 and decreased by $23 million in 2016. The 2017 increase was primarily due to the remeasurement of deferred tax assets and liabilities to reflect the reduction in the corporate tax rate from the enactment of the TCJA in December 2017 of $21 million, an increase due to higher pretax loss of $7 million, and a decrease due to a worthless stock deduction associated with the Shenango closure in 2016 of $10 million. The decrease in 2016 was primarily driven by a lower pretax loss of $33 million, offset by a $10 million worthless stock deduction due to the Shenango closure.
Income Taxes — Production Tax Credits increased by $39 million in 2017 and increased $23 million in 2016. The increase in both periods was primarily due to new projects in the REF business.
Net Loss Attributable to Noncontrolling Interests increased by $8 million in 2017 and increased by $32 million in 2016. The 2017 increase is primarily due to a change in the ownership percentage in one of the REF projects of $8 million. The 2016 increase consists of $27 million due to new lease arrangements and $5 million due to existing lease arrangements with investors at various REF facilities.
Outlook — Power and Industrial Projects has constructed and placed in service REF facilities at eleven sites including facilities located at eight third-party owned coal-fired power plants. DTE Energy has sold membership interests in four of the facilities and entered into lease arrangements in three of the facilities. DTE Energy will continue to optimize these facilities by seeking investors or entering into lease arrangements for facilities operating at DTE Electric and other utility sites.
Power and Industrial Projects will continue to leverage its extensive energy-related operating experience and project management capability to develop additional energy projects to serve energy intensive industrial customers.
ENERGY TRADING
Energy Trading focuses on physical and financial power and natural gas marketing and trading, structured transactions, enhancement of returns from its asset portfolio, and optimization of contracted natural gas pipeline transportation and storage positions. Energy Trading also provides natural gas, power, and related services, which may include the management of associated storage and transportation contracts on the customers' behalf, and the supply or purchase of renewable energy credits to various customers. Energy Trading results are discussed below:
| 2017 | 2016 | 2015 | |||||||||
| (In millions) | |||||||||||
| Operating Revenues — Non-utility operations | $ | 4,277 | $ | 2,575 | $ | 2,459 | |||||
| Purchased power and gas — non-utility | 4,077 | 2,552 | 2,417 | ||||||||
| Non-utility Margin | 200 | 23 | 42 | ||||||||
| Operation and maintenance | 68 | 63 | 67 | ||||||||
| Depreciation and amortization | 5 | 3 | 2 | ||||||||
| Taxes other than income | 4 | 2 | 4 | ||||||||
| Operating Income (Loss) | 123 | (45 | ) | (31 | ) | ||||||
| Other (Income) and Deductions | 2 | 29 | 6 | ||||||||
| Income Tax Expense (Benefit) | 49 | (29 | ) | (15 | ) | ||||||
| Net Income (Loss) Attributable to DTE Energy Company | $ | 72 | $ | (45 | ) | $ | (22 | ) |
Operating Revenues — Non-utility operations and Purchased power and gas — non-utility were impacted by an increase in both volumes and gas prices for the year ended December 31, 2017, primarily in the gas structured strategy. For 2016, these line items were impacted by an increase in volumes, partially offset by a decrease in gas prices, primarily in the gas structured strategy.
Non-utility Margin increased $177 million in 2017 and decreased $19 million in 2016. The change in both periods was primarily due to timing from the unrealized and realized margins presented in the following tables:
| 2017 | |||
| (In millions) | |||
| Unrealized Margins(a) | |||
| Favorable results, primarily in gas structured and gas full requirements strategies(b) | $ | 113 | |
| Unfavorable results, primarily in power and gas trading and power full requirements strategies | (26 | ) | |
| $ | 87 | ||
| Realized Margins(a) | |||
| Favorable results, primarily in gas structured, environmental trading and gas storage strategies(c) | $ | 103 | |
| Unfavorable results, primarily in the power full requirements strategy | (13 | ) | |
| $ | 90 | ||
| Increase in Non-utility Margin | $ | 177 |
| (a) | Natural gas structured transactions typically involve a physical purchase or sale of natural gas in the future and/or natural gas basis financial instruments which are derivatives and a related non-derivative pipeline transportation contract. These gas structured transactions can result in significant earnings volatility as the derivative components are marked-to-market without revaluing the related non-derivative contracts. |
| (b) | Amount includes $113 million of timing related gains related to gas strategies which will reverse in future periods as the underlying contracts settle. |
| (c) | Amount includes $95 million of timing related losses related to gas strategies recognized in previous periods that reversed as the underlying contracts settled. |
| 2016 | |||
| (In millions) | |||
| Unrealized Margins(a) | |||
| Unfavorable results, primarily in gas structured, gas full requirements, gas transportation, and power trading strategies(b) | $ | (74 | ) |
| Favorable results, primarily in gas trading and power full requirements strategies | 28 | ||
| $ | (46 | ) | |
| Realized Margins(a) | |||
| Favorable results, primarily in power full requirements, gas full requirements, power trading, and gas structured strategies | $ | 48 | |
| Unfavorable results, primarily in the gas transportation strategy(c) | (21 | ) | |
| $ | 27 | ||
| Decrease in Non-utility Margin | $ | (19 | ) |
| (a) | Natural gas structured transactions typically involve a physical purchase or sale of natural gas in the future and/or natural gas basis financial instruments which are derivatives and a related non-derivative pipeline transportation contract. These gas structured transactions can result in significant earnings volatility as the derivative components are marked-to-market without revaluing the related non-derivative contracts. |
| (b) | Amount includes $46 million of timing related losses related to gas strategies which will reverse in future periods as the underlying contracts settle. |
| (c) | Amount includes $4 million of timing related gains related to gas strategies recognized in previous periods that reversed as the underlying contracts settled. |
Other (Income) and Deductions decreased $27 million in 2017 and increased $23 million in 2016. The change in both periods was primarily due to 2016 contributions to the DTE Energy Foundation.
Outlook — In the near-term, Energy Trading expects market conditions to remain challenging and the profitability of this segment may be impacted by the volatility in commodity prices and the uncertainty of impacts associated with financial reform, regulatory changes, and changes in operating rules of RTOs. Significant portions of the Energy Trading portfolio are economically hedged. Most financial instruments and physical power and natural gas contracts are deemed derivatives, whereas natural gas inventory, pipeline transportation, renewable energy credits, and storage assets are not derivatives. As a result, Energy Trading will experience earnings volatility as derivatives are marked-to-market without revaluing the underlying non-derivative contracts and assets. Energy Trading's strategy is to economically manage the price risk of these underlying non-derivative contracts and assets with futures, forwards, swaps, and options. This results in gains and losses that are recognized in different interim and annual accounting periods.
See also the "Fair Value" section herein and Notes 12 and 13 to the Consolidated Financial Statements in Item 8 of this Report, "Fair Value" and "Financial and Other Derivative Instruments," respectively.
CORPORATE AND OTHER
Corporate and Other includes various holding company activities, holds certain non-utility debt, and holds energy-related investments. The 2017 net loss of $103 million represents an increase of $42 million from the 2016 net loss of $61 million due primarily to the remeasurement of deferred tax assets and liabilities to reflect the reduction in the corporate tax rate from the enactment of the TCJA in December 2017 resulting in income tax expense of $34 million, and the contribution of land and improvements to the DTE Energy Beacon Park Foundation. The 2016 net loss of $61 million represents an increase of $13 million from the 2015 net loss of $48 million due primarily to state tax adjustments related to the Gas Storage and Pipelines acquisition and the write-off of unamortized debt issuance costs associated with the redemption of Junior Subordinated Debentures.
See Note 10 to the Consolidated Financial Statements in Item 8 of this Report, "Income Taxes."
CAPITAL RESOURCES AND LIQUIDITY
Cash Requirements
DTE Energy uses cash to maintain and invest in the electric and natural gas utilities, to grow the non-utility businesses, to retire, and pay interest on long-term debt, and to pay dividends. DTE Energy believes it will have sufficient internal and external capital resources to fund anticipated capital and operating requirements. DTE Energy expects that cash from operations in 2018 will be approximately $2.0 billion. DTE Energy anticipates base level utility capital investments, including environmental, renewable, and energy waste reduction expenditures; expenditures for non-utility businesses; and contributions to equity method investees in 2018 of approximately $3.6 billion. DTE Energy plans to seek regulatory approval to include utility capital expenditures in regulatory rate base consistent with prior treatment. Capital spending for growth of existing or new non-utility businesses will depend on the existence of opportunities that meet strict risk-return and value creation criteria.
| 2017 | 2016 | 2015 | |||||||||
| Cash and Cash Equivalents | (In millions) | ||||||||||
| Cash Flow From (Used For) | |||||||||||
| Operating Activities | |||||||||||
| Net Income | $ | 1,112 | $ | 834 | $ | 720 | |||||
| Adjustments to reconcile Net Income to Net cash from operating activities: | |||||||||||
| Depreciation and amortization | 1,030 | 976 | 852 | ||||||||
| Nuclear fuel amortization | 53 | 58 | 46 | ||||||||
| Allowance for equity funds used during construction | (23 | ) | (21 | ) | (21 | ) | |||||
| Deferred income taxes | 196 | 265 | 237 | ||||||||
| Asset (gains) losses and impairments, net | 38 | 8 | 107 | ||||||||
| Working capital and other | (289 | ) | (36 | ) | (25 | ) | |||||
| Net cash from operating activities | 2,117 | 2,084 | 1,916 | ||||||||
| Investing Activities | |||||||||||
| Plant and equipment expenditures — utility | (2,037 | ) | (1,898 | ) | (1,817 | ) | |||||
| Plant and equipment expenditures — non-utility | (213 | ) | (147 | ) | (203 | ) | |||||
| Acquisition, net of cash acquired | — | (1,147 | ) | (241 | ) | ||||||
| Restricted cash for debt redemption, principally Securitization, net | (2 | ) | 1 | 97 | |||||||
| Contributions to equity method investees | (299 | ) | (239 | ) | (98 | ) | |||||
| Other | (13 | ) | 42 | 58 | |||||||
| Net cash used for investing activities | (2,564 | ) | (3,388 | ) | (2,204 | ) | |||||
| Financing Activities | |||||||||||
| Issuance of long-term debt, net of issuance costs | 1,398 | 2,035 | 956 | ||||||||
| Redemption of long-term debt | (385 | ) | (807 | ) | (286 | ) | |||||
| Repurchase of long-term debt | — | (59 | ) | — | |||||||
| Issuance of equity units, net of issuance costs | — | 654 | — | ||||||||
| Short-term borrowings, net | 122 | — | 101 | ||||||||
| Repurchase of common stock | (51 | ) | (33 | ) | — | ||||||
| Dividends on common stock and other | (592 | ) | (531 | ) | (501 | ) | |||||
| Contributions from noncontrolling interests | 50 | 114 | 23 | ||||||||
| Distributions to noncontrolling interests | (40 | ) | (5 | ) | (8 | ) | |||||
| Other | (81 | ) | (9 | ) | (8 | ) | |||||
| Net cash from financing activities | 421 | 1,359 | 277 | ||||||||
| Net Increase (Decrease) in Cash and Cash Equivalents | $ | (26 | ) | $ | 55 | $ | (11 | ) |
Cash from Operating Activities
A majority of DTE Energy's operating cash flows are provided by the electric and natural gas utilities, which are significantly influenced by factors such as weather, electric retail access, regulatory deferrals, regulatory outcomes, economic conditions, changes in working capital, and operating costs.
Cash from operations increased $33 million in 2017. The increase in operating cash flows reflects an increase in Net Income and adjustments for non-cash and non-operating items, primarily Depreciation and amortization, and Assets (gains) losses and impairments, partially offset by a decrease to Deferred income taxes and working capital adjustments.
Cash from operations increased $168 million in 2016. The increase in operating cash flows reflects an increase in Net Income and adjustments for non-cash and non-operating items, primarily Depreciation and amortization, partially offset by decreases from Asset (gains) losses and impairments, net and working capital items.
The change in working capital items in 2017 primarily related to increases of cash used for Accounts Receivable, Inventories, Accrued pension liability, Derivative assets and liabilities, Equity earnings of equity method investees, and Other current and noncurrent assets and liabilities, partially offset by increases in cash from the Accrued postretirement liability, and Regulatory assets and liabilities. The change in working capital items in 2016 primarily related to increases in cash used for Accounts receivable, and Regulatory assets and liabilities, partially offset by increases in cash from Accounts payable, Accrued pension liability, and Accrued postretirement liability.
Cash used for Investing Activities
Cash inflows associated with investing activities are primarily generated from the sale of assets, while cash outflows are the result of plant and equipment expenditures. In any given year, DTE Energy looks to realize cash from under-performing or non-strategic assets or matured, fully valued assets.
Capital spending within the utility businesses is primarily to maintain and improve electric generation and the electric and natural gas distribution infrastructure, and to comply with environmental regulations and renewable energy requirements.
Capital spending within the non-utility businesses is primarily for ongoing maintenance, expansion, and growth. DTE Energy looks to make growth investments that meet strict criteria in terms of strategy, management skills, risks, and returns. All new investments are analyzed for their rates of return and cash payback on a risk adjusted basis. DTE Energy has been disciplined in how it deploys capital and will not make investments unless they meet the criteria. For new business lines, DTE Energy initially invests based on research and analysis. DTE Energy starts with a limited investment, evaluates the results, and either expands or exits the business based on those results. In any given year, the amount of growth capital will be determined by the underlying cash flows of DTE Energy, with a clear understanding of any potential impact on its credit ratings.
Net cash used for investing activities decreased $824 million in 2017 due primarily to DTE Energy's 2016 acquisition of midstream natural gas assets, partially offset by increased capital expenditures, Contributions to equity method investees, primarily the NEXUS Pipeline as it continues to develop, and two acquisitions of landfill gas facilities, which are presented in Investing Activities - Other.
Net cash used for investing activities increased $1.2 billion in 2016 due primarily to DTE Energy's acquisition of midstream natural gas assets, net of cash acquired of $83 million, of $1.1 billion, as described in Note 4 to the Consolidated Financial Statements in Item 8 of this Report, "Acquisitions and Exit Activities," as well as increased Contributions to equity method investees, primarily the NEXUS Pipeline as it continues to develop.
Cash from Financing Activities
DTE Energy relies on both short-term borrowing and long-term financing as a source of funding for capital requirements not satisfied by its operations.
DTE Energy's strategy is to have a targeted debt portfolio blend of fixed and variable interest rates and maturity. DTE Energy continually evaluates its leverage target, which is currently 50% to 54%, to ensure it is consistent with the objective of a strong investment grade debt rating.
Net cash from financing activities decreased $938 million in 2017. The decrease is primarily attributable to a decrease in Issuances of long-term debt and equity units, Contributions from noncontrolling interests, an increase in Dividends on common stock, and Distributions to noncontrolling interests, partially offset by an increase to Short-term borrowings, and a decrease to Redemptions and Repurchases of long-term debt.
Net cash from financing activities increased $1.1 billion in 2016. The increase is primarily attributable to increases in Issuances of long-term debt and equity units, which are partially offset by increased Redemptions of long-term debt and a decrease in Short-term borrowings. The increased issuances in 2016 were primarily related to the acquisition of midstream natural gas assets. See details in the "Acquisition Financing" section of Note 14 to the Consolidated Financial Statements in Item 8 of this Report, "Long-Term Debt."
Outlook
DTE Energy expects cash flows from operations to increase over the long-term, primarily as a result of growth from the utility and non-utility businesses. Growth in the utilities is expected to be driven primarily by capital spending to maintain and improve the electric generation and electric and natural gas distribution infrastructure and to comply with new and existing state and federal regulations that will result in additional environmental and renewable energy investments which will increase the base from which rates are determined. Non-utility growth is expected from additional investments, primarily in the Gas Storage and Pipelines and Power and Industrial Projects segments.
DTE Energy may be impacted by the timing of collection or refund of various recovery and tracking mechanisms, as a result of timing of MPSC orders. Energy prices are likely to be a source of volatility with regard to working capital requirements for the foreseeable future. DTE Energy continues its efforts to identify opportunities to improve cash flows through working capital initiatives and maintaining flexibility in the timing and extent of long-term capital projects.
DTE Energy has approximately $110 million in long-term debt, including capital leases, maturing in the next twelve months. The repayment of the debt is expected to be paid through internally generated funds or the issuance of long-term debt.
DTE Energy has approximately $1.4 billion of available liquidity at December 31, 2017, consisting of cash and amounts available under unsecured revolving credit agreements.
DTE Energy expects to issue equity up to $300 million in 2018 through the dividend reinvestment plan and pension and other employee benefit plans.
At the discretion of management, and depending upon financial market conditions, DTE Energy may make contributions up to $200 million, including contributions from DTE Electric of $175 million, to its pension plans in 2018. DTE Energy does not anticipate making any contributions to the other postretirement benefit plans in 2018.
Various subsidiaries and equity investees of DTE Energy have entered into contracts which contain ratings triggers and are guaranteed by DTE Energy. These contracts contain provisions which allow the counterparties to require that DTE Energy post cash or letters of credit as collateral in the event that DTE Energy's credit rating is downgraded below investment grade. Certain of these provisions (known as "hard triggers") state specific circumstances under which DTE Energy can be required to post collateral upon the occurrence of a credit downgrade, while other provisions (known as "soft triggers") are not as specific. For contracts with soft triggers, it is difficult to estimate the amount of collateral which may be requested by counterparties and/or which DTE Energy may ultimately be required to post. The amount of such collateral which could be requested fluctuates based on commodity prices (primarily natural gas, power, and coal) and the provisions and maturities of the underlying transactions. As of December 31, 2017, DTE Energy's contractual obligation to post collateral in the form of cash or letters of credit in the event of a downgrade to below investment grade, under both hard trigger and soft trigger provisions, was approximately $456 million.
DTE Energy believes it will have sufficient operating flexibility, cash resources, and funding sources to maintain adequate amounts of liquidity and to meet future operating cash and capital expenditure needs. However, virtually all of DTE Energy's businesses are capital intensive, or require access to capital, and the inability to access adequate capital could adversely impact earnings and cash flows.
See Notes 9, 10, 14, 16, 18, and 20 to the Consolidated Financial Statements in Item 8 of this Report, "Regulatory Matters," "Income Taxes," "Long-Term Debt," "Short-Term Credit Arrangements and Borrowings," "Commitments and Contingencies," and "Retirement Benefits and Trusteed Assets."
Contractual Obligations
The following table details DTE Energy's, including DTE Electric's, contractual obligations for debt redemptions, leases, purchase obligations, and other long-term obligations as of December 31, 2017:
| Total | 2018 | 2019-2020 | 2021-2022 | 2023 and Thereafter | |||||||||||||||
| (In millions) | |||||||||||||||||||
| Long-term debt: | |||||||||||||||||||
| Mortgage bonds, notes, and other(a) | $ | 11,227 | $ | 104 | $ | 2,180 | $ | 1,078 | $ | 7,865 | |||||||||
| Junior subordinated debentures(b) | 1,180 | — | — | — | 1,180 | ||||||||||||||
| Capital lease obligations | 6 | 5 | 1 | — | — | ||||||||||||||
| Interest | 9,877 | 504 | 970 | 849 | 7,554 | ||||||||||||||
| Stock purchase contract(c) | 68 | 34 | 34 | — | — | ||||||||||||||
| Operating leases | 166 | 40 | 56 | 22 | 48 | ||||||||||||||
| Electric, gas, fuel, transportation, and storage purchase obligations(d) | 5,713 | 2,162 | 1,421 | 663 | 1,467 | ||||||||||||||
| Long-term DTE Electric renewable energy power purchase agreements(e)(f) | 1,219 | 85 | 166 | 166 | 802 | ||||||||||||||
| Other long-term obligations(g)(h)(i) | 614 | 484 | 106 | 16 | 8 | ||||||||||||||
| Total obligations | $ | 30,070 | $ | 3,418 | $ | 4,934 | $ | 2,794 | $ | 18,924 |
| (a) | Excludes $15 million of unamortized debt discount and $69 million of unamortized debt issuance costs. |
| (b) | Excludes $35 million of unamortized debt issuance costs. |
| (c) | Includes $2 million of interest. |
| (d) | Excludes amounts associated with full requirements contracts where no stated minimum purchase volume is required. |
| (e) | The agreements represent the minimum settlements with suppliers for renewable energy and renewable energy credits under existing contract terms which expire from 2030 through 2035. DTE Electric's share of plant output ranges from 44% to 100%. |
| (f) | Excludes a power purchase agreement with a non-utility affiliate of DTE Energy. |
| (g) | Includes liabilities for unrecognized tax benefits of $10 million. |
| (h) | Excludes other long-term liabilities of $178 million not directly derived from contracts or other agreements. |
| (i) | At December 31, 2017, DTE Energy met the minimum pension funding levels required under the Employee Retirement Income Security Act of 1974 (ERISA) and the Pension Protection Act of 2006 for the defined benefit pension plans. DTE Energy may contribute more than the minimum funding requirements for the pension plans and may also make contributions to the other postretirement benefit plans; however, these amounts are not included in the table above as such amounts are discretionary. Planned funding levels are disclosed in the "Capital Resources and Liquidity" and "Critical Accounting Estimates" sections herein and in Note 20 to the Consolidated Financial Statements in Item 8 of this Report, "Retirement Benefits and Trusteed Assets." |
Credit Ratings
Credit ratings are intended to provide banks and capital market participants with a framework for comparing the credit quality of securities and are not a recommendation to buy, sell, or hold securities. DTE Energy, DTE Electric, and DTE Gas' credit ratings affect their costs of capital and other terms of financing, as well as their ability to access the credit and commercial paper markets. DTE Energy, DTE Electric, and DTE Gas' management believes that the current credit ratings provide sufficient access to capital markets. However, disruptions in the banking and capital markets not specifically related to DTE Energy, DTE Electric, and DTE Gas may affect their ability to access these funding sources or cause an increase in the return required by investors.
As part of the normal course of business, DTE Electric, DTE Gas, and various non-utility subsidiaries of DTE Energy routinely enter into physical or financially settled contracts for the purchase and sale of electricity, natural gas, coal, capacity, storage, and other energy-related products and services. Certain of these contracts contain provisions which allow the counterparties to request that DTE Energy posts cash or letters of credit in the event that the senior unsecured debt rating of DTE Energy is downgraded below investment grade. The amount of such collateral which could be requested fluctuates based upon commodity prices and the provisions and maturities of the underlying transactions and could be substantial. Also, upon a downgrade below investment grade, DTE Energy, DTE Electric, and DTE Gas could have restricted access to the commercial paper market, and if DTE Energy is downgraded below investment grade, the non-utility businesses, especially the Energy Trading and Power and Industrial Projects segments, could be required to restrict operations due to a lack of available liquidity. A downgrade below investment grade could potentially increase the borrowing costs of DTE Energy, DTE Electric, and DTE Gas and their subsidiaries and may limit access to the capital markets. The impact of a downgrade will not affect DTE Energy, DTE Electric, and DTE Gas' ability to comply with existing debt covenants. While DTE Energy, DTE Electric, and DTE Gas currently do not anticipate such a downgrade, they cannot predict the outcome of current or future credit rating agency reviews.
CRITICAL ACCOUNTING ESTIMATES
The preparation of the Registrants' Consolidated Financial Statements in conformity with generally accepted accounting principles requires that management apply accounting policies and make estimates and assumptions that affect results of operations and the amounts of assets and liabilities reported in the Consolidated Financial Statements. The Registrants' management believes that the areas described below require significant judgment in the application of accounting policy or in making estimates and assumptions in matters that are inherently uncertain and that may change in subsequent periods. Additional discussion of these accounting policies can be found in the Combined Notes to Consolidated Financial Statements in Item 8 of this Report.
Regulation
A significant portion of the Registrants' businesses are subject to regulation. This results in differences in the application of generally accepted accounting principles between regulated and non-regulated businesses. DTE Electric and DTE Gas are required to record regulatory assets and liabilities for certain transactions that would have been treated as revenue or expense in non-regulated businesses. Future regulatory changes or changes in the competitive environment could result in the discontinuance of this accounting treatment for regulatory assets and liabilities for some or all of the Registrants' businesses. The Registrants' management believes that currently available facts support the continued use of regulatory assets and liabilities and that all regulatory assets and liabilities are recoverable or refundable in the current rate environment.
See Note 9 to the Consolidated Financial Statements in Item 8 of this Report, "Regulatory Matters."
Derivatives
Derivatives are generally recorded at fair value and shown as Derivative assets or liabilities. Changes in the fair value of the derivative instruments are recognized in earnings in the period of change. The normal purchases and normal sales exception requires, among other things, physical delivery in quantities expected to be used or sold over a reasonable period in the normal course of business. Contracts that are designated as normal purchases and normal sales are not recorded at fair value. Substantially all of the commodity contracts entered into by DTE Electric and DTE Gas meet the criteria specified for this exception.
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date in a principal or most advantageous market. Fair value is a market-based measurement that is determined based on inputs, which refer broadly to assumptions that market participants use in pricing assets or liabilities. These inputs can be readily observable, market corroborated, or generally unobservable inputs. The Registrants make certain assumptions they believe that market participants would use in pricing assets or liabilities, including assumptions about risk, and the risks inherent in the inputs to valuation techniques. Credit risk of the Registrants and their counterparties is incorporated in the valuation of assets and liabilities through the use of credit reserves, the impact of which was immaterial at December 31, 2017 and 2016. The Registrants believe they use valuation techniques that maximize the use of observable market-based inputs and minimize the use of unobservable inputs.
The fair values the Registrants calculate for their derivatives may change significantly as inputs and assumptions are updated for new information. Actual cash returns realized on derivatives may be different from the results the Registrants estimate using models. As fair value calculations are estimates based largely on commodity prices, the Registrants perform sensitivity analyses on the fair values of forward contracts. See the sensitivity analysis in Item 7A. of this report, "Quantitative and Qualitative Disclosures About Market Risk." See also the "Fair Value" section herein.
See Notes 12 and 13 to the Consolidated Financial Statements in Item 8 of this Report, "Fair Value" and "Financial and Other Derivative Instruments," respectively.
Asset Impairments
Goodwill
Certain of DTE Energy's reporting units have goodwill or allocated goodwill resulting from business combinations. DTE Energy performs an impairment test for each of the reporting units with goodwill annually or whenever events or circumstances indicate that the value of goodwill may be impaired.
In performing Step 1 of the impairment test, DTE Energy compares the fair value of the reporting unit to its carrying value including goodwill. If the carrying value including goodwill were to exceed the fair value of a reporting unit, Step 2 of the test would be performed. Step 2 of the impairment test requires the carrying value of goodwill to be reduced to its fair value, if lower, as of the test date.
For Step 1 of the test, DTE Energy estimates the reporting unit's fair value using standard valuation techniques, including techniques which use estimates of projected future results and cash flows to be generated by the reporting unit. Such techniques generally include a terminal value that utilizes an earnings multiple approach, which incorporates the current market values of comparable entities. These cash flow valuations involve a number of estimates that require broad assumptions and significant judgment by management regarding future performance. DTE Energy also employs market-based valuation techniques to test the reasonableness of the indications of value for the reporting units determined under the cash flow technique.
DTE Energy performs an annual impairment test each October. In between annual tests, DTE Energy monitors its estimates and assumptions regarding estimated future cash flows, including the impact of movements in market indicators in future quarters, and will update the impairment analyses if a triggering event occurs. While DTE Energy believes the assumptions are reasonable, actual results may differ from projections. To the extent projected results or cash flows are revised downward, the reporting unit may be required to write down all or a portion of its goodwill, which would adversely impact DTE Energy's earnings.
DTE Energy performed its annual impairment test as of October 1, 2017 and determined that the estimated fair value of each reporting unit exceeded its carrying value, and no impairment existed. As part of the annual impairment test, DTE Energy also compared the aggregate fair value of the reporting units to its overall market capitalization. The implied premium of the aggregate fair value over market capitalization is likely attributable to an acquisition control premium (the price in excess of a stock's market price that investors typically pay to gain control of an entity).
The results of the test and key estimates that were incorporated are as follows as of the October 1, 2017 valuation date:
| Reporting Unit | Goodwill | Fair Value Reduction %(a) | Discount Rate | Terminal Multiple(b) | Valuation Methodology(c) | |||||||||
| (In millions) | ||||||||||||||
| Electric | $ | 1,208 | 46 | % | 6 | % | 10.0x | DCF, assuming stock sale | ||||||
| Gas | 743 | 35 | % | 6 | % | 11.0x | DCF, assuming stock sale | |||||||
| Gas Storage and Pipelines | 299 | 48 | % | 8 | % | 11.0x | DCF, assuming asset sale | |||||||
| Power and Industrial Projects(d) | 26 | 21 | % | 8 | % | 10.0x | DCF, assuming asset sale(e) | |||||||
| Energy Trading | 17 | 32 | % | 13 | % | n/a(f) | DCF, assuming asset sale | |||||||
| $ | 2,293 |
| (a) | Percentage by which the fair value of equity of the reporting unit would need to decline to equal its carrying value, including goodwill. |
| (b) | Multiple of enterprise value (sum of debt plus equity value) to earnings before interest, taxes, depreciation, and amortization (EBITDA). |
| (c) | Discounted cash flows (DCF) incorporated 2018-2022 projected cash flows plus a calculated terminal value. |
| (d) | Power and Industrial Projects excludes the Biomass reporting unit, as this unit has no allocated goodwill. |
| (e) | Asset sales were assumed, except for Power and Industrial Projects' reduced emissions fuels projects, which assumed stock sales. |
| (f) | Due to lack of market comparable information for Energy Trading, DTE Energy capitalized the terminal year cash flows at the weighted average cost of capital (WACC) in lieu of applying a terminal EBITDA multiple. |
Long-Lived Assets
The Registrants evaluate the carrying value of long-lived assets, excluding goodwill, when circumstances indicate that the carrying value of those assets may not be recoverable. Conditions that could have an adverse impact on the cash flows and fair value of the long-lived assets are deteriorating business climate, condition of the asset, or plans to dispose of the asset before the end of its useful life. The review of long-lived assets for impairment requires significant assumptions about operating strategies and estimates of future cash flows, which require assessments of current and projected market conditions. An impairment evaluation is based on an undiscounted cash flow analysis at the lowest level for which independent cash flows of long-lived assets can be identified from other groups of assets and liabilities. Impairment may occur when the carrying value of the asset exceeds the future undiscounted cash flows. When the undiscounted cash flow analysis indicates a long-lived asset is not recoverable, the amount of the impairment loss is determined by measuring the excess of the long-lived asset over its fair value. An impairment would require the Registrants to reduce both the long-lived asset and current period earnings by the amount of the impairment, which would adversely impact their earnings.
Pension and Other Postretirement Costs
DTE Energy sponsors defined benefit pension plans and other postretirement benefit plans for eligible employees of the Registrants. The measurement of the plan obligations and cost of providing benefits under these plans involve various factors, including numerous assumptions and accounting elections. When determining the various assumptions that are required, DTE Energy considers historical information as well as future expectations. The benefit costs are affected by, among other things, the actual rate of return on plan assets, the long-term expected return on plan assets, the discount rate applied to benefit obligations, the incidence of mortality, the expected remaining service period of plan participants, level of compensation and rate of compensation increases, employee age, length of service, the anticipated rate of increase of health care costs, benefit plan design changes, and the level of benefits provided to employees and retirees. Pension and other postretirement benefit costs attributed to the segments are included with labor costs and ultimately allocated to projects within the segments, some of which are capitalized.
DTE Energy had pension costs of $172 million in 2017, $167 million in 2016, and $221 million in 2015. Other postretirement benefit credits were $31 million in 2017, $111 million in 2016, and $99 million in 2015. Pension costs and other postretirement benefit credits for 2017 were calculated based upon several actuarial assumptions, including an expected long-term rate of return on plan assets of 7.50% for the pension plans and 7.75% for the other postretirement benefit plans. In developing the expected long-term rate of return assumptions, DTE Energy evaluated asset class risk and return expectations, as well as inflation assumptions. Projected returns are based on broad equity, bond, and other markets. DTE Energy's 2018 expected long-term rate of return on pension plan assets is based on an asset allocation assumption utilizing active investment management of 40% in equity markets, 32% in fixed income markets, including long duration bonds, and 28% invested in other assets. DTE Energy's 2018 expected long-term rate of return on other postretirement plan assets is based on an asset allocation assumption utilizing active investment management of 40% in equity markets, 26% in fixed income markets, and 34% invested in other assets. Because of market volatility, DTE Energy periodically reviews the asset allocation and rebalances the portfolio when considered appropriate. Given market conditions and financial market risk considerations, DTE Energy is maintaining its long-term rate of return assumptions for the pension plans and other post retirement plans at 7.50% and 7.75%, respectively for 2018. DTE Energy believes these rates are reasonable assumptions for the long-term rate of return on the plan assets for 2018 given its investment strategy. DTE Energy will continue to evaluate the actuarial assumptions, including its expected rate of return, at least annually.
DTE Energy calculates the expected return on pension and other postretirement benefit plan assets by multiplying the expected return on plan assets by the market-related value (MRV) of plan assets at the beginning of the year, taking into consideration anticipated contributions and benefit payments that are to be made during the year. Current accounting rules provide that the MRV of plan assets can be either fair value or a calculated value that recognizes changes in fair value in a systematic and rational manner over not more than five years. For the pension plans, DTE Energy uses a calculated value when determining the MRV of the pension plan assets and recognizes changes in fair value over a three-year period. Accordingly, the future value of assets will be impacted as previously deferred gains or losses are recognized. Positive asset performance in 2017 resulted in unrecognized net gains. As of December 31, 2017, DTE Energy had $223 million of cumulative gains that remain to be recognized in the calculation of the MRV of pension assets related to investment performance in 2017 and 2016. For the other postretirement benefit plans, DTE Energy uses fair value when determining the MRV of other postretirement benefit plan assets, therefore all investment gains and losses have been recognized in the calculation of MRV for these plans.
The discount rate that DTE Energy utilizes for determining future pension and other postretirement benefit obligations is based on a yield curve approach and a review of bonds that receive one of the two highest ratings given by a recognized rating agency. The yield curve approach matches projected pension plan and other postretirement benefit payment streams with bond portfolios reflecting actual liability duration unique to the plans. The discount rate determined on this basis was 3.70% for the pension and other postretirement plans at December 31, 2017 compared to 4.25% for the pension and other postretirement plans at December 31, 2016.
DTE Energy changed the mortality assumption as of December 31, 2017 to reflect the updated MP-2017 projection scale, along with the actual experience and credibility of each population. The mortality assumptions used at December 31, 2017 are the RP-2014 mortality table, projected back to 2006 using Scale MP-2014 and projected forward using Scale MP-2017 with generational projection. The base mortality tables vary by type of plan, employee's union status and employment status, with additional adjustments to reflect the actual experience and credibility of each population.
DTE Energy estimates the 2018 total pension costs will be approximately $150 million in 2018, compared to $172 million in 2017. The reduction in total pension costs is primarily due to updated demographic assumptions and positive asset performance, offset by a lower discount rate. The 2018 other postretirement benefit credit will be approximately $30 million compared to $31 million in 2017.
The health care trend rates for DTE Energy assume 6.75% for pre-65 participants and 7.25% for post-65 participants for 2018, trending down to 4.50% for both pre-65 and post-65 participants in 2030.
Future actual pension and other postretirement benefit costs or credits will depend on future investment performance, changes in future discount rates, and various other factors related to plan design.
Lowering the expected long-term rate of return on the plan assets by one percentage point would have increased the 2017 pension costs by approximately $42 million. Lowering the discount rate and the salary increase assumptions by one percentage point would have increased the 2017 pension costs by approximately $38 million. Lowering the expected long-term rate of return on plan assets by one percentage point would have decreased the 2017 other postretirement credit by approximately $18 million. Lowering the discount rate assumption by one percentage point would have decreased the 2017 other postretirement credit by approximately $26 million. Lowering the health care cost trend assumptions by one percentage point would have increased the other postretirement credit for 2017 by approximately $5 million.
The value of the qualified pension and other postretirement benefit plan assets was $6.5 billion at December 31, 2017 and $5.8 billion at December 31, 2016. At December 31, 2017, DTE Energy's qualified pension plans were underfunded by $807 million and its other postretirement benefit plans were underfunded by $62 million. The 2017 funding levels improved as positive asset performance and plan sponsor contributions offset a decrease in discount rates.
Pension and other postretirement costs and pension cash funding requirements may increase in future years without typical returns in the financial markets. DTE Energy made contributions to its qualified pension plans of $223 million in 2017 and $179 million in 2016. At the discretion of management, consistent with the Pension Protection Act of 2006, and depending upon financial market conditions, DTE Energy anticipates making contributions to its qualified pension plans of up to $200 million in 2018 and up to $415 million over the next five years. DTE Energy did not make other postretirement benefit plan contributions in 2017 and made contributions of $20 million in 2016. DTE Energy does not anticipate making any contributions to its other postretirement plans in 2018 or over the next five years. The planned pension contributions will be made in cash and/or DTE Energy common stock.
See Note 20 to the Consolidated Financial Statements in Item 8 of this Report, "Retirement Benefits and Trusteed Assets."
Legal Reserves
The Registrants are involved in various legal proceedings, claims, and litigation arising in the ordinary course of business. The Registrants regularly assess their liabilities and contingencies in connection with asserted or potential matters, and establish reserves when appropriate. Legal reserves are based upon the Registrants' management’s assessment of pending and threatened legal proceedings and claims against the Registrants.
Accounting for Tax Obligations
The Registrants are required to make judgments regarding the potential tax effects of various financial transactions and results of operations in order to estimate their obligations to taxing authorities. The Registrants account for uncertain income tax positions using a benefit recognition model with a two-step approach, a more-likely-than-not recognition criterion, and a measurement attribute that measures the position as the largest amount of tax benefit that is greater than 50% likely of being realized upon ultimate settlement. If the benefit does not meet the more likely than not criteria for being sustained on its technical merits, no benefit will be recorded. Uncertain tax positions that relate only to timing of when an item is included on a tax return are considered to have met the recognition threshold. The Registrants also have non-income tax obligations related to property, sales and use, and employment-related taxes, and ongoing appeals related to these tax matters.
Accounting for tax obligations requires judgments, including assessing whether tax benefits are more likely than not to be sustained, and estimating reserves for potential adverse outcomes regarding tax positions that have been taken. The Registrants also assess their ability to utilize tax attributes, including those in the form of carry-forwards, for which the benefits have already been reflected in the Consolidated Financial Statements. The Registrants believe the resulting tax reserve balances as of December 31, 2017 and 2016 are appropriate. The ultimate outcome of such matters could result in favorable or unfavorable adjustments to the Registrants' Consolidated Financial Statements, and such adjustments could be material.
See Note 10 to the Consolidated Financial Statements in Item 8 of this Report, "Income Taxes."
NEW ACCOUNTING PRONOUNCEMENTS
See Note 3 to the Consolidated Financial Statements in Item 8 of this Report, "New Accounting Pronouncements."
FAIR VALUE
Derivatives are generally recorded at fair value and shown as Derivative assets or liabilities. Contracts DTE Energy typically classifies as derivative instruments include power, natural gas, oil, and certain coal forwards, futures, options and swaps, and foreign currency exchange contracts. Items DTE Energy does not generally account for as derivatives include natural gas inventory, pipeline transportation contracts, renewable energy credits, and storage assets. See Notes 12 and 13 to the Consolidated Financial Statements in Item 8 of this Report, "Fair Value" and "Financial and Other Derivative Instruments," respectively.
The tables below do not include the expected earnings impact of non-derivative natural gas storage, transportation, certain power contracts, and renewable energy credits which are subject to accrual accounting. Consequently, gains and losses from these positions may not match with the related physical and financial hedging instruments in some reporting periods, resulting in volatility in the Registrants' reported period-by-period earnings; however, the financial impact of the timing differences will reverse at the time of physical delivery and/or settlement.
The Registrants manage their MTM risk on a portfolio basis based upon the delivery period of their contracts and the individual components of the risks within each contract. Accordingly, the Registrants record and manage the energy purchase and sale obligations under their contracts in separate components based on the commodity (e.g. electricity or natural gas), the product (e.g. electricity for delivery during peak or off-peak hours), the delivery location (e.g. by region), the risk profile (e.g. forward or option), and the delivery period (e.g. by month and year).
The Registrants have established a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value in three broad levels. The fair value hierarchy gives the highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). For further discussion of the fair value hierarchy, see Note 12 to the Consolidated Financial Statements in Item 8 of this Report, "Fair Value."
The following table provides details on changes in DTE Energy's MTM net asset (or liability) position:
| Total | |||
| (In millions) | |||
| MTM at December 31, 2016 | $ | (86 | ) |
| Reclassified to realized upon settlement | (52 | ) | |
| Changes in fair value recorded to income | 128 | ||
| Amounts recorded to unrealized income | 76 | ||
| Changes in fair value recorded in regulatory liabilities | 25 | ||
| Change in collateral | (7 | ) | |
| MTM at December 31, 2017 | $ | 8 |
The table below shows the maturity of DTE Energy's MTM positions. The positions from 2021 and beyond principally represent longer tenor gas structured transactions:
| Source of Fair Value | 2018 | 2019 | 2020 | 2021 and Beyond | Total Fair Value | |||||||||||||||
| (In millions) | ||||||||||||||||||||
| Level 1 | $ | 3 | $ | 3 | $ | (1 | ) | $ | 2 | $ | 7 | |||||||||
| Level 2 | (16 | ) | 6 | 4 | 3 | (3 | ) | |||||||||||||
| Level 3 | (5 | ) | 10 | 1 | (15 | ) | (9 | ) | ||||||||||||
| MTM before collateral adjustments | $ | (18 | ) | $ | 19 | $ | 4 | $ | (10 | ) | (5 | ) | ||||||||
| Collateral adjustments | 13 | |||||||||||||||||||
| MTM at December 31, 2017 | $ | 8 |
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