filings.toolsItem 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
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Item 2. 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 and 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 also operates two energy-related non-utility segments with operations throughout the United States.
On July 1, 2021, DTE Energy completed the separation of DT Midstream, its former natural gas pipeline, storage, and gathering non-utility business. Financial results of DT Midstream are presented as discontinued operations in the Consolidated Financial Statements. Refer to Note 4 to the Consolidated Financial Statements, “Discontinued Operations,” for additional information.
Management’s Discussion and Analysis of Financial Condition and Results of Operations below reflect DTE Energy’s continuing operations, unless noted otherwise. The following table summarizes DTE Energy's financial results:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| (In millions, except per share amounts) | |||||||||||||||||||||||
| Net Income Attributable to DTE Energy Company — Continuing operations | $ | 387 | $ | 58 | $ | 818 | $ | 495 | |||||||||||||||
| Diluted Earnings per Common Share — Continuing operations | $ | 1.99 | $ | 0.30 | $ | 4.21 | $ | 2.55 |
The increase in Net Income Attributable to DTE Energy Company for the three and nine months ended September 30, 2022 was primarily due to lower losses in the Corporate and Other segment, driven primarily by the loss on debt extinguishment incurred in the third quarter 2021. The increase for the three month period was also due to higher earnings in the Electric and Energy Trading segments, partially offset by lower earnings in the DTE Vantage segment. For the nine month period, the increase was also due to higher earnings in the Gas and Energy Trading segments, partially offset by lower earnings in the Electric and DTE Vantage segments.
STRATEGY
DTE Energy's strategy is to achieve long-term earnings growth with a strong balance sheet and attractive dividend.
DTE Energy's utilities are investing capital to support a modern, reliable grid and cleaner, affordable energy through investments in base infrastructure and new generation. Increasing intensity of wind storms and other weather events, coupled with increasing electric vehicle adoption, will drive a continued need for substantial grid investment over the long-term.
DTE Energy is committed to reducing the carbon emissions of its electric utility operations by 32% by 2023, 50% by 2028, and 80% by 2040 from 2005 carbon emissions levels. DTE Energy is also committed to a net zero carbon emissions goal by 2050 for its electric and gas utility operations. To achieve the carbon reduction goals at the electric utility, DTE Energy has begun to transition away from coal-powered sources and is replacing or offsetting the generation from these facilities with renewable energy and energy waste reduction initiatives. Refer to the "Capital Investments" section below for further discussion regarding DTE Energy's retirement of its aging coal-fired plants and transition to renewable energy and other sources. Over the long-term, DTE Energy is also monitoring the viability of emerging technologies involving energy storage, carbon capture and sequestration, low carbon fuels such as hydrogen, and advanced nuclear power.
For gas utility operations, DTE Energy aims to cut carbon emissions across the entire value chain. To achieve net zero emissions by 2050, DTE Energy is working to source gas with lower methane intensity, reduce emissions through its gas main renewal and pipeline integrity programs, and if necessary, use carbon offsets to address any remaining emissions. DTE Energy is also committed to helping DTE Gas customers reduce their emissions by 35% by 2040 by increasing energy efficiency, pursuing advanced technologies such as hydrogen, and through the CleanVision Natural Gas Balance program which provides customers the option to use carbon offsets and renewable natural gas.
DTE Energy expects that these initiatives at the electric and gas utilities will continue to provide significant opportunities for capital investments and result in earnings growth. DTE Energy is focused on executing its plans to achieve operational excellence and customer satisfaction with a focus on customer affordability. DTE Energy's utilities operate in a constructive regulatory environment and have solid relationships with their regulators.
DTE Energy also has significant investments in non-utility businesses and expects growth opportunities in its DTE Vantage segment. 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 markets with attractive competitive dynamics where meaningful scale is in alignment with its risk profile.
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. Capital plans may be regularly updated as these requirements change.
DTE Electric's capital investments over the 2022-2026 period are estimated at $15 billion, comprised of $8 billion for distribution infrastructure, $4 billion for base infrastructure, and $3 billion for cleaner generation including renewables. DTE Electric has retired all eleven coal-fired generation units at the Trenton Channel, River Rouge, and St. Clair facilities, including five units that were retired in the third quarter 2022, and has announced plans to retire its remaining six coal-fired generating units. The two units at the Belle River facility will cease the use of coal by 2028 and are being evaluated for conversion to cleaner energy resources. The four units at the Monroe facility are expected to be retired by 2040. Generation from the retired facilities will continue to be replaced or offset with a combination of renewables, energy waste reduction, demand response, and natural gas fueled generation, including the Blue Water Energy Center which commenced operations in June 2022.
DTE Gas' capital investments over the 2022-2026 period are estimated at $3.1 billion, comprised of $1.5 billion for base infrastructure and $1.6 billion for gas main renewal, meter move out, and pipeline integrity programs.
DTE Electric and DTE Gas plan to seek regulatory approval for capital expenditures consistent with ratemaking treatment.
DTE Energy's non-utility businesses' capital investments are primarily for expansion, growth, and ongoing maintenance in the DTE Vantage segment, including approximately $1 billion to $1.5 billion from 2022-2026 for renewable energy projects and industrial energy services.
ENVIRONMENTAL MATTERS
The Registrants are subject to extensive environmental regulations, including those addressing climate change. 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.
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 waste reduction 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.
For further discussion of environmental matters, see Note 13 to the Consolidated Financial Statements, "Commitments and Contingencies."
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:
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electric and gas customer satisfaction;
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electric distribution system reliability;
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new electric generation;
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gas distribution system renewal;
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reducing carbon emissions at the electric and gas utilities;
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rate competitiveness and affordability;
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regulatory stability and investment recovery for the electric and gas utilities;
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strategic investments in growth projects at DTE Vantage;
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employee engagement, health, safety and well-being, and diversity, equity, and inclusion;
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cost structure optimization across all business segments; and
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cash, capital, and liquidity to maintain or improve financial strength.
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 utility and gas utility 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. For the Electric segment, non-utility Operating Revenues are reported separately so that Utility Margin can be used to assess utility performance.
The Non-utility Margin relates to the DTE Vantage and Energy Trading segments. For the DTE Vantage segment, Non-utility Margin primarily includes Operating Revenues net of Fuel, purchased power, and gas expenses. Operating Revenues include sales of metallurgical coke and related by-products, petroleum coke, renewable natural gas and related credits, and electricity, as well as rental income and revenues from utility-type consulting, management, and operational services. For the prior periods, Operating revenues also include sales of refined coal to third parties and the affiliated Electric utility. 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.
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| (In millions) | |||||||||||||||||||||||
| Net Income (Loss) Attributable to DTE Energy by Segment | |||||||||||||||||||||||
| Electric | $ | 363 | $ | 342 | $ | 750 | $ | 788 | |||||||||||||||
| Gas | (23) | (30) | 179 | 146 | |||||||||||||||||||
| DTE Vantage | 26 | 73 | 68 | 115 | |||||||||||||||||||
| Energy Trading | 56 | (52) | (80) | (173) | |||||||||||||||||||
| Corporate and Other | (35) | (275) | (99) | (381) | |||||||||||||||||||
| Income from Continuing Operations | 387 | 58 | 818 | 495 | |||||||||||||||||||
| Discontinued Operations | — | (33) | — | 106 | |||||||||||||||||||
| Net Income Attributable to DTE Energy Company | $ | 387 | $ | 25 | $ | 818 | $ | 601 |
ELECTRIC
The Results of Operations discussion for DTE Electric is presented in a reduced disclosure format in accordance with General Instruction H(2) of Form 10-Q.
The Electric segment consists principally of DTE Electric. Electric results and outlook are discussed below:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| (In millions) | |||||||||||||||||||||||
| Operating Revenues — Utility operations | $ | 1,844 | $ | 1,700 | $ | 4,896 | $ | 4,468 | |||||||||||||||
| Fuel and purchased power — utility | 593 | 462 | 1,543 | 1,178 | |||||||||||||||||||
| Utility Margin | 1,251 | 1,238 | 3,353 | 3,290 | |||||||||||||||||||
| Operating Revenues — Non-utility operations | 3 | 2 | 11 | 9 | |||||||||||||||||||
| Operation and maintenance | 409 | 408 | 1,188 | 1,116 | |||||||||||||||||||
| Depreciation and amortization | 307 | 281 | 909 | 820 | |||||||||||||||||||
| Taxes other than income | 86 | 82 | 258 | 245 | |||||||||||||||||||
| Operating Income | 452 | 469 | 1,009 | 1,118 | |||||||||||||||||||
| Other (Income) and Deductions | 84 | 82 | 248 | 238 | |||||||||||||||||||
| Income Tax Expense | 5 | 45 | 11 | 92 | |||||||||||||||||||
| Net Income Attributable to DTE Energy Company | $ | 363 | $ | 342 | $ | 750 | $ | 788 | |||||||||||||||
See DTE Electric's Consolidated Statements of Operations for a complete view of its results. Differences between the Electric segment and DTE Electric's Consolidated Statements of Operations are primarily due to non-utility operations at DTE Sustainable Generation and the classification of certain benefit costs. Refer to Note 14 to the Consolidated Financial Statements, "Retirement Benefits and Trusteed Assets" for additional information.
Utility Margin increased $13 million and $63 million in the three and nine months ended September 30, 2022, respectively. 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 periods:
| Three Months | Nine Months | ||||||||||
| (In millions) | |||||||||||
| Regulatory mechanism — RPS | $ | 12 | $ | 33 | |||||||
| COVID-19 voluntary refund amortization | 9 | 25 | |||||||||
| Regulatory mechanism — DTE Securitization | 9 | 20 | |||||||||
| Regulatory mechanism — EWR | 12 | 18 | |||||||||
| Weather | (14) | (5) | |||||||||
| Base sales / rate mix | (24) | (42) | |||||||||
| Other regulatory mechanisms and other | 9 | 14 | |||||||||
| Increase in Utility Margin | $ | 13 | $ | 63 |
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| (In thousands of MWh) | |||||||||||||||||||||||
| DTE Electric Sales | |||||||||||||||||||||||
| Residential | 4,803 | 4,998 | 12,393 | 12,705 | |||||||||||||||||||
| Commercial | 4,541 | 4,625 | 12,501 | 12,532 | |||||||||||||||||||
| Industrial | 2,271 | 2,214 | 6,464 | 6,431 | |||||||||||||||||||
| Other | 48 | 49 | 151 | 155 | |||||||||||||||||||
| 11,663 | 11,886 | 31,509 | 31,823 | ||||||||||||||||||||
| Interconnection sales(a) | 1,766 | 1,008 | 3,551 | 2,812 | |||||||||||||||||||
| Total DTE Electric Sales | 13,429 | 12,894 | 35,060 | 34,635 | |||||||||||||||||||
| DTE Electric Deliveries | |||||||||||||||||||||||
| Retail and wholesale | 11,663 | 11,886 | 31,509 | 31,823 | |||||||||||||||||||
| Electric retail access, including self-generators(b) | 1,201 | 1,232 | 3,417 | 3,260 | |||||||||||||||||||
| Total DTE Electric Sales and Deliveries | 12,864 | 13,118 | 34,926 | 35,083 |
(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.
Operation and maintenance expense increased $1 million and $72 million in the three and nine months ended September 30, 2022, respectively. The increase in the third quarter was primarily due to higher EWR expense of $11 million, higher RPS expense of $5 million, and higher distribution operations expense of $2 million, partially offset by lower plant generation expense of $9 million and lower benefits and other compensation expense of $8 million. The increase in the nine-month period was primarily due to higher plant generation expense of $33 million (primarily due to increased planned and unplanned outage costs), higher distribution operations expense of $31 million (primarily due to increased tree trim costs), higher EWR expense of $15 million, and higher RPS expense of $9 million, partially offset by lower benefits and other compensation expense of $15 million.
Depreciation and amortization expense increased $26 million and $89 million in the three and nine months ended September 30, 2022, respectively. The increase in both periods was primarily due to a higher depreciable base.
Taxes other than income increased $4 million and $13 million in the three and nine months ended September 30, 2022, respectively. The increase in both periods was primarily due to higher property taxes.
Other (Income) and Deductions increased $2 million and $10 million in the three and nine months ended September 30, 2022, respectively. The increase in the third quarter was primarily due to higher interest expense of $8 million and higher losses in the rabbi trust and other investments of $2 million, partially offset by lower non-operating retirement benefits expense of $9 million. The increase in the nine-month period was primarily due to higher interest expense of $20 million and a change in rabbi trust and other investment earnings (loss of $13 million in 2022 compared to a gain of $6 million in 2021), partially offset by lower non-operating retirement benefits expense of $27 million.
Income Tax Expense decreased $40 million and $81 million in the three and nine months ended September 30, 2022, respectively. The decrease in the both periods was primarily due to higher amortization of the TCJA regulatory liability, driven by the accelerated amortization approved in DTE Electric's prior year accounting applications to the MPSC. The decrease in both periods was also due to higher production tax credits and lower earnings.
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 will maintain a strong focus on customers by increasing reliability and satisfaction while keeping customer rate increases affordable. 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, uncertainty of legislative or regulatory actions regarding climate change, and effects of energy waste reduction programs.
DTE Electric filed a rate case with the MPSC on January 21, 2022 requesting an increase in base rates of $388 million based on a projected twelve-month period ending October 31, 2023. The requested increase in base rates is primarily due to an increase in net plant resulting from generation and distribution investments, as well as related increases to depreciation and property tax expenses. The rate filing also requests an increase in return on equity from 9.9% to 10.25% and includes projected changes in sales. A final MPSC order in this case is expected in November 2022.
GAS
The Gas segment consists principally of DTE Gas. Gas results and outlook are discussed below:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| (In millions) | |||||||||||||||||||||||
| Operating Revenues — Utility operations | $ | 230 | $ | 193 | $ | 1,358 | $ | 1,070 | |||||||||||||||
| Cost of gas — utility | 39 | 23 | 436 | 263 | |||||||||||||||||||
| Utility Margin | 191 | 170 | 922 | 807 | |||||||||||||||||||
| Operation and maintenance | 130 | 123 | 405 | 380 | |||||||||||||||||||
| Depreciation and amortization | 47 | 44 | 140 | 130 | |||||||||||||||||||
| Taxes other than income | 21 | 20 | 76 | 71 | |||||||||||||||||||
| Asset (gains) losses and impairments, net | — | 1 | — | 1 | |||||||||||||||||||
| Operating Income (Loss) | (7) | (18) | 301 | 225 | |||||||||||||||||||
| Other (Income) and Deductions | 22 | 18 | 65 | 54 | |||||||||||||||||||
| Income Tax Expense (Benefit) | (6) | (6) | 57 | 25 | |||||||||||||||||||
| Net Income (Loss) Attributable to DTE Energy Company | $ | (23) | $ | (30) | $ | 179 | $ | 146 |
Utility Margin increased $21 million and $115 million in the three and nine months ended September 30, 2022, respectively. Revenues associated with certain mechanisms and 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 periods:
| Three Months | Nine Months | ||||||||||
| (In millions) | |||||||||||
| Implementation of new rates | $ | 12 | $ | 57 | |||||||
| Weather | 2 | 33 | |||||||||
| Base sales | 2 | 15 | |||||||||
| Home protection program | 1 | 5 | |||||||||
| Other | 4 | 5 | |||||||||
| Increase in Utility Margin | $ | 21 | $ | 115 |
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| (In Bcf) | |||||||||||||||||||||||
| Gas Markets | |||||||||||||||||||||||
| Gas sales | 8 | 7 | 100 | 88 | |||||||||||||||||||
| End-user transportation | 33 | 34 | 124 | 123 | |||||||||||||||||||
| 41 | 41 | 224 | 211 | ||||||||||||||||||||
| Intermediate transportation | 125 | 102 | 404 | 370 | |||||||||||||||||||
| Total Gas sales | 166 | 143 | 628 | 581 |
Operation and maintenance expense increased $7 million and $25 million in the three and nine months ended September 30, 2022, respectively. The increase in the third quarter was primarily due to higher gas operations expense of $7 million and higher corporate support costs of $2 million, partially offset by lower uncollectible expense of $1 million. The increase in the nine-month period was primarily due to higher gas operations expense of $19 million and higher corporate support costs of $8 million.
Depreciation and amortization expense increased $3 million and $10 million in the three and nine months ended September 30, 2022, respectively. The increase in both periods was primarily due to a higher depreciable base.
Taxes other than income expense increased $1 million and $5 million in the three and nine months ended September 30, 2022, respectively. The increase in both periods was primarily due to higher property taxes.
Other (Income) and Deductions increased $4 million and $11 million in the three and nine months ended September 30, 2022, respectively. The increase in the third quarter was primarily due to investment losses of $2 million and higher interest expense of $2 million. The increase in the nine-month period was primarily due to a change in investment earnings (loss of $7 million in 2022 compared to a gain of $1 million in 2021) and higher interest expense of $3 million.
Income Tax Expense (Benefit) increased $32 million in the nine months ended September 30, 2022. The increase was primarily due to higher earnings and lower amortization of the TCJA regulatory liability.
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 VANTAGE
The DTE Vantage segment is comprised primarily of renewable energy projects that sell electricity and pipeline-quality gas and projects that deliver energy and utility-type products and services to industrial, commercial, and institutional customers. DTE Vantage formerly included projects that produced reduced emissions fuel; however, these projects were closed as planned in 2022 upon REF facilities exhausting their eligibility for generating production tax credits. DTE Vantage results and outlook are discussed below:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| (In millions) | |||||||||||||||||||||||
| Operating Revenues — Non-utility operations | $ | 227 | $ | 372 | $ | 626 | $ | 1,132 | |||||||||||||||
| Fuel, purchased power, and gas — non-utility | 124 | 267 | 317 | 851 | |||||||||||||||||||
| Non-utility Margin | 103 | 105 | 309 | 281 | |||||||||||||||||||
| Operation and maintenance | 64 | 77 | 194 | 226 | |||||||||||||||||||
| Depreciation and amortization | 13 | 18 | 39 | 55 | |||||||||||||||||||
| Taxes other than income | 3 | 2 | 8 | 8 | |||||||||||||||||||
| Asset (gains) losses and impairments, net | 1 | 1 | (4) | 28 | |||||||||||||||||||
| Operating Income (Loss) | 22 | 7 | 72 | (36) | |||||||||||||||||||
| Other (Income) and Deductions | (9) | (61) | (10) | (108) | |||||||||||||||||||
| Income Taxes | |||||||||||||||||||||||
| Expense | 8 | 18 | 20 | 22 | |||||||||||||||||||
| Production Tax Credits | (3) | (20) | (6) | (56) | |||||||||||||||||||
| 5 | (2) | 14 | (34) | ||||||||||||||||||||
| Net Income | 26 | 70 | 68 | 106 | |||||||||||||||||||
| Less: Net Loss Attributable to Noncontrolling Interests | — | (3) | — | (9) | |||||||||||||||||||
| Net Income Attributable to DTE Energy Company | $ | 26 | $ | 73 | $ | 68 | $ | 115 |
Operating Revenues — Non-utility operations decreased $145 million and $506 million in the three and nine months ended September 30, 2022, respectively. The decrease in both periods was due to the following:
| Three Months | Nine Months | ||||||||||
| (In millions) | |||||||||||
| Closure of the REF business | $ | (185) | $ | (625) | |||||||
| Closure in the Steel business | (4) | (17) | |||||||||
| Higher (lower) production and prices in the Renewables business | (2) | 6 | |||||||||
| New contract in the Renewables business | 5 | 16 | |||||||||
| Higher prices in the On-site business | 10 | 24 | |||||||||
| Higher demand and prices in the Steel business | 31 | 90 | |||||||||
| $ | (145) | $ | (506) |
Non-utility Margin decreased $2 million and increased $28 million in the three and nine months ended September 30, 2022, respectively. The following table details changes in Non-utility Margin relative to the comparable prior periods:
| Three Months | Nine Months | ||||||||||
| (In millions) | |||||||||||
| New contract in the Renewables business | $ | 5 | $ | 14 | |||||||
| Higher (lower) demand and prices in the Steel business | (3) | 11 | |||||||||
| Higher (lower) production and prices in the Renewables business | (4) | 4 | |||||||||
| Closure in the Steel business | (2) | (5) | |||||||||
| Other | 2 | 4 | |||||||||
| $ | (2) | $ | 28 |
Operation and maintenance expense decreased $13 million and $32 million in the three and nine months ended September 30, 2022, respectively. The decrease in the third quarter was primarily due to $11 million associated with the closure of the REF business. The decrease in the nine-month period was primarily due to $30 million associated with the closure of the REF business and $4 million of lower corporate overhead costs, partially offset by a $6 million increase due to a new contract in the Renewables business.
Depreciation and amortization expense decreased $5 million and $16 million in the three and nine months ended September 30, 2022, respectively. The decrease in both periods was primarily due to the closure of the REF business.
Asset (gains) losses and impairments, net changed $32 million in the nine months ended September 30, 2022. The change was primarily due to an asset impairment of $27 million recorded in 2021 in the Steel business for the anticipated closure of a pulverized coal facility, as well as a $3 million gain recorded in 2022 in the Renewables business related to lower future contingent obligations.
Other (Income) and Deductions decreased $52 million and $98 million in the three and nine months ended September 30, 2022, respectively. The decrease in the third quarter was primarily due to $57 million lower income associated with the closure of the REF business, partially offset by $3 million lower interest expense. The decrease in the nine-month period was primarily due to $102 million lower income associated with the closure of the REF business and $10 million lower equity investment earnings due to a planned outage in the Renewables business, partially offset by $11 million lower interest expense.
Income Taxes — Production Tax Credits decreased $17 million and $50 million in the three and nine months ended September 30, 2022, respectively. The decrease in both periods was primarily due to the closure of the REF business.
Net Loss Attributable to Noncontrolling Interests decreased $3 million and $9 million in the three and nine months ended September 30, 2022, respectively. The decrease in both periods was primarily due to the closure of the REF business.
Outlook — DTE Vantage will continue to leverage its extensive energy-related operating experience and project management capability to develop additional energy and renewable natural gas projects to serve energy intensive industrial customers. Compared to prior years, DTE Vantage expects that lower earnings will continue in 2022 due to the closure of the REF business. Over the long-term, DTE Vantage expects that growth in renewable energy and industrial energy services projects will offset the decreases to Net Income caused by the REF closures. DTE Vantage is also exploring decarbonization opportunities relating to carbon capture and storage projects.
ENERGY TRADING
Energy Trading focuses on physical and financial power, natural gas and environmental 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, environmental, and related services, which may include the management of associated storage and transportation contracts on the customers' behalf and the supply or purchase of environmental attributes to various customers. Energy Trading results and outlook are discussed below:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| (In millions) | |||||||||||||||||||||||
| Operating Revenues — Non-utility operations | $ | 3,024 | $ | 1,602 | $ | 8,059 | $ | 4,208 | |||||||||||||||
| Purchased power and gas — non-utility | 2,928 | 1,630 | 8,087 | 4,347 | |||||||||||||||||||
| Non-utility Margin | 96 | (28) | (28) | (139) | |||||||||||||||||||
| Operation and maintenance | 16 | 17 | 51 | 60 | |||||||||||||||||||
| Depreciation and amortization | 2 | 1 | 4 | 4 | |||||||||||||||||||
| Taxes other than income | 1 | 1 | 6 | 4 | |||||||||||||||||||
| Operating Income (Loss) | 77 | (47) | (89) | (207) | |||||||||||||||||||
| Other (Income) and Deductions | 3 | 22 | 18 | 23 | |||||||||||||||||||
| Income Tax Expense (Benefit) | 18 | (17) | (27) | (57) | |||||||||||||||||||
| Net Income (Loss) Attributable to DTE Energy Company | $ | 56 | $ | (52) | $ | (80) | $ | (173) |
Operating Revenues — Non-utility operations increased $1,422 million and $3,851 million in the three and nine months ended September 30, 2022, respectively. The increase in both periods was primarily due to higher gas prices in the gas structured and gas transportation strategies.
Non-utility Margin increased $124 million and $111 million in the three and nine months ended September 30, 2022, respectively. The following tables detail changes in Non-utility margin relative to the comparable prior periods:
| Three Months | |||||
| (In millions) | |||||
| Unrealized Margins**(a)** | |||||
| Favorable results, primarily in gas structured and gas transportation strategies(b) | $ | 204 | |||
| Unfavorable results, primarily in power full requirements and environmental trading strategies | (48) | ||||
| 156 | |||||
| Realized Margins**(a)** | |||||
| Favorable results, primarily in the environmental trading strategy | 16 | ||||
| Unfavorable results, primarily in power full requirements, gas transportation, and gas trading strategies(c) | (48) | ||||
| (32) | |||||
| Increase in Non-utility Margin | $ | 124 |
(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 $208 million of timing related gains related to gas strategies which will reverse in future periods as the underlying contracts settle.
(c)Amount includes $31 million of timing related gains related to gas strategies recognized in previous periods that reversed as the underlying contracts settled.
| Nine Months | |||||
| (In millions) | |||||
| Unrealized Margins**(a)** | |||||
| Favorable results, primarily in gas structured, gas transportation, and power trading strategies(b) | $ | 107 | |||
| Unfavorable results, primarily in power full requirements and environmental trading strategies | (30) | ||||
| 77 | |||||
| Realized Margins**(a)** | |||||
| Favorable results, primarily in gas transportation, gas full requirements, and environmental trading strategies(c) | 104 | ||||
| Unfavorable results, primarily in power full requirements and gas trading strategies | (70) | ||||
| 34 | |||||
| Increase in Non-utility Margin | $ | 111 |
(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 $71 million of timing related gains related to gas strategies which will reverse in future periods as the underlying contracts settle.
(c)Amount includes $54 million of timing related losses related to gas strategies recognized in previous periods that reversed as the underlying contracts settled.
Operation and maintenance decreased $1 million and $9 million in the three and nine months ended September 30, 2022, respectively. The decrease in nine-month period was primarily due to lower compensation costs.
Other (Income) and Deductions decreased $19 million and $5 million in the three and nine months ended September 30, 2022, respectively. The decrease in both periods was primarily due to lower contributions to not-for-profit organizations.
Outlook — In the near-term, Energy Trading expects market conditions to remain challenging. The profitability of this segment may be impacted by the volatility in commodity prices and the uncertainty of impacts associated with regulatory changes, and changes in operating rules of Regional Transmission Organizations. Significant portions of the Energy Trading portfolio are economically hedged. Most financial instruments, physical power and natural gas contracts, and certain environmental contracts are deemed derivatives; whereas, natural gas and environmental inventory, contracts for pipeline transportation, storage assets, and some environmental contracts 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 8 and 9 to the Consolidated Financial Statements, "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 certain investments, including funds supporting regional development and economic growth. The net loss of $35 million and $99 million for the three and nine months ended September 30, 2022, respectively, represents a decrease of $240 million and $282 million from the net loss of $275 million and $381 million in the comparable 2021 periods.
The lower losses in both periods were primarily due to the loss on debt extinguishment incurred in 2021, which increased earnings by $286 million and $292 million for the three and nine months ended September 30, 2022, respectively. Lower losses in both 2022 periods were also due to effective income tax rate adjustments, lower state income taxes, and a valuation allowance recorded in 2021. For the nine month period, the lower losses were also due to decreased net interest expense in 2022. For both the three and nine month periods, the lower losses were partially offset by equity investment losses in 2022 and tax impacts from the separation of DT Midstream in the third quarter 2021, which resulted in a net tax benefit of $76 million in the prior year.
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 2022 will be approximately $2.1 billion. DTE Energy anticipates base level utility capital investments, including environmental, renewable, and energy waste reduction expenditures, and expenditures for non-utility businesses of approximately $3.5 billion in 2022. 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.
Refer below for analysis of cash flows relating to operating, investing, and financing activities, which reflect DTE Energy's change in financial condition. Any significant non-cash items are included in the Supplemental disclosure of non-cash investing and financing activities within the Consolidated Statements of Cash Flows, as applicable.
| Nine Months Ended September 30, | |||||||||||
| 2022 | 2021 | ||||||||||
| (in millions) | |||||||||||
| Cash, Cash Equivalents, and Restricted Cash at Beginning of Period | $ | 35 | $ | 516 | |||||||
| Net cash from operating activities | 1,412 | 2,372 | |||||||||
| Net cash used for investing activities | (2,453) | (2,780) | |||||||||
| Net cash from (used for) financing activities | 1,057 | (52) | |||||||||
| Net Increase (Decrease) in Cash, Cash Equivalents, and Restricted Cash | 16 | (460) | |||||||||
| Cash, Cash Equivalents, and Restricted Cash at End of Period | $ | 51 | $ | 56 |
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.
Net cash from operations decreased by $960 million in 2022. The decrease was primarily due to lower cash from working capital items. The decrease was also partially due to changes in Net Income, which decreased year-over-year if adjusted for the Loss on extinguishment of debt in 2021, primarily driven by the separation of DT Midstream in July 2021 and the closure of the REF business at DTE Vantage in 2022.
The change in working capital items in 2022 was primarily due to decreases in cash related to Regulatory assets and liabilities, Accounts receivable, net, and Derivative assets and liabilities, partially offset by an increase in cash related to Other current and noncurrent assets and liabilities.
Changes in these line items were significantly impacted by higher prices for natural gas and electricity during 2022, including Regulatory assets attributed to the PSCR and GCR mechanisms at DTE Electric and DTE Gas, respectively. Refer to "Quantitative and Qualitative Disclosures About Market Risk" within Item 3 of this Report for additional information regarding DTE Energy's management of commodity price and other market risks.
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 and acquisitions. 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 by $327 million in 2022 primarily due to decreases in utility plant and equipment expenditures and non-utility plant and equipment expenditures.
Cash from (used for) 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 targets balance sheet financial metrics to ensure it is consistent with the objective of a strong investment grade debt rating.
Net cash from financing activities increased by $1.1 billion in 2022 primarily due to decreases in Redemption of long-term debt and Prepayment costs for extinguishment of long-term debt, primarily related to redemptions of $2.6 billion following the separation of DT Midstream in the third quarter of 2021. The increase in cash from financing activities is partially offset by a decrease in Issuance of long-term debt, net of issuance costs, primarily due to $3.1 billion of long-term debt that was issued in 2021 to facilitate the separation of DT Midstream.
Outlook
Sources of Cash
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 which will increase the base from which rates are determined. Non-utility growth is expected from additional investments in the DTE Vantage segment. Compared to prior years, DTE Vantage expects that lower cash flows will continue in 2022 due to the closure of REF business. Growth from new renewable energy investments and industrial energy services projects are expected to offset these decreases over the long-term.
DTE Energy's separation of DT Midstream on July 1, 2021 may also contribute to lower cash from operations in 2022 and the near term. However, DTE Energy still expects higher cash flows from operations over the long-term due to the growth of its utilities and remaining non-utility businesses. For additional information regarding the separation of DT Midstream, refer to Note 4 to the Consolidated Financial Statements, "Discontinued Operations."
DTE Energy's utilities 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.
To finance the acquisition of midstream natural gas assets in December 2019, DTE Energy issued equity units that will result in the issuance of $1.3 billion of common stock in November 2022. DTE Energy does not anticipate the issuance of any additional equity in 2022. However, at the discretion of management and depending upon economic and financial market conditions, DTE Energy could issue additional equity as part of its financial planning process. If issued, DTE Energy anticipates these discretionary equity issuances would be made through contributions to the dividend reinvestment plan or employee benefit plans.
Over the long-term, DTE Energy does not have any equity commitments other than the 2019 equity units noted above and will continue to evaluate equity needs on an annual basis. DTE Energy currently expects its primary source of long-term financing to be the issuance of debt and is monitoring the impact of rising interest rates on the cost of borrowing.
Uses of Cash
DTE Energy has $1.4 billion in long-term debt, including finance leases, maturing within twelve months. Repayment of the debt is expected to be made through internally generated funds, the issuance of new long-term debt, and proceeds from the equity issuances associated with the 2019 equity units.
DTE Energy has paid quarterly cash dividends for more than 100 consecutive years and expects to continue paying regular cash dividends in the future, including approximately $0.7 billion in 2022. Any payment of future dividends is subject to approval by the Board of Directors and may depend on DTE Energy's future earnings, capital requirements, and financial condition. Over the long-term, DTE Energy expects continued dividend growth and is targeting a payout ratio consistent with pure-play utility companies.
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, environmental, and coal) and the provisions and maturities of the underlying transactions. As of September 30, 2022, 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 $699 million.
Other obligations are further described in the following Combined Notes to the Consolidated Financial Statements:
| Note | Title | |||||||
| 1 | Organization and Basis of Presentation | |||||||
| 2 | Significant Accounting Policies | |||||||
| 6 | Regulatory Matters | |||||||
| 9 | Financial and Other Derivative Instruments | |||||||
| 10 | Long-Term Debt | |||||||
| 11 | Short-Term Credit Arrangements and Borrowings | |||||||
| 13 | Commitments and Contingencies | |||||||
| 14 | Retirement Benefits and Trusteed Assets |
Also refer to the "Capital Investments" section above regarding DTE Energy's capital strategy and estimated spend over the next five years. For additional information regarding DTE Energy's future cash obligations, including scheduled debt maturities and interest payments, minimum lease payments, and future purchase commitments, refer to DTE Energy's Annual Report on Form 10-K for the year ended December 31, 2021.
Liquidity
DTE Energy has approximately $2.4 billion of available liquidity at September 30, 2022, consisting primarily of cash and cash equivalents and amounts available under unsecured revolving credit agreements and term loans.
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.
NEW ACCOUNTING PRONOUNCEMENTS
See Note 3 to the Consolidated Financial Statements, "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, some environmental contracts, and certain forwards, futures, options and swaps, and foreign currency exchange contracts. Items DTE Energy does not generally account for as derivatives include natural gas and environmental inventory, pipeline transportation contracts, storage assets, and some environmental contracts. See Notes 8 and 9 to the Consolidated Financial Statements, "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 some environmental contracts 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 8 to the Consolidated Financial Statements, "Fair Value."
The following table provides details on changes in DTE Energy's MTM net asset (or liability) position:
| DTE Energy | |||||
| (In millions) | |||||
| MTM at December 31, 2021 | $ | (159) | |||
| Reclassified to realized upon settlement | (33) | ||||
| Changes in fair value recorded to income | (114) | ||||
| Amounts recorded to unrealized income | (147) | ||||
| Changes in fair value recorded in Regulatory liabilities | 20 | ||||
| Amounts recorded in other comprehensive income, pre-tax | 2 | ||||
| Change in collateral | 48 | ||||
| MTM at September 30, 2022 | $ | (236) |
The table below shows the maturity of DTE Energy's MTM positions. The positions from 2025 and beyond principally represent longer tenor gas structured transactions:
| Source of Fair Value | 2022 | 2023 | 2024 | 2025 and Beyond | Total Fair Value | |||||||||||||||||||||||||||
| (In millions) | ||||||||||||||||||||||||||||||||
| Level 1 | $ | 66 | $ | 130 | $ | 50 | $ | 15 | $ | 261 | ||||||||||||||||||||||
| Level 2 | (10) | (33) | (55) | (31) | (129) | |||||||||||||||||||||||||||
| Level 3 | (68) | (151) | (64) | (91) | (374) | |||||||||||||||||||||||||||
| MTM before collateral adjustments | $ | (12) | $ | (54) | $ | (69) | $ | (107) | (242) | |||||||||||||||||||||||
| Collateral adjustments | 6 | |||||||||||||||||||||||||||||||
| MTM at September 30, 2022 | $ | (236) |
Previous: Item 1. Financial Statements · Next: Item 3. Quantitative and Qualitative Disclosures About Market Risk